Pricing Fundamentals in Europe ABA Pricing Conduct Committee and International Committee 30 May 2013
Panel Members -Pedro Callol, Partner, Roca Junyent, Madrid/Barcelona -Magdalena Brenning Louko, Senior Policy Analyst, DG Comp, Brussels -John Ratliff, Partner, WilmerHale, Brussels -Frédéric Puel, Partner, Fidal, Brussels/Paris
Session Outline 1. The System of Competition Enforcement in Europe. The regulation of vertical restraints (Pedro Callol) 2. Detailed discussion on the regulation of supply and distribution agreements. RPM. Pricing on the Internet (Magdalena Brenning) 3. Focus of NCAs on RPM. Hub-and-spoke cartels (John Ratliff) 4. Price variations accross customers, including price discrimination. The issue of parallel trade (Frederic Puel) 5. Pricing tied to competitors. MFNs and MFCs (Magdalena Brenning) 6. Further discussion on price discrimination (Frederic Puel) 7. Overview of the law applicable to pricing under Art. 102 (Pedro Callol) 8. Discussion of the recent Post Danmark case (John Ratliff)
1. The System of Competition Enforcement in Europe. The regulation of vertical restraints Pedro Callol
The main provisions in the Treaty of Functioning of the European Union (TFEU) Article 101 TFEU Rough equivalent to Sec. 1 Sherman Act General prohibition on agreements which have as their object or effect the restriction of competition and which affect trade between MS Agreements under the first parag. are void Forbidden agreements may be allowed in block or in individual cases if they achieve positive effects for the economy and allow consumers a fair share Article 102 TFEU Rough equivalent to Sec. 2 Sherman Act Does not forbid monopoly or acquisition of market power as such, but the abuse of a dominant position
EU and National Competition Law Key concept for the application of Articles 101 and 102 TFEU: may affect trade between Member States EU Member States have their own national competition provisions largely mirroring Articles 101 and 102 TFEU Anticompetitive conduct often caught by both national and EU law If no inter-state trade affection: national law alone (which must not pose an obstacle to uniform application of competition law throughout EU)
Competition Law Enforcement (ii) European Commission. Has power to enforce Articles 101 and 102 by investigating and fining infringements Pre-emption rule: if the European Commission initiates antitrust proceedings, National Competition Authorities (NCAs) must abstain from acting NCAs are competent to apply EU competition law and national competition law Together they form the European Competition Network (ECN) active cooperation and information on matters
Competition Law Enforcement (iii) System of allocation of cases between European Commission and NCAs System of work-sharing, case allocation based on sharing information on new files and determining who is best positioned (NCA for a matter affecting a single State; European Commission for matters affecting three or more Member States) National courts also have power to apply Articles 101 and 102 in legal controversies between companies Direct effect of Articles 101 and 102 TFEU Courts can also award damages
Regulation of Vertical Restraints in Europe Agreements between principal and distributor are agreements between undertakings as pointed out under Article 101.1 TFEU Article 101.3 provides for the possibility of block exemptions Legislation currently in force is Regulation 330/2010, of 20 April, on application of Article 101.3 to categories of vertical agreements Guidelines on Vertical Restraints Regulation and Guidelines available: http://ec.europa.eu/competition/antitrust/legislation /vertical.html
2. Detailed discussion on the regulation of supply and distribution agreements. RPM. Pricing on the Internet Magdalena Brenning 10
EU Competition rules for supply and distribution agreements Effects-based approach with Vertical Restraints Block Exemption Regulation (VRBER) and Vertical Restraints Guidelines (VRGL) Apply to agreements between non-competitors concerning the sale and purchase of goods and services for all sectors, both on- and offline VRBER creates a wide safe harbour by presuming that vertical agreements are not leading to net negative effects for consumers and are thus exempted under Article 101(3) if: Market share of supplier and buyer does not exceed 30% Agreement does not contain any of the so-called hardcore restrictions Above 30% individual assessment under Article 101 11
