CURRENT STATUS OF PRICE PARITY - MOST FAVORED CUSTOMER CLAUSES AFTER POPULAR INVESTIGATIONS IN EUROPE

24.10.2018

 

In most markets, suppliers deliver their products to the distributors in order them to supply the products to the customers. This relation between the suppliers and the distributors are made by vertical agreements. Suppliers do not have to distribute the products via other undertakings as distributors. They may distribute the products themselves or by the affiliated undertakings. But especially within two types of markets, suppliers choose to distribute the products by authorized or independent dealers/distributors. One reason to choose this distribution method is, the market being wide. The suppliers, whose products are being demanded by a wide range of consumers from different parts of a country or the world, choose to deliver the products by distributors. This is because it would be too hard and costly to establish affiliated distributors in so many different locations. At the same time, it would be hard to control the service quality in so many places.

The second reason to choose to deliver the goods via distributors is, the difficulty of maintaining the brand image. This is mostly recordable for the luxury products suppliers, such as Mercedes, Audi and BMW. The luxury product suppliers care the service quality more than the other product suppliers. In order to present the product better, there need to be executive sales representatives within the showrooms for the luxury brands. If the supplier wants to create its own distribution system, it has to hire thousands of sales representatives who are qualified. But in fact, it is more expensive than making a vertical agreement with every distributor. And also, since it is hard to control all the affiliated distributors periodically, the service quality would most probably decrease in time and reduce the brand image of the supplier. To sum up, for the global companies and the luxury brand companies, distribution is as important as the production and it need to be done with the vertical agreements.

On the other hand, since we are living in a global world, % 90 of the people in the world intend to meet their needs via online platforms. And it is going more popular than ever. Most Favored Customer (MFC) clauses are mostly being used by online platform companies within those vertical agreements made between the suppliers and the distributors. Especially by the price parity MFC clauses, online platform companies ensure that a supplier is going to act the platform at least as favorable as any other platform. These MFN clauses are the fundamental aspects of some of the world’s leading companies such as Amazon.com, Booking.com, Apple, Expedia.com. these MFN clause implications have been the most discussed and investigated issue by European Commission Directorate General for Competition as well as the national competition authorities all around the world. By some of them huge investigations have been started against platforms and by some of them applied sanctions to the platforms. But it should be examined that what is the role of the clauses within online platform markets, do they serve for the abuse of the dominant position in fact and finally, how can the clauses be used for serving to maintain the competitive structure.

Price Parity Most Favored Customer clauses (also known as Most Favored Nation Clause within the private international law) are clauses which oblige a supplier to supply its goods or services to the platform companies, who is the other party of the vertical agreement, at a price, which are at least as favorable as those offered to other customers. At the first step, it seems like these clauses appear to be strengthen to the competition since they force the supplier to offer the customer the best/lowest/the most competitive pricewhich the supplier offers to anyone else. On the other hand, in time, these clauses have seemed to be threatening by some local Competition/Antitrust Authorities all over the world and the European Commission Directorate General for Competition.

The objectives were as follows: they may act as a disincentive to price-cutting as a discount offered to a third party must also be offered to the customer benefitting from the MFC clause; and (ii) the cumulative effect of several agreements with MFC clauses can lead to an alignment of prices. Lately in 2017, European Commission Directorate General for Competition carried out an important investigation based violating competition by MFC clauses. It was the Amazon.com case. After that, the OFT and the German Competition Authorities started investigations about Amazon.com’s price parity based MFC clause application. Amazon’s policy prohibited third party sellers from selling their products at lower prices on other online platforms. The Office of Fair Trading/UK and the Bundeskartellamt were concerned that the price parity requirement might be anti-competitive as it had the potential to raise platform fees, curtail entry by potential entrants as well as directly affect the prices set on platforms. After a short investigation both Authorities closed the case for administration reasons.

However, within the investigation carried out by EU Commission, Amazon.com made several commitments as: 1- Not to enforce relevant clauses requiring publishers to offer Amazon similar non-price and price terms and conditions as those offered to Amazon's competitors or any such clauses requiring publishers to inform Amazon about such terms and conditions. The commitments cover in particular provisions related to alternative/new business models, release date and catalogue of e-books, features of e-books, promotions, agency price, agency commission and wholesale price. 2- To allow publishers to terminate e-book contracts that contain a clause linking discount possibilities for e-books to the retail price of a given e-book on a competing platform (so-called Discount Pool Provision). Publishers are allowed to terminate the contracts upon 120 days' advance written notice. 3- Not to include, in any new e-book agreement with publishers, any of the clauses mentioned above, including Discount Pool Provisions.

Following, EU Commission and French, Swedish and Italian Competition Authorities started to accept proposals against Booking.com which is world-wide known on-line hotel booking platform that uses price parity MFC clauses within their agreements made with the hotels. Thus, Turkish Competition Authority banned the access to Booking.com platform from Turkey. The investigations in Europe on Booking.com are in progress.

After these investigations existed world-wide, the role of price parity MFC Clauses on the competition structure within the market appeared significantly. Also it is started to be discussed that whether the MFC clauses simplify the abuse of the dominant position within the market, thus are the MFC clauses efficient, eliminating competition and serve for cartel practices or are they indifferent due to the each present case.

MFC clauses are fundamental contractual assets of online-platform based companies. To ban the usage of the clauses by Authorities would not serve as efficient as it’s expected. The companies may look for another type of regulation that would serve them in the same way. Therefore, by some restrictions or newly enhanced implication conditions, MFC clauses would serve more to ensure the competitive structure within a market, more than restraining it, I believe.

For now, price parity MFC clauses are accepted as preventing the competition within the market, simplifies the abuse of the dominant position, establishes dominant position or monopoly within the market So, the Authorities try to avoid the usage of the clauses. Lately, it is being discussed that in some situations price parity clauses may not set aside the competitive structure of the market. The basic request about price parity most favored customer clauses may be the European Union Authorities to establish a Communiqué specified on Most Favored Customer clauses, just like Motor Vehicles Sector Vertical Agreements Block Exemption Communiqué or Communiqué on Retail Services.

 

Att. Ayça Güntülü ALKAN 

 

BIBLIOGRAPHY

1. European Commission. (2017) Case AT. 40153 E-Book MFNs and Related Matters Amazon, Antitrust Procedure Council Communique 1/2003, Http://Ec.Europa.Eu/Competition/Antitrust/Cases/Dec_Docs/40153/40153_4392_3.Pdf 7

2. Euroepan Commission. (2010) Commission Communique 330/2010 Of 20 April 2010 On The Application of Article 101(3) Of The Treaty On The Functioning Of The European Union To Categories of Vertical Agreements And Concerted Practices, Http://Ec.Europa.Eu/Competition/Antitrust/Legislation/Vertical.Html

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