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Pricing Algorithms

01 November 2018 by Robert Bell

Pricing Algorithms

Questions have been raised surrounding the existing provisions of competition law

Companies are increasingly using pricing algorithms to set the prices for their products automatically. These can promote competition by allowing companies to react quickly to changes in prices of competitors’ products and compete keenly on price. However, their use also has a more sinister side as these algorithms can be used to align prices and reduce price competition to the disadvantage of consumers. There have been a couple of recent cases in the UK and the EU where the regulators have considered the application of the competition rules to pricing algorithms and whether the provisions are up to scratch.

Digitisation

The EU Commission’s E-Commerce Sector Inquiry highlighted how online commerce is growing rapidly and is now worth over €500 billion in Europe every year. The report also shed light on the increased use of automatic software applied by retailers for price monitoring and price setting. Figures collated recently by academic commentators suggested that over 500 sellers were using algorithmic pricing on leading on-line market platform, Amazon Marketplace.

Competition regulators at both a national and an EU level have been grappling with the challenge algorithmic pricing brings to the enforcement of competition law. Both EU (Article 101(1) Treaty for the Functioning of the European Union) and UK (Chapter I of Competition Act 1998) competition law relies on the presence of an agreement between undertakings or at least a concerted practice relating to anti-competitive behaviour to trigger a regulator’s ability to enforce the rules.

However, technology is now making it progressively more difficult to say whether human intervention has caused the offending behaviour and with that conundrum comes the question whether existing powers are sufficient to police the digital world.

Andreas Mundt, Chairman of the Bundeskartelamt was rather scathing when he commented in September 2017: 'We are still waiting for colluding algorithms…we haven’t found any yet.' However, the EU Competition Commissioner, Magarethe Vestager, sounded a more cautious note stating: 'The challenges that automated systems create are very real.'

These challenges have prompted several EU Member States and the EU Commission to set up taskforces to look at whether competition law needs to be amended to tackle these types of behaviour. For example, in the UK an expert panel has been formed under former Obama aide, Professor Jason Furman, to look at competition in the digital economy.

Fixing prices

The first case involving pricing algorithms in the UK involved Trod Limited and GB Eye Limited (trading as ‘GB Posters’) and came before the CMA in 2016. These companies both sold licensed sport and entertainment merchandise and related products, including posters, frames, badges, stickers and mugs, with popular images from the sport and entertainment world, such as One Direction and Justin Bieber.

Following the CMA’s investigation, Trod admitted agreeing with competing online seller, GB Eye, not to undercut each other’s prices for posters and frames sold on Amazon’s Marketplace’s UK website. The agreement was implemented by using automated repricing software which the parties each configured to give effect to the illegal cartel. The cartel applied to posters and frames sold by both parties on Amazon Marketplace via Amazon’s UK website from 24 March 2011 (at the latest) to 1 July 2015 (at the earliest). Amazon Marketplace was not investigated by the CMA under the investigation.

“Algorithms can be used to align prices and reduce price competition”

Following the conclusion of the CMA’s investigation Trod was fined £163,371 for taking part in the cartel. This was reduced by 20% to reflect Trod’s cooperation with the CMA’s investigation. In this case it was quite clear that executives at Trod and GB Eye had used software to give effect to a pre-determined arrangement between them so the ability to enforce the competition rules was clearly not in doubt. It was an old-fashioned cartel using software as means of policing the arrangement.

This case and other prior cases involving internet selling show the CMA attaches a particular priority to ensuring that online and digital markets work. As the internet is being an increasingly important way in which people buy products or services in their everyday lives their work in digital markets attracts considerable importance.

So, sellers on online platforms need to be aware that agreeing with each other to limit price competition in this way is a serious infringement of competition law which can have serious consequences.

Enforcing RPM

More recently the EU Commission has looked at the question of pricing algorithms. On 24 July 2018 the EU Commission fined a number of leading consumer electronics groups including Denon & Marantz and Pioneer, over €111 million for a range of resale pricing and other competition law infringements. The level of fines was substantially reduced due to the companies’ cooperation with the Commission.

The Commission’s e-commerce sector inquiry, the results of which the Commission published in May 2017 as part of its Digital Single Market strategy, showed that resale-price related restrictions are by far the most widespread restrictions of competition in e-commerce markets.

Given the results of the e-commerce sector inquiry the particularly interesting aspect of these cases is the role played by pricing algorithms deployed by the companies concerned to ensure their distributors set their resale prices at the manufacturers’ recommended levels.

The companies engaged in resale price maintenance by restricting the ability of their online retailers to set their own retail prices for widely used consumer electronics products such as kitchen appliances, notebooks and hi-fi products. In particular the manufacturers intervened with online retailers, who offered their products at low prices. If those retailers did not follow the prices requested by manufacturers, they faced threats or sanctions such as blocking of supplies. The companies used pricing algorithms to effectively track resale price setting in the distribution network and to intervene swiftly in case of price decreases. The price interventions limited effective price competition between retailers and led to higher prices with an immediate effect on consumers.

In addition, in one of the cases parallel to resale price maintenance a manufacturer also limited the ability of its retailers to sell-cross border to consumers in other Member States in order to sustain different resale prices in different Member States, for example by blocking orders of retailers who sold cross-border.

Similar to the Trod case, while pricing algorithms were the means of enforcing the anti-competitive conduct, at the root of the behaviour was an agreement between suppliers and retailers to follow an anti-competitive course of action.

Fit for purpose

Competition law always tends to play catch up with technology and the challenges digital markets represent is no different. So, it is entirely appropriate that consideration should be given by competition regulators and governments as to whether changes in the law should be made to ensure consumer’s interests are adequately protected.

Whilst it may be possible that the use of pricing algorithms could, in the future, result in cartel behaviour without any human involvement, this is some time away. A review of recent cases shows that existing competition law provisions remain fit for purpose because at the base of anti-competitive behaviour there is always the need for people to agree or follow a common course of action as part of a predetermined plan. 

Robert Bell is a partner at Bryan Cave Leighton Paisner LLP

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