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ACM sees risks associated with paid ranking for consumers and competition

In a study into paid ranking, the Netherlands Authority for Consumers and Markets (ACM) has found that paid ranking (or sponsored ranking) comes with risks for competition and consumers. Paid ranking involves providers paying extra in exchange for a higher position in search results on platforms. Consumers may be misled by the presented search results, if it is unclear that the ranking is influenced by payments. Moreover, it may restrict competition among providers. Transparency about paid results can help limit the risks of paid ranking, but that does call for requirements for how that would work in real life.

Martijn Snoep, Chairman of the Board of ACM, explains: “More and more platforms use paid ranking, but, in terms of prevalence, it is still a limited phenomenon. We conducted this study in order to identify the effects of paid ranking on consumers and businesses. Our next step is to examine what role transparency can play in mitigating the risks that we have identified. That study will result in drawing up requirements that need to be met. Clear transparency standards offer guidance for compliance.”

ACM’s study into paid ranking

On many internet platforms, such as Beslist.nl, bol.com, Booking.com, and Thuisbezorgd.nl, businesses (including small businesses) are able to improve their search rankings if they pay a fee. ACM examined whether paid ranking could lead to higher prices or reduced quality for consumers. In addition, ACM looked into the ways platforms inform consumers what paid results are included in the ranking, and whether such information influences the purchasing decisions of consumers.

Businesses pay for higher rankings because it leads to extra traffic and extra purchases, as consumers are more likely to click on higher-ranked items. ACM’s study shows that providers pay an extra fee of approximately 15 to 40% on top of the usual fee paid to platforms for a higher ranking in the search results. It also turns out that, on most of the platforms included in ACM’s study, the role of paid ranking is still limited. However, there are some exceptions. ACM sees risks for both competition and consumers particularly in those cases. The study contains an assessment framework that offers insight into the risks of paid ranking in individual cases. In that context, key factors include the extent to which paid ranking is used on the platform, as well as how clearly the user is informed about that.

The effects of paid ranking on consumers

If many providers are at the top of the rankings because of extra fees, it could lead to less favorable deals for consumers. First of all, providers can include the extra fee in the consumer price. Second, payments for higher rankings can reduce competition on price and quality. After all, it is currently possible to climb the rankings by paying an extra fee instead of making a better offer. Finally, the providers that are at the top of the search results because of such payments can be less relevant to consumers compared with other providers. Platforms normally sort providers primarily on the basis of relevance for consumers, such as review scores and repeat purchases. However, paid ranking makes platforms also take into consideration their own financial rewards when sorting the search results.

Paid ranking can also have benefits for consumers. Paid ranking can act as a sign of quality to the platform or to consumers. In order for it to signal quality to consumers, it is necessary for consumers that paid results are recognizable as such. Paid ranking can also help in introducing new products, or in utilizing capacity better. Although such benefits may occur, it turns out that platforms already have a lot of information to sort products by relevance, and that alternatives to these kinds of benefits exist. In addition, an ACM case study has revealed that providers do not use sponsoring for improved utilization of capacity.

Recognizing paid search results

Transparency about paid ranking helps consumers recognize paid results. It also prevents consumers from unwittingly clicking on the paid search results. However, ACM has also established that, in practice, transparency statements about paid ranking are often either difficult-to-spot or unclear. In order to gain insight in the effectiveness of transparency, and to gain knowledge about paid ranking, ACM studied the introduction of a label added to sponsored results on a platform that is active in the Netherlands. It turned out that the label barely had any effect on the purchasing behavior of users. One of the reasons could be that users did not see or understand the label, or because users found the sponsored results just as relevant as the non-sponsored results.

In its Guidelines on the protection of the online consumer, ACM has indicated that platforms must be transparent about paid results vis-à-vis consumers. Transparency means that users see and understand the statement about paid results. If it is unclear in advance whether a specific statement is easy-to-spot and easy-to-understand, businesses can, for example, use an A/B test to gain insight into the extent to which their transparency statements are easy-to-spot and easy-to-understand. ACM is currently conducting a follow-up study into the role of transparency with regard to paid ranking.