Legal Briefing

A fresh look at price promises: the impact of competition law

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Corporate and commercial | 01 November 2012

Customers may often demand that suppliers’ charge prices that are the same as, or lower than, those charged to other customers. For some time, it has been assumed that these arrangements reduce supply chain costs and therefore benefit competition and consumers.

However, this may not always be the case, according to a report (the Report) issued 
in September by the UK’s Office of Fair Trading (OFT)1 into a broad category of 
‘price relationship agreements’ (PRAs). 


PRAs include agreements contained in long-term supply arrangements to match, or better, the price of competing products (known as ‘English clauses’); promises by a supplier to offer the purchaser the best price it offers to other purchasers (known as a most favoured nation (MFN), or most favoured customer clause (MFCC)); and price match guarantees given directly to consumers. They can also include price parity agreements where products are 
sold on different platforms (often relevant in the context of internet selling), or agreements where the retail price of a product is linked to the price of a 
competing product. The Report groups these different types of PRAs into three categories: ‘across-seller agreements’, ‘across-competitor agreements’ and 
‘third-party agreements’.

The Report summarises relevant economic literature and reviews the application of competition law in this area in a number of key jurisdictions, including the EU, UK and US. Most importantly, it provides a framework for analysing the competitive effects of pricing relationships. We summarise the main findings of the Report below, and offer some guidance on when issues might arise.

ACROSS-SELLER AGREEMENTS

An across-seller agreement is an arrangement whereby a seller makes a promise to a customer that, should it find a competitor offering the same product for a lower price, the seller will either match or better that lower price. This promise may come in 
the form of an advertisement targeted 
at consumers or be contained within a long-term contract between, for example, a manufacturer and a distributor (where it is known as an English clause).

English clauses

English clauses have frequently been dealt with in economic literature and have also been considered by the European Commission and the Court of Justice of the EU2. The European Commission has recognised that such clauses tend to increase transparency between competing suppliers and may thereby facilitate collusion, particularly where they oblige the customer to reveal the name of the alternative supplier. The law has found 
that where the supplier is dominant 
the effect of such clauses can be a contributing factor in a finding of an 
abuse of dominance.

Price matching (or beating) 
offers to consumers

These types of price-matching offers differ from English clauses. They are offered to consumers rather than to businesses, and are not contained in long-term supply arrangements. This raises a question about the extent to which they are subject to competition rules at all in Europe, where such rules apply only where there is an agreement between undertakings, or an abuse of dominance. This jurisdictional point is not developed in the Report, which nevertheless goes on to consider potential substantive issues arising from such arrangements. The Report considers that this type of agreement can facilitate collusion around higher prices. The more efficient consumers are in notifying sellers of cheaper prices and/or the quicker the price adjustment is put into effect, the lower is the incentive for sellers to offer lower prices in order to gain market share.

In addition to the dangers concerning collusion, economic literature supports the view that these types of across-seller agreements can give rise to: foreclosure (where the arrangements are used by a dominant supplier to deter entry); and price discrimination (where sellers set artificially high prices to consumers who do not shop around, and lower prices to customers who are prepared to do so).

The Report does however acknowledge that across-seller agreements can produce efficiencies, particularly when offered by relatively small suppliers in fragmented markets. But it is difficult to assess those efficiencies; the Report suggests that further analysis is required of such potential efficiencies.

ACROSS-CUSTOMER AGREEMENTS

MFNs/MFCCs

An across-customer agreement is one in which a supplier agrees to sell to a buyer at the best price it offers to any other buyer. The agreement can be contemporaneous, referencing the best prices currently offered, or may be retroactive. Under the latter, a supplier agrees to refund a buyer for prior sales made at prices that exceed more recent prices. The obligation to sell at best prices can be characterised as a penalty accepted by a supplier for offering lower prices for its other buyers. The penalty results from the need to lower its prices for all customers benefitting from the arrangement. These arrangements are commonly referred to as MFNs, but are referred to in the Report as MFCCs.

