Antitrust Matters Episode 11: The EU’s and UK’s Differing New Antitrust Regimes
Antitrust Matters provides engaging and timely conversations about competition policy in the digital age. Antitrust has always mattered to consumers and businesses, and to antitrust lawyers and economists, but today it also is in the political and public discourse more than ever. From the prices we pay for food, travel, financial services, payments to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. Antitrust Matters brings you you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going and why it is so important to our current political discourse.
In this episode, our guests, Robin Noble and Helen Ralston-Smith, expert economists with Oxera Consulting discuss with Jeff Shinder and Stephen Critchley the UK’s post-Brexit divergence from EU competition law generally but taking a particularly deep dive into the UK’s and EU’s new vertical agreements rules which both came into force earlier this year.
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Episode Transcript and Show Notes:
Welcome to Antitrust Matters, a Constantine Cannon podcast where we have engaging and timely conversations about competition policy in the digital age. My name is Jeff Shinder and I’ll be your host. Antitrust has always mattered to consumers and businesses, but today it is also in the public discourse more than ever. From how we get our food on our plates, to how we travel, to the way we interact daily using digital apps and platforms, antitrust touches each and every one of us in ways we may not even realize. In Antitrust Matters, we bring you perspectives of experts and visionaries in the field who discuss where antitrust law has been, where it is going, and why it matters today more than ever before.
Welcome everyone. We are back with the Antitrust Matters podcast, and we’re going to do something a little different today. We’re going to cross the pond and we’re going to get a report on some interesting issues and recent cases that have been adjudicated over in the United Kingdom and a view from our friends in the UK regarding the state of competition law on some important topics that my partner, Stephen Critchley, will introduce. Stephen is a competition law and competition litigation specialist. Along with Stephen, we are joined by two economists from Oxera. Oxera is a European economic and finance consultancy. We have two partners from Oxera here, Helen Ralston-Smith and Robin Noble.
Helen Ralston-Smith specializes in financial services markets and has experience in competition, policy and regulation, litigation and arbitration. She has analyzed the economics of markets on both the wholesale and retail sides to the financial services sector. Much of her work has been focused on high profile issues, including the European Commission’s investigation into the proposed London Stock Exchange and Deutsche Börse merger, the impact of the financial transaction, tax and the investigation into FX trading by various competition and financial regulators.
Robin Noble is a partner at Oxera with more than 18 years experience. He specializes in digital issues, competition, economics, and quantifying damages. He advises governments, regulators, and businesses on high profile issues and is recognized as a leader in his field. He leads Oxera’s work in the digital arena, his advises high profile clients such as Amazon, Google, and Microsoft. Issues he has examined in this area include valuing data, policy and regulatory issues in the UK and EU, cryptocurrencies and algorithms. Welcome, Helen. Welcome, Robin. Stephen, it’s great to have you here. I’m going to toss the baton from New York to London and you can introduce our topics and I will turn it over to you. And again, I’m looking forward to a very interesting discussion.
Thank you, Jeff. So, we’re going to be discussing today specifically vertical agreements and the vertical agreements regimes in the UK and in the EU. For context, I’m going to start by setting out the basic framework, governing vertical agreements, which is the dry bit, in other words, before Helen and Robin get into some real world examples. So, I’ll canter through it quickly. The old EU regime, which governed vertical agreements in the UK expired on the 1st of June. That’s not a Brexit thing, it expired all across Europe. So, on the 1st of June, the EU and the UK both introduced new regimes. And today, what we’re going to be doing is a three-way comparison between the old regime and the two new ones.
The framework’s easy because it’s the same for all three regimes. The legislation against anti-competitive agreements is the same. The UK legislation is basically a copy and paste of the EU legislation. And despite Brexit, I don’t think there’s any plans to change that. So, the framework is this. The, legislation is short, it doesn’t give all the details you need to comply with it. So, the European Commission and now also the UK’s competition and Markets Authority publish lengthy guidance on how to comply with the legislation. And there’s different guidance for horizontal agreements. Today we’re just talking about vertical agreements, ensuring compliance with the guidance can be pretty technical and costly, particularly for smaller companies. So, there is a vertical agreements block exemption, which specifies that if the market shares the parties to the agreement are below 30% on their respective levels of the supply chain, the agreement is within a safe harbor.
Agreements within the safe harbor may be unlawful if they contain certain, what are called, hardcore restraints. In other words, the most objectionable restraints, these hardcore restraints are listed in the block exemption, things like price fixing, which in the context of vertical agreements, means fixing the purchaser’s onward sale price. But so long as the parties have market shares under 30% and their agreement avoids hardcore restraints, then it’s lawful and the parties don’t need to bother themselves with the guidance. If, on the other hand, a market share threshold is exceeded or if it’s not exceeded, but the agreement contains a hardcore restraint, then the parties need to reach for the guidance. And in the case of a hardcore restraint, the guidance probably won’t save you. So, that’s the framework within which Robin and Helen will be speaking. Now, this divergence between the EU and UK vertical agreement regimes is, needless to say, not the only consequence that Brexit has had on competition law.
