Expansion of digital markets and restrictions

by Bryan Cave Leighton Paisner
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The European Commission has been closely following the developments in e-commerce. As more and more goods and services are sold online, the Commission finds itself inevitably drawn into regulating the competition rules in this increasing important sector.

On 22 March 2018, the Director General of Competition, Mr Laitenberger, set out the Commission’s views on the key challenges it faces in dealing with ecommerce and how it proposes to deal with them in the future.

Geo-blocking and price monitoring software

The Commission’s sector inquiry into e-commerce markets demonstrated that digital services have changed the dynamics and incentives of companies in the distribution chain. Vertical restrictions impacting online sales remain widespread across industries. Therefore while digital services have enormous potential to boost cross-border trade, companies are taking steps to implement vertical restrictions, for example through geo-blocking practices. E-commerce also allows manufacturers to monitor the setting of retailers’ prices and intervene to dampen price pressure. These practices enable manufacturers and suppliers to compartmentalise national markets and keep prices artificially high.

In this regard there has been an explosion in the use of price tracking software. Many online retailers use this software to automatically adjust retail prices to those of competitors. In its recent e-commerce market study, the Commission found the majority of respondents to the Commission’s survey admitted to using competitor price tracking software and adjusting their own prices to those of their competitors.

MFN clauses

In the context of e-commerce markets, the Commission is particularly concerned about vertical restraints which are widespread in a particular sector. This is particularly true of most favoured nation clauses (MFN) which typically bind a supplier to giving its most favourable price it offers to third parties to particular buyer. Although these clauses have been widespread in commercial contracts in the past, the very wide scope and universal geographical coverage provided by the internet gives these clauses extra potency in affecting competition on the market. The effect of these terms may lead to foreclosure of other suppliers or buyers, facilitate collusion at the supplier or buyer level, or directly lead to a reduction of intra-brand price competition through retail price maintenance.

Online platform intermediaries

Access to online market places is becoming of increasing importance to small and medium sized businesses. These companies are now less likely to have a bricks and mortar shop, but much more likely to have market access through online marketplace platforms.

In the past the Commission’s guidance on the Vertical Agreements Block Exemption had permitted suppliers to ban their retailers from selling on such platforms in certain limited circumstances to protect the supplier’s brand. This was particularly so in luxury goods markets. The recent Coty judgement by the European Court of Justice has leant further support to this position. However certain member states, in particular Germany, are in the vanguard of trying to open up access for SMEs to online market platforms. Several German cases have seen restrictions on using online market places struck down as being unlawful. So there is a tension between the Commission’s view and that of certain Member States. This is leading the Commission to re-examine its treatment of online intermediary platforms and meant the Commission had to consider how to qualify intermediary agreements.

In addition the increased use of online market places by SMEs had focused the Commission on the market power enjoyed by those online platforms. The assessment of intermediary markets would be important for the competition law assessment of market power, and noted that these markets are currently being assessed by the European Commission to see whether there is an imbalance of bargaining power between online platforms and business users.

Conclusion

The Director General concluded by noting that the Commission was very closely following market developments, and would continue monitoring market evidence to tackle practices that are detrimental to open markets, competition and consumer welfare.

Expect to see increasing activity from the Commission on e-commerce in the future. As internet commerce becomes more and more part of our everyday lives, its importance in consumer welfare is going to take centre stage for competition regulators. Coming to grips with the rapid deployment of new technology and whether the existing regulatory tools under competition law are adequate is a continuing debate.

On 28th March 2018 the EU Commission appointed several special advisers to advise it on future challenges of digitisation for competition policy in an effort to stay on top of developments. This is upon the initiative of Commissioner Vestager, the EU Competition Commissioner.  The task of these new advisers is to advise on what the key upcoming digital changes are that will affect markets and consumers, and on their implications for competition policy. An open conference to obtain a wide range of contributions is expected to be held in Brussels in January next year with their report expected to be delivered by 31 March 2019.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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