Will Banning Self-Preferencing in Digital Markets Help or Hurt?

When searching for clothing on Amazon you may have noticed that the items that come up first are from Amazon Essentials, Amazon Collection and Amazon Aware. That practice — a company favoring its own products over that of its rivals — is known as self-preferencing. It has come under scrutiny and Congress is considering legislation that would ban it. The bills are aimed at large digital platforms, including Amazon, Alphabet (Google’s parent company), Apple, and Meta.

The American Innovation and Choice Online Act (AICOA) restricts the nation’s largest tech companies from not only engaging in self-preferencing but also other acts, like limiting the number of products competing companies can put on large digital platforms. The Open App Markets Act (OAMA) keeps app marketplaces from engaging in self-preferencing and prohibits marketplaces with over 50 million users from forcing developers to use an in-app payment system owned or controlled by the app store.

“Regulatory agencies in the U.S. are worried that the fate of millions of consumers is being determined by a few big firms,” says Bobby Zhou, associate professor of marketing at the University of Maryland Robert H. Smith School of Business. Under AICOA when a shopper searches for a product, a large online retail platform would have to first display, “whatever product aligns with that consumer’s personal preferences, with the one with the best fit coming up first,” says Zhou. So, if you always buy Stanley water bottles, when you search for water bottles, Stanley drinking cups would be displayed first instead of one of the platform’s own brands.

Research conducted by Zhou with two other professors — Daniel Sokol, a professor at the University of Southern California Gould School of Law and its Marshall School of Business, and University of Florida Warrington College of Business professor Tianxin Zou — finds this kind of regulation may lead to higher prices. If self-preferencing by the largest digital markets goes away, the seller whose product appears first during a search may decide to raise prices because it has enough well-matched customers to extract that profit or surplus. The seller whose product appears second might also charge more for the same reason. Zhou says, “This is a situation where both sellers have very strong incentives to keep their prices high, so they don’t really compete head-to-head. To some extent, this ex-ante (preventative) regulation backfires.”

The European Union has already enacted regulations that ban big tech companies from making sure their products are displayed before those of other firms. The rules have been highly criticized and the European Commission recently opened an investigation into whether Apple, Alphabet and Meta are complying with the Digital Markets Act (DMA). 

In their paper, Zhou and Sokol assert that digital markets have become increasingly important for the economy, as they enable new forms of innovation, competition, and value creation in the process of exchanging goods, services, and information. And Zhou says, “The Justice Department and the Federal Trade Commission are justified in looking into big tech platforms. I just caution against hasty decisions that are nearly impossible to reverse.”

Read the studies, Antitrust Regulation, published in the Journal of Law & Innovation, and Self-preferencing and Search Neutrality in Online Retail Platforms, accepted at Management Science.