competition policy in modern retail...

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Competition policy in modern retail markets Hans W. Friederiszick* and Ela Głowicka ABSTRACT With e-commerce having accelerated over recent years, retailing has changed signifi- cantly. Manufacturers and retailers have established multichannel (offline/online) strategies within which pricing restraints often constitute a central element. Behind these strategies sits the firms’ ambition to find a solution to free-riding. Free-riding re- sults in non-optimal service levels and price setting and thus offers a business justifica- tion for pricing restrains which, in many instances, are viewed as infringements under Article 101 or 102 Treaty on the Functioning of the European Union (TFEU). In this article we map out the alignment of characteristics of products targeted by recent anti- trust enforcement in Europe with the likelihood of free-rider effects taking place. Specifically in the case of products with search and experience characteristics, we find intensive enforcement activity despite prevalent free-rider effects. KEYWORDS : retail competition; externalities; free-riding; vertical restraints; cross- channel shopping; competition law JEL CLASSIFICATIONS : K21, L42, L81 I. INTRODUCTION Online retail sales in European Member States are soaring, with predicted growth rates of above 13 per cent from 2014 to 2015. In the UK and Denmark online retail sales have exceeded a share of all retail revenue of 10 per cent in 2014; for specific product catego- ries the share of sales concluded online comes close to 30 per cent in those countries. 1 This trend puts pressure on traditional retailers. While part of the increase of on- line market share is made up for by market growth, revenue loss in absolute terms is a credible and persisting threat. The question whether online retailing is a * Hans W. Friederiszick, Managing Director of E.CA Economics and Research Fellow of ESMT, European School of Management and Technology. Email: [email protected]. Ela Głowicka, Manager at E.CA Economics. Email: [email protected]. This article has been prepared for the Antitrust Enforcement Symposium 2015 in Oxford and benefited from feedback from two anonymous referees. We also would like to thank Ludwig Willnegger (EDEKA) for sharing his knowledge on relevant studies on the development of e-commerce and on European policy initiatives with us. The authors are re- sponsible for all opinions, errors or omissions. 1 Depending on the exact definition of internet retailing and country coverage the numbers vary across dif- ferent data sources. In Section II we offer a discussion of the underlying assumptions. V C The Author 2015. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: [email protected] 1 Journal of Antitrust Enforcement, 2015, 0, 1–42 doi: 10.1093/jaenfo/jnv030 Article Journal of Antitrust Enforcement Advance Access published November 26, 2015

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Competition policy in modern retailmarkets

Hans W Friederiszick and Ela Głowickadagger

A B S T R A C T

With e-commerce having accelerated over recent years retailing has changed signifi-cantly Manufacturers and retailers have established multichannel (offlineonline)strategies within which pricing restraints often constitute a central element Behindthese strategies sits the firmsrsquo ambition to find a solution to free-riding Free-riding re-sults in non-optimal service levels and price setting and thus offers a business justifica-tion for pricing restrains which in many instances are viewed as infringements underArticle 101 or 102 Treaty on the Functioning of the European Union (TFEU) In thisarticle we map out the alignment of characteristics of products targeted by recent anti-trust enforcement in Europe with the likelihood of free-rider effects taking placeSpecifically in the case of products with search and experience characteristics we findintensive enforcement activity despite prevalent free-rider effectsK E Y W O R D S retail competition externalities free-riding vertical restraints cross-channel shopping competition lawJ E L C L A S S I F I C A T I O N S K21 L42 L81

I I N T R O D U C T I O NOnline retail sales in European Member States are soaring with predicted growth ratesof above 13 per cent from 2014 to 2015 In the UK and Denmark online retail sales haveexceeded a share of all retail revenue of 10 per cent in 2014 for specific product catego-ries the share of sales concluded online comes close to 30 per cent in those countries1

This trend puts pressure on traditional retailers While part of the increase of on-line market share is made up for by market growth revenue loss in absolute terms isa credible and persisting threat The question whether online retailing is a

Hans W Friederiszick Managing Director of ECA Economics and Research Fellow of ESMT EuropeanSchool of Management and Technology Email friederiszicke-cacom

dagger Ela Głowicka Manager at ECA Economics Email glowickae-cacom This article has been prepared forthe Antitrust Enforcement Symposium 2015 in Oxford and benefited from feedback from two anonymousreferees We also would like to thank Ludwig Willnegger (EDEKA) for sharing his knowledge on relevantstudies on the development of e-commerce and on European policy initiatives with us The authors are re-sponsible for all opinions errors or omissions

1 Depending on the exact definition of internet retailing and country coverage the numbers vary across dif-ferent data sources In Section II we offer a discussion of the underlying assumptions

VC The Author 2015 Published by Oxford University PressAll rights reserved For permissions please e-mail journalspermissionsoupcom

1

Journal of Antitrust Enforcement 2015 0 1ndash42doi 101093jaenfojnv030Article

Journal of Antitrust Enforcement Advance Access published November 26 2015

complement or a substitute to traditional retailing is still unanswered (and dependson national preferences product characteristics and technological and business in-novation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment

Besides replacement due to better digitalized products as for example in the fieldof video or music streaming and increased geographic competition as experiencedin for instance office supply both of which are unambiguously good from a con-sumer welfare perspective free-riding behaviour also plays a role in this developmentand may lead to welfare losses

In fact retailers frequently offer complementary services or efforts related to prod-ucts sold These services comprise product comparison and technical advice touch andfeel price positioning and ambient and after-services The provision of the services is af-fected by externalities potentially aggravated by free-riding behaviour These external-ities and the accompanying free-riding behaviour often results in non-optimal servicelevels and price setting and hence offer business justification for pricing restraints whicharemdashin the context of traditional retailingmdashviewed in many instances as infringementsunder Article 101 or 102 Treaty on the Functioning of the European Union (TFEU)

In this article we map out the alignment of product characteristics (also calledlsquoproduct qualitiesrsquo in the marketing literature) of products targeted by recent anti-trust enforcement in Europe France Germany and the UK with the likelihood offree-rider effects taking place

The main body of this article is structured along the following lines In Section IIwe describe the empirical development of e-commerce in retailing in Europe InSection III we introduce different types of free-riding explore countervailing busi-ness strategies and summarize the available empirical evidence on free-riding behav-iour In Section IV we first offer an overview of the EU legal provisions and of therelevant antitrust cases decided by competition authorities in Germany France theUK and European Commission related to selective distribution systems and agencymodels in non-food retailing Then we describe different product characteristics thatmake a product prone to free-rider effects and rank products affected by current anti-trust enforcement according to those characteristics By showing which product char-acteristics attract most attention by competition authorities we identify areas ofconflict In Section V we offer some concluding observations

I I R E C E N T T R E N D S I N E - C O M M E R C EE-commerce is changing retail markets significantly and on a lasting basis On theone hand this is due to changes in consumer behaviour and in the size of geographicmarkets on the other hand it is due to differences in cost structures and pricingmodels between offline and online retail markets

Online shoppers have lower search costs and can more easily compare prices andproducts of different sellers than offline consumers2 They are not limited in terms

2 Holland and Jacobs (2015 p 2) provide an overview of the literature identifying a significant reduction ofsearch costs due to the Internet Interestingly the authors do not find an increase in the lsquoconsideration setrsquothe number of alternative suppliers searched online by customers due to the internet indicating that

2 Journal of Antitrust Enforcement

of geography but can order from any location world-wide Online retailers can main-tain lower inventory and do not have to maintain a brick and mortar store networkAccordingly they exhibit a significantly different cost structuremdashboth with respectto variable versus fixed costs and with respect to cost levels3 With data mining andmatching techniques becoming more sophisticated and depending on future privacypolicies online retailers are better positioned to price discriminate and to researchand monitor competitor pricing4

In fact in a digital environment a retailerrsquos role is transformed from that of a lsquore-sellerrsquo selling products to its local customer base into that of a lsquobrokerrsquo offering aplatform to connect potential buyers and sellers efficiently In this setting the eco-nomics of retailing change dramatically bringing (cross market) network effects tothe centre of strategic considerations where previously the focus was on local accessto end consumers5

What role traditional offline retailing will play in the long term is yet unclear thiswill depend not only on cost advantages technological advances and consumer pref-erences but also on regulationmdashwhether privacy- or consumer protection-centred orfocused on copyright and Intellectual Property (IP) laws or antitrust enforcementRegulation in particular will define whether the emerging long-term market out-come also maximizes consumer welfare

Current figures indicate future growth in online retailing However the exactnumbers vary depending inter alia on how onlineoffline purchases aredelineated from each other6 While to some extent this is a simple question ofstandardization of definitions across time and data providers7 it is also due to the

search behaviour by customers is driven by a more complex relationship then just search cost optimizationSee CP Holland and JA Jacobs lsquoThe Influence of the Herfindahl-Hirschman Index and ProductComplexity on Search Behaviour A Cross-sector Study of the US Germany and UKrsquo ECIS 2015Completed Research Papers Paper 80 (2015) See also P Buccirossi lsquoVertical restraints on E-Commerceand Selective Distributionrsquo (2015) 113 p 747ndash773

3 According to McKinsey Amazon exhibits a 3ndash4 lower cost base than its competitorsrsquo (in addition to alarger assortment and highest customer-satisfaction scores in the industry) Herringer Wachinger andWigley Making stores matter in a multichannel world McKinsey 2014 p 5 (n 14) 5 An overview of maindifferences between online and offline retailing is provided in E Lieber and C Syverson lsquoOnline vs OfflineCompetitionrsquo in Martin Peitz and Joel Waldfogel (eds) The Oxford Handbook of the Digital Economy(2012) and M Trenz Mutlichannel Commerce (Springer 2015) 1ndash153 ch 2