So, Jeff’s asked me to pull the camera back and give an idea of where today’s subject sits in the overall story of Brexit, which is a fairly daunting ask given the size of the subject. But very briefly, I’ll try to summarize the effects of Brexit. First of all, legislation. Whilst the UK was in the EU, EU laws became so pervasive that we couldn’t just scrap them all when we left, it would just have left a massive hole. So, the EU Withdrawal Act, a UK Act parliament created something called Retained EU Law. Essentially it turned EU law into UK law. So, calling it Retained EU Law is really a misnomer. It’s UK law now, it just has origins as EU law. The idea was that we would then be free to change the law and diverge from the EU at our leisure. So, the old Vertical agreements block exemption that we’re talking about today, that was Retained EU Law, which is why it governed us until it lapsed last June.
Now, that leisurely divergence is likely to get upended because during the, blink and you missed it, Liz Truss Administration, the government published draft legislation to revoke at the end of 2023 all Retained EU Laws except any which might be chosen to be explicitly preserved. So, it’s basically the opposite of the Withdrawal Act, which retained EU laws to avoid massive gaps in our legislation. The new law is almost designed to create gaps, so it’s set to turbocharge our divergence from the EU. Although, if you ask me, it’s divergence for divergence’s sake and it’s been widely criticized as a bull in a China shop measure, which is just political, but there’s been no indication from Sunak that he will change course on that.
As I said, the UK legislation against Anti-Competitive Agreements is a copy and paste of the EU legislation. The other behavioral competition law (against Abuse of Dominance) is also a copy and paste of the EU legislation. And both of those laws are immune from this revocation. The law against Anti-Competitive Agreements and against Abuse of dominance were copied from EU law, but they were copied donkeys years ago and they’re UK law, they have been ever since the Competition Act 1998. However, we’ve just got rid of section 60 of the Competition Act 1998, which obliged the UK courts to interpret those laws consistently with the EU Court of Justice. So, over time now, section 60 has been repealed, the UK and EU regimes will start to drift apart. What we’re going to chat about today, the divergence of UK and EU vertical agreements regimes wouldn’t have been possible without the repeal of Section 60. Okay. So, that’s the first big point, the new legislative landscape.
Second point, investigations. Businesses can now be subject to parallel investigations if they’re alleged anti-competitive conduct effects both the EU and UK markets. Similarly, with merger control, where a merger has an EU dimension, the National Regulator cedes control to the European Commission, but not for the UK anymore. If a merger affects the EU and the UK, you need to apply for parallel merger clearance from the commission and from the UK’s competition and markets authority.
Finally, you’ve got state aid. Now, these are rules to keep a level playing field in the EU single market by preventing member state governments from subsidizing their own pet industries. There are exceptions to it. The bank bailouts during the financial crisis were a big one. Still, I think if an EU member state tried to pass something like Biden’s Inflation Reduction Act, the European Commission’s entire dashboard would start flashing red. The UK is introducing its own looser state aid regime and EU state aid rules will continue to apply in Northern Ireland because Northern Ireland is remaining in the EU single market to avoid a hard customs border between it and the Irish Republic for extremely important political reasons. This does, however, require barriers to trade between Northern Ireland and Great Britain, which is an unresolved issue and there’s a whole podcast to be had about the ructions that that has been causing.
So, that’s the helicopter view of the effects of Brexit on competition law. At the risk of giving our listeners whiplash, not only are we going to zoom back into vertical agreements. We’re going to take a deeper dive into it. So, I’ve given you the framework which is common to the UK and the EU. Just to remind you, it’s a block exemption which offers a safe harbor to agreements between parties with under 30% market share, so long as there’s no hardcore restraints and there’s guidance to help apply the law outside of the harbor.
And so, our guests Helen and Robin are going to discuss some, but by no means all of the differences between the old EU regime and the new EU and UK ones. I think the first one you wanted to discuss, Helen and Robin, was most favored nation clauses or MFNs, where a hotel booking site, for example, says to the hotels, “Look, if you want to list on our website, you can, but you can’t sell rooms directly to customers more cheaply than you sell them through our website.” So-called narrow MFNs. Or you can have wide MFNs, where the website says, “Not only can’t you sell more cheaply direct to customers, but you can’t sell more cheaply through other channels either.” So, for example, through other hotel websites. The old regime was almost completely silent about MFNs because back in the day they mainly cropped up in business to business deals. But with the advent of the internet, e-commerce and especially price comparison sites, they have become much more of a thing. So, Helen, if I can hand over to you on the question of MFNs.
