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Price Comparison Websites and Selective Distribution Systems: An Effects-Based Approach

The Düsseldorf Regional Court of Appeals ruled in April 2017 in the Asics/Bundeskartellamt case, deciding that a restriction in the use and/or active support of price comparison websites by authorised dealers within a selective distribution system is a restriction of competition by object and violates Article 101(1) of the TFEU. The court dismissed all lines of arguments referring to potential efficiencies or anticompetitive effects.

The possible effects, however, of vertical provisions not to actively support and/or use price comparison websites are manifold. The solution to free-rider problems and brand image protection are in our view plausible economic efficiencies. Limited functionality, low standards for privacy and consumer protection as well as reports from customers who were misled by price comparison websites, imply a serious risk that the appearance of price comparison websites carry over in a negative way to brand image. These qualitative shortcomings of price comparison websites might have diminished over the last decade, but they are still present. Provisions on the use of price comparison websites (in the sense of a qualitative criterion in a selective distribution system) can be justified in such market circumstances. For a consistent and substantiated theory of harm a detailed analysis of competition between brands needs to be carried out, since a plausible theory of harm is unlikely in a market with effective inter-brand competition. In addition, fundamental problems of coordination between online and offline retail channels, taking account specific features of these channels, need to be understood. The treatment of these provisions as a by-object competition restriction in the sense of Article 101.1 of the TFEU, and/or as a hardcore restriction in the sense of the EC Vertical Block Exemption Regulation, cannot be supported from an economic point of view. This contribution presents factual findings and economic arguments that speak against the “per se” treatment of price comparison website restrictions.

Price comparison functionality and websites

Price Comparison Functionality (“PCF”) allows consumers to compare prices of specific goods or services across different retailers and directs them to the online shop with the cheapest offer (only recently some price comparison websites sell directly from their own website). Although there are other online services offering PCF, price comparison websites focus on this functionality in their service to visitors and build their business model around it.

In their early days, but in principle still today, price comparison websites were centred on the PCF. Throughout the last decade these websites have evolved in different directions. Those price comparison websites which extended their functionalities and moved in the direction of (relatively high-quality) open market places were able to win customers, while price comparison websites that kept on focusing  only on PCF attracted fewer visitors.

This consolidation process is visible when looking at changes in the ranking of price comparison websites in, for instance, Germany. The following example illustrates this: in 2010 Ciao ranked second among German price comparison websites but dropped to the seventh place in 2017. Ciao was and still is perceived in Germany as a pure price comparison website where PCF is key. Its distance to the market leader Idealo, which as opposed to Ciao added functionalities besides PCF and moved in the direction of an open market place, increased even more when looking at the ranking among all German websites: while in 2010 Ciao was only 16 places behind Idealo, in 2017 it moved to the 1,477th rank behind the leader. Similarly, Preisroboter, like Ciao in Germany perceived as PCF central, moved from the third to the 14th rank among price comparison websites, while in the absolute ranking of all websites it dropped from 76 to 18,766 ranks behind Idealo.

The dynamics of today’s internet have generated overlapping functionalities of various websites. This has resulted in a complex and highly idiosyncratic journey by potential purchasers from an interest for a specific product to the moment of purchasing. Interestingly, there is significant variation in the usage of price comparison websites across retailers and across countries. The DG Competition’s e-sector inquiry found that typically larger retailers actively make use of price comparison websites.[1] In Germany retailers less frequently use price comparison websites relative to other EU countries.

Economic effects of price comparison websites

It can be argued that price comparison websites increase price transparency for consumers, by reducing search costs, and thereby strengthen price competition to the benefit of consumers. However, other economic effects of price comparison websites are discussed in economic literature as well and need to be taken into account. Several negative effects have been identified.

First, as long as price transparency is indeed increased, price comparison websites can facilitate coordination between competitors. Second, a certain convergence between online and offline prices is present irrespective of price comparison websites: retailers often charge the same online and offline price to limit price differences between retail channels (suggesting that a reduction in search costs due to price comparison websites may be limited). In contrast, some price dispersion across retailers persists. This indicates that non-price factors such as service and reputation of retailers may also be important online. However, these factors are often not sufficiently captured by price comparison websites, resulting in free-ride problems. Third, the significant costs (fees) of using price comparison websites for retailers may in certain situations drive consumer prices up. Fourth, multiple studies show that price comparison websites lack transparency and neutrality, especially in the past. Fifth, free-rider problems and other problems of retail channel coordination can be exacerbated by price comparison websites.

