Temu, a cross-border e-commerce platform, has recently filed a lawsuit against Shein, an online fashion retailer, in a Massachusetts court in the U.S., alleging that Shein had violated U.S. antitrust law. Temu claims in its complaint that Shein has abused its dominant position in the U.S. ultra-fast fashion market by threatening, fining, and coercing 8,338 Chinese apparel manufacturers that have partnerships with Shein into signing “loyalty agreements” that prevent them from simultaneously supplying Temu with goods; Temu asserts that Shein’s actions have interfered with fair competition between the two parties and prevented manufacturers from earning income through multiple platform channels, which will reduce product diversity and quality while raising market prices, thereby harming the interests of consumers, manufacturers and Temu. Therefore, Temu requests the court to immediately put an end to Shein’s associated illegal acts and seeks restitution for the economic losses Temu sustained.

In essence, this case is about the “choosing one from two” issue. Let’s utilize this instance to discuss the theoretical basis and determine whether “choosing one from two” is reasonable.

“Choosing one from two” is a form of exclusive dealing, which is an important means of restricted trading. Item 4, Article 22, Chapter 3 of the Anti-Monopoly Law of the People’s Republic of China (hereinafter referred to as the Anti-Monopoly Law) states, “Business operators with a dominant market position are prohibited from committing… restricting their trading party so that it may conduct deals exclusively with themselves or with the designated business operators without any justifiable causes.”

In other words, the legality of “choosing one from two” depends on two key factors:

First, whether there is a dominant market position. Article 22 of the Anti-Monopoly Law provides a definition, “The term ‘dominant market position’ as mentioned in this Law refers to a market position held by business operators that have the ability to control the price or quantity of commodities or other trading conditions in the relevant market or block or affect the entry of other business operators into the relevant market.” An enterprise’s market share is one important indicator. For example, Item 1, Article 24, Chapter 3 of the Anti-Monopoly Law stipulates that when “the market share of one business operator accounts for 1/2 or more in the relevant market”, “a business operator may be presumed to have a dominant market position”. Given the importance of market share in defining dominance, the definition of the relevant market is particularly crucial in antitrust litigation.

Second, whether there is a “justifiable cause”. What is a justifiable cause? The Anti-Monopoly Law does not provide details. However, regarding the platform economy, detailed supplementary explanations have been provided in Article 15, Chapter 3 of the Guidelines for Anti-monopoly in the Field of Platform Economy by the State Council’s Anti-Monopoly Commission, involving four causes: (1) It is necessary to protect the interests of the trading parties and consumers; (2) It is necessary to protect intellectual property rights, trade secrets or data security; (3) It is necessary to protect specific resource investments made for trading; (4) It is necessary to maintain a reasonable business model.

In principle, economic law provisions are generally based on economic theory. As a result, the above exceptions are also generally supported by related theories. For example, the protection of consumer interests in item (1) is sourced from the service free-rider problem in economics. However, the part about using the “choosing one from two” to protect trading parties in the above guidelines is confusing: if “choosing one from two” is required and can protect merchants, wouldn’t it be better to let merchants make their own decisions?

Other exceptions are primarily made to protect platform/channel investments, such as product design, consumer preference analysis and prediction based on massive data gathered during market development, and product recommendations and traffic on platforms, especially the core issues regarding ownership of traffic and data.

Specifically, if traffic and data are considered to be the property of digital platforms, then product recommendations and traffic guidance provided by platforms are essentially no different from product placement on physical store shelves or recommendations made by salespeople: both are services provided by sellers for the sale of products, and costs associated with these services are borne by sellers themselves. To encourage the provision of services and solve the free-rider problem, certain channel control measures adopted by platforms may be considered to have justifiable causes. On the contrary, if traffic and data are not simply controlled by platforms, the traditional free-rider logic cannot be used to support platforms’ channel control behavior.

Original article published in Chinanews.com on August 22, 2023