Sure. Thank you, Stephen. Yes. So, that’s exactly right. So, the new regime in the UK and Europe has now tightened the use, or suggested guidance that tightens the use, of wide MFNs. And in particular, I think you were explaining the safe harbors. In the case of the UK, wide MFNs are now referred to as hardcore. So, it wouldn’t naturally fall into that area of safe harbor even if you were small provider meeting the other criteria. And that’s quite interesting, for me at least, because I recently testified, or actually, a year ago, I testified for CompareTheMarket in its appeal of the CMA, the UK authorities infringement decision against their wide MFNs in home insurance.
And the reason this is a hot topic is the judgment came out at the end of August, only a couple months after the UK VABEO, Vertical Block Exemption Regime, was published in law. And the surprising point there, perhaps to some, is against this wave of regulation starting to push back about wide MFNs, the UK competition court decided that in this case there was no effect on insurance on the two main outcomes of competition, I.E. These weren’t Anti-competitive and fully turned over the UK authorities infringement decision.
Helen, if I could jump in, there’s a couple of terms you used that I just want to make sure that our audience understands because they’re not native to the US. So, wide MFNs. And I’ve read the decision and it talks about narrow MFNs and wide MFNs. Could you explain both?
Yeah, absolutely. Apologies for that. So, one way to think about these MFNs is as best price guarantees. We all get what that means. So, best price guarantee, when it’s a narrow MFN, and they’re also actually called narrow parity clauses as well. When it’s narrow, that best price guarantee is from a platform, but it’s only giving you the best price relative to direct websites. So, a classic example here is if you are looking on a hotel booking website, if that booking platform has a narrow best price guarantee or a narrow parity clause, the hotel can’t offer a better price direct. So, the consumer can’t save money by ringing up the hotel and trying to sidestep the platform. And when it’s a wide MFN, that best price guarantee is broader, it covers other platforms as well. And that’s the general principle.
So, the notion where the wide MFN is that it has the potential to undermine competition between the price comparison platforms, would that be correct?
Yeah, absolutely. So, the theories of harm and the way in which these MFNs can cause harm is they inhibit the ability of price differentiation between platforms. So, they can restrict what’s often referred to as intra-brand competition, which is the competition between different sales channels. And the way in which that happens is partly indirect. So, firstly, the first effect is they prevent the supplier offering a lower price in a different distribution channel. So, that in itself can restrict retail price competition. By definition, you can’t have lower prices elsewhere. But that has this knock-on effect on the platform-to-platform, or, distribution channel-to-distribution channel, competition.
Because the platform knows they can’t get a lower price from the supplier, by for example, reducing their commissions. They have a lower incentive to do so, so they have less incentive to discount their commissions and attract lower prices from suppliers. The wide MFN would require that supplier to offer the same discount to the platform imposing that condition.
And so, is it correct that theory failed in the CompareTheMarket case? And if that’s true, if you could explain to our viewers, our audience, why it failed.
Yeah. So, that’s a theory, firstly. So, as you say, it can fail. There are a lot of theoretical models that explain the mechanisms about how that [harm] can arise. But in this market, it was quite important two big things. One was market definition, and related to that, was the coverage of the MFNs. And related to that, the extent to which the suppliers adhered which in turn affected coverage. So, firstly, what is this case about? So, what is CompareTheMarket? So, in the UK, for the distribution of insurance, a lot of retail insurance products like home insurance or car insurance, there are a number, there are four in particular, websites. A bit like online marketplaces, a bit like Amazon, a bit like various kinds of online marketplaces where you can quickly and easily search between many insurance products and find the best price.
But that’s not the only way to buy insurance. And that was a really important question in this case, how important were these platforms in distributing the home insurance relative to the direct sales by the insurance? Why is that important? Well, the direct sales, to an extent, where outside the scope of the wide MFN (renewals) and could impose direct competition and mitigate any anti-competitive effects. And even within the scope of PCW sales, that’s our acronym for price comparison websites, not all insurers agreed to the wide MFN. Now, that’s quite interesting. Roughly, half of the insurers by sales agreed to the wide MFN. So, even in that price comparison website only market, so when you’re considering customers that only look online, even those people could be attracted by discounting because many insurers were not tied to the wide MFN at all.