4 See A Odlyzko lsquoPrivacy Economics and Price Discrimination on the Internetrsquo Proceedings of the 5thInternational Conference on Electronic Commerce ACM 2003 The degree of price transparency offeredvia the Internet results in new antitrust issues related to tacitly coordinated pricing through price trackersoftware The recent practice and capabilities of price tracking software is summarized in D PopesculsquoRepricing Alggorithms in E-Commercersquo INSEAD Working Paper 201575TOM 1ndash36

5 In the report presenting the European Commissionrsquos digital agenda it moves away from the term lsquovaluechainrsquo to the term lsquovalue webrsquo to reflect changing consumer behaviour allowing multiple interlinked valuechains EU lsquoA Digital Single Market Strategy for Europersquo COM (2015)192 final p 7

6 When comparing figures across different data sources it is in addition to the above mentioned differences indefinition specifically variation on country coverage and product range which needs to be taken into account

7 There is a significant number of competing data providers available offering retail data As in retailing itselfthere is also a convergence of data providers with some of the traditional offline retail data providers likeNielsen IRI and GFK building significant online research panels On the other hand traditional onlinetech-nology data providers like comScore or Forrester increasingly gain relevance in retailing with online retailingbecoming more a more important channel With data aggregators like Planet Retail and EuromonitorPassport additional comprehensive datasets are built up in parallel to the data provided by statistical offices

Competition policy in modern retail markets 3

dynamics of the underlying industry and changing business models adopted byretailers8

For instance one of the leading data providers in that field Euromonitor excludesrevenues generated over consumer-to-consumer sales sites such as eBay B2C pro-portion of such sites will be captured though Equally it excludes quick delivery ofservices of food magazines household goods and DVD rentals which increasinglystay in close competition to traditional retailing eg in grocery retailing The increas-ing adoption of multichannel strategies by store-based retailers and the building-upof physical store networks by retailers viewed historically as pure online retailer fur-ther blurs a proper delineation Referring again to the definition of internet retailingby Euromonitor click and collect orders in stores where the payment is made in thestore are excludedmdashthereby underestimating the full value of internet marketing forretailers9 With this limitations in mind we summarize in the following the maintrends of retailing

Despite those inconsistencies across databases it seems a robust statement thatonline retail sales in European Member States are soaring Euromonitor reports thepredicted growth rate of 132 per cent for all EU Member States for which data isavailable This is consistent with the growth rate for the European B2C e-commerceturnover in 2015 to reach 128 per cent as reported by Ecommerce Foundation10

Also according to Center for Retail Research (CRR) the predicted rates from 2014to 2015 exceed 10 per cent for most of countries11

Online penetration of retail turnover varies significantly across countries thoughIn the UK and Denmark the share of online sales in all retail revenue exceeded 10per cent in 2014 (see Fig 1) This is in contrast to countries like Bulgaria andCroatia with a share around 1 per cent

Abstracting from those differences the average share of online retail reached 7 percent in Europe according to Euromonitor According to a different source Eurostatwhich defines e-commerce more broadly as all revenue made by firms via the inter-net or other online networks e-commerce reached a market share of 15 per cent in2014 again with strong variation across countries12

Some commentators consider this a level which will inevitably increase the ten-sion between online and offline retailing According to CRR lsquoby the time that onlinesales represent 5 or more of domestic retailing the continued growth of online retailersoccur (sic) at the expense of conventional storesrsquo13 This critical value has recently been

8 OXIRM (2014 p 59) the Oxford Institute of Retail Management states lsquoThis is a fast-moving area of theeconomy which makes it more difficult to achieve reliable and timely statistical estimates Such distinctions arein any case increasingly difficult to sustain as for example more and more store-based retailers adopt more fullyintegrated multi-channel strategies and it becomes more difficult to distinguish and accurately attribute data onsales by channelrsquo OXIRM lsquoRetail amp Wholesale Key Sectors for the European Economyrsquo Said BusinessSchool University of Oxford (2014)

9 For the full definition of internet retailing according to Euromonitor see Category definitions Internet re-tailing Euromonitor International 2015

10 European B2C E-commerce Report 2015 Ecommerce Foundation11 Centre for Retail Research (CRR) Online Retailing Britain Europe USA and Canada 2015 ltwww

retailresearchorgonlineretailingphpgtaccessed 6 March 201512 Eurostat (isoc_ec_evaln2) extracted on 8 March 201513 CRR (2015)

4 Journal of Antitrust Enforcement

reached in many European countries as we see in Fig 1 Thus CRR experts expectfurther growth of e-commerce to lead to cannibalization of revenues of conventionalstores

This prediction is in line with evidence on store closure in the UK McKinsey(refereeing to data from The Local Data Company) reports for instance an increasein the number of vacant retail shops by 355 per cent in the UK between 2008 and2013 The most pronounced decline is found in consumer electronics where a 20ndash30 per cent decline in physical retail space in the UK market between 2006 and 2012was fully offset by the addition of an equivalent amount of virtual space14

Equally Reynolds from the Oxford Institute of Retail Management15 reports de-tailed results for UKrsquos High Streets showing a 53 per cent decline in the number ofstores by multiple retailers of non-perishable products (so called comparison prod-ucts in contrast to convenience goods like food) over the two years 2011ndash2013Also the most recent numbers show a further escalation of this trend while the netclosure of stores by multiple retailers was 371 stores in 2013 it increased to 987 in201416 Across all retailersmdashindependent and chainsmdashthe net decline rate in storesfor comparison products increased from 09 per cent in 2013 to 14 percent in2014 with fashion retailers being most heavily pulled out of the market

Figure 1 Share of online retail in total retail sales across countries 2014ndash2015

Source Euromonitor International EU25 refers to all EU member states except Cyprus Luxembourg and Malta for which

retail data is not available in Euromonitor

14 Virtual space is defined as lsquofloor space that would be required to generate the sales volume that online re-tail now accounts for at a sales density equivalent to the industry averagersquo See Louise Herringer TobiasWachinger and Chris Wigley lsquoMaking Stores Matter in a Multichannel World Perspectives on Retail andConsumer Goodsrsquo McKinsey (2014) 5

15 Jonathan Reynoldsrsquo online blog (19 July 2013) lthttpoxford-institutesbsblogscouk20130719diversity-and-the-uks-high-streetsgt accessed 2 October 2015

16 Opening amp Closure Report 2014 by The Local Data Company (published March 2015)

Competition policy in modern retail markets 5

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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le3

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Competition policy in modern retail markets 39

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le3

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tinu

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able

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ing

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able

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ing

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

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tinu

ed)

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me

Rel

evan

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ury

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erie

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denc

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es

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132

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king

-BP

CH

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ing

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le

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vate

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orin

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ance

2014

UK

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nce

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le

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odel

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ooks

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01

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ivox

2015

DE

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ce-

com

pari

son

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form

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ener

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ovid

ers

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PC

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rgy

pric

eco

mpa

riso

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able

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20

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thor

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ote

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hene

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nopa

rtic

ular

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dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF1
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  • jnv030-FN30
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  • jnv030-FN77
  • jnv030-FN78
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  • jnv030-TF3

complement or a substitute to traditional retailing is still unanswered (and dependson national preferences product characteristics and technological and business in-novation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment

Besides replacement due to better digitalized products as for example in the fieldof video or music streaming and increased geographic competition as experiencedin for instance office supply both of which are unambiguously good from a con-sumer welfare perspective free-riding behaviour also plays a role in this developmentand may lead to welfare losses

In fact retailers frequently offer complementary services or efforts related to prod-ucts sold These services comprise product comparison and technical advice touch andfeel price positioning and ambient and after-services The provision of the services is af-fected by externalities potentially aggravated by free-riding behaviour These external-ities and the accompanying free-riding behaviour often results in non-optimal servicelevels and price setting and hence offer business justification for pricing restraints whicharemdashin the context of traditional retailingmdashviewed in many instances as infringementsunder Article 101 or 102 Treaty on the Functioning of the European Union (TFEU)

In this article we map out the alignment of product characteristics (also calledlsquoproduct qualitiesrsquo in the marketing literature) of products targeted by recent anti-trust enforcement in Europe France Germany and the UK with the likelihood offree-rider effects taking place

The main body of this article is structured along the following lines In Section IIwe describe the empirical development of e-commerce in retailing in Europe InSection III we introduce different types of free-riding explore countervailing busi-ness strategies and summarize the available empirical evidence on free-riding behav-iour In Section IV we first offer an overview of the EU legal provisions and of therelevant antitrust cases decided by competition authorities in Germany France theUK and European Commission related to selective distribution systems and agencymodels in non-food retailing Then we describe different product characteristics thatmake a product prone to free-rider effects and rank products affected by current anti-trust enforcement according to those characteristics By showing which product char-acteristics attract most attention by competition authorities we identify areas ofconflict In Section V we offer some concluding observations

I I R E C E N T T R E N D S I N E - C O M M E R C EE-commerce is changing retail markets significantly and on a lasting basis On theone hand this is due to changes in consumer behaviour and in the size of geographicmarkets on the other hand it is due to differences in cost structures and pricingmodels between offline and online retail markets

Online shoppers have lower search costs and can more easily compare prices andproducts of different sellers than offline consumers2 They are not limited in terms

2 Holland and Jacobs (2015 p 2) provide an overview of the literature identifying a significant reduction ofsearch costs due to the Internet Interestingly the authors do not find an increase in the lsquoconsideration setrsquothe number of alternative suppliers searched online by customers due to the internet indicating that

2 Journal of Antitrust Enforcement

of geography but can order from any location world-wide Online retailers can main-tain lower inventory and do not have to maintain a brick and mortar store networkAccordingly they exhibit a significantly different cost structuremdashboth with respectto variable versus fixed costs and with respect to cost levels3 With data mining andmatching techniques becoming more sophisticated and depending on future privacypolicies online retailers are better positioned to price discriminate and to researchand monitor competitor pricing4