Hardcore Restrictions Serious restrictions of competition (Art 4 VRBER): prohibited in most cases because of their harm to consumers Resale Price Maintenance (RPM): agreeing fixed or minimum resale price (not maximum and recommended resale prices) Sale restrictions on the buyer: in principle a buyer/distributor should be free to resell where and to whom it wants Hardcore restrictions apply to off- and online sales VRGL clarify and provide examples of hardcore restrictions 12
Hardcore Restrictions: RPM VRGL describe the numerous possible negative effects of RPM, but also some potential positive effects (section VI.2.10) Hardcore approach motivated not only by seriousness of possible negative effects, but also by doubts about effectiveness and indispensability of RPM to obtain efficiencies Hardcore approach supported by case experience of Commission and NCAs and by (scarce) other empirical data 13
Restrictions: RPM Effects basedhardcore approach with reversed order of bringing forward evidence and showing effects RPM: general questions under Article 101(3) Likelihood that RPM will induce the retailers to provide extra services/promotion? Incentive for retailers to spend the extra money on extra services if still free riding? Indispensability: not directly contract the extra services? Benefit to consumers: to most or only new/marginal consumers? RPM: general questions under Article 101(1) Buyer or supplier driven? Competing vertical structures or sales through same distributors? Market shares and cumulative market coverage? Mature or dynamic markets? 14
Pricing on the Internet General rules on resale restrictions apply to offand online sales Restrictions on the distributor s use of the internet are generally considered as hardcore restrictions of passive sales, e.g. dual pricing (VRGL 52(d)) Possible for the supplier to offer a fixed fee to support the distributor s offline efforts (VRGL 52(d)) Efficiency defence under Article 101(3) possible but unlikely (VRGL 64) 15
3. Focus of NCAs on RPM. Hub-and-spoke cartels John Ratliff
Recommended prices Rpm generally unlawful (with frequent enforcement at national competition authority ( NCA ) level) Recommended prices usually considered lawful due to their unilateral and non-binding nature But participation in a price monitoring system which aims to ensure adherence to recommended prices on retail level may be unlawful E.g. The Bundeskartellamt recently imposed a 20 million fine on a company that was de facto fixing prices through economic pressure on retailers who were not following recommendations, e.g. through oral threats to reduce rebates (see, B5-20/10 BKartA decision of 20 August 2012).
Hub and spoke information Concept: exchange Retailer A discloses to supplier B its future pricing intentions in circumstances where A may be taken to intend that B will make use of that information to influence market conditions by passing that information to other retailers B does in fact pass that information to C, another retailer, who is aware of the background of the information transfer from A to B C does in fact act upon the information in determining future pricing intentions (see, JJB Sports, UK Court of Appeal, 2006 EWCA Civ 1318, para. 141) Could be other way around also (i.e. A and C suppliers; B the retailer coordinator)
Hub and spoke (2) Enforcement focus of National Competition Authorities ( NCAs ) so far (e.g. UK, Germany). For example, in April 2010 the Bundeskartellamt issued an preliminary and informal guidance letter during its investigation concerning price maintenance in the food sector in Germany, where it explicitly addressed the issue ( Handreichung, WuW 2010, p.790-791). e.g. prohibition of coordination on range of goods, sales strategy or advertising between the retailer and the supplier, provided that the intention or effect is the indirect coordination on prices or other competitive parameters between the retailers (para. 4(d)).
Hub and spoke (3) Note that in EU law, actual effect may not be required for an infringement, if the unlawful information exchange occurs Many retail suppliers have active compliance procedures in this area, emphasising: that information supplied to retailers is confidential; and may not be passed on. Particularly in the context of category management.