Okay. I have one more topic on that case, Robin, and I want to bring you into the conversation, but I can’t help myself on the two-sided market element to the decision. Helen, as you know, two-sided markets has been an important topic of conversation in the United States, Ohio V. American Express ushering in a major sea change in the law here requiring two-sided market treatment for so-called transactions markets where there’s a simultaneous handshake between one side and the other. And ensuing cases then discussed, is it a transactions market or not? Are the network effects indirect? Sufficiently indirect such that it should be treated as one? A platform that links two distinct markets? And the courts are trying to figure out the teaching of Ohio V. American Express. And that decision has been much criticized. And I noted, in reading compare the market, that the tribunal noted the “Powerful dissent of Justice Breyer.”
So, if you could spend a moment just discussing how the two-sided market issue came out. Robin, I promise to bring you into the conversation, but this is an issue that is consequential.
Keep diving because this is absolutely fascinating stuff. It’s a case that’s really made a lot of headlines in the UK and it’s being much talked about across Europe. So, yes, we should keep diving deeper.
Yes. So, I think market definition is another really important aspect of the judgment which has wider, broader implications than just parity clauses and MFNs which are a specific conduct. So, what are the issues at stake? The first question and a big question is, should you define one single market which encapsulates both sides of the platform? So, here, the insurers and the consumers. Or should you define two markets on each side? That’s often considered the most important question. And I understand in the US, with the transaction markets, you have agreement that it’s one market for both sides. Now, that is my opinion and that would be consensus actually of the CMA in this case as well. That there’s a single market for both sides. The reason I laugh is despite consensus by the economists that that’s the right approach in this case, the court took a different view. They said that it could be two markets on both sides or it should be, you should define two markets one on each side.
Now, that sounds controversial but I really don’t think it’s actually that different to where the evidence that Oxera put forward on behalf of CompareTheMarket. So, why do I say that? Well, the main thing to take away from the judgment is the real importance to test both sides of the platform very carefully and thoroughly. What the CMA did was they tested the competitive constraints on the supplier side. Well, they agreed that you should test both sides but they thought it was sufficient to test the consumer side only through the pass through of the supplier, the platform fee to suppliers to consumers. So, putting this in real terms, a price comparison website, like many online marketplaces, charges suppliers a commission and there’s no price to consumers.
They get free search, there’s no explicit price. So, the CMAs approach was we’ve got a commission fee, that’s where the platform earns its money, lets impose a SSNIP test, the hypothetical monopolist test to that, and see how many suppliers divert and how many consumers would divert from the pass through. Our view is that’s not testing the consumer side properly. By definition, there’s a partial pass through of the SSNIP, it’s not a SSNIP, it’s a half a SSNIP, for example. And that is what the court agreed with, that you need to test the consumer side properly. I would suggest testing the consumer side properly in the context of zero price markets by, in this case, we’ve got retail prices to consumers, they’re selling insurance just like on other platforms you’re selling goods and other types of retail. So, why not take those prices and apply a SSNIP to them?
And we’re in a digital market setting. So, you’ve got a bucket load of data to look at how customers might switch away from that platform in response to small changes and prices. So, it’s not actually that hard to quantify or really explore firmer than just hypothesize in your mind. And that’s what we did. We had the data, we found that it’s likely there’d be enough consumers to switch to the renewal channel or insurers direct to broaden the market. The court took a different view. They really wanted to test the consumer side and saw a disadvantage of only applying it to retail prices: there are some consumers that browse and you don’t test their diversion if you only apply it to purchasers, which is the case with retail prices.
So, they introduced a special fee, a new fee, which is quite novel. This platform doesn’t charge consumers at all. They said, “Why don’t you introduce a fee?” That fee really has a similar effect to the SSNIP on retail prices. And they deduced from the evidence that everyone’s put forward about the high price sensitivity of consumers, the market is broader on the consumer side. So, they concluded, agreed with the CMA that the suppliers may not switch, that that might be a narrow market price comparison website only. But on the consumer side, it was a broad market including the direct channel. And then, they kind of forget about the insurer side of the market when they do the effects analysis, which in this case is entirely right because the concern, as we were talking about before, is that the wide MFN restricts price competition, retail price competition and commissions. So, you’ll think about retail prices and its consumers who respond to retail prices. So, that consumer market is, perhaps, more important.
Robin, I think you wanted-
Yeah. I was going to just answer that, Jeff. I mean, in a sense, zooming out a little bit from this specific case, because, of course, there’s a lot of specificity in what Helen’s describing because we’re talking there about insurance markets and renewal is really important in that. You’ve been insured by someone, you will receive a letter from that insurer offering to renew your policy. And so, of course, that’s a really key part of the factual matrix of a case like that. But for me, when you zoom out and look at, what lessons does the in-house counsel take from a case like this? For me, there are really three. The first is that, as Helen articulated, as I think both yourself and Stephen articulated, there’s a lot of theory behind why it is MFNs can be good, but also MFNs can be bad.
