Liyang Hou investigates the recent antitrust enforcement in China’s digital sector and highlights how formalistic dominance assessments and merger reviews have shaped the country’s approach to regulating its platform economy.
The global economy has been experiencing a significant shift away from purely offline operations due to the emergence and extension of the digital economy in the last decades. This technical change has also affected global regulatory paradigms. More and more countries have felt the immediate pressure to regulate digital platforms with innovative instruments. Several jurisdictions are adopting competition policy that is specifically geared towards regulation of digital platforms including Australia, China, the European Union, France, Germany, Italy, Japan, the United Kingdom, and the United States.
China’s regulatory attitudes towards the platform economy has similarly undergone a significant change. Before 2020, China had practiced a more “tolerant and prudent” approach towards regulation, suggesting almost no regulation at all. In December 2020, the Chinese government set as its policy priority “strengthening anti-monopoly and preventing disordered capital expansion” in the digital economy. Immediately after this policy shift from tolerant and prudent regulation to strengthened anti-monopoly legislation, the State Administration for Market and Regulation (SAMR), China’s competition authority, became active and increased the frequency of enforcement of the Anti-monopoly Law (AML) against digital platforms. By the end of 2024, the SAMR had entered into 107 decisions, including four cases of abuse, one blocked merger case and 102 cases regarding non-notified mergers. The total antitrust fines that have been imposed amount to over 22bn RMB.
Abuse of dominance cases
Out of the four cases of abuse, two are of particular importance as they involved Alibaba, the biggest e-commerce platform, and Meituan, the biggest online food ordering platform in China. Both cases concerned the same type of abusive conduct pertaining to exclusive dealing, where the two platforms required single homing and did not allow their business users to offer services on competing platforms. Alibaba was fined about 18bn RMB, and Meituan was fined about 3.4bn RMB. While the two decisions sent shockwaves through the platform economy, it is worth examining whether they were based on a formalistic application of the law rather than sound economic analyses.
The Alibaba case was flawed on the evaluation of dominance. Although Alibaba held more than 60% of the e-commerce market from 2015 to 2019, in recent years it was facing tough competition from a newcomer, Pinduoduo. Alibaba’s market share in terms of sales decreased from 76% in 2015 to 61% in 2019, and in terms of revenue its market share decreased from 86% in 2015 to 71% in 2019. The reduced market share was acquired by the newcomer, Pinduoduo. Alibaba’s market share began to shrink in 2015, the year in which Pinduoduo was founded. Indeed, in March 2021 (while the Alibaba case was still ongoing), Pinduoduo became the biggest e-commerce platform in China in terms of active end users. It also became the biggest e-commerce platform in terms of share value in 2024. The quick rise of Pinduoduo and its ability to challenge a strong incumbent like Alibaba suggests strong competitive dynamics in the e-commerce market, and indicates that Alibaba lacked dominant power because new players could enter the market.
Similarly, in the Meituan case, the SAMR relied on Meituan’s consistently high market share of about two-thirds of the market in 2018-2020, for its dominance evaluation. However, the monthly active users of Ele.me, Meituan’s major competitor, became double that of Meituan’s in 2020. In both cases dominance was formalistically presumed mainly based on high market share, without realizing that the markets were dynamic and entry barriers were not prohibitive.
Additionally, the SAMR’s analysis of anti-competitive effects in both cases was flawed. The SMAR investigated the anti-competitive effects on competing platforms, business users, end users and innovation. However, the SMAR did not demonstrate that the relevant market had been foreclosed or could not explain the powerful presence of Pinduoduo. The investigation of Alibaba lasted for roughly three months. In such a short time, the SAMR could not collect sufficient market data to rationalize its decisions. The decision in the Alibaba case was criticized because it seemed to make exclusive dealing by dominant platforms per se illegal.
