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European Commission goes online with final report in e-commerce sector inquiry

EU-FlagThe final report on the European Commission’s e-commerce sector inquiry was published last week and contains some important observations about how online channels of distribution are transforming consumer goods and digital content markets.

Margrethe Vestager, the European Commissioner in charge of competition policy, launched the Commission’s e-commerce sector inquiry in May 2015, announcing that “European citizens face too many barriers to accessing goods and services online across borders”. The final report largely confirms the Commission’s preliminary findings published in September 2016, but also reflects comments received in relation to those findings.

The inquiry was intended to identify possible competition concerns in European e-commerce markets, drawing on information collected from 1,900 stakeholders across all 28 EU Member States and an analysis of around 8,000 distribution and licence agreements.

The Commission has stated that the report will inform antitrust enforcement in European e-commerce markets, with the Commission suggesting that it will open further investigations in this area (in February 2017 it opened three separate investigations into suspected anti-competitive practices in e-commerce).

In addition to increased opportunities for price coordination, a number of other restrictive practices uncovered during the inquiry are identified as problematic, some involving behaviour that may amount to hardcore infringements of competition law. Retail price maintenance, dual-pricing and restrictions on cross-border sales and on the use of price comparison tools all feature as areas of concern.

Several businesses, including major brands in the clothing industry (Mango, Oysho, Pull & Bear, Dorothy Perkins and Topman) are said to have reviewed their commercial practices in response to the inquiry – an early victory for the Commission. Other businesses, seeking to avoid the Commission’s proactive approach to enforcement, might consider following suit.

Pricing transparency: a double-edged sword

The Commission’s report makes several observations about increased pricing transparency.

The increased availability of product and price information means that consumers can switch swiftly from one channel (online/offline) to the other.  Although this empowers consumers, who are in a better position to find the best deals, it encourages “free-riding” whereby customers use pre-sales services offered by brick and mortar shops to inform purchases they make online.  The difficulty of recouping the costs of pre-sales services is said to be a concern for both manufactures and retailers, reflected in responses provided to the Commission’s requests for information.

That increased pricing transparency may be a double-edged sword is also seen in the use of software which tracks retailers’ online prices.  Two-thirds of retailers are said to use programmes which adjust their selling prices based on the observed prices of their competitors.  Pricing software is also a tool in the hands of manufacturers, who are increasingly able to monitor the prices of retailers who sell their products.

The Commission’s report reflects its concern about this activity, suggesting that the availability of real-time pricing information may facilitate retail price maintenance and trigger automatised price coordination. These concerns were voiced by Margrethe Vestager earlier this year who, speaking at the Bundeskartellamt 18th Conference on Competition, reiterated that competition enforcers “need to make it very clear that companies can’t escape responsibility for collusion by hiding behind a computer program”.

The potential for this software to be used for anti-competitive ends has also been flagged by the UK’s Competition and Markets Authority, which has issued a number of recent online RPM infringement decisions and launched a campaign at the end of last year to raise awareness about price fixing online.

Shop or drop

The report notes that, in response to the growth of e-commerce, manufacturers are increasingly taking measures to maximise control over their distribution networks.

Responses to the Commission’s information requests revealed that, in the last 10 years, around one in five of respondent manufacturers had introduced selective distribution systems for the first time, and that 67% of those using selective distribution systems had introduced new selection criteria, typically in relation to online sales.  The Commission recognises the importance for manufacturers and brand owners of maintaining high quality distribution (including pre-and post-sale services), but notes the need to balance this against the vital freedom for retailers to independently set resale prices, sell products online and serve customers from outside their territory.

The sector inquiry has not led the Commission to call for a change to the competition law treatment of selective distribution, but its report acknowledges that such arrangements may facilitate the implementation and monitoring of certain vertical restraints that may raise competition concerns and require further inspection.

The use of brick and mortar requirements, whereby manufacturers require the operation of a shop by retailers, is prevalent and excludes pure online players from distributing certain products.  The final report suggests that although such requirements are generally exempt from prohibition (by the Vertical Block Exemption Regulation), certain measures requiring retailers to operate brick and mortar shops without any apparent link to distribution quality or efficiencies may be subject to scrutiny.

Digital content

The inquiry also investigated digital content, with questionnaires sent to service providers and rights holders offering a variety of different types of content (including films, sports, fiction TV, music and news).

The final report indicates that restrictions between suppliers and providers of digital content may be damaging competition by shutting out new entrants. Exclusivity and geo-blocking arrangements are said to be widespread in the distribution of digital content, though such measures do not necessarily entail a breach of competition law.

This is an area of particular interest for the Commission, which has already proposed a Regulation on geoblocking, intended to bolster e-commerce and remove discrimination based on nationality or place of establishment.