In fact in a digital environment a retailerrsquos role is transformed from that of a lsquore-sellerrsquo selling products to its local customer base into that of a lsquobrokerrsquo offering aplatform to connect potential buyers and sellers efficiently In this setting the eco-nomics of retailing change dramatically bringing (cross market) network effects tothe centre of strategic considerations where previously the focus was on local accessto end consumers5

What role traditional offline retailing will play in the long term is yet unclear thiswill depend not only on cost advantages technological advances and consumer pref-erences but also on regulationmdashwhether privacy- or consumer protection-centred orfocused on copyright and Intellectual Property (IP) laws or antitrust enforcementRegulation in particular will define whether the emerging long-term market out-come also maximizes consumer welfare

Current figures indicate future growth in online retailing However the exactnumbers vary depending inter alia on how onlineoffline purchases aredelineated from each other6 While to some extent this is a simple question ofstandardization of definitions across time and data providers7 it is also due to the

search behaviour by customers is driven by a more complex relationship then just search cost optimizationSee CP Holland and JA Jacobs lsquoThe Influence of the Herfindahl-Hirschman Index and ProductComplexity on Search Behaviour A Cross-sector Study of the US Germany and UKrsquo ECIS 2015Completed Research Papers Paper 80 (2015) See also P Buccirossi lsquoVertical restraints on E-Commerceand Selective Distributionrsquo (2015) 113 p 747ndash773

3 According to McKinsey Amazon exhibits a 3ndash4 lower cost base than its competitorsrsquo (in addition to alarger assortment and highest customer-satisfaction scores in the industry) Herringer Wachinger andWigley Making stores matter in a multichannel world McKinsey 2014 p 5 (n 14) 5 An overview of maindifferences between online and offline retailing is provided in E Lieber and C Syverson lsquoOnline vs OfflineCompetitionrsquo in Martin Peitz and Joel Waldfogel (eds) The Oxford Handbook of the Digital Economy(2012) and M Trenz Mutlichannel Commerce (Springer 2015) 1ndash153 ch 2

4 See A Odlyzko lsquoPrivacy Economics and Price Discrimination on the Internetrsquo Proceedings of the 5thInternational Conference on Electronic Commerce ACM 2003 The degree of price transparency offeredvia the Internet results in new antitrust issues related to tacitly coordinated pricing through price trackersoftware The recent practice and capabilities of price tracking software is summarized in D PopesculsquoRepricing Alggorithms in E-Commercersquo INSEAD Working Paper 201575TOM 1ndash36

5 In the report presenting the European Commissionrsquos digital agenda it moves away from the term lsquovaluechainrsquo to the term lsquovalue webrsquo to reflect changing consumer behaviour allowing multiple interlinked valuechains EU lsquoA Digital Single Market Strategy for Europersquo COM (2015)192 final p 7

6 When comparing figures across different data sources it is in addition to the above mentioned differences indefinition specifically variation on country coverage and product range which needs to be taken into account

7 There is a significant number of competing data providers available offering retail data As in retailing itselfthere is also a convergence of data providers with some of the traditional offline retail data providers likeNielsen IRI and GFK building significant online research panels On the other hand traditional onlinetech-nology data providers like comScore or Forrester increasingly gain relevance in retailing with online retailingbecoming more a more important channel With data aggregators like Planet Retail and EuromonitorPassport additional comprehensive datasets are built up in parallel to the data provided by statistical offices

Competition policy in modern retail markets 3

dynamics of the underlying industry and changing business models adopted byretailers8

For instance one of the leading data providers in that field Euromonitor excludesrevenues generated over consumer-to-consumer sales sites such as eBay B2C pro-portion of such sites will be captured though Equally it excludes quick delivery ofservices of food magazines household goods and DVD rentals which increasinglystay in close competition to traditional retailing eg in grocery retailing The increas-ing adoption of multichannel strategies by store-based retailers and the building-upof physical store networks by retailers viewed historically as pure online retailer fur-ther blurs a proper delineation Referring again to the definition of internet retailingby Euromonitor click and collect orders in stores where the payment is made in thestore are excludedmdashthereby underestimating the full value of internet marketing forretailers9 With this limitations in mind we summarize in the following the maintrends of retailing

Despite those inconsistencies across databases it seems a robust statement thatonline retail sales in European Member States are soaring Euromonitor reports thepredicted growth rate of 132 per cent for all EU Member States for which data isavailable This is consistent with the growth rate for the European B2C e-commerceturnover in 2015 to reach 128 per cent as reported by Ecommerce Foundation10

Also according to Center for Retail Research (CRR) the predicted rates from 2014to 2015 exceed 10 per cent for most of countries11

Online penetration of retail turnover varies significantly across countries thoughIn the UK and Denmark the share of online sales in all retail revenue exceeded 10per cent in 2014 (see Fig 1) This is in contrast to countries like Bulgaria andCroatia with a share around 1 per cent

Abstracting from those differences the average share of online retail reached 7 percent in Europe according to Euromonitor According to a different source Eurostatwhich defines e-commerce more broadly as all revenue made by firms via the inter-net or other online networks e-commerce reached a market share of 15 per cent in2014 again with strong variation across countries12

Some commentators consider this a level which will inevitably increase the ten-sion between online and offline retailing According to CRR lsquoby the time that onlinesales represent 5 or more of domestic retailing the continued growth of online retailersoccur (sic) at the expense of conventional storesrsquo13 This critical value has recently been

8 OXIRM (2014 p 59) the Oxford Institute of Retail Management states lsquoThis is a fast-moving area of theeconomy which makes it more difficult to achieve reliable and timely statistical estimates Such distinctions arein any case increasingly difficult to sustain as for example more and more store-based retailers adopt more fullyintegrated multi-channel strategies and it becomes more difficult to distinguish and accurately attribute data onsales by channelrsquo OXIRM lsquoRetail amp Wholesale Key Sectors for the European Economyrsquo Said BusinessSchool University of Oxford (2014)

9 For the full definition of internet retailing according to Euromonitor see Category definitions Internet re-tailing Euromonitor International 2015

10 European B2C E-commerce Report 2015 Ecommerce Foundation11 Centre for Retail Research (CRR) Online Retailing Britain Europe USA and Canada 2015 ltwww

retailresearchorgonlineretailingphpgtaccessed 6 March 201512 Eurostat (isoc_ec_evaln2) extracted on 8 March 201513 CRR (2015)

4 Journal of Antitrust Enforcement

reached in many European countries as we see in Fig 1 Thus CRR experts expectfurther growth of e-commerce to lead to cannibalization of revenues of conventionalstores

This prediction is in line with evidence on store closure in the UK McKinsey(refereeing to data from The Local Data Company) reports for instance an increasein the number of vacant retail shops by 355 per cent in the UK between 2008 and2013 The most pronounced decline is found in consumer electronics where a 20ndash30 per cent decline in physical retail space in the UK market between 2006 and 2012was fully offset by the addition of an equivalent amount of virtual space14

Equally Reynolds from the Oxford Institute of Retail Management15 reports de-tailed results for UKrsquos High Streets showing a 53 per cent decline in the number ofstores by multiple retailers of non-perishable products (so called comparison prod-ucts in contrast to convenience goods like food) over the two years 2011ndash2013Also the most recent numbers show a further escalation of this trend while the netclosure of stores by multiple retailers was 371 stores in 2013 it increased to 987 in201416 Across all retailersmdashindependent and chainsmdashthe net decline rate in storesfor comparison products increased from 09 per cent in 2013 to 14 percent in2014 with fashion retailers being most heavily pulled out of the market

Figure 1 Share of online retail in total retail sales across countries 2014ndash2015

Source Euromonitor International EU25 refers to all EU member states except Cyprus Luxembourg and Malta for which

retail data is not available in Euromonitor

14 Virtual space is defined as lsquofloor space that would be required to generate the sales volume that online re-tail now accounts for at a sales density equivalent to the industry averagersquo See Louise Herringer TobiasWachinger and Chris Wigley lsquoMaking Stores Matter in a Multichannel World Perspectives on Retail andConsumer Goodsrsquo McKinsey (2014) 5

15 Jonathan Reynoldsrsquo online blog (19 July 2013) lthttpoxford-institutesbsblogscouk20130719diversity-and-the-uks-high-streetsgt accessed 2 October 2015

16 Opening amp Closure Report 2014 by The Local Data Company (published March 2015)

Competition policy in modern retail markets 5

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

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2015

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attr

ess

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ubes

126

100

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01

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ucts

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Competition policy in modern retail markets 39

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le3

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40 Journal of Antitrust Enforcement

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le3

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
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  • jnv030-FN30
  • jnv030-FN31
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  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
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of geography but can order from any location world-wide Online retailers can main-tain lower inventory and do not have to maintain a brick and mortar store networkAccordingly they exhibit a significantly different cost structuremdashboth with respectto variable versus fixed costs and with respect to cost levels3 With data mining andmatching techniques becoming more sophisticated and depending on future privacypolicies online retailers are better positioned to price discriminate and to researchand monitor competitor pricing4

In fact in a digital environment a retailerrsquos role is transformed from that of a lsquore-sellerrsquo selling products to its local customer base into that of a lsquobrokerrsquo offering aplatform to connect potential buyers and sellers efficiently In this setting the eco-nomics of retailing change dramatically bringing (cross market) network effects tothe centre of strategic considerations where previously the focus was on local accessto end consumers5

What role traditional offline retailing will play in the long term is yet unclear thiswill depend not only on cost advantages technological advances and consumer pref-erences but also on regulationmdashwhether privacy- or consumer protection-centred orfocused on copyright and Intellectual Property (IP) laws or antitrust enforcementRegulation in particular will define whether the emerging long-term market out-come also maximizes consumer welfare

