Outside construction of the RPC building.

Online resale price maintenance and pricing software under scrutiny

30 July 2018. Published by Lambros Kilaniotis, Partner and Melanie Musgrave, Senior Associate

The imposition of fixed or minimum prices on their online retailers, in breach of EU competition law, has resulted in four consumer electronics manufacturers being fined over €111 million in total by the European Commission. As part of its investigations into their pricing practices, the use of pricing algorithms by online retailers and the use of monitoring tools by the manufacturers came under scrutiny from the European Commission.

In light of this decision, manufacturers and online retailers need to consider their use of  price monitoring software and the potential impact it may have on compliance with competition laws.

Background

In February 2017, the European Commission announced that it had launched various investigations into issues which had come to light as part of its then on-going e-commerce sector inquiry. In addition to its investigations into the pricing practices of Asus, Denon & Marantz, Philips and Pioneer, the European Commission also launched investigations into geo-blocking practices in the video games sector, whereby customers are prevented from purchasing digital content based on their location or country of residence, and into price discrimination for hotel accommodation based again on customer location or country of residence. The sector inquiry found that these various restrictive practices were widespread throughout the EU.

The Infringements

On 24 July 2018, the European Commission announced the conclusion of its investigations into each of the four consumer electronics manufacturers and its decision to impose fines on each of them. These fines were reduced by between 40% and 50% as a result of the manufacturers' co-operation.

The European Commission concluded that these manufacturers had engaged in resale price maintenance in breach of Article 101 of the TFEU by restricting their online retailers' ability to set their own retail prices for a range of consumer electronics products, such as kitchen appliances, hi-fi products and notebooks. The duration of the infringing conduct and its geographic scope varied with each manufacturer. Pioneer was also found to have restricted its retailers' ability to sell cross-border in order to maintain different retail prices in different Member States.

The manufacturers had used "sophisticated monitoring tools" in order to monitor retailers' adherence to their minimum or fixed prices, albeit sometimes under the guise of recommended retail prices, and to intervene swiftly where their retailers had deviated from the prices.  Non-compliant retailers faced threats or sanctions, including those affecting product availability.

The European Commission also noted that many online retailers, including the largest ones, made use of pricing algorithms to monitor and adapt their prices to those of their competitors. Consequently, the manufacturers' pricing restrictions "typically had a broader impact on overall prices" for their respective products.

Pricing Software

In its e-commerce sector inquiry final report, the European Commission noted that online pricing transparency can have both positive and negative effects on competition. Whilst transparency makes it easier for consumers to compare prices and seek the best deal for them, it inevitably also makes it easier for manufacturers to monitor resale prices. The inquiry established that, of the 30% of respondent manufacturers who systematically tracked the online retail prices of their products (not in itself a problem, unless they then act upon these prices either directly or indirectly), 38% used tracking software to do so.

The use of pricing algorithms is ever increasing with over half of the retailers responding to the sector inquiry confirming that they tracked the online prices of their competitors, with two-thirds of these using price monitoring software to do so and 78% of these software users then adjusting their prices.

Pricing algorithms have become a hot topic for competition regulators at EU and Member State levels, as well as across the globe, with concerns that they could be used to make price-fixing cartels more effective and also make it harder for authorities to detect this illegal activity. The European Commission has indicated that cartelists who use pricing software to achieve this may face higher fines. The UK's CMA is setting up a new data unit to enhance its capabilities in light of this and other developments.

These recently concluded investigations have been the first in which the European Commission has been looking at the impact of pricing algorithms, albeit in the context of vertical price setting, and will certainly not be the last.

The CMA has already had to consider pricing algorithms in the context of a cartel agreement between two online retailers of posters and frames. These retailers had agreed not to undercut each other and, due to problems in monitoring adherence, they then utilised automated repricing software which was configured to give effect to their illegal agreement.

Conclusion

It is clear that the European Commission is now focusing much more on vertical arrangements, particularly those involving restrictions imposed on online retailers. This is also true of the CMA. The e-commerce sector inquiry and the investigations flowing from it have offered a timely reminder to businesses to review their practices and ensure competition law compliance.

The use of pricing software will become a much more significant consideration going forward for companies and competition authorities alike. True price competition amongst retailers is good news for consumers and, to achieve this, retailers do need to know how others are pricing relevant products. Nevertheless, retailers should take care as to how the software programme is set up/designed as it is clear that they "cannot hide behind algorithms". A company and its officers will not be absolved of responsibility for competition law infringements simply because an automated system is utilised to give effect to the collusion. Similarly, there may be legitimate reasons for a manufacturer to monitor how its products are faring in the marketplace.  However, the crucial issue will be what the manufacturer then does with that information and whether this impacts directly or indirectly on the ability of retailers to determine their own prices for these products.