Background
The growth of ecommerce has benefitted consumers in numerous ways - it provides greater price transparency, the ability to compare prices across several retailers online and reduces search costs. This growth has simultaneously changed the manner in which businesses conduct themselves online, with a shift towards greater reliance on software to handle certain business processes.
The use of pricing algorithms by businesses, in particular, has attracted the attention of many competition authorities. The European Commission’s report on its ecommerce sector inquiry in 2017 revealed that a majority of retailers track their competitors’ prices online and two thirds of them use automatic software programmes that adjust their prices based on the observed prices of competitors. It is therefore no surprise that competition authorities have been interested in investigating whether the use of these pricing algorithms has an effect on competition in recent cases. Whilst these cases do not condemn algorithms in themselves, businesses need to be vigilant so that the pricing algorithms that they use do not lead them to infringe competition law.
What are the rules?
EU and UK competition law broadly prohibit agreements or concerted practices that have as their object or effect the prevention, restriction or distortion of competition where there is an effect on trade between EU Member States and in UK respectively. In the context of ecommerce, this can include agreements which, for example:
- Price fix
- Impose fixed or minimum retail prices (RPM)
- Impose restrictions on online sales
- Impose most favoured nation clauses
- Control the display of prices online.
However, such agreements may be exempted from the relevant prohibitions if they are economically beneficial, subject to certain criteria being satisfied, particularly if they fall within the European Commission’s Vertical Agreements Block Exemption.
What is a pricing algorithm?
The Competition and Markets Authority’s (CMA) recent Economic Paper on Pricing Algorithms defined an algorithm as 'any well defined computational procedure that takes some value or set of values as input and produces some value or set or values as output'. A pricing algorithm uses price as the relevant input and output. There are different variations of pricing algorithms, including price monitoring algorithms, price recommendation algorithms and price setting algorithms, all with different levels of sophistication.
When does the use of a pricing algorithm constitute an infringement of competition law?
The CMA's Paper states that pricing algorithms may have pro-competitive effects for both suppliers and consumers. For example, they may be expected to make markets more efficient for suppliers as prices become more responsive to market changes and some alert consumers when prices reach a certain level. However, the main competition law concern with pricing algorithms is that they may be used to monitor and enforce existing anti-competitive agreements. This was demonstrated in 2016 when the CMA settled a case against Trod Limited and GB Eye Limited who entered into a price fixing agreement which was implemented using automated online repricing software. The algorithm monitored and adjusted the parties’ prices to make sure neither was undercutting the other.
As a direct result of the information found during the European Commission's Inquiry, the Commission fined four consumer electronics manufacturers over €111 million in 2018 for imposing fixed or minimum retail prices on their retailers online. The manufacturers monitored the retailers' prices using sophisticated pricing software and threatened them with sanctions if they did not comply with the prices that the manufacturers requested. The manufacturers’ RPM scheme was aggravated by the use of pricing algorithms by retailers that automatically adapted their retail prices to those of their competitors. However, the Commission fined the manufacturers rather than the retailers because it was the manufacturers that imposed the anti-competitive agreements in this case.
Another competition law concern is that algorithms may lead to tacit coordination (where companies collude without explicit communication), for example, via ‘hub and spoke’ arrangements. This might occur where competing companies (the ‘spokes’) individually delegate their pricing decisions to a common a third party platform (the ‘hub’) which provides the algorithmic pricing services. This was explored by the European Union Court of Justice (CJEU) in 2016 when it considered whether 30 travel agencies which had joined a common online booking system had infringed competition law when they applied a common cap in discounting which was communicated through the system. The CJEU held that the ‘spokes’ could be liable for an infringement if they were aware of the communication, unless if they publicly distanced themselves or reported it to competition authorities.
Who is liable?
The European Commission and the CMA can impose fines up to 10% of the worldwide turnover of a business that intentionally or negligently infringes competition law. In the cases mentioned above, the parties that used the algorithms to implement anti competitive agreements/behaviour were found to be liable for the competition law infringement. The cases suggest that it is lawful for companies to use algorithms to adapt themselves intelligently on the market, provided there is no anti-competitive agreement or tacit co-ordination.
Comment
The recent cases illustrate that algorithms, in themselves, are not considered problematic from a competition law perspective. As ecommerce grows and algorithms become more sophisticated, it is yet to be seen whether algorithms will be capable of colluding between themselves (without human intervention), and if so, there may be arguments about who would be liable in those circumstances. However, it seems unlikely that the CMA or European Commission would accept the argument: 'it wasn’t me, it was the algorithm!' as businesses and their directors are responsible for negligent as well as deliberate competition law infringements. The CMA has recently announced that it is conducting research with BEIS into the use of personalised pricing by retailers to charge online shoppers different prices for the same products. It is yet to be whether this will shed more light on the role of pricing algorithms in ecommerce. In the meantime, businesses should be cautious to ensure that any pricing algorithms they use do not give rise to or facilitate anti-competitive agreements.
How can Burges Salmon help?
The CMA has indicated that digital and online markets are of strategic importance to the way it selects cases and are therefore a priority for the CMA. Burges Salmon has a broad range of experience in advising businesses in this area of the law.