Current figures indicate future growth in online retailing However the exactnumbers vary depending inter alia on how onlineoffline purchases aredelineated from each other6 While to some extent this is a simple question ofstandardization of definitions across time and data providers7 it is also due to the

search behaviour by customers is driven by a more complex relationship then just search cost optimizationSee CP Holland and JA Jacobs lsquoThe Influence of the Herfindahl-Hirschman Index and ProductComplexity on Search Behaviour A Cross-sector Study of the US Germany and UKrsquo ECIS 2015Completed Research Papers Paper 80 (2015) See also P Buccirossi lsquoVertical restraints on E-Commerceand Selective Distributionrsquo (2015) 113 p 747ndash773

3 According to McKinsey Amazon exhibits a 3ndash4 lower cost base than its competitorsrsquo (in addition to alarger assortment and highest customer-satisfaction scores in the industry) Herringer Wachinger andWigley Making stores matter in a multichannel world McKinsey 2014 p 5 (n 14) 5 An overview of maindifferences between online and offline retailing is provided in E Lieber and C Syverson lsquoOnline vs OfflineCompetitionrsquo in Martin Peitz and Joel Waldfogel (eds) The Oxford Handbook of the Digital Economy(2012) and M Trenz Mutlichannel Commerce (Springer 2015) 1ndash153 ch 2

4 See A Odlyzko lsquoPrivacy Economics and Price Discrimination on the Internetrsquo Proceedings of the 5thInternational Conference on Electronic Commerce ACM 2003 The degree of price transparency offeredvia the Internet results in new antitrust issues related to tacitly coordinated pricing through price trackersoftware The recent practice and capabilities of price tracking software is summarized in D PopesculsquoRepricing Alggorithms in E-Commercersquo INSEAD Working Paper 201575TOM 1ndash36

5 In the report presenting the European Commissionrsquos digital agenda it moves away from the term lsquovaluechainrsquo to the term lsquovalue webrsquo to reflect changing consumer behaviour allowing multiple interlinked valuechains EU lsquoA Digital Single Market Strategy for Europersquo COM (2015)192 final p 7

6 When comparing figures across different data sources it is in addition to the above mentioned differences indefinition specifically variation on country coverage and product range which needs to be taken into account

7 There is a significant number of competing data providers available offering retail data As in retailing itselfthere is also a convergence of data providers with some of the traditional offline retail data providers likeNielsen IRI and GFK building significant online research panels On the other hand traditional onlinetech-nology data providers like comScore or Forrester increasingly gain relevance in retailing with online retailingbecoming more a more important channel With data aggregators like Planet Retail and EuromonitorPassport additional comprehensive datasets are built up in parallel to the data provided by statistical offices

Competition policy in modern retail markets 3

dynamics of the underlying industry and changing business models adopted byretailers8

For instance one of the leading data providers in that field Euromonitor excludesrevenues generated over consumer-to-consumer sales sites such as eBay B2C pro-portion of such sites will be captured though Equally it excludes quick delivery ofservices of food magazines household goods and DVD rentals which increasinglystay in close competition to traditional retailing eg in grocery retailing The increas-ing adoption of multichannel strategies by store-based retailers and the building-upof physical store networks by retailers viewed historically as pure online retailer fur-ther blurs a proper delineation Referring again to the definition of internet retailingby Euromonitor click and collect orders in stores where the payment is made in thestore are excludedmdashthereby underestimating the full value of internet marketing forretailers9 With this limitations in mind we summarize in the following the maintrends of retailing

Despite those inconsistencies across databases it seems a robust statement thatonline retail sales in European Member States are soaring Euromonitor reports thepredicted growth rate of 132 per cent for all EU Member States for which data isavailable This is consistent with the growth rate for the European B2C e-commerceturnover in 2015 to reach 128 per cent as reported by Ecommerce Foundation10

Also according to Center for Retail Research (CRR) the predicted rates from 2014to 2015 exceed 10 per cent for most of countries11

Online penetration of retail turnover varies significantly across countries thoughIn the UK and Denmark the share of online sales in all retail revenue exceeded 10per cent in 2014 (see Fig 1) This is in contrast to countries like Bulgaria andCroatia with a share around 1 per cent

Abstracting from those differences the average share of online retail reached 7 percent in Europe according to Euromonitor According to a different source Eurostatwhich defines e-commerce more broadly as all revenue made by firms via the inter-net or other online networks e-commerce reached a market share of 15 per cent in2014 again with strong variation across countries12

Some commentators consider this a level which will inevitably increase the ten-sion between online and offline retailing According to CRR lsquoby the time that onlinesales represent 5 or more of domestic retailing the continued growth of online retailersoccur (sic) at the expense of conventional storesrsquo13 This critical value has recently been

8 OXIRM (2014 p 59) the Oxford Institute of Retail Management states lsquoThis is a fast-moving area of theeconomy which makes it more difficult to achieve reliable and timely statistical estimates Such distinctions arein any case increasingly difficult to sustain as for example more and more store-based retailers adopt more fullyintegrated multi-channel strategies and it becomes more difficult to distinguish and accurately attribute data onsales by channelrsquo OXIRM lsquoRetail amp Wholesale Key Sectors for the European Economyrsquo Said BusinessSchool University of Oxford (2014)

9 For the full definition of internet retailing according to Euromonitor see Category definitions Internet re-tailing Euromonitor International 2015

10 European B2C E-commerce Report 2015 Ecommerce Foundation11 Centre for Retail Research (CRR) Online Retailing Britain Europe USA and Canada 2015 ltwww

retailresearchorgonlineretailingphpgtaccessed 6 March 201512 Eurostat (isoc_ec_evaln2) extracted on 8 March 201513 CRR (2015)

4 Journal of Antitrust Enforcement

reached in many European countries as we see in Fig 1 Thus CRR experts expectfurther growth of e-commerce to lead to cannibalization of revenues of conventionalstores

This prediction is in line with evidence on store closure in the UK McKinsey(refereeing to data from The Local Data Company) reports for instance an increasein the number of vacant retail shops by 355 per cent in the UK between 2008 and2013 The most pronounced decline is found in consumer electronics where a 20ndash30 per cent decline in physical retail space in the UK market between 2006 and 2012was fully offset by the addition of an equivalent amount of virtual space14

Equally Reynolds from the Oxford Institute of Retail Management15 reports de-tailed results for UKrsquos High Streets showing a 53 per cent decline in the number ofstores by multiple retailers of non-perishable products (so called comparison prod-ucts in contrast to convenience goods like food) over the two years 2011ndash2013Also the most recent numbers show a further escalation of this trend while the netclosure of stores by multiple retailers was 371 stores in 2013 it increased to 987 in201416 Across all retailersmdashindependent and chainsmdashthe net decline rate in storesfor comparison products increased from 09 per cent in 2013 to 14 percent in2014 with fashion retailers being most heavily pulled out of the market

Figure 1 Share of online retail in total retail sales across countries 2014ndash2015

Source Euromonitor International EU25 refers to all EU member states except Cyprus Luxembourg and Malta for which

retail data is not available in Euromonitor

14 Virtual space is defined as lsquofloor space that would be required to generate the sales volume that online re-tail now accounts for at a sales density equivalent to the industry averagersquo See Louise Herringer TobiasWachinger and Chris Wigley lsquoMaking Stores Matter in a Multichannel World Perspectives on Retail andConsumer Goodsrsquo McKinsey (2014) 5

15 Jonathan Reynoldsrsquo online blog (19 July 2013) lthttpoxford-institutesbsblogscouk20130719diversity-and-the-uks-high-streetsgt accessed 2 October 2015

16 Opening amp Closure Report 2014 by The Local Data Company (published March 2015)

Competition policy in modern retail markets 5

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

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Competition policy in modern retail markets 37

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

Tab

le3

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tinu

ed)

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me

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evan

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ers

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ote

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hene

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dor

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conc

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dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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dynamics of the underlying industry and changing business models adopted byretailers8

For instance one of the leading data providers in that field Euromonitor excludesrevenues generated over consumer-to-consumer sales sites such as eBay B2C pro-portion of such sites will be captured though Equally it excludes quick delivery ofservices of food magazines household goods and DVD rentals which increasinglystay in close competition to traditional retailing eg in grocery retailing The increas-ing adoption of multichannel strategies by store-based retailers and the building-upof physical store networks by retailers viewed historically as pure online retailer fur-ther blurs a proper delineation Referring again to the definition of internet retailingby Euromonitor click and collect orders in stores where the payment is made in thestore are excludedmdashthereby underestimating the full value of internet marketing forretailers9 With this limitations in mind we summarize in the following the maintrends of retailing

Despite those inconsistencies across databases it seems a robust statement thatonline retail sales in European Member States are soaring Euromonitor reports thepredicted growth rate of 132 per cent for all EU Member States for which data isavailable This is consistent with the growth rate for the European B2C e-commerceturnover in 2015 to reach 128 per cent as reported by Ecommerce Foundation10

Also according to Center for Retail Research (CRR) the predicted rates from 2014to 2015 exceed 10 per cent for most of countries11

Online penetration of retail turnover varies significantly across countries thoughIn the UK and Denmark the share of online sales in all retail revenue exceeded 10per cent in 2014 (see Fig 1) This is in contrast to countries like Bulgaria andCroatia with a share around 1 per cent

Abstracting from those differences the average share of online retail reached 7 percent in Europe according to Euromonitor According to a different source Eurostatwhich defines e-commerce more broadly as all revenue made by firms via the inter-net or other online networks e-commerce reached a market share of 15 per cent in2014 again with strong variation across countries12

Some commentators consider this a level which will inevitably increase the ten-sion between online and offline retailing According to CRR lsquoby the time that onlinesales represent 5 or more of domestic retailing the continued growth of online retailersoccur (sic) at the expense of conventional storesrsquo13 This critical value has recently been

