July 20 2017
While the digital economy offers abundant opportunities to customers and retailers alike, it also raises a number of competition concerns, including the impact on bricks-and-mortar businesses, the potential for abuse of market power by major digital platforms and the challenge of fostering online competition while preventing free riding. Competition authorities must evolve and adapt traditional antitrust principles and approaches to meet the challenges of the rapidly changing digital market.
What impact has the rapidly changing digital market had on competition in your jurisdiction and how have legislators and competition authorities responded?
Digital markets are a priority under existing EU competition policy. The fast-paced nature of the market has posed challenges for competition authorities and legislatures alike. However, EU Competition Commissioner Margrethe Vestager has stressed that digitalisation does not require a complete overhaul of competition law or the creation of sector-specific rules, but rather adaptation to the features of digital markets. At the same time, according to the European Commission, fully reaping the benefits of the digital revolution necessitates a consistent regulatory framework. This is why turning the digital single market into a reality has been a European Commission priority since the start of its mandate in 2014.
The new digital ecosystem has thus seen the rise of new means of anti-competitive behaviour, transforming what have so far been traditional competition law infringements – for example:
The European Commission's findings in the e-commerce sector inquiry suggest that this will continue to be an important compliance area. The inquiry noted that the majority of retailers track competitors' prices, with more than two-thirds of those doing so via automated software programs. An overwhelming majority in fact adjust their own prices to those of competitors. In addition, the inquiry noted that collection by marketplaces or direct online sellers of their retailer's pricing information might require safeguards to avoid anti-competitive consequences.
Platforms' use of MFN clauses
With online platforms becoming increasingly popular, most-favoured-nation (MFN) clauses have increasingly captured the attention of both the European Commission and national competition authorities. So far, the focus has been on the markets for hotel accommodation and e-books.
Germany's national competition authority prohibited certain MFN clauses. The French, Italian, Swedish, Irish and UK national competition authorities accepted commitments. France and Austria legislated to prohibit online travel agents' price parity clauses.
Data as an asset
Competition authorities have become sensitive to the growing importance of Big Data in today's economy. Vestager has emphasised that merely holding a large amount of data may not be problematic, but might need to be factored into the competition law assessment under merger control. Under exsting merger rules, the commission and national competition authorities examine mergers that meet certain turnover thresholds.
Following the Google/DoubleClick and Facebook/WhatsApp cases, several respondents (including the European Data Protection Supervisor) argued that the existing EU merger control regime should be updated to capture proposed concentrations or acquisitions of less established digital companies, which may hold significant quantities of personal data that have yet to be monetised.
The European Commission is examining whether a value-based threshold could be an appropriate proxy for identifying mergers with an EU dimension. The rationale is that the new threshold would take into account both the future market capitalisation of an IT company and how data acts as a currency with which consumers pay for free services they receive via the Internet. A 'value of transaction' merger threshold has already been adopted in Germany and Austria.
At the same time, the final report of the e-commerce sector inquiry confirmed that competition concerns could arise with regard to data collection and usage. For example, exchanging competitively sensitive data between online marketplaces and third-party sellers or manufacturers with their own shops and retailers may be anti-competitive where the same companies are also direct competitors on a given set of products or services.
Tackling unjustified geo-blocking
With the global economy becoming digitalised at a rapid pace, the European Commission emphasised the need to ensure better access for consumers and businesses to digital goods and services across Europe. E-commerce in the European Union has grown steadily, with the percentage of people ordering goods or services online having grown from 30% in 2007 to 55% in 2016. One of the European Commission's primary goals is to tackle unjustified geo-blocking (ie, commercial practices that prevent online customers from accessing and purchasing a product or a service from a website based in another member state, or which automatically re-route them to a local site). Geo-blocking can also occur when trying to access or purchase online copyright-protected content from another member state.
The European Commission has proposed addressing geo-blocking in the European Union via legislative proposals and the competition law toolbox.
Ensuring fair and innovation-friendly platform economy
Complementing enforcement action under competition law, the European Commission is conducting a fact-finding exercise on platform-to-business trading practices. Concerns relate to platforms favouring their own products or services, discriminating between suppliers and sellers and restricting access to and the use of personal and non-personal data. The absence of transparency and redress mechanisms are additional matters raised by stakeholders. The European Commission aims to propose legislation by the end of 2017 to address unfair contractual clauses and trading practices identified in business-to-business relationships.
In terms of market definition, are online services considered to be in the same market as traditional services in your jurisdiction? What impact has this had on competition?
Market definition constitutes the point of departure for an analysis of competitive forces. According to the applicable legal test, the delineation of the relevant market is in essence a matter of substitutability. If traditional and online services can be regarded by consumers as substitutable due to their characteristics or price, they fall within the same product market. Demand substitutability generally consists of the strongest competitive constraint exercised on firms and is considered to carry the heaviest weight in the determination of the relevant market.
The key question is whether a supplier of a traditional service should introduce a 5% to 10% price increase and whether enough customers would be inclined to switch to online (and vice versa), making the price rise unprofitable. An affirmative answer may suggest that the market encompasses both traditional and online services.
The question of whether online and offline services are part of the same product market has already been dealt with by the European Commission in a plethora of merger cases. However, no uniform guidance is provided, as the answer is dependent on the service under consideration.
Travel agency services
In Dnata/Stella, American Express Company/Qatar Holding/GBT, Axa/Permira/Opodo/Go Voyages/Edreams and Thomas Cook/Travel Business of co-operative group/Travel Business of Midlands Society, while leaving the precise market definition open, the European Commission considered a possible sub-segmentation of the market for the distribution of leisure travel agency services into offline travel agencies (package and independent holidays) and online travel agencies (package and independent holidays and leisure flights).