These possible, and for the most part clearly documented, disadvantages need to be compared to the benefits of price comparison websites for some consumers, retailers and manufacturers. To assess whether the positive or the negative effects dominate, it is necessary to take account of the time frame and to examine the specific product and market circumstances. The positive impact of price comparison websites on competition and consumers cannot be assumed per se.

Competitive assessment of vertical restraints regarding price comparison websites

When assessing the economic effects of vertical coordination, as opposed to horizontal coordination, the following principles need to be taken into account:

  • An interest of manufacturers (i.e. an economic incentive) to restrict sales cannot be assumed per se. Manufacturers benefit from higher wholesale prices and increased sales volumes, and generally not from higher retail prices. That is why manufacturers have no incentives to increase retail prices by weakening intra-brand competition.
  • Motives for vertical and horizontal restraints are principally different. The scope for efficiencies due to vertical restraints is larger than for horizontal agreements. Possible benefits are increased sales volumes due to solving free-rider problems or encouraging investments in demand-expanding brand quality.
  • A reduction of intra-brand competition can only lead to higher retail prices when inter-brand competition is not effective. As long as inter-brand competition is effective, negative effects of reduced intra-brand competition for consumers are unlikely. If the only effect of reducing intra-brand competition were that prices of a specific brand increased with the prices of other brands remaining unchanged, consumers of that brand would switch to these other brands.

When applying the general principles and steps to the economic assessment of provisions regarding the use of price comparison websites, the following effects can be distinguished:

On possible anticompetitive effects

  • The economic incentive of a manufacturer to restrict sales needs to be sufficiently examined, as well as the intensity of competition between brands. The potential theory of harm that a restraint to use price comparison websites was forced upon a manufacturer by retailers with buyer power in order to foreclose potential discounters is generally unlikely to be plausible. Another issue is the concern that in particular SME retailers are disadvantaged by a restriction to use price comparison websites. According to the findings in the Preliminary Report of the e-commerce sector inquiry, it is precisely the larger retailers who use price comparison websites more frequently than smaller retailers. Less than 10% of retailers with yearly turnover under 100.000 € support price comparison websites, compared to 30% of retailers with yearly turnover larger than 500.000 €, and 50% of retailers with yearly turnover larger than 50 million €. This suggests that price comparison websites are not part of the strategy of smaller retailers to enter markets.
  • Also the presumption that a provision to not actively support price comparison websites would lead to higher prices, needs further economic substantiation. The available economic studies provide evidence that most retailers set identical prices online and offline, that the variation in online and offline prices is limited, and that online retail is characterised by differentiation and search costs (just like offline retail). Price-increasing effects due to price comparison websites cannot simply be excluded either: based on publically available information, the cost of using price comparison websites by retailers appears significant. Under plausible assumptions, it can be calculated that retailers pay about 11% of the final consumer price of each pair of shoes as a fee to price comparison websites. Also, a price-increasing effect due to more price transparency between retailers cannot be excluded. In any case, vertical and horizontal free-riding is potentially stronger, search costs for some consumers in some product categories are higher and additional distribution costs are created.

On possible efficiencies

  • Certain types of products, including sports footwear, have clear characteristics of so-called experience or credence goods: the quality and personal suitability of specific sports shoes can only be known to consumers after purchasing and using the shoes (a number of times). And even then most consumers remain uncertain about having purchased the most suitable shoes and about possible long-term effects on injuries.
  • This nature of sports goods and footwear explains the economic choice of a selective distribution system by sports goods manufacturers. By setting up a selective distribution system, manufacturers are better able to ensure the pre- and post-sales services and to build the brand value that is needed to provide potential consumers sufficient comfort to purchase experience goods.
  • This same reasoning serves as the economic justification for provisions to not to actively support and/or use price comparison websites:
    • Although some price comparison websites have been “upgraded”, in the past price comparison websites focussed mostly or even solely on PCF, had few additional functionalities and generally offered a low-quality environment for presentation of branded products.
    • In this context, a provision not to actively support and/or use price comparison websites, helps to protect the brand image of manufacturers. Price comparison websites, in particular in the past, undermine reputation building, because they stress price rather than non-price factors. Limited functionalities, low standards for privacy and consumer protection and reports of consumers feeling misled, imply the risk that appearance on price comparison websites reflects badly on brand image. Extensive evidence points at such effects: several reports document low quality of information and lack of transparency and neutrality of price comparison websites. This can lead to reduced product quality in the long term.
    • Insofar price comparison websites increase price transparency and price convergence between online and offline prices – which cannot be simply assumed – manufacturers face the aggravation of two problems: retail channel coordination in general and free-riding in particular. Provisions not to actively support and/or use price comparison websites can be seen as a suitable method to respond to these problems and to correct the incentives of authorised retailers for the provision of sales services.