8 OXIRM (2014 p 59) the Oxford Institute of Retail Management states lsquoThis is a fast-moving area of theeconomy which makes it more difficult to achieve reliable and timely statistical estimates Such distinctions arein any case increasingly difficult to sustain as for example more and more store-based retailers adopt more fullyintegrated multi-channel strategies and it becomes more difficult to distinguish and accurately attribute data onsales by channelrsquo OXIRM lsquoRetail amp Wholesale Key Sectors for the European Economyrsquo Said BusinessSchool University of Oxford (2014)

9 For the full definition of internet retailing according to Euromonitor see Category definitions Internet re-tailing Euromonitor International 2015

10 European B2C E-commerce Report 2015 Ecommerce Foundation11 Centre for Retail Research (CRR) Online Retailing Britain Europe USA and Canada 2015 ltwww

retailresearchorgonlineretailingphpgtaccessed 6 March 201512 Eurostat (isoc_ec_evaln2) extracted on 8 March 201513 CRR (2015)

4 Journal of Antitrust Enforcement

reached in many European countries as we see in Fig 1 Thus CRR experts expectfurther growth of e-commerce to lead to cannibalization of revenues of conventionalstores

This prediction is in line with evidence on store closure in the UK McKinsey(refereeing to data from The Local Data Company) reports for instance an increasein the number of vacant retail shops by 355 per cent in the UK between 2008 and2013 The most pronounced decline is found in consumer electronics where a 20ndash30 per cent decline in physical retail space in the UK market between 2006 and 2012was fully offset by the addition of an equivalent amount of virtual space14

Equally Reynolds from the Oxford Institute of Retail Management15 reports de-tailed results for UKrsquos High Streets showing a 53 per cent decline in the number ofstores by multiple retailers of non-perishable products (so called comparison prod-ucts in contrast to convenience goods like food) over the two years 2011ndash2013Also the most recent numbers show a further escalation of this trend while the netclosure of stores by multiple retailers was 371 stores in 2013 it increased to 987 in201416 Across all retailersmdashindependent and chainsmdashthe net decline rate in storesfor comparison products increased from 09 per cent in 2013 to 14 percent in2014 with fashion retailers being most heavily pulled out of the market

Figure 1 Share of online retail in total retail sales across countries 2014ndash2015

Source Euromonitor International EU25 refers to all EU member states except Cyprus Luxembourg and Malta for which

retail data is not available in Euromonitor

14 Virtual space is defined as lsquofloor space that would be required to generate the sales volume that online re-tail now accounts for at a sales density equivalent to the industry averagersquo See Louise Herringer TobiasWachinger and Chris Wigley lsquoMaking Stores Matter in a Multichannel World Perspectives on Retail andConsumer Goodsrsquo McKinsey (2014) 5

15 Jonathan Reynoldsrsquo online blog (19 July 2013) lthttpoxford-institutesbsblogscouk20130719diversity-and-the-uks-high-streetsgt accessed 2 October 2015

16 Opening amp Closure Report 2014 by The Local Data Company (published March 2015)

Competition policy in modern retail markets 5

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

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com

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able

0

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

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ed)

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ena

me

Rel

evan

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oduc

tsb

rand

sP

rice

rang

efo

rth

ety

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duct

(EU

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)

Lux

ury

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ities

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ities

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rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-TF1
  • jnv030-FN28
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  • jnv030-FN30
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reached in many European countries as we see in Fig 1 Thus CRR experts expectfurther growth of e-commerce to lead to cannibalization of revenues of conventionalstores

This prediction is in line with evidence on store closure in the UK McKinsey(refereeing to data from The Local Data Company) reports for instance an increasein the number of vacant retail shops by 355 per cent in the UK between 2008 and2013 The most pronounced decline is found in consumer electronics where a 20ndash30 per cent decline in physical retail space in the UK market between 2006 and 2012was fully offset by the addition of an equivalent amount of virtual space14

Equally Reynolds from the Oxford Institute of Retail Management15 reports de-tailed results for UKrsquos High Streets showing a 53 per cent decline in the number ofstores by multiple retailers of non-perishable products (so called comparison prod-ucts in contrast to convenience goods like food) over the two years 2011ndash2013Also the most recent numbers show a further escalation of this trend while the netclosure of stores by multiple retailers was 371 stores in 2013 it increased to 987 in201416 Across all retailersmdashindependent and chainsmdashthe net decline rate in storesfor comparison products increased from 09 per cent in 2013 to 14 percent in2014 with fashion retailers being most heavily pulled out of the market

Figure 1 Share of online retail in total retail sales across countries 2014ndash2015

Source Euromonitor International EU25 refers to all EU member states except Cyprus Luxembourg and Malta for which

retail data is not available in Euromonitor

14 Virtual space is defined as lsquofloor space that would be required to generate the sales volume that online re-tail now accounts for at a sales density equivalent to the industry averagersquo See Louise Herringer TobiasWachinger and Chris Wigley lsquoMaking Stores Matter in a Multichannel World Perspectives on Retail andConsumer Goodsrsquo McKinsey (2014) 5

15 Jonathan Reynoldsrsquo online blog (19 July 2013) lthttpoxford-institutesbsblogscouk20130719diversity-and-the-uks-high-streetsgt accessed 2 October 2015

16 Opening amp Closure Report 2014 by The Local Data Company (published March 2015)

Competition policy in modern retail markets 5

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

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ird

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ead

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ulus

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0(i

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rict

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erSD

22

00-

748

5(i

deal

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21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

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Lux

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ities

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erie

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DE

2009

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rive

80

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015)

ide

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329

90-6

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(con

tinue

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38 Journal of Antitrust Enforcement

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le3

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tinu

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evan

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Competition policy in modern retail markets 39

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le3

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able

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2015

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ing

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PC

Hot

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SFR

2015

hot

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okin

g-B

PC

Hot

elbo

okin

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able

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12

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(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

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tinu

ed)

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ena

me

Rel

evan

tpr

oduc

tsb

rand

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rice

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rth

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duct

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Lux

ury

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usqu

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ities

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erie

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ities

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denc

equ

aliti

es

HR

SD

E20

132

015

hote

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king

-BP

CH

otel

book

ing

Not

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le

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20

Pri

vate

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orin

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ance

2014

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nce

Not

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le

02

01

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odel

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ivox

2015

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PC

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W

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dor

prod

uct

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conc

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dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF3

While those numbers indicate substitution between online and offline many com-mentators have a more positive or at least nuanced view on the impact of theInternet on retailing In a recent study by OXIRM (2014) the authors conclude lsquoSooften portrayed simply as a threat to traditional forms of commerce the scale and natureof innovation being generated by a combination of online store-based and multichannel re-tailers is in fact making a significant contribution to the competitiveness of the Europeaneconomy as well as to the welfare of its consumersrsquo17

The study highlights specifically additional indirect effects which are felt at amacroeconomic level For instance new jobs for high-skilled workers are createdwhile jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retailFurthermore new business models emerge with the prominent example of con-sumer-to-consumer trading platform which find ways to become viable andprofitable18

Besides variation across countries the relevance of online retailing varies alsostrongly across product categories Figure 2 shows the share of online sales in all re-tail turnovers per product type in Germany for the years 2012 and 2013

Products of the category lsquoElectronics amp technicsrsquo were most often sold onlineBoth in 2012 and 2013 29 per cent of all sales were concluded via the InternetThe second highest share of online sales was for products in the category lsquoPlay ampsportsrsquo which reached 26 per cent in 2013 (25 per cent in 2012) Products in

Figure 2 Shares of online sales across product categories Germany 2012ndash2013

Source HDE Handel digital Online-Monitor 2014 Note Non-food are consumer durables markets like textiles hardware

electronics and do-it-yourself Online purchases are defined as all purchases made via the Internet

17 OXIRM (n 8) 5918 The OXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 The relevance of e-commerce

for growth is also stressed in the Recommendations of the High Level Group on Retail CompetitivenessDownloadable at lthttpeceuropaeugrowthtools-databasesnewsroomcfitemdetailcfmitem_idfrac148388amplangfrac14enamptpa_idfrac140amptitlefrac14High-Level-Group-on-Retail-Competitiveness-publishes-its-recommendations-gt accessed 2 October 2015

6 Journal of Antitrust Enforcement

the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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le3

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Competition policy in modern retail markets 39

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le3

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tinu

ed)

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me

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

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ena

me

Rel

evan

tpr

oduc

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rand

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rth

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ury

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ities

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erie

nce

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ities

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denc

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es

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king

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CH

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ing

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le

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vate

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orin

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ance

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nce

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le

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01

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oks

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ity

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odel

and

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ooks

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le

01

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ivox

2015

DE

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ce-

com

pari

son

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form

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ener

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ovid

ers

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PC

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rgy

pric

eco

mpa

riso

nN

otap

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able

0

20

0

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ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF1
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the category lsquoOffice amp corsquo came next with respect to their share of online sales(23 per cent in 2013) Interestingly this segment was according to this sourcethe most dynamic with its share increasing by 5 percentage points from 2012 to2013

The reasons for the relatively high share of online sales for products in thesecategories are related to their physical characteristics All of them can becharacterizedmdashto varying degreesmdashas non-perishable of limited weight orpossessing small cubic volume With further cost reductions in logistics the rele-vance of those physical barriers for online retail most likely will erode furtherthough

In addition to actual competition as expressed in sale shares potentialcompetition between online and offline retail channels is a real threat asincreasing numbers of individuals shop online According to survey data for2014 from Eurostat 41 per cent of all individuals in Europe purchased a prod-uct online at some point in the three months preceding the survey up from 23per cent in 2007 Again percentages here vary strongly across EU countriesranging from 6 per cent in Romania to as much as 72 per cent in the UK (seeFig 3)