In BNP Paribas Fortis/Belgacom/Belgian Mobile Wallet, the European Commission equally left the definition of these potential markets open, primarily due to the rapidly evolving payment landscape which sees new innovative technologies and platforms being developed.
Sale of books
Books are sold to final consumers through a wide range of different channels, including independent book stores, book chains, hypermarkets, book clubs, the Internet, mail orders, credit sales and telemarketing. In Ahold/Flevo and Lagardère/Natexis/VUP, the European Commission segmented offline and online sales channels, identifying the existence of a distinct 'distant sale' segment within the market for the sale of books to final consumers, comprising book clubs, mail orders and online sales. In Bertelsmann/Kooperative Förbundet/Bol Nordic, the European Commission further considered a narrower market for the online sales of books.
However, in Egmont/Bonnier the European Commission departed from this direction and identified a single market for all book sales to final consumers, given that the market investigation (covering the Danish market) did not bring forward any element on the basis of which a separate distant sale market might be identified.
Looking further at the upstream market for the acquisition of publishing rights, the market investigation in Bertelsmann/Pearson/Penguin Random House revealed strong indications that publishing rights for English language print books and e-books belong to the same product market, as in the majority of cases publishers seem to acquire both rights. On the contrary, results were mixed with regard to the acquisition of publishing rights for audiobooks.
Although having left open the question of whether all retail sales channels form one product market, the European Commission's investigation in Otto/Primondo Assets revealed that the more standardised products within a product category are, the more likely it is that bricks-and-mortar and distance selling (ie, home shopping) could belong to the same relevant product market. This was mainly attributed to the fact that:
Ultimately, the competitive pressure exerted by home shopping and by bricks-and-mortar shops on each other was considered on a member state and sector (non-food retail) level.
What types of conduct constitute abuse of dominance in the online space and what practices are most likely to catch out unwary online players?
Common online business practices may attract abuse claims when engaged in by an allegedly dominant company. Competing to integrate new services or features may draw allegations of tying. Online operators' efforts to gain greater reach through free or 'freemium' models may be allegedly predatory. The race to secure the best online real estate, to leverage a unique set of big data or secure a prime position to offer services to a well-used website's audience may also result in allegations of foreclosure.
What steps are competition authorities in your jurisdiction taking to prevent online retailers and service providers from free riding on the investments of bricks-and-mortar retailers and service providers?
EU competition policy encourages online sales as a means of completing the EU single market. Suppliers must not restrict retailers from advertising or selling products online.
This raises free-riding concerns. Bricks-and-mortar retailers complain that customers benefit from their pre-sale services, but then purchase the products from online retailers. In turn, suppliers are concerned that free-riding may disincentivise bricks-and-mortar retailers from investing in high-quality services (eg, by retaining qualified and trained personnel).
Suppliers find it difficult to address free-riding concerns by bricks-and-mortar retailers. In 2016 Ultra Finishing – a bathroom-fittings manufacturer – was fined almost £800,000 for resale price maintenance in the United Kingdom. Offline retailers warned Ultra Finishing that they would no longer promote its brand because of internet retail outlets butchering prices to the point where it was impossible to compete. In response, Ultra Finishing adopted an 'e-tail' policy recommending online prices not to go 25% below recommended resale prices. The UK national competition authority found that, in reality, this was far from a recommendation. Ultra Finishing monitored online retailers' pricing daily and key accounts reported 'idiot sellers'. Online retailers disregarding the recommendation faced reduced discounts, were prevented from using product images and mere refused orders.
There are indications that there is a growing understanding among enforcers of the need to ensure that physical shops can survive as e-commerce booms. In the EU-wide sector inquiry into e-commerce, aimed at gathering evidence on potential barriers to competition in the online space, the European Commission identified a number of business practices that may limit online sales. But it also acknowledged the legitimacy of free-riding concerns by bricks-and-mortar retailers. Recent public statements made by Vestager also indicate that a shift in attitude may be underway.
As it stands, EU competition rules allow suppliers to take the following steps, among other things, in order to address free-riding concerns and restore the incentives of bricks-and-mortar retailers to increase sales efforts:
How can competition authorities best ensure that these steps do not hinder innovation or consumer choice and promote the continued evolution of online services?
EU competition authorities closely examine online sales restrictions imposed by suppliers. Among other things, a supplier may not:
Exceptionally, a retailer's ability to actively solicit orders from customers online (eg, by sending out emails or using territory-based banners on third-party websites) may be limited, where those customers reside in territories or belong to customer groups which are exclusively allocated to another retailer. However, in practice, online sales are generally considered to be a passive response by retailers to unsolicited orders placed by customers and cannot therefore be restricted.
There is a risk that EU competition authorities adopt an overly restrictive approach to online sales restrictions, which can have a straightjacket effect on brand owners. It may impede the adjustment of their commercial practices (eg, regarding product presentation and quality) to a retail environment that is changing rapidly, and inhibit them from addressing legitimate concerns (eg, free riding).
There have already been instances where this has happened at the national competition authority level:
In order to ensure a high level of innovation and consumer choice and promote the continued evolution of online services, EU competition authorities should avoid adopting a hardline approach to online sales restrictions. Moreover, EU competition authorities should coordinate more with one another. Following its EU-wide sector inquiry into e-commerce, the European Commission has vowed to broaden the dialogue with national competition authorities within the European competition network in order to contribute to a consistent application of the EU competition rules as regards e-commerce-related business practices.
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