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Wednesday, June 22, 2011

Using a Sledgehammer to Crack a Nut: Why China's Anti-Monopoly Law was Inappropriate for Renren v. Baidu

Posted by D. Daniel Sokol

Angela Huyue Zhang (Cleary Gttlieb) discusses Using a Sledgehammer to Crack a Nut: Why China's Anti-Monopoly Law was Inappropriate for Renren v. Baidu. ABSTRACT: On December 18, 2009, Beijing No. 1 Intermediate People's Court issued a ruling in favor of Baidu, Inc., a leading search engine provider in China, in an abuse of a dominant position case brought by Tangshan Renren Information Services Co., an operator of a medical information consulting website. Renren alleged that Baidu had downgraded its website in order to coerce it into using its search advertising services. The Court dismissed the case primarily on the grounds that Renren had failed to establish that Baidu had a dominant position in China's search engine service market.

Although the dismissal may have been the correct outcome, the Court's analysis was misguided. While the Court recognized certain two-sided features of Baidu's business model, it failed to further explore the impact of those features on the competition analysis. Crucially, the Court erred in defining the relevant product market as the search engine service market. Instead of using a one-sided approach, the Court should have adopted a two-sided approach in defining therelevant market.

Moreover, the Court readily accepted Baidu's defense without investigating whether the blockage was solely motivated by the existence of junk links the information asymmetry between Baidu and customers such as Renren made it difficult to discern whether Baidu had downgraded the websites with the legitimate reason of penalizing junk links or with the motive of coercing those websites into using its advertising services.

On the other hand, although there is a theoretical possibility that Baidu may have had an incentive to impose artificial switching costs in order to lock in existing customers, the reputational cost should have been sufficient to deter Baidu from committing such abuses. New customers who are informed about the switching cost would be unlikely to choose Baidu and existing customers who are locked in would be unlikely to choose Baidu again. As informed consumers would not be harmed, the application of the Anti-Monopoly Law to this case is like using a sledgehammer to crack a nut. Indeed, consumer protection law rather than antitrust law would have been a better tool to tackle abusive behaviors like those alleged by Renren.

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