Conclusion

The possible effects of price comparison websites on online and offline markets are manifold and so are the effects of the restriction in active use of price comparison websites within a selective distribution system. The solution to free-rider problems and image protection are in our view plausible economic efficiencies, precisely for products that are typically selectively distributed. Limited functionality, low standards for privacy and consumer protection as well as reports from customers who were misled by price comparison websites, imply the risk that the appearance of price comparison websites carry over in a negative way to brand image. For a consistent and substantiated theory of harm a detailed analysis of competition between brands needs to be carried out, since a plausible theory of harm is unlikely in a market with effective inter-brand competition. Finally, fundamental problems of coordination between online and offline retail channels need to be analysed. Treatment of these provisions as a by-object competition restriction in the sense of Article 101.1 of the TFEU, and/or as a hardcore restriction in the sense of the EC Vertical Block Exemption Regulation, cannot be supported from an economic point of view.

[1] European Commission, Preliminary report on the e-commerce sector inquiry (15/09/2016), p.158.

Authors

Theon van Dijk

Theon van Dijk is a director in the Brussels office of E.CA. Theon has over 20 years’ experience as an expert on the economics of competition law. He has provided expert economic advice to clients involved in competition law proceedings before the European Commission and competition authorities in the Netherlands, Belgium, Germany, France and the United Kingdom. His consulting experience covers a wide range of industries including pharmaceuticals, biotechnology, consumer electronics, fast-moving consumer goods, broadcast services, lighting products, salt, sugar, beer, publishing, hospital services and telecommunications services. Theon has provided expert economic advice in all functional areas of competition law including mergers and acquisitions, abuse of dominance, cartel investigations and private damages claims, vertical and horizontal agreements, state aid and licensing conditions of intellectual property. He has appeared as an economic expert in various court cases and arbitration proceedings, and has acted as an arbitrator. Theon started working in economic consultancy in 1996, after completing his PhD in industrial economics and intellectual property at Maastricht University and spending a year as a postdoctoral researcher at the University of Toulouse. Having worked in senior positions for major international consultancies in London and Brussels, in 2005 he founded Lexonomics, which joined forces with E.CA Economics in November 2016. Between 2013 and 2015 he held the position of Chief Economist at the European Patent Office in Munich. Theon Van Dijk has published widely in the area of industrial economics, competition policy and intellectual property. hans

Hans Friederiszick

Hans W Friederiszick is a director of E.CA Economics and one of the founders of E.CA Economics.  Dr Friederiszick has extensive experience in advising clients in all fields of competition economics (cartels, merger cases, abuse of a dominant position and state aid cases) and has led teams of economists on international antitrust investigations. He has been retained as an economic expert in front of German, UK and other European courts and is named in GCR’s Who’s Who as one of the leading competition economists. He is a member of the steering committee of the Association of Competition Economics (ACE). While working at the European Commission, he was one of the main contributors to the ongoing reform in the field of EC State aid control, including contributions to the State Aid Action Plan and the R&D&I Guidelines. He worked during that time, inter alia, on the Alstom R&R case, German Landesbanken cases, the Microsoft/ContentGuard merger, the article 102 case against AstraZeneca and the copper tubes cartel cases. Dr Friederiszick is also a research fellow at the ESMT Berlin. He has published widely and is a regular speaker at international antitrust conferences. Most recent publications address the economics of regional state aid (book chapter, Wolters Kluwer), efficiencies in article 102 TFEU cases (JCLE) and selective distribution systems (Journal of Antitrust Enforcement). 2

Ela Głowicka

Ela Głowicka has 10 years of experience in the application of qualitative and quantitative economic analysis in the context of European competition policy and private litigation. She provided expert advice in all fields of competition policy, including antitrust, mergers (Phase I and Phase II investiations), cartels and concerted practice, and state aid. Her expertise covers a wide range of industries such as pharmaceuticals, fuel retailing, agriculture, electricity generation and transmission, cement, air freight, automotive bearings and music. Before joining E.CA Economics dr Głowicka was a member of the Chief Economist Team in DG Competition, European Commission. She holds a doctoral degree from Humboldt University for the thesis on competition policy applied to bailouts. W@Competition named her as one of the '30 in their 30s' Notable Women in Competition Economics in 2017. 3

 

[1] European Commission, Preliminary report on the e-commerce sector inquiry (15/09/2016), p.158.

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