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Online trading not anti-competitive for small biz

OFT report gives thumbs up, behemoth warning

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Small and medium sized (SME) companies do not face major anti-competitive barriers when trying to sell goods or services online, the Office of Fair Trading (OFT) has said.

The OFT has published research (pdf) it commissioned into the services that SMEs need to use if they are to trade online. It said that internet technologies had done much to help SMEs and that competition in most cases was healthy.

It warned, though, that in some cases the dominance of companies such as Paypal and Google could cause problems for firms that were completely reliant on them.

The research assessed the barriers that small firms face when trying to move their services or sales of goods online.

"Small businesses increasingly rely on services such as search engines, online market places and payment service providers as essential gateways to trading over the internet," said an OFT statement. "Some firms have complained to the OFT that certain practices of these large players can lead to barriers to entry or expansion."

The OFT has asked SMEs to respond, telling it if its research has correctly characterised the markets for various online services.

"Barriers to SMEs setting up business have decreased across all areas of online markets except supply of goods," said the report, produced by Plum Consulting and Keplar. "This has enabled a new set of SMEs to trade online. Online services used by businesses are characterised by relatively low unit costs which makes them very accessible to SMEs."

The research found that businesses could use the internet to conduct their business more cheaply and easily than ever, and more cheaply than they could offline. The fact that small companies can trade via big ones also helps to reassure customers, it found.

"The presence of major platforms and review sites has made it easier for SMEs to overcome reputational barriers to trading online," said the report. "Trust and reputation are important to reassure consumers who are shopping online: a survey commissioned by the OFT found that 72% of online shoppers had concerns in January 2009, of which security issues (68%) and privacy issues (28%) were the most important.

"To independently establish a reputation online requires the expense of marketing and developing a professional-appearing website. Innovation has, however, provided alternative lower cost ways to build reputation online," it said. "[Companies can shelter] under the brands of platforms – platforms such as Amazon and PayPal to some extent lend their brands to the SMEs that use them, providing some consumer reassurance."

The research found, though, that in markets such as payments processing and search advertising some companies, in these cases Paypal and Google, have achieved near-total dominance. This has led to a high degree of reliance of many companies on those firms.

"Some SMEs are currently dependent on particular providers and would be strongly affected by any 'system changes' or loss of service," the report said. "SMEs experiencing this kind of dependence include small companies that lack the resources to diversify/explore new options. In these cases issues may arise if providers change the rules (e.g. changes to the Google search algorithm would benefit some and disadvantage others) or rates or cut off service."

The research also found that actions taken by some of these service providers to protect consumers can damage businesses that are not in control of the dispute-resolution process.

"SMEs' service may be suspended if there is suspicion that their activity is fraudulent/harmful (e.g. if consumer complaints are received or unusual trading patterns identified)," it said. "An example is PayPal suspending accounts in cases of disputed transactions. This type of consumer protection may be disruptive to an SME that come under suspicion due to unfounded consumer complaints or mistaken analysis of trading patterns, but may serve the interests of users collectively."

OFT chief executive John Fingleton said that the organisation had to make sure it monitored whether marketplaces were fair.

'The open and competitive nature of the internet has yielded a staggering pace of innovation, and the growth of online commerce has brought with it new business models, new firms, and whole new markets," it said. "Online markets are an important driver of greater customer choice and higher economic growth, and the OFT has a key role to play in ensuring that they work well.

"The OFT … has an important role to play in ensuring that online markets remain competitive. As we continue to look at these markets we are keen to ensure the right balance is struck between letting markets resolve problems through innovation, and intervening where necessary."

Copyright © 2010, OUT-LAW.com

OUT-LAW.COM is part of international law firm Pinsent Masons.

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