The significance of mobile devices and electronic payments (also called m-commerce) is also growing On average 20 per cent of the onlinepurchases in Europe in 2015 are expected to be made on mobile devices comparedto 125 per cent in 2014 reaching close to 30 per cent in the most advancedcountries19 in 2013 27 per cent of online sales in non-food retailing in Germany

Figure 3 Percentage of individuals who purchased online in the three months preceding thesurvey EU-28 2014

Source Eurostat (isoc_ec_ibuy) extracted 12062015 Note The percentages are defined as the percentage of surveyed in-

dividuals who purchased online in the past three months

19 CRR Online Retailing Britain Europe USA and Canada 2015 Retail is strictly defined by CRR as re-tailing of goods and does not include study travel tickets restaurants motor fuel and insurance This fig-ure is consistent with Euromonitor Passport the average share of mobile retail sales (sales completed onmobile devices such as smartphones and tablets) in overall online retail sales for all EU Member States

Competition policy in modern retail markets 7

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

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Competition policy in modern retail markets 33

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34 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 35

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36 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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le3

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dlsquoN

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
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  • jnv030-FN117
  • jnv030-TF3

was spent using electronic payment methods20 Both trends show the increasing con-fidence of end consumers in e-payment systems confidence having been one of themajor obstacles to online retailing in the past

These trends put pressure on traditional retailers While part of the increase ofonline market share is made up for by market growth revenue loss in absolute termsis a credible and persisting threat The question whether online retailing is a comple-ment or a substitute to traditional retailing is still unanswered (and depends on na-tional preferences product characteristics and technological and businessinnovation) but it seems clear that brick and mortar retailers either need to scaledown their shop networks or find a new role for brick and mortar stores in a multi-channel (offlineonline) environment21

In some areas the increasing relevance of online retailing is simply the result ofdigital distribution offering a superior product in place of an inferior one ie the prod-uct becomes digitalized For example in 2014 Blockbuster which was active in trad-itional video retailing closed its last brick and mortar store in the UK JP ClaytonDISH president and CEO of Blockbusterrsquos mother company commented as followslsquoThis is not an easy decision yet consumer demand is clearly moving to digital distri-bution of video entertainmentrsquo22

In other product categories increased geographic competition may be the coredriver of change For example price-matching policies including internet retailersmake price competition independent of the geographic location of the store Thiscan be found in the US office supplies market where Staples matches prices of on-line retailers like Amazon23 The substantial change this has brought to geographicmarket definition in this industry has been explored by the Federal TradeCommission (FTC) during the merger between Office Depot and OfficeMax in2013 The FTC summarizes its findings as follows24

lsquoIn the 1997 Staples case the Commission successfully argued that the relevantproduct market was the sale of consumable office supplies through OSS[Office Supply Superstores] and that the proposed merger of two of the threeOSS would lead to competitive harm In finding an OSS-only market theStaples court relied principally on qualitative and empirical evidence that OSS

for which the data is available is expected to reach 20 in 2015 In Ireland and the UK the share is ex-pected to exceed 30

20 According to the Handel Digital Online-Monitor 2014 page 9 based on the German GfK ConsumerPanel

21 We explore in the sub-Section lsquoEmpirical findings on free-ridingrsquo strategies related to multichannel mar-keting strategies The expansion of online retail also brings changes at macroeconomic level TheOXIRM study refers to these effects as lsquoindirectrsquo see OXIRM (n 8) 64 First new jobs for high-skilledworkers are created while jobs in traditional retail are cut The net effect on employment is however dif-ficult to quantify as the jobs are not easily classified to online versus offline retail Second new businessmodels emerge with the prominent example of consumer-to-consumer trading platform which find waysto become viable and profitable

22 Dish lsquoBlockbuster to End Domestic Retail DVD By Mail Servicesrsquo press release 6 November 2013 Seealso BBC News lsquoLast US Blockbuster Video Rental Stores to Closersquo (6 November 2013)

23 lthttpswwwstaplescomsbdcontenthelpusinggeneral_match_popuphtmlgt accessed 2 October 201524 Statement of the Federal Trade Commission Concerning the Proposed Merger of Office Depot Inc and

OfficeMax Inc FTC File No 131-0104 1 November 2013

8 Journal of Antitrust Enforcement

prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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prices were set according to the number of competing OSS in a local areaCompany documents revealed the merging partiesrsquo intense competitive focuson other OSS and general lack of concern with non-OSS rivals The evidencealso showed that the defendants grouped their stores into price zones specific-ally based on the number of nearby OSS resulting in higher prices in localmarkets with fewer OSS even if non-OSS competitors were present

The current competitive dynamics are very different The Commissionrsquos inves-tigation shows that todayrsquos market for the sale of consumable office supplies isbroader due mainly to two significant developments One is that customersnow look beyond OSS for office supply products and rely more heavily onnon-OSS brick-and-mortar retailers [ ]

The other is the explosive growth of online commerce which has had a majorimpact on this market Online retailers stock a vast array of office supply prod-ucts and can deliver them quickly anywhere in the country at nominal costCompany documents show that OSS are acutely aware of and feel threatenedby the continued growth of online competitors most notably Amazon OSShave lost and continue to lose substantial in-store sales to online competitorsThis increased competition from online retailers has caused OSS to respondwith new pricing practices and other strategies For example because onlineprices are often lower than in-store prices and because many customers com-parison shop in-store prices against online prices OSS are often pressured tomatch these lower online prices in their stores And in-store and online chan-nel boundaries are blurring as OSS seek to create a seamless customer experi-ence by offering in-store pickup for online orders and using in-store Internetkiosks to order products online

The merging partiesrsquo pricing policies and practices reflect these changes in cus-tomer behavior and now specifically factor in non-OSS competition Pricezones and retail pricing are no longer dictated by the number of local OSS Infact a majority of products sold by the merging parties are priced nationallyand the products priced locally take into account competition from non-OSSretailers OSS closely monitor and respond competitively to other non-OSSretailers This competitive interaction includes price-checking price matchingand advertising and promotion designed specifically to compete effectivelywith non-OSS retailersrsquo

Besides replacement due to better products as for example in the fields of videoand music streaming and increased geographic competition as experienced in officesupplymdashboth of which are unambiguously good from a consumer-welfare perspec-tivemdashfree-riding behaviour by shoppers also plays a role in this development andmay lead to diminished consumer welfare Free riding is defined and discussed in thefollowing section

Competition policy in modern retail markets 9

I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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I I I F R E E - R I D I N G C O N C E P T C O U N T E R V A I L I N G S T R A T E G I E S A N DE M P I R I C A L R E L E V A N C E

Free-riding describes a situation where an agent provides specific services and is notpaid for those services Retailers frequently offermdashor increasingly define themselvesthrough the delivery ofmdashcomplementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services While modern marketing theory considers thephysical product and the service increasingly as a single non-divisible function25 de-livered to and created in collaboration with the consumermdashlike serving the cus-tomersrsquo desire for lsquolistening music with friendsrsquo by offering online offline musicstreams in a social network environment instead of selling him a CD or addressingthe consumersrsquo needs of effective residential heating by offering a package of pre-sales advice heating unit installation and after services at a fixed price instead ofdisentangled parts and pieces26mdashstrategic customer behaviour may disrupt this busi-ness proposition To the extent that monetarization of the holistic functionalityoffered by a retailer to its customers is linked to the exchange of the physical productmainly the technological opportunities offered by the Internet may render non-profitable due to free-riding opportunities built-up in parallel

In the following we discuss free-riding in the traditional productservice space asthis helps to understand the challenges modern multichannel marketing is exposedto due to free-riding behaviour

On externalities and free-ridingRetailers frequently offer complementary services or efforts related to the productsold namely product comparison and technical advice touch and feel price position-ing and ambient and after-services The relevance and importance of these servicesand effort varies with the product category and the quality level of the products soldWithin that context two types of externalities can arise27

First we may find an externality between suppliers and retailers where theincentives of retailers providing demand-enhancing services or efforts are not alignedwith the incentives of suppliers (lsquovertical externalityrsquo) This externality is oftenviewed as a moral hazard problem a (monopolistic) retailer provides too little ser-vices as the retailer does not take into account the extra margin earned by the sup-plier on every additional unit sold when deciding on service levels to extend

25 This paradigm shift in marketing theory and practice become manifest in the seminal paper by Stephen LVargo and Robert F Lusch lsquoEvolving to a New Dominant Logic for Marketingrsquo (2004) 68 J Marketing 1ndash17 The authors document the shift in marketing theory from manufacturing physical product exchangeto service as the central product delivered by a firm

26 This example is based on the business model of Thermondo and onlineoffline retailer for heating inGermany Thermondo uses the Internet capabilities of customer participation (up loading of fotos in orderto streamline the installation process) and benchmarking (prediction model of local heating requirements) toserve customersrsquo needs at a fixed price See lthttpswwwthermondodegt accessed 2 October 2015

27 We here follow J Tirole The Theory of Industrial Organization (MIT Press 1988) ch 4 Tesler was the firstto point out that competition between retailers may lead to underprovision of services in L Tesler LlsquoWhy should Manufacturers want Fair Tradersquo (1960) 3 J L amp Econ 86ndash105 This topic has also beenstudied in the context of franchise contracts See for example G Frank Mathewson and Ralph A WinterlsquoThe Economics of Franchise Contractsrsquo (1985) 28 (3) J L amp Econ 503ndash26

10 Journal of Antitrust Enforcement

demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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demand28 Free-riding behaviour of suppliers can aggravate this underprovision of re-tailer services as a supplier may circumvent purchases from the online retail platformby offering direct product delivery (lsquovertical free-ridingrsquo)

