Dual pricing and dual distribution – the German perspective

By Marcio da Silva Lima

10-2020

The EU Commission has confirmed in its recently published Evaluation that it is assessing the competitive effects of dual pricing and dual distribution. Following the significant growth of online sales, these practises have also been a focus of the German FCO.

The German FCO has looked at the anti-competitive effects of dual pricing systems. In its view, they can constitute an inadmissible hardcore restriction under Article 4 (b) VBER. As far as dual distribution systems are concerned, the FCO has looked at the extent to which online hybrid platforms are covered by the cartel prohibition exemption pursuant to Article 2 (4) VBER.

Dual pricing

In a dual pricing system, a manufacturer grants its retailers different purchase prices depending on their reselling behaviour. The purchase prices can be controlled directly via fixed price tables or indirectly through a discount system or variable subsidies. While such systems have long been used primarily in the context of products sold at home or abroad, they are now often applied by manufacturers to retailers who resell products both in a physical retail store and online (so-called “hybrid retailers”). Generally, manufacturers aim to restrict online sales in favour of sales in a store. By granting different purchase prices depending on whether the retailer sells the product online or through his physical store, the manufacturer exerts at least factual control over the retailer’s choice of distribution channel as unfavourable conditions for online sales incentivise the retailer to limit or do without them.

Consequently, dual pricing systems that factually restrict or impede retailers from selling their products online are generally considered to be hardcore restrictions pursuant to Article 4 (b) VBER by restricting passive sales via online retail channels.

In Germany the FCO has acted repeatedly upon complaints of retailers faced with dual pricing systems and secured amendments to the respective manufacturer’s terms and conditions. As an example, the FCO acted against Bosch Siemens Hausgeräte (“BSH”) who had introduced a system of performance discounts in an annual agreement with its retailers (see the FCO’s press release available in German and English). The discounts were based on BSH’s selling price and were lower the more sales a retailer generated online. To calculate the individual discounts, the retailer’s online/offline quotas were applied to fixed discount rates which were more than five times higher for offline sales. The quotas were estimated by BSH and weren’t based on the retailer’s information. BSH had also reserved the right to adjust the required quotas during the year. After the FCO’s intervention, the discount spread was abolished and replaced by quality-based presentation and consulting discounts.

Further proceedings were conducted against Dornbracht (see the FCO’s case report available in German), a manufacturer of sanitary fittings, and against GARDENA (see the FCO’s press release available in German and English), a manufacturer of garden products, which had employed similar dual pricing systems. Since the aforementioned proceedings were concluded by mutual agreement and became legally binding, a significant case law on dual pricing systems has yet to be established in Germany.

The severe approach towards dual pricing systems was confirmed by the FCO in its working paper “Quo vadis Vertikal-GVO” of 10 October 2019 (available in German) in which the FCO commented on the upcoming expiration of the VBER. In particular, due to having an effect similar to an absolute ban on online sales, the FCO recommends maintaining dual pricing systems as a hardcore restriction. Nevertheless, the FCO recognizes that differentiation based on actual costs and sales efforts may encourage hybrid dealers to invest in stationary customer services which can offer added value for consumers. In this regard, the FCO stated that the EU Commission’s vertical guidelines would already provide for the possibility of a fixed remuneration, outlining, however, that the requirements for competition law compliant incentives should be further substantiated in the future.

Dual distribution

In its reassessment of the VBER, the European Commission is also focussing on dual distribution systems. In such a system, a manufacturer sells his products also directly to end customers and not only through retail partners. Thus, a manufacturer using a dual distribution system is considered as competitor in relation to his distribution partners on the retail level.

From an antitrust perspective, agreements between a directly distributing manufacturer and their retail partners would, therefore, have to be assessed under horizontal aspects. However, the current VBER provides for an exemption from the cartel prohibition covering agreements between self-distributing manufacturers and their retail partners, even if they compete on the retail level. Due to the growing importance of dual distribution systems, more and more doubts have been raised as to whether the exemption is still appropriate and adequate. One of the main questions in relation to dual distribution systems is the extent to which a manufacturer using such a distribution system competing with his distribution partners on the retail level may engage in a mutual exchange of competition sensitive information, i.e. on prices, customers or sales volumes, which is handled more strictly under competition law in horizontal relations than in vertical ones.

The FCO has so far stated that new rules of differentiation are necessary to take into account the potential competitive effects of vertical agreements related to dual distribution systems (i.e. anti-competitive horizontal coordination between product manufacturers and their distribution partners), which are becoming increasingly important in the market.

In addition, the FCO has also questioned the extent to which digital “hybrid platforms” are covered by the VBER. In the case of a hybrid platform, the platform operator acts as an intermediary for retailers to sell their products on the digital platform to end customers who, on the other hand, use the platform to find interesting products. On the other hand, the operator of a hybrid platform also sells products on his own digital platform to platform users, so that he must be considered as competitor to other retailers active on the platform. However, the difference with the classic dual distribution system is that the platform operator does not sell a special product, distributed by independent distribution partners in parallel. Rather, the operator of a hybrid platform operates two parallel businesses: an intermediary service provided to retailers using the digital platform to sell products and its own retail business conducted on its own digital platform. Due to this significant deviation from the classic dual distribution, the FCO has expressed doubts that the VBER should favour hybrid platforms fearing, in particular, that an exemption of hybrid platforms under the VBER bears the risk of significant restrictions to competition.

The FCO has therefore already conducted an administrative proceeding against Amazon in 2013 in the area of hybrid platforms for illegal price collusions with retailers active on Amazon’s hybrid platform “Marketplace” (please see here the FCO’s case report available in German). The FCO, in particular, did not consider the relationship between Amazon and Marketplace retailers to be purely vertical but rather a horizontal cooperation. In fact, Amazon had prohibited Marketplace retailers selling products both on Amazon’s Marketplace and on other digital platforms or online shops from offering lower prices than those found on the Marketplace. The FCO considered this to be inadmissible under competition law.

 

For more information please contact Marcio da Silva Lima.

 
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