On 10 September, the OFT published a report exploring the impact on competition of price relationship agreements. It concludes that many price relationship agreements can have a softening effect on competition. It sets out decision trees and checklists of risk factors which can be used to identify those agreements most likely to have a negative effect on competition, as well as efficiency justifications that may be made in respect of the agreements.
The report was prepared by economists and does not have any legal effect, but the OFT believes it will provide an “excellent external reference on the competition impacts of various types of price relationship agreements”. The OFT also confirmed that it will continue to consider enforcement activity where it finds that competition is harmed. The publication of the report is particularly helpful as there has been very little consideration of these relatively common clauses in guidance or case law to date. The relevance of the report is highlighted by yesterday’s announcement by the European Commission that Apple has agreed to remove Most Favoured Nation clauses (a form of price relationship agreement) from its agreements with e-book publishers, in order to remedy concerns that the clauses led to increased prices in the e-books market.
Types of agreements and their effect on competition
The report divides price relationship agreements into three categories:
• Across-sellers agreements – where a retailer promises customers to match or beat the prices they find elsewhere for the same or similar products. This category also covers ‘English’ clauses under which a supplier promises to match the lowest price offered by any other supplier;
• Across-customer agreements – commonly known as Most Favoured Nation (MFN) clauses, these are agreements which require a manufacturer to offer to the retailer the best price the manufacturer offers to any other retailer; and
• Third party agreements – agreements entered into by either a manufacturer and retailer or platform and seller which determine the price paid by the consumer. For example, these might include an agreement which requires the seller to sell goods on a particular platform at a price that is not higher than the price the seller charges on other platforms.
The report concludes that all three types of agreements can have a softening effect on competition.
Across-sellers agreements - the report recognises that there can be benefits to such agreements, in particular if they are offered by relatively small players in relatively fragmented markets, or when they are used in long-term contracts with pricing rigidity. However, it concludes that they can also soften competition in a number of ways. They can lead to price discrimination, with lower prices for those who are willing to seek out alternative prices, at the expense of increased prices for those who are not. The guarantees may reduce incentives to shop around, thereby undermining direct competition. Furthermore, the guarantees may soften price competition - competitors considering making price reductions are aware that their reductions will be matched and are therefore unlikely to lead to improved market share. Reciprocal price-matching strategies can also be an effective way to facilitate collusion. Finally, the guarantees can discourage market entry and foreclose the market, preventing new entrants from using price reductions to gain market share.
Across-customer agreements – once again, the report recognises that these clauses can be efficient, in particular when it is important for buyers not to be put at a competitive disadvantage after investing in the product (e.g. buying product-specific display material or input-specific machinery). The report notes the common view that the risks of softening of competition and foreclosure are lower with across-customer agreements than across-seller agreements. Nonetheless, it concludes that across-customer agreements may reduce incentives to lower prices, or, if not all customers benefit from the guarantee, lead to price discrimination. The agreements may also reduce downstream entry, preventing new entrants from negotiating the beneficial supply agreements they need in order to reach a minimum efficient scale. As with across-seller agreements, across-customer agreements may also facilitate collusion.
Third party agreements – the report concludes that third party agreements must be treated more sceptically than the others, as their only real benefit is to prevent free-riding problems for high-quality platforms which invest in a valuable pre-sales service for customers. Otherwise, it believes that the clauses can have significant negative effects, affecting competition between manufacturers/platforms and also competition between retailers, and foreclosing entry by new manufacturers/platforms for which price reductions may be key to gaining market entry.
Decision trees, risk factors and efficiency justifications
Usefully, the report provides a decision tree which can be used to identify the likely impact on competition of a particular agreement, considering factors such as the nature of the market, the market strength of the parties to the agreement, and the nature of the customers. It then sets out a number of specific ‘risk increasing’, ‘risk decreasing’ or ‘risk mitigating’ factors to determine the likely effect of the agreement.
The report is useful because guidance on the effect of price relationship agreements, including those commonly used in commercial agreements (e.g. English clauses and MFN clauses), has been very limited both at an EU and a UK level. The report not only provides guidance but also collates the limited case law that there has been to date both at a national and European level, as well as identifying relevant US case law.
More difficult, though, is understanding how the OFT will use the report and decision trees. Many of the price relationship agreements identified in the report are very commonplace and have not been the subject of enforcement action by the OFT. It is certainly possible that markets where such agreements are particularly prevalent could find themselves subject to OFT scrutiny on the basis of the findings of this report. The report sets out a series of characteristics of markets, parties and price relationship agreements that are likely to indicate an adverse effect on competition. Price relationship agreements are more likely to raise competition concerns when entered into in markets and between parties traditionally seen as more susceptible to competition infringement – high market shares, concentrated markets, high entry barriers etc. Such characteristics are prevalent in the e-books market, which is the subject of an ongoing investigation by the European Commission. One of its main objections seems to be to Apple’s extensive use of MFN clauses, which it believes has had the effect of forcing Apple’s rival Amazon to price higher. As outlined above, in the draft commitments which are the subject of the Commission’s consultation launched yesterday, Apple will commit not to use MFN clauses in its e-books agreements for 5 years.
The relevant characteristics of the price relationship agreements are more complex, and require careful consideration. As a general rule, however, a price relationship agreement is likely to have an adverse effect on competition only if it is entered into by a party which individually has appreciable market power in its relevant market or which, although not itself having appreciable market power, operates in a market where such price relationship agreements are widespread and collectively cover parties representing a significant proportion of the market.
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Peter Willis firstname.lastname@example.org