2021 is arguably one of the most memorable years regarding China’s economic performance, destined to be a peculiar year for its antitrust laws. Scrolling through news mediate can frequently spot titles with catchy phrases like tech giants being fined for monopolistic behaviors. On January 22nd, Simcere, a pharmaceutical company, was charged one hundred million for abusing its market power; On January 28th, eight mining enterprises in East China were fined 230 million yuan for concluding and implementing a monopoly agreement; on April 10th, the multinational technology company Alibaba was charged 18 billion for practicing a culture of “Er Xuan Yi,” which literary translates to “choose one out of two.” So what exactly is the antitrust law, and how does it influences the consumer?
In general, there are two types of monopolies: natural and economical.
A natural monopoly arises due to the high fixed cost of producing a good. Thus, the average cost of production would be lower if there’s only one firm in the market, as opposed to multiple firms. The electricity and gasoline industries are two great examples that illustrate natural monopoly. Because the market's efficiency is improved when there is only one seller, natural monopoly is often considered acceptable, as it allows the producer to achieve productive efficiency and serve the product at its lowest possible cost.
Economic monopoly arises when companies rely on patent and market operation strategies to obtain their monopoly position. Because this type of monopoly is often the product of technological progress and innovation, the government will adopt a more tolerant attitude as long as it does not pose a severe threat to market fairness. This is especially evident in the context of economic globalization. To strengthen the competitiveness of domestic industries, the government will not intervene in the market even if there’s a threat of monopoly. However, once it is found that the enterprises abuse their market share, the government will act with antitrust law to prohibit further exploitation of the firm’s market share.
In short and simple terms, monopoly means that only Didi is the only available riding service; Meituan is the only available delivery service; WeChat is the only available social media; and Taobao is the only E-commerce platform. It should be noted that a monopoly is usually not illegal, and normal marketing after a monopoly is also not illegal. The abuse of the dominant market position causes a company to be punished for monopoly.
“choose one out of two.”
On April 10, 2021, the State Administration of Market Supervision and Administration of the People's Republic of China announced that Alibaba was using unfair competition practices and, as a result, was fined 18.2 billion yuan. The figure of 18.2 billion yuan is an unprecedented amount of fines in China. 18.2 billion seems to be an astronomical number, but for Alibaba, a tech giant in the E-commerce industry, this is only 4% of its turnover in China in 2019.
The main reason that caused this severe fine was its “choose one out of two” policy. Essentially, Alibaba is reading the message to all online retailers that they can sell their services or commodities on Taobao, the E-commerce platform developed by Alibaba, or sell them on other platforms. The same retailer cannot simultaneously sell on Taobao and another platform. Alibaba ensures the enforcement of this policy with the help of its resources, data, and algorithm that tracks the behavior of its online retailer.
The story of Ali's implementation of "selection" has to start in 2015. In 2015, Pinduoduo rose strongly. To maintain its market share, Alibaba asked its retailers to sell their products on only one platform (the so-called “choose one out of two” policy). Although Alibaba does not explicitly require merchants to stand aside, Alibaba will use different tactics to reduce the sales volume of the retailer’s shop if they fail to obey. The most commonly used tactic is to close the flow channel of the stores directly. The number of visits to a store determines its sales performance.
Every store must have internet traffic to do a good job. The best example was Galanz in 2019. Because Galanz tried to sell its products in Pinduoduo, Alibaba directly cut off the flow of Galanz stores, resulting in a sharp decline in sales. The sales volume of Galanz in Tmall 618 was more than 40 million yuan, with a year-on-year decrease of 7%, less than the 43 million sales volume of last year's 618. The sales volume of Galanz in Tmall and the sales volume of Tmall kitchen products are obviously in the opposite direction. Then consumers will start to doubt the quality of the store's products due to its low sales volume, and the store sales volume will be reduced further. This operation caused Galanz to lose more than 100 million yuan in vain.
Influence to consumers
In the past, enterprises have been pursuing quality. As long as the quality of products is in place, they will not need to worry about sales. Nowadays, every family is pursuing internet traffic and developing gimmicks. Firms pursue sales volume and invest their money in a propaganda so that less investment is really invested in R&D products. At the same time, the store operators crazily invested money in Alibaba, which led to an increase in publicity costs and did not improve the quality of products. These giant companies (Meituan, Alibaba, Tencent, etc.) are the top giants in China, and they hold huge amounts of capital on the Internet. These companies are allowed to desperately acquire other emerging enterprises, leading to more customers being exploited by them, forming a dead cycle. When the State Administration of Market Supervision and Administration of the People's Republic of China promulgated the system when the market is more competitive, the efficiency of enterprises can be maximized, the rights and interests of consumers can be protected, and the common prosperity emphasized by the government can be realized.