In 2015, the European Commission launched the Digital Single Market strategy, under which it plans to create a ‘Digital Single Market’ with better access for both consumers and businesses to goods and services via e-commerce across the EU. As part of the strategy, an inquiry was launched into the ever expanding e-commerce sector to obtain an overview of prevailing trends and any market barriers associated with it.
The Commission recently published its findings, concluding that as e-commerce continues to grow, retailers are seeking to exploit this market with business practices that potentially raise competition concerns. Of particular interest to the retail sector, the Commission identified the following trends in company and consumer behaviour:
The EU is one of the largest e-commerce markets in the world, with 55% of people aged between 16 and 74 having ordered goods or services over the internet. With such a market increase has come an increase in price transparency. Consumers are now readily able to obtain and compare price and product price information online, switching between online and offline retailers quickly and easily. Consumers are able to ‘free-ride’ by using bricks-and-mortar shops for pre-sales services (such as product demonstrations) but making their purchase (from a different retailer) online. The Commission highlights that both manufacturers and retailers are having to invest heavily in creating high quality services to try to create a balance between the online and offline market places.
In addition to the obvious benefits to consumers, an increase in price transparency has also led to retailers having easy access to price monitoring. The Commission found that a majority of retailers track the prices of their competitors, with two thirds using automated software to make price adjustments as a result. The Commission has flagged that the ability to track prices in real time may result in automated price co-ordination, and could result in competition concerns in certain circumstances.
Consumers’ ability to compare prices easily has led to increased price competition, and indirectly an increase in competition in other brand matters. Quality, image and innovation are all important factors in competition between brands, and where there is an increase in price competition, the importance of these factors is likely to rise even further to ensure long term business success.
As a result of the increased transparency and competition around pricing, manufacturers are often seeking to have greater control over their distribution networks to try and control price and quality. A large proportion of manufacturers now sell directly to their customers through an online platform. The Commission also found an increase in selective distribution systems (in which a manufacturer only admits to its network those resellers that meet given criteria, and restricts sales outside that network), with more than half of manufacturers requiring the operation by their retailers of a physical brick and mortar shop, excluding any purely online sellers. These types of restriction generally do not result in competition issues, but the Commission does note that cases where there is no apparent link between the requirement of a physical shop and distribution quality may require further scrutiny on a case-by-case basis.
The Commission’s report does not change the legal framework in which brands may operate with their resellers, although it does give the Commission’s view on some topical questions.
One such issue concerns whether a brand can require its resellers not to operate via third-party online platforms (such as Amazon or eBay). Most distribution agreements are drafted so as to comply with the EU Vertical Agreements Block Exemption (which guarantees compliance with the competition rules for agreements that meet its criteria). Agreements with resellers that ban internet reselling outright will not qualify for protection under the Block Exemption and will almost inevitably be found to be anti-competitive, but the Commission clarifies its view that merely requiring a reseller not to sell through third-party platforms would not lose the ‘safe harbour’ of the Block Exemption. This is not a definitive ‘all-clear’ for such restrictions in any context, however, and the European Court of Justice is currently ruling on this precise point (as well as the legality of these restrictions in cases to which the Block Exemption does not apply for any reason).
The Commission also discusses issues of differential pricing and dual pricing. ‘Dual pricing’ refers to the practice of charging the same reseller different product prices according to whether the product is resold in store or online, and can clearly be used to disincentivise online ‘discounting’. As such, it is generally prohibited as a form of restriction of online sales. Although any restriction of competition may, in theory, be permitted in specific circumstances where given efficiency benefits can be demonstrated, the prevailing view (supported by previous Commission guidance) has been that dual pricing would always be very difficult to justify. The Commission opens the door to possible routes to justify dual pricing, such as where it would be necessary to counter free-riding between offline and online sales between resellers within a brand’s network (ie where reseller A invested heavily in in-store promotion and pre-sale services which retailer B then took advantage of online). However, a note of caution must be sounded on this point: it is notoriously difficult to demonstrate efficiencies to the degree necessary to exempt what is otherwise a clear restriction of competition, and that will remain the case with dual pricing. Nonetheless, this may signal the start of a more flexible approach on this issue by competition regulators.
On the question of differential pricing (where a brand charges one wholesale price to reseller A, and a different wholesale price to reseller B), the Commission comments that ‘Charging different (wholesale) prices to different retailers is generally considered a normal part of the competitive process … [u]nless different wholesale prices to (online) retailers have the object of restricting exports or partitioning markets’, and further that ‘Free-riding by pure online sellers on services provided offline can be addressed by other means, such as price differentiation’. Although there is generally no problem in a supplier charging different prices to different customers, the Commission’s apparent support for charging a higher wholesale price to a pure online reseller may surprise some.
Inevitably, a couple of caveats should again be mentioned. In the first place, suppliers that are dominant (a possibility where market share is above around 40%) will be aware that charging different prices to different customers for equivalent transactions may be an abuse of a dominant position. Secondly, and perhaps most pertinently, all suppliers should be aware that the main enforcement priority of competition regulators in online markets has and will remain resale price maintenance, that is, agreements between a supplier and its reseller that set a fixed or maximum resale price. If a supplier were to signal to a reseller, for example, that if it did not adhere to a given resale price, it might find its wholesale prices increasing, that would amount to a prohibited resale pricing agreement. Accordingly, while charging different prices to different retailer customers may be ‘a normal part of the competitive process’, suppliers should avoid agreements or understandings (however informal) with their retailer network that link changes in wholesale price to a retailer’s own resale prices: retailers should always be free (on paper and in reality) to set their own resale prices independently.