This is a problem specifically related to search services offered by an Internet plat-form where online platforms link consumers to suppliers Once the link is estab-lished the services of the platform are no longer required The risk is high when theproduct is purchased regularly by the customer (for instance vacuum cleaner bags)and when the customer has to contact the supplier in any case (hotel services med-ical devices such as hearing aids that require adjustments by experts) Accordinglythe potential for this type of free-riding is in our view specifically a concern for on-line retailers competing against direct (online offline) distribution by suppliersNote however that due to ad-based business models for online services the extentof actual free-riding is significantly reduced For instance cross-references betweenonline platforms are tracked and priced in line with actual click-through rates Stillas made clear in recent hotel booking cases free-riding of online suppliers (in thiscases hoteliers) on the service of online retailers (in this case hotel booking sites)seems to be an area of concern (Table 1)

The second externality is an externality between competing retailers (lsquohorizontal ex-ternalityrsquo) To the extent that some of the service or efforts provided by a retailer alsoincrease sales at competing retailersrsquo stores a retailer will underprovide those servicesand efforts Again this externality can be amplified by free-riding behaviour of cus-tomers (lsquohorizontal free-ridingrsquo) Horizontal free-riding occurs in this setting when acustomer uses services complementary to the product sale from a specific retailer forfree but does not purchase the product at this retailerrsquos store Horizontal free-ridingnegatively affects the profitability of complementary services offered by retailers29

Table 1 Summarizes our assessment of the relevance of vertical free-rider ef-fects across retail channels Potential for vertical free-riding

Supplier

Offline OnlineRetailer Offline low medium

Online high medium

Source The Authors

28 The vertical externality described here is comparable to the standard double marginalization problem invertical relationships By contrast to the traditional double marginalization problem though the verticalexternality cannotmdashfrom the perspective of the manufacturermdashbe simply resolved by introducing com-petition in retail markets a competitive retail market maximizes consumer surplus subject to the non-profit restraint of retailers given that market power lies with the end consumer in perfectly competitiveretail markets Consumer surplus maximization focuses on the average consumer profit maximization onthe marginal consumer Depending on whether the average consumer values services more or less thanthe marginal consumer there will be oversupply or undersupply in competitive retail markets

29 However in some rather specific circumstances free-riding does not undermine incentives to offer pre-sale services In J Shin lsquoHow does Free Riding on Customer Service Affect Competitionrsquo (2007) 264Marketing Science 488ndash503 it is shown that in markets with lock-in effects free-riding softens price com-petition and is therefore accepted by the retailer with services For an empirical assessment of the rele-vance of lock-in effects for cross-channel shopping see also Hung-Chang Chiu and others lsquoThe

Competition policy in modern retail markets 11

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

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Competition policy in modern retail markets 33

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34 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 35

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36 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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le3

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dlsquoN

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
  • jnv030-FN113
  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

Other retailers who do not offer the servicemdashand hence have lower costsmdashgain rev-enue Typically brick and mortar retailers are negatively affected pure online retailersare positively affected In a static environment free-riding customers do benefit as wellBut in the long term incentives to invest in pre- and post-sale services are reducedand this may lead to an undersupply of complementary services to the detriment ofconsumers with preferences for those services

Table 2 summarizes our assessment of the relevance of free-rider effects betweenor within different retail channels Given search costs within-channel free-riding israther limited in offline retailing While the potential for free-rider effects must beconsidered high for all other combinations the actual impact will be felt mostly bybrick and mortar retailers from online retailers as online retailers typically offer com-plementary services to a lesser extent than offline retailers and are partially protectedby ad-based business models (which are a form of functional pricing see nextsection)

These two externalities act together For instance a horizontal externality be-tween retailers may limit their incentives to offer services that are valuedby the supplier While the supplier is specifically interested in resolving thevertical externality the solution may lie in resolving the horizontal externalityfirst

Countervailing strategiesStrategies that internalize externalities or disrupt free-riding opportunities offer sup-pliers and retailers a solution to the problem of market failure However potentiallythese strategies can negatively impact effective retail competition and thus be harm-ful to consumers and have been attracting attention of competition authorities30 Inthis section we offer an overview of both pro-business justifications and theories ofharm of relevance in this context

Table 2 Potential for horizontal free-riding

Retailer 1

Offline OnlineRetailer 2 Offline low high

Online high high

Source The authors

Challenge for Multichannel Services Cross-Channel Free-Riding Behaviorrsquo (2011) 102 ElectronicCommerce Research and Applications 268ndash77

30 Vertical restraints are considered in the EU under art 101 of the TFEU The principles for the assessmentof the vertical restraints were set out in the Guidelines on Vertical Restraints Official Journal C 13019052010 p 1 The EC has also adopted a block exemption regulation which provides safe harbours forvertical agreements that meet certain criteria The latest vertical block exemption regulation (VBER) withgeneral application to vertical agreements was adopted in 2010 (Commission Regulation (EU) No 3302010) Any vertical restraints in an agreement which meet the requirements of the VBER are exemptedfrom the prohibition in art 101(1) See sub-Section lsquoEU legal provisionsrsquo for a detailed overview

12 Journal of Antitrust Enforcement

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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le3

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able

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ing

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

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me

Rel

evan

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rand

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rice

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rth

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ury

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ities

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erie

nce

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ities

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denc

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es

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132

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le

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vate

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ance

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Mot

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nce

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le

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er

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odel

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ooks

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le

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ivox

2015

DE

pri

ce-

com

pari

son

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form

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ener

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ovid

ers

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PC

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rgy

pric

eco

mpa

riso

nN

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able

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ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF1
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  • jnv030-FN30
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  • jnv030-TF3

Internalization strategiesOne way to internalize a supplierrsquos vertical externalities is to reward retailers finan-cially for services subject to free-riding this process is referred to as functional pric-ing Examples of functional pricing are payment to suppliers for shelf space andproduct placement While functional pricing works well for services and efforts thatcan be easily quantified and monitored it is an ineffective instrument for serviceswhose quality is difficult to assess such as technical advice to customers If functionalpricing is based on some form of exclusivity inducing rebate functional pricing maybe restrained by competition law enforcement (Article 102 TFEU)31

As an alternative to functional pricing that requires explicit payments or rebatesa supplier may offer implicit payments and hence incentivize retailers to provide ser-vices at the optimal level from the supplierrsquos point of view

A number of vertical restraints can serve this purpose the most prominent beingretail price maintenance obligations (RPMs) and agency models which keep theright to set end consumer prices with the supplier

For example RPMs can be set at a retail price level at this level the retail marginallows recovery of the cost of extra services While partially resolving the free-riderproblem32 RPMs hamper intra-brand competition When a supplier tries to encour-age retailers to make more sales efforts by granting them additional margin he neces-sarily limits competition between them

While hampering intra-brand competition is intrinsically connected with the pro-business justification in this case33 RPMs or equivalent vertical restraints can alsohave primarily anticompetitive motives For instance RPMs may facilitate collusionat both levels of the vertical chain34 This is mainly because fixed retail prices increasetransparency thus facilitating detection of deviations from collusive price pointsBased on this reasoning RPM or binding minimum prices set by a manufacturer areconsidered hardcore restraints under Article 101 TFEU35

Another theory of harm related to vertical restraints centres on exclusive dealingby signing up all available distributors into exclusive contracts in a market where

31 Judgement of the General Court 12 June 2014 Case T-28609 (Intel)32 The increased retail margin may soften the problem of vertical externality but does not resolve it

Retailers might offer higher service levels but not at the optimal level (without explicit monitoring)Vertical free-riding might also still occur Non-linear pricing schemes can resolve this problem but are un-common in retailing (outside franchise contracts)

33 For that reason it is argued for an integrated analysis of pro-business justifications in 102 TFEU casesSee Friederiszick Hans W and Linda Gratz lsquoHidden Efficiencies The Relevance of Business Justificationsin Abuse of Dominance Casesrsquo (2015) 11 (3) J Comp L amp Econ 671ndash700

34 See for example B Jullien and Patrick Rey lsquoResale Price Maintenance and Collusionrsquo (2007) 384 TheRAND J Econ 983ndash1001

35 See Vertical Guidelines paras 223ndash29 Despite this negative categorization as a hardcore restriction theGuidelines leave the door open to argue for efficiencies This is specifically the case when it is the supplierwho proposes RPM (and not the buyer) in particular in the context of the introduction of a new productThe Guidelines also recognize the need for a fixed retail price within the context of a franchise system toguarantee a consistent pricing system a concern also highly relevant for multichannel marketing includingfranchisees Pre-sale services and free-riding are also considered justifications for RPM In any case theywill require notification ie the measure is not block exempted In contrast to that on-binding recommen-dations or maximum price ceilings are covered by the Block Exemption Only in exceptional cases theywill be seen as being problematic eg in facilitating downstream collusion

Competition policy in modern retail markets 13

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

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eute

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ird

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38 Journal of Antitrust Enforcement

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le3

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Competition policy in modern retail markets 39

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tinue

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40 Journal of Antitrust Enforcement

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le3

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ed)

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otap

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
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  • jnv030-FN6
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  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
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  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
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  • jnv030-FN111
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  • jnv030-TF3

distribution has economies of scale and scope it is possible to keep potential en-trants from accessing the market Even without full exclusivity such a strategy may in-crease rivalsrsquo costs36

In addition to functional pricing and vertical restraints vertical integration allowsa successful resolution of (vertical) free-rider effects Retailers may build their ownlabel and integrate vertically backwards by taking over related production facilities Asupplier may take full ownership of the entire distribution network or alternativelybuild an exclusive distribution network Backward integration has been increasinglyused by manufacturers in Germany whose own online shops are quickly growing insize According to statistics published by IFH Koln the turnover in online shops ofmanufacturers in Germany grew between 2008 and 2013 almost four-foldCompared to this the total turnover in German online retail increased by a factor of25 only37