The significance of the penalty accepted by the supplier will depend on the number of customers who will benefit, the size of the price reductions, and the quantity of goods purchased. It may also depend on process design, such as whether the burden is on the buyer to alert the supplier that the obligation has been triggered (which a buyer may not do because of the costs and time taken to do so), or whether the clause obliges the supplier to make the changes automatically.

The effects of MFCCs have been considered in economic literature, particularly in the US, where MFCCs have been analysed both from the perspective of foreclosure and a possible softening of competition. The European Commission has considered the foreclosure effects of MFCCs on a few occasions, for example in its investigation into E.ON Ruhrgas – Gazprom (Ruhrgas)3 and an investigation concerning contracts between Hollywood majors and European Pay-TV companies4. However, both cases were settled with the parties agreeing to remove their MFCCs.

In a more recent example, the European Commission has consulted on a number of commitments offered by four international publishers to address concerns that the Commission has identified regarding the sale of e-books.5 In particular, the Commission considers that the companies may have breached EU competition rules by jointly switching the sale of e-books from a wholesale model to agency contracts containing the same key terms – specifically an MFCC clause that may have been aimed at raising the retail price of e-books in the EU, or preventing the emergence of lower prices.

The Report explains that MFCCs can have several anti-competitive effects. First, they can lead to a reduction in competition if the supplier is less likely to reduce its price to any customer in order to avoid the need to reduce it for all others who benefit from the MFCC. This in turn may result in competing suppliers charging higher prices as they have less fear over being undercut. Secondly, there may be a restriction of entry on the downstream market because the price-levelling effect of an MFCC discourages more efficient firms from entering the market. The effect of a contemporaneous MFCC is potentially less harmful than a retroactive one.

The Report notes that MFCC clauses can be a useful way of introducing price flexibility into long-term contracts. By allowing for prices to move alongside superior offers, it prevents buyers from being tied to set prices over a long period. Being afforded this protection may ultimately be an important incentive for a buyer to invest in the contract in the first place.

THIRD-PARTY AGREEMENTS

Finally, the Report considers ‘third-party agreements’. This category includes price relativities agreements, where a manufacturer requires a retailer to price its product(s) by reference to the price of competing product. It also includes platform parity agreements – where a manufacturer requires a retailer not to sell its product on one ‘platform’ (such as a bricks and mortar shop) at a price that is higher than the price it sells the same product on another platform (such as online).

Price relativities agreements

Under a price relativities agreement, a retailer may undertake to maintain price parity between two competing products or to keep a fixed differential between the two prices or to guarantee that the difference between the two retail prices never exceeds a specific level.

The Report explains that there has been little academic review of such agreements and no meaningful case law.6 It makes some general observations on when such price relativities agreements may raise issues. In particular, such agreements may facilitate collusion in the upstream market where they enable competing manufacturers to have a clearer view on wholesale prices as a result of stability in retail margins. Moreover, competition may be softened because manufacturers will be less aggressive in their pricing if they know that there will be no change in the relative pricing of competing products. The existence of such agreements may prevent the entry of new competitors offering competitive pricing. Moreover, a retailer bound by such an agreement may be less likely to reduce the price of a product if they know that they will have to make a corresponding reduction in price of a competing product.

Platform parity agreements

Under a platform parity agreement, a reseller undertakes to set resale prices on one platform at the same level, or no higher than, the price charged for the purchase of the same product on another platform. Again, absent case law or a body of economic literature on such agreements, the Report comments that platform parity agreements are most likely to raise concerns where the platforms compete against each other. If the agreement covers existing platforms and new entrants, it may discourage the entry of competing platforms, where they would otherwise be able to charge resellers lower ‘listing’ fees or use different business models that would allow no sellers to sell at lower prices on the new platform. Competition between platforms may be reduced if they have no incentive to compete for business from sellers. Collusion between platforms may be facilitated if there is increased transparency about the level of fees they charge to sellers as a result of the pricing parity arrangements imposed on the sellers. However, it is perhaps worth noting that 
the Report recognises in particular that such agreements may sometimes be justified to encourage investment in the platform.