And I think it’s worth getting under the skin of that because it helps you understand the ways in which some of them are a little bit counterintuitive, that certain types of parity causes on their face can be good but could actually, under certain circumstances, have some harm. And I think everyone accepts that, theoretically, these things can happen. But I think there are two other really critical lessons that come out from this case. One is, Helen used the word substitution a lot and I think that’s a real buzzword and something you should take away because it is critical. Whatever framework you’re going to use to think about this, it’s almost trite to say that, fundamentally, antitrust competition economics is a lot about substitution. It’s the ability of suppliers to substitute to other sales channels. It’s about the ability of consumers to substitute to other buying channels.
Whichever framework you’re going to use, understanding the degree of substitution is really, really important. Conceptualizing of it and then going to get the detail on it. And then, I think the third real message from that is that the facts matter, renewal really mattered in that case. This was a great way for the incumbent to contact their customer and it meant that they were always competing against the renewal. You’ve got a renewal that you receive in the post that’s normally the prompt to then go to a comparison website in the first place. Now, of course, that’s not true for a lot of other mediums. You talk about hotel bookings, well, maybe there are people that get renewals, they have long term leases, but normally that’s not the way the world works.
You are going on holiday somewhere, you want to go and visit somewhere, you are proactively reaching out. It’s a different kind of search. And the same, again, for resale websites, et cetera. So, the facts really, really matter. The context really, really matters. And so, one has to think pretty hard about these things.
It might not have been clear, but just to clarify, renewals would not be captured by these wide MFNs. An insurer was free to offer any price through the offline (paper) distribution channel. So, via the renewal, hence, why this coverage, the scope of these wide MFNs, when you consider the proper market as defined by the courts, the broader one, they’re much narrower, and therefore, their ability to have anti-competitive effects is inherently limited.
So, let me follow up on a couple things here, if we stay. And I want you both to comment on this. Helen, you walked us through the market definition analysis and I understand why the tribunal would have an issue with the pass through approach. And as I understand what you explained, this is how I netted it out, if I get it wrong, you’ll tell me, is that this is a platform that links two sets of interdependent suppliers, of home insurance, on the one hand and the consumers of home insurance on the other hand. So, it has two sided characteristics. I think that’s easy and doesn’t help that much towards the ultimate outcome. And that on both sides of the platform, the tribunal essentially said, “Do a traditional market definition analysis.” Almost as if there are really two distinct markets to evaluate, ultimately, whether there was harm on the consumer side since, as you articulated well, the issue of a wide MFN would be whether pricing to the, what we’ll call, the end consumer was elevated.
And so, this raises the following question in my mind, what does the two-sided market nomenclature add if, ultimately, what was demanded was an evaluation of what essentially are two distinct but linked markets? And, to my mind, this is what Justice Breyer, forgive me for expounding on US law, we’re here to talk about what happened in the UK, this is what I thought Justice Breyer was talking about in his dissent as the right way to analyze these platforms, which are fairly ubiquitous now. So, did I get anything wrong?
I think I’ve got two points to say here. So, I think the key to the question was why does two-sided-ness matter here? And I want to just… The first point I’ll make is actually a really important part for the judgment and I think a takeaway for a lot of digital markets is almost that point. The court said, “The CMA is basically…” A phrase I use, at least in England, is “They’ve lost the wood for the trees.” Basically, this is just an intermediary. And the CMA is so focused on trying to find other comparison websites or the full features, the full bells and whistles that a price comparison website offers, that it’s missing the competitive constraints of the direct channel. Effectively, consumers can buy insurance through intermediaries or they can go to insurers direct. And yes, one of these intermediaries offers other things such as comparison and search.
The main thing that a consumer values from that intermediary is the product, the insurance product. And there are other ways they can go about getting that, and I think that’s an important takeaway. And then, we see that in other precedent. However, when it comes to effects, I would push back and I would say that there’s actually… The competitive pressure on the consumer side in this situation also prevented harm on the supplier side and it would be much easier to show you with a visual. But if you think it through, if there’s competitive pressure keeping prices to consumers at the competitive level, it also means you can’t have the platform charging higher commissions to some suppliers, which is the way in which the theories of harm work through. Because, effectively, this is a competitive market, the insurer market is competitive. So, if it can’t pass this through, higher commissions through to higher retail prices, then they can’t pay those higher commissions themselves.