4. Price variations accross customers, including price discrimination. The issue of parallel trade Frederic Puel 21
Price variations across customers, including price discrimination Legal context Price discrimination prohibited before 2008 (until the Economy Modernization Act) in France as a restrictive competition practice. Current situation: Under both EU and French Law, Price discrimination expressly considered as an anti-competitive practice sanctioned - Articles L.420-1 of the French Commercial Code and/or Article 101 TFEU Prohibition of anticompetitive agreements) Exemption is possible - Articles L.420-2 of the French Commercial Code and/or Article 102 of the TFEU (prohibition of abuses of a dominant position). 22
The particular case of pharmaceuticals Specific situation of the pharmaceutical industry when Competition rules to be applied Laboratories negotiate reimbursement prices with national social security administrations - Prices vary from one country to the other - To make a margin, wholesalers organize the orders to reexport towards the country where the price is higher To minimize this loss, Laboratories - Impede parallel imports (see Bayer v Commission, T- 41/96, 26 October 2000) - Organize price discrimination to reduce the benefit of parallel imports (GSK v Commission, T-168/01, 27 September 2006 and C-501/06, 6 October 2009) 23
The particular case of pharmaceuticals (EU level) In the GSK case, Commission has fined GSK for having concluded with Spanish wholesalers an agreement containing different prices depending on whether the products are to be sold in Spain or in another Member State. In the GSK case, the Court (C-501/06) considered - that the system put in place could provide an economic advantage by contributing to innovation. - that the specificities of the pharmaceutical sector have to be taken into consideration if they might have an impact on the results of the analysis 24
The particular case of pharmaceuticals (EU level) In the Lélos Kai Sia case (C-468/06 16 September 2008), the ECJ considered that the fact for a laboratory to refuse to meet orders introduced by some wholesalers known to be active in the export of medicine, is prohibited under art 102 TFUE The specificity of the pharmaceutical sector was not taken into account But dominant pharmaceutical companies can protect their commercial interests by restricting parallel trade (reasonably and proportionally) 25
The particular case of pharmaceuticals (French level) The specificity of the pharmaceutical sector is also taken into account by the French Authority (ADLC) ADLC 20 December 2005 GSK laboratories may protect their commercial interests by refusing to deliver a product at an administered price to an exporter if it s only aimed at making profits by selling it on a foreign market ADLC recently launched an inquiry in the pharmaceutical sector (Decision 13-SOA-01): - Issue of laboratories pricing policy - Relationships between laboratories, wholesalers and dispensing chemists in the price fixing 26
5. Pricing tied to competitors. MFNs and MFCs Magdalena Brenning
Pricing Tied to Competitors: MFCs Two types of price commitment agreements: across-sellers (e.g. price-match guarantees) and across-buyers (e.g. most favoured customer clauses, MFCs). MFCs: contractual arrangement that guarantees the distributor the best wholesale price the supplier gives to any distributor. Distributors are free in setting the retail price. Normally a restriction by effect. Risk: possible reduced incentive for the supplier to compete on prices. Block exempted if market share (supplier s and buyer s) does not exceed 30%. 28
Pricing Tied to Competitors: MFCs Recent cases where the MFC clause concerns the retail price (price parity clause), e.g. e-books, online hotel booking cases Supplier upstream. Platforms as distributors downstream. Supplier guarantees the best retail price of goods/services offered on a certain platform. Risk: possible foreclosure of platforms and reduced incentive for the supplier to compete on prices. In addition, only possible if supplier imposes RPM on distributors or if genuine agency agreement (supplier sets the retail price). RPM if non-genuine agency is not allowed to effectively share its commission with final customers. 29
Pricing Tied to Competitors: MFCs Third scenario. Platform does not operate as a distributor or agent but rents out space on its platform for the supplier to distribute its goods/services, e.g. ebay. Platform upstream. Supplier downstream. Supplier guarantees the best retail price of goods/services offered on a certain platform. Possible to consider it as a sort of exclusive dealing cf platform with a shopping mall. Normally restriction by effect. Risk: possible foreclosure of other platforms and reduced competition between incumbent platforms. 30
6. Further discussion on price discrimination Frédéric Puel
Price discrimination: recent developments at the EU level EUROPEAN DECISION Post Danmark case (ECJ 27 March 2012): focus on the price discrimination part A Danish company offered selectively low prices to the three main clients of its own main competitor. The prices where below average total costs, but above average variable costs. ECJ: such prices may constitute an abuse only if - It results in having an exclusionary effect on competitors considered to be as efficient as it is itself (effects-based approach) - and that such pricing policy cannot be objectively justified 32