The Report notes that platform parity agreements are becoming more widespread. In July 2012, the OFT issued a Statement of Objections (essentially a draft decision) alleging that Booking.com, Expedia and InterContinental Hotels had infringed competition law in relation to the online supply of room-only hotel accommodation by online travel agents. In particular, the OFT alleges that Booking.com and Expedia each entered into separate arrangements with InterContinental Hotels that restricted their ability to discount the price of room-only hotel accommodation.

HOW CAN YOU DETERMINE WHETHER 
A PRA MAY RAISE CONCERNS?

The Report distinguishes across-seller and across-customer PRAs from third-party agreements. As mentioned previously, in relation to third-party agreements, economic literature is rather thin and 
there is no clear case law allowing any guidelines to be drawn. However, in relation to across-seller and across-customer agreements, the Report explains that when assessing PRAs, competition authorities (and therefore companies) should have regard to the following factors:

  • market characteristics: markets with few competitors are more likely to raise concerns; foreclosure is more likely 
where companies have a degree of market power; differences between sellers reduces the risk of collusion; differences between buyers increases the risk of price discrimination; high barriers to entry raise the risks of foreclosure;
  • seller characteristics: where a dominant seller is present on the market, the risk of foreclosure is high; if the sellers that adopt the PRA have the lowest prices in the market the adoption of the arrangement may be a form of ‘price signalling’ to the remaining sellers; the more undertakings that adopt the arrangement, the risk of an overall softening of competition increases;
  • characteristics of the PRA: the easier it is to renegotiate the agreement, the lower the chance that competitive harm will arise; promises to ‘match’ the price of any competitor gives rise to a greater risk of collusion; if the promise is to ‘beat’ the price of any competitor there is a greater risk that another competitor will be foreclosed.

To assist regulators in assessing the 
impact of PRAs the Report includes a ‘screening device’ in the form of a flowchart facilitating the assessment of both 
across-seller and across-customer PRAs. It includes a checklist of risk indicators for each of the two categories of PRAs, which will be useful for both regulators and practitioners alike.

CONCLUSIONS

The OFT is not the only competition authority to be considering the question of price relationship agreements. In September 2012, the two US competition authorities – the Federal Trade Commission and the Department of Justice – held a public workshop on the implications of MFNs for US antitrust enforcement. The conclusions were broadly the same: these arrangements can introduce efficiencies but are more likely to be critically scrutinised than they have been previously. The OFT’s decision concerning price relativities agreements in the sale of cigarettes in the UK was overturned on appeal but the interest in assessing the competitive impact of all the relevant pricing agreements has not diminished. Companies and their advisers will need to be more aware of the potential implications for PRAs in the future in order to avoid issues arising.

NOTES

  1. Office of Fair Trading, ‘Can “Fair” Prices be Unfair? A Review of Price Relationship Agreements’, September 2012, OFT1438.
  2. For example, Hoffmann-La Roche & Co Ag v Commission [1979].
  3. See http://europa.eu/rapid/pressReleasesAction.do?reference=IP/05/710&format=HTML&aged=0&language=EN&guiLanguage=en.
  4. See http://europa.eu/rapid/press-release_IP-04-1314_en.htm?locale=en.
  5. OFT Press Release 65/12, dated 31 July 2012, available at: http://www.oft.gov.uk/news-and-updates/press/2012/65-12.
  6. Somewhat oddly there is no consideration of the OFT’s decision in relation to cigarette prices in the UK (Case CE/2596 – 03), which dealt with the issue of reference pricing but which was subsequently overruled by the Competition Appeals Tribunal ((1) Imperial Tobacco Group PLC and (2) Imperial Tobacco Ltd v Office of Fair Trading and joined cases [2010]).