And how does that work? Well, you can think about it as the platform faces competitive constraints in this situation by the value chain, the bundle, the suppliers and the platforms or the renewal channels that aren’t covered by the wide MFN. So, suppose an insurer is going around offering 150 pounds on the wide MFN platform. There’s an insurer on that platform, not constrained by the wide MFN, that’s free to offer 145 pounds and they will win the customers from that insurer. Simply, another platform can go around and offer lower commissions and attract that insurers lower 145 pounds and win customers from the wide MFN platform. So, the wide MFN platform itself is hurt by keeping commissions up. So, through the competition on the consumer side, actually the harm on the supplier side dissipates and that’s because it’s a two-sided market.
Okay. That was great. Appreciate that, Helen. Robin, do you have anything to add?
I think Helen covered the key points which is, I think, in a sense… I mean, maybe, again, one of the lessons here is in cases like this, it can be helpful to almost think of it both ways round and try to test the logic. Don’t almost fall into the… What I think, sometimes, can be the alluring trap of trying to put lots of things into the two-sided markets bucket. That’s pretty fashionable to do that. And I think, in a way, back to the substitution point, one of the messages from this case, I think, is about sometimes simpler can be clearer and more insightful and it can really stress test whether or not a theory of harm that might be very reliant on a two-sided intellectual structure actually isn’t robust. And sometimes the answer is it’s not.
Well, one thing I’ll say before I hand the baton back to Stephen is any sensible discussion of any antitrust issue in any jurisdiction, what you said, Robin, the facts matter, has to be front and center. The facts always, always matter. And, as basic as that is, it is worth emphasizing. Stephen, let me turn it back to you because I know there’s some other topics that you want to navigate.
I was going to say a final word on the MFNs, actually, because we were talking about the different regimes, the new EU regime and the new UK regime. It’s worth mentioning that under the new UK regime they made wide MFNs hardcore, but they didn’t do that under the new EU regime. So, there’s a divergence there. And Helen mentioned, when we were chatting offline, about isn’t it interesting the moment the UK says, “Wide MFNs, these are terribly restrictive and they’re hardcore.” Almost immediately, the competition appeal tribunal comes out and says, “There’s nothing wrong with the wide MFN in this particular case.” And how do you square that circle? I mean, when I was introducing this earlier, I said that if you’ve got a hardcore restriction, it’s not necessarily unlawful, it just means you’re not in the safe harbor and you’ve got to reach for the guidance.
And I said in the case of a hardcore restriction, the guidance probably won’t save you. I think this is an example where the guidance would save you. And it just goes to show, as you were saying, Jeff, it turns on its facts and it’s not the end of the world if the block exemption says this is a hardcore restriction because it could be you say, “Well, okay. Then, I’m outside of the safe harbor, but anyway let’s have a look at the guidance. And it could be that this is lawful anyway and it’s worth taking a shot at it.” So, that is what I would say on that one. But yes, time is a thing. And moving on, Robin and Helen, what was the next point you wanted to discuss? Was it differentiation of pricing, online and offline?
Dual pricing, I guess, is another interesting topic that it’s worth diving into. And just to explain some of the background on this, under the old EU regime in our three-way comparison, dual pricing, which is where, as a supplier, you are charging different prices to one group of sellers and another group of sellers. In particular, one group of sellers being online sellers and another group of sellers being offline or physical sellers. That was regarded as a hardcore restriction in the old regime. Under both the new regimes there is a new approach which is much more accommodating towards this kind of dual pricing. And the examples that they use are typically the online versus the offline. And typically, they talk about how it might be the case that as a manufacturer you might wish to charge online sellers somewhat higher prices than offline sellers.
And they cite examples, like the fact that offline seller might be doing an installation for their customers, but an online seller might not. And of course, that might then impose costs on the manufacturer. It might be that there are more warranty claims, for example, from the online sales because perhaps they’re not being installed quite so well by the home installer as opposed to the more professional physical training business. Now, of course, if we remind ourselves, if we wind back the clock a little bit, it’s worth reminding ourselves almost why is it there was this distaste or lack of enthusiasm in the guidelines about your pricing. In one level, one explanation certainly that I’ve heard a few times in Brussels is that, in fact, it wasn’t a really a competition issue at all. This is more about EU single market and the fact that online sales were seen, at least some years ago, as needing a little bit of nurturing.
And that since having manufacturers or brands deliberately discriminating against online sales by charging online sellers higher wholesale prices than physical sellers would be harmful both to the growth of the internet in Europe, but also potentially to cross-border sales, which is so important within the EU. And obviously, online cross-border sales, perhaps a little bit easier to nurture than physical cross-border sales for obvious reasons. But I think this is actually really quite an interesting development and it’s a change of tone in both of the guidelines. And it’s also quite interesting in a sense the type of evidence that is now being talked about in this guidelines about… Well, not necessarily that the low bar, but it’s not requiring that you have a great steal of evidence. There is some discussion in the guidelines about how one should think about what a cost orientated differential might be between the two, perhaps looking back to some of those points around whether it imposes more costs on you because of faulty sales, et cetera.