Merger cases
In addition to the abuse cases, the SAMR also used its merger control powers to regulate the platform economy. 103 decisions were adopted in this domain. The vast majority of cases were about unnotified mergers involving the variable interest entity (VIE) structure. While the definition of VIE is complex, for our purposes it is important to note that Chinese platforms constantly used the VIE structure to circumvent restrictive Chinese laws governing foreign investment. This has been a grey area dating back to the period when the SAMR practiced the tolerant and prudent approach. The SAMR was hesitant to review VIE mergers due to the concern that its reviewing activities may be viewed as endorsing VIE. Consequently, those decisions were less about strengthening the AML than including VIE mergers in the scope of merger control.
Two merger cases are notable and both involved the acquisition activities of Tencent. The first case was the horizontal merger between Huya and Douyu, the two biggest video livestreaming platforms, particularly for video games. Together, they held over 70% of the market share in terms of revenue and over 80% of the market share in terms of active users. This became the first-ever domestic merger to be blocked by SAMR– only international mergers had been blocked in the past. The SAMR reasoned that no other competitors could effectively restrain the new entity post-merger. The block might appear reasonable on the surface; however, as indicated in the decision, both companies were controlled by Tencent. Huya was solely controlled by Tencent, and Douyu was jointly controlled by Tencent with another shareholder. Merger control in China includes in its review scope only mergers involving change of control between different companies, and excludes international reorganization within the same company group. This case was essentially the latter. Therefore, this merger should not have fallen within the scope of merger control. Nevertheless, it was blocked.
Another merger decision that went largely unnoticed took place between Tencent and China Music Group. This was an unnotified merger that was finalized in 2016. Five years after the merger was concluded the SAMR passed a decision about it. This horizontal merger concerned the online music streaming market in China. The merged entity held more than 80% of the market share in terms of exclusively licensed music and songs, active users and usage time. Since the SAMR expected no effective competition after the merger, it concluded that the merger may cause significant damage to the relevant market. According to the AML, once an unnotified merger is observed producing significant anti-competitive effects, the SAMR can unscramble the merger, require the merged entity to disposed of acquired shares, property or operation in due time, or impose any other measure to restore the market to what it was before the merger. More than 80% of the market share suggests that merger would have significantly limited competition in the relevant market. Based on previous practice an obligation of structural divestiture should be imposed in order to restore competition. However, Tencent was only granted conditional approval by promising (i) not to engage in exclusive licensing with any copyright owners, (ii) not to ask any copyright owners to license their copyright with more advantageous conditions than other competitors and (iii) not to offer any copyright owners higher prices for the purpose of raising other competitors’ costs. What is worse is that the decision gave no time limit for those commitments. This decision went beyond merely restoring the market to what it was before the merger, as provided by the AML, and almost amounts to sector-specific regulation.
Conclusions and aftermath
It seems that the strengthened enforcement of the AML has brought little benefits to the digital sector in China. First, the active enforcement of the SAMR suggests a more movement-style enforcement than a normal one. The decisions contain no quantitative analysis of the foreclosing effects, and hence create a confusing impression that many business strategies applied by dominant digital platforms might be held per se illegal. Second, the decisions produced under-deterrent effects. In the days immediately following the decisions’ publication, the share prices of all the platform companies surged, for example 6% for Alibaba and 8% for Meituan. Given the size of these companies, the deterrence effect of the antitrust fine has been quickly counterbalanced by the increase in share prices.
Possibly realizing that the strengthened enforcement of the AML was insufficient, in October 2021, the SAMR published two draft guidelines for consultation, namely the Internet Platform Classification and Grading Guidelines and the Internet Platform Fulfilling Liability Guidelines. Without examining these two draft guidelines in detail here, they are very similar to the Digital Markets Act (DMA) adopted by the EU. However, the two draft guidelines are flawed in several ways. For example, the thresholds for the regulated platforms under these guidelines are, (i) 50 million active users, and (ii) a share value of 100 bn RMB. This is a very big net which may catch about 30 platforms. In comparison, so far only 6 platforms are considered ‘gatekeepers’ under the DMA, including Google, Apple, Facebook, Apple, Microsoft and TikTok. Moreover, the fact that the SMAR has taken no action more than three years after the publication of these guidelines suggests that the drafts might have been abandoned already.
Author Disclosure: The author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