Price discrimination: recent developments at the EU level EUROPEAN DECISION Clearstream case (General Court - 9 September 2009) Clearstream, which is in a dominant position, applied higher prices to its competitor for equivalent services (primary cleaning and settlement services related to them) than the prices applied to similar clients ECJ discussed about 3 points: - Existence of a discrimination (price difference for equivalent services) - Which is not objectively justified - And places the competitor at a competitive disadvantage no need to prove an effective deterioration of the competitive position of the competitor 33
FRENCH DECISIONS: Price discrimination: recent developments at the French level ADLC 3 September 2007: application to CIPHA or its subcontractors of prices two times lower for the use of its public loading/unloading equipment than those applied to CIPHA s competitors such as the plaintiff fine of 2.8 million ADLC 9 December 2009, 24 January 2012 and 13 December 2012: mobile phone companies were sanctioned for having offered to their clients different prices depending on whether the calls were made on net or off net. This practice raised barriers to entry for new operators! 34
7. Overview of the law applicable to pricing under Art. 102 TFEU Pedro Callol
Intro to Article 102 TFEU Article 102 TFEU requires Dominant position (market power) Abusive conduct Abuses related to price Predatory pricing Targetting and price discrimination Fidelity rebates Excessive pricing Margin squeezing
Predatory, discriminatory pricing Predatory pricing: Areeda-Turner test Akzo case (case C-62/86): (i) prices below AVC are abusive; (ii) prices above AVC but below ATC are abusive if part of plan to eliminate competitor Measure of cost is varying. Must be regarded case by case (Akzo); in network industries LRAIC is basic measure of costs Evidence of recoupment not required (Tetra Pak II, case T- 83/91; Wanadoo v. Commission, case T-340/03) Selective price cutting: Compagnie Maritime Belge (cases C-395, 396/96): dominant firm reduces prices only to customers approached by new entrant Discrimination, e.g., vertically integrated company charging more to client who at the same is competitor downstream Discrimination is in principle fine if economically justified
Exclusionary rebates Fidelity rebates by dominant company may amount to exclusive dealing/monopolization Michelin case (C-322/81): rebates granted only if sales targets of great majority of purchasing needs yearly purchased from Michelin. Also British Airways c. Commission (case C-95/04) Intel (Decision 13/6/2009) and Tomra (case C- 549/10)
Excessive pricing Measure of excessive pricing based on costs (Port of Helsinborg, Decision of 23/6/2004); United Brands (case C-27/76). Comparison with other equally efficiently managed companies Comparison with prices charged in other Member States (SACEM, case C-110/88) Prices charged by the same dominant enterprise overtime (British Leyland, case 226/84) Counterfactual exercise of fair price in competition (Commission Communication on Access in the Telecoms sector)
Margin squeeze British Sugar (Commission Decision 19/10/88) Deutsche Telekom (C-280/08) Telia Sonera (case C-52/09) Telefonica (case T-336/07)
8. Discussion of the recent Post Danmark case John Ratliff
Background of Post Danmark case Reference from Danish Court to European Court of Justice ( ECJ ), asking for clarification of EU law Post Danmark ( PD ) had been found to abuse its dominant position in the distribution of non-addressed mail in Denmark through selective prices which were discriminatory because not in its general tariff; and not applied to its existing clients (para.8) although no proof of a strategy to drive out competitors PD had made offers to three customers of its main rival Forbruger-Kontakt a-s ( FK ) and won them, but this did not cause an actual exclusionary effect. FK won back two customers later. One offer was above average incremental cost (aic), but below average total cost (atc); the other two were above atc.
ECJ Ruling Case C-209/10, Judgment of 27 March 2012 No violation of Art. 102 if a dominant company simply lowers a price selectively, but the price is > aic, < atc and it is not shown that the price was set with the aim of eliminating a competitor (para. 44) Danish Competition Authority ( DCA ) wrong to conclude that a practice is an exclusionary abuse just because it involves price discrimination (e.g. different prices to different customers or single price to all) (para. 30) Referring court has to decide if an as efficient competitor can compete with these prices without losses which would be impossible to support in the long term (paras 38,39)
ECJ Ruling (2) If referring court finds anti-competitive effects, the Court also has to consider any justifications, e.g. Whether objective necessity Whether exclusionary effect may be counterbalanced or outweighed by efficiencies which (equally) benefit consumers. (Up to PD to show). Simple fact that an efficiency criterion is not included in PD s price tariffs is not a reason to exclude such gains If they can be shown to exist, or are likely to exist because of the behaviour concerned, if the behaviour is indispensable for the gains, and the behaviour will not eliminate effective competition. (paras 43 and 42)
Query future impact? Danish Supreme Court follow-up ruling: In February 2013, the Court quashed the challenged (national) decision on grounds of incorrect substantive test Other cases? Note stricter line in ECJ rulings on exclusionary conduct, see, e.g. Tomra, Case C-549/10 P, Judgment of 19 April 2012