But no, I think that’s quite an interesting point, I think, for people to be aware of. And actually, it flows into another related point, which is that, as you might imagine, given the history of the EU and the UK, both guidelines are not particularly welcoming of resale price maintenance, which comes together in the context of online sales. Because we have started to see, in enforcement terms, quite a few cases emerging around Europe that have really been looking very hard at resale price maintenance. And so, it’s not just the fact that the guidelines say that resale price maintenance is a hardcore restriction and doesn’t benefit, it’s also that it’s being pursued more generally. And you’ve even started to see litigations emerging, business on business litigations not involving authorities either that have been exploring that topic.
So Robin, if I may follow up on the second point you made, because that’s an interesting divergence between what’s happening over in Europe and the United States where resale price maintenance post Legion is a rule of reason issue, can be anti-competitive if there’s horizontal effects, but the tenor of the Legion decision recognized the possibility of the resale price maintenance can facilitate pro-competitive outcomes that are beneficial for consumers. And as we noted earlier, the facts matter. So, if you could speak to the, why is it the case in your view that the direction of the law and litigation is different in Europe? Are we missing something here in the US?
Well, I guess maybe if I start by talking about some of the litigation, because, in a way, what’s really interesting about the litigation is that, naturally, I think the litigation is actually drawn more naturally to the US view because, of course, the litigations that you see tend to be business on business. This is a retailer litigating against its supplier. And of course, it’s worth thinking about why is that happening? Because traditionally, one reason why authorities and legislators don’t like resale price maintenance is actually quite similar to the points that Helen was making about intra brand competition. Because what does resale price maintenance do, is it reduces the competition between retailers, and that may reduce overall competition, which may then result in higher prices for consumers. Now, that does have some logic associated with it, but I think, as we talked about earlier, facts matter. And I think that’s where the US perspective comes in of, well, that can work, but it doesn’t always work, so let’s look at the facts.
But it’s worth, just go back to those litigations because those litigations tend to be a retailer against the wholesaler. Now, if you think resale price maintenance is having this effect, how is it doing it? Well, what it’s doing, typically, if it’s working and it’s harming consumers, is that it is raising the margins that retailers can earn because there’s less competition between them, so they don’t drive down the margins between each other so ferociously, therefore, the price to the end consumer goes up. And if you think about that through, what does that mean? That means actually retailers, maybe they quite like resale price maintenance. They don’t have to compete so hard with each other. They might sell a few less units, but they earn bigger margins on the units that they do sell. So, it’s actually, potentially more profitable for them to be in a resale price maintenance world than a not resale price maintenance world.
But then again, go back to the fact that this is retailers suing their suppliers. But then, look a bit deeper and what it tends to be is this online specialists suing their suppliers. And of course, why does that make sense? Well, that makes sense because you may think that, well, what differentiates an online specialist? Is low prices. What differentiates a high street retailer? It tends to be location, service, in-store experience, et cetera, maybe slightly higher prices. And of course, if you have effective resale price maintenance that applied to the online and the offline, well, actually, that can mean, well, why would I want to go to an online seller when I can get the in-store experience, I can get the benefit of the advice from the salesperson essentially for free, because I can’t get it cheaper anywhere else. So, potentially, what happens in a situation like that is that effective resale price maintenance really takes away the competitive advantage that an online seller has got.
And essentially, you do work through the mass very high elasticity of demand for that firm, there’s lots of sales, it’s actually quite bad for them. And so, again, the theory works, but in a litigation you’ve got to test the facts. You’ve got to go and find out, “Okay. How many sales did you lose? Who did you lose them to? Was the resale price maintenance actually affected?” All of those kinds of things. And there’s a few cases… None of them have gone to trial, so we don’t know all the facts that are associated with them, but they cover things like lawn and bowling shoes, lingerie products. There’s all sorts of things that people buy online and wherever they buy them online, this is the potential for cases like this.
So Robin, there are two issues lurking in your answer that I want to just probe a little deeper on. One is, is the resale price maintenance and the fact patterns you just went into a legitimate device to protect against free riding? So, that’s one question. Second is, interbrand versus intrabrand competition. And here, the Supreme Court has said, “The primary purpose of the antitrust laws is the protection of intrabrand competition.” Which doesn’t mean you can’t have a violation of the antitrust laws based upon a restraint intrabrand, but it does mean here… And the question is, is it different? And Stephen, you may want to jump in too here. Is it different in the United Kingdom or Europe? Because I hear that fact pattern… So, maybe there’s a restraint intrabrand, but if there’s vigorous competition interbrand, what’s the problem? I mean, that’s the US perspective on it. So, I toss two things at you.
Let me try and grab with the second one first, which is the inter versus intra. And again, I mean, this is where I think the litigations are perhaps the closer mirror to the US, which is that, in a sense, those are the facts in these cases. I mean, we’ve advised on several of them. You have to look very hard at the intrabrand competition. So, who are the rivals? Are you the only online specialist if you are the claimant? Are there lots of other people like you? How price sensitive are customers for this specific product? But then, of course, you’ve got to look at the interbrand dynamics too. How important is this particular brand to you? How many other brands do you carry? How easy is it, for you as a retailer, to switch to other brands as well? Because, of course, it’s not just… If you’re talking about the harm to a retailer, it’s not just about the overall harm to competition, it’s about the harm to them.
Most retailers don’t stock all products, they stock a subset. And so, you’ve got to explore all of those topics. But I think, zooming back out, I guess it’s a bit hard to draw general lessons about, does Europe have a different view about inter versus intra? I guess perhaps it’s got a little bit less faith in the power of competition of one layer of a value chain to save you from reductions in competition at another layer of a value chain. That might be one hypothesis to explore.
Is substitutability an issue here, Robin? I mean, you were saying it’s always about substitutability. I mean, the example that was occurring to me as you were talking was tomato ketchup. I don’t know how it is in the state, but there are some people that are only going to have Heinz tomato ketchup. They want their Heinz. And I think what you were saying, Jeff, was that provided you’ve got competition between different brands of ketchup, who cares. Whereas, if you’ve got a consumer base that doesn’t see it as particularly substitutable, then that’s when it’s more important to have measures which seek to promote competition even within the supply chain of one particular brand.
Robin, I’m tempted to toss this back to you, or to Helen. I see Helen…
I was just going to say, from one economics perspective, is… I mean, Heinz is a good example perhaps because you’ve got to think about the value chain and how much value is created by the brand as opposed to the retailer there. And perhaps Heinz is quite cheap to produce. So, it’s actually the logistics and the retail there where there’s more cost involved. And so, competition at that point of the value chain might have a bigger impact on a consumer overall price. Whereas, in my case of the MFN case in home insurance, the home insurance product is the valuable part. And the court was seeing that, at the most, wide MFNs were restricting intrabrand competition, which is a small component of the overall consumer cost. But they can actually intensify in interbrand competition by reducing search costs and clarifying where the best price is for the right brand.
So, I think that would be one way to try and evaluate. If you were to want to look at the overall impact on consumer costs, think about the value chain and where is the value, where is the cost most.
Yeah. And I guess, Jeff, you are bridging to the conversed here in the sense of, we economists are great enthusiasts of effects based analysis, looking at the facts of every individual case. But I guess, as pragmatists, we can also see the value that policy makers can sometimes take the view, we just want to take a judgment call on something, we want to guide the nature of competition in a particular area, in a particular direction. And if we’re concerned, if we find some of these theories compelling enough of the time, then maybe we just want to make it harder for people to do those kinds of things in the first place. And of course, there are pros and cons of making choices like that.
You see that in other related legislation. I mean, we go slightly beyond the vertical sphere, but those kinds of debates are right at the heart of the discussions around the Digital Markets Act, where essentially there are some parts of that that are based on competition and antitrust thinking, but there are other parts that are drawing much more heavily on more traditional regulatory market design principles about, how do we want things to work? We want to steer competition in a particular way because we think that is the better way? And in a sense, for better or worse, those are the kinds of judgments the policy makers make and we just have to look carefully at them. And business people have to think carefully about, well, how do you comply with those rules? How do you make the best of them? How do you optimize with them?
So, let me say that we have a few topics here that would merit a follow-up podcast. First of all, I’ll throw a prop to my partner in London for his very quick summary of Brexit, which merits its own discussion. And two-sided markets, we should have a two-sided market focused discussion on both sides of the pond. And this discussion of dual pricing, dual distribution also merits further, deeper dives. But we will save that for another day because-
I would just like to add one, Jeff. At the very end there Robin threw in something called the Digital Markets Act. I’m not sure if this is something that’s come across your radar yet. It’s new EU legislation which is aimed at regulating just the behavior of the largest tech firms and which, like GDPR is set to have ramifications all over the world. So, that is another piece which could very likely be of interest for a future podcast.
I completely concur. So, Robin and Helen, we’ll have you back. Who wants the last word, the economist or lawyer?
The title of this series is Antitrust Matters, but I guess one of the messages from this is Facts Matter.
Bravo, I want to thank you all. This has been great. Stephen, thank you for putting this together. Helen, Robin, it was fascinating and a pleasure meeting you in all this and we will have you back. Be well everybody. And thanks for your time here.
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