Tchibo the German coffee manufacturer offers a good example of a vertical inte-gration strategy Tchibo has historically relied heavily on a vertically integrated brickand mortar distribution network selling roasted coffee beans and coffee for in-houseconsumption together with consumer durables In addition the company imple-mented an agency model38 for distributing its roasted coffee brands in supermarketssecuring the right to set end consumer prices there as well Within the context of dig-ital markets Tchibo succeeded in building an online platform that is considered oneof the leading retail platforms in Germany for the relevant products According tothe Online-Shop-Study 2015 by Statista Tchibo ranked fifth in the number of visitsand top in the purchase probability of all German online retailers in December201439

Potential anti-competitive concerns related to vertical integration are tied to theo-ries of harm in the context of vertical mergers40 A specific concern in retailing isbuyer power exercised by retailers on smaller suppliers41

Similarly horizontal free-riding can be addressed by integrating online and offlineretailing channels into single ownership if a retailing firm controls both distributionchannels it internalizes the cross-channel externalities - to the extent it succeeds in

36 For this strategy see Bernheim B Douglas and Michael D Whinston lsquoExclusive dealingrsquo No w5666National Bureau of Economic Research 1996

37 Boris Hedde lsquoDie Zukunft hat begonnen ndash Handel 2020 IFH Institut fur Handelsforschung GmbHrsquoBerlin 22 September 2014

38 If the principal (in this case Tchibo) carries all the costs and commercial risks associated with the sale ofits product (like transportation costs costs and risks associated with stock holding or product liabilitypromotional effort or market-specific investment etc) an agency model falls outside typically the scope ofart 101 TFEU (Vertical Guidelines paras 12ndash21) As the recently executed e-books gains shows agencymodels can be used to facilitate collusion though in this case by combining it with MFN clauses SeeCase COMP39847 mdash E-BOOKS Accordingly some commentators see them equally sceptical as RPMin particular in the context of online markets Amelia Fletcher lsquoPros and Cons of Agency Models and isthe Law in the Right Place on thisrsquo Presentation at the ACE conference Brussels (2013)

39 Online Shop Studie 2015 Statista GmbH40 See Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of con-

centrations between undertakings Official Journal C 265 of 1810200841 This is more a concern in food retailing See for instance the sector inquiry by the German competition

authority on that topic Sektoruntersuchung lsquoNachfragemacht im LebensmitteleinzelhandelrsquoBundeskartellamt Bericht gemaszlig sect 32 e GWB - September 2014

14 Journal of Antitrust Enforcement

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

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Competition policy in modern retail markets 33

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34 Journal of Antitrust Enforcement

Tab

le3

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Competition policy in modern retail markets 35

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36 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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le3

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40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

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ena

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evan

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rand

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dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
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  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
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  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
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  • jnv030-FN111
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  • jnv030-TF3

committing the customer to its retail brand - and sets prices and investmentsoptimally

In fact some brick and mortar retailers have successfully implemented amultichannel strategy allowing shoppers to seamlessly switch between online and off-line channels while staying within the retailerrsquos own universe Kalyanam and Tsay(2013)42 describe several multichannel business strategies implemented by Walmartbuy online with a credit card and pick up at the local store order online and thenpay and pick up offline or develop apps capturing the shopperrsquos smartphone whilein the store Lieber and Syverson (2011) and Trenz (2015) offer reasons why multi-channel retail strategy may be conceived as optimal for retailers The most salientreason is consumersrsquo perception that online and offline channels are substitutableAnother rationale for entry of a brick and mortar company into the online world istechnological complementarity (eg an existing distribution network) which gives off-line stores an advantage and thus provides incentives for opening an online distribu-tion channel as well

An example of a brick and mortar retailer that successfully switched to amultichannel structure is Argos which has become part of the Home Retail GroupIn 1998 Argos was primarily a single-channel brick and mortar retailer with a chainof 435 stores selling a smaller range of general merchandize mostly in the UK Itscore categories were jewellery toys electronics and housewares

In 2011 Home Retail Groupmdashafter some corporate restructuringmdashincludedArgos Homebase and Habitat which gave the company three distinct retail brandswith over 1000 stores three transactional websites two mobile shopping apps andthe UKrsquos biggest home-delivery operation making Home Retail Group the UKrsquosleading multichannel retailer according to HRGrsquos website43 Nowadays it considersmultichannel experience a core strategy lsquoIncreasingly people choose to buy onlineor on the move through mobile devices principally for pick-up in a local store butalso for direct delivery This lsquomulti-channelrsquo experience is core to what the groupdoes ndash and brings major advantages to our business customers large and smallrsquo44

Online retailers likewise move into physical presence whether through distribu-tion centres or through lsquobuy-online-collect-offlinersquo stores One example is Cyberporta German online retailer for electronic products Founded in 1999 in Dresden as apurely online company it has become a leading retailer for tech and lifestyle prod-ucts with around 640 employees and revenue of more than 600 million euro in 2014(10 per cent growth between 2013 and 2014) It now has 15 physical stores inGermany and Austria with a focus on larger cities In Berlin Cyberport operatesthree stores the latest and largest opened in 2014 in a premium shopping mallAlong with the expected selection of products and in-shop advice the brick and

42 Kirthi Kalyanam and Andy A Tsay lsquoFree Riding and Conflict in Hybrid Shopping EnvironmentsImplications for Retailers Manufacturers and Regulatorsrsquo (2013) 581 The Antitrust Bulletin 19ndash68

43 lthttpargosforbusinesscoukabout-usstorygt accessed 2 October 2015 See also McKinsey (2014p6) explaining lsquoBritish retailer Argos for one is experimenting with hub-and-spoke distribution system inLondon with products being delivered from large stores to smaller-format lsquodigitally enabledrsquo stores - allowing allArgos stores in the area to guarantee same-day or next-day fulfilment on some 20000 productsrsquo

44 lthttpargosforbusinesscoukabout-usstrategygt accessed 2 October 2015

Competition policy in modern retail markets 15

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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tinue

d)

40 Journal of Antitrust Enforcement

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le3

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ed)

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me

Rel

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
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  • jnv030-FN22
  • jnv030-FN23
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
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  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
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  • jnv030-FN102
  • jnv030-FN103
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  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
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  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

mortar stores also offer a same-day-pickup service enabling collection of an onlinepurchase in the physical store after only an hour45

Alternatively price paritymost favoured nation (MFN) clauses allow horizontal(as well as vertical) externalities to be addressed by retailers These clauses limit pricecompetition for retailers thus increasing their incentive to provide services comple-mentary to purchase In some instances the clauses are considered problematic froma competition law perspective as they may reinforce a horizontal agreement (both inthe upstream or downstream markets) or where they reinforce upstream resale pricemaintenance46 In addition they may hamper the incentive for new retailers to enterthe markets

Strategies of disruptionAn alternative response to the challenge of potential free-riding is a strategy of dis-ruption Such a strategy tries to reduce product comparability across alternative chan-nels or in its extreme form to suppress a productrsquos availability in competing retailchannels

Both suppliers and retailers may have the ability and incentive to disrupt free-riding Suppliers can use strategies such as restriction of online sales in general oron third-party internet platforms in particular restricting the use of price-comparison machines and exclusive dealing or exclusive territories (eggeoblocking)

One example that comes to mind here is Scout a producer of school bags inGermany Scout did not supply and did not allow reselling to retailers present in on-line third-party platforms such as eBay The companyrsquos rationale was to protect itshigh-quality brand image which it believed would be destroyed if Scoutrsquos schoolbags were made available in a platform perceived in lsquoflee-marketrsquo terms Anotherexample is Stihl a family-owned German manufacturer of garden machines for ex-ample chainsaws and pruners The company describes its policy as follows lsquoTheseproducts can be purchased online and picked up at our store Here we offer you per-sonal advice and professional service Since your safety is of particular importance forus we provide you with extensive personal instruction for a safe handlingrsquo47 Hencein this case the pick-up in a brick and mortal store is justified on security grounds

Retailers may likewise be tempted to suppress free-riding One strategy is sellingexclusive products those unavailable in any other shop These might be own-labelproducts or branded products designed especially for a retailer In fact since 2009the share of own-label products in total retail sales has increased in 16 out of 21 EU

45 lthttpswwwcyberportdeimpressumgt accessed 2 October 2015 Another example of former pure onlineretailers which opened physical stores is Amazon Also Sofacom and Oak Furniture Land opened storeswhich according to McKinsey (2014 p 5) generate as much as 60 of their sales via those physical stores

46 Ingrid Vandenborre and Michael J Frese lsquoMost Favoured Nation Clauses Revistedrsquo (2014) Eur Comp L RevIssue 12 Lisa Hamelmann J Haucap and Ch Wey lsquoDie wettbewerbsrechtliche Zulassigkeit vonMeistgegunstigungsklauseln auf Buchungsplattformen am Beispiel HRSrsquo (2015) 3 ZWeR 3 245

47 lthttpsgroundservstihl-dealercouken-gbstihlen-gb-7212chainsaws-and-telescopic-pole-prunersgt accessed2 October 2015 For a description of Stihlrsquos distribution policy in the USA see also lthttpswwwrohwed-der-berlinstihl-haendlerdede-destihlde-de-65motorsagengt accessed 2 October 2015 and Kalyanamand Tsay (n 42)

16 Journal of Antitrust Enforcement

countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

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Competition policy in modern retail markets 33

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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ote

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dor

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uct

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conc

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dby

the

case

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fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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countries In Western Europe own-label products now account for one-third ofconsumer expenditure in the consumer packaged goods market48

Alternatively retailers may sell exclusive branded products Examples of such re-tail channel products are specific Lego sets or Barbie dolls only distributed by ToysR Us through an exclusive contract with the manufacturer Similarly the UK depart-ment store Debenhams offers a branded product series lsquoDesigner for Debenhamsrsquoexclusively designed and manufactured for the retailer49

Also Amazon turned to exclusive products and opened its Amazon Exclusive storeearlier this year The store is designed to provide early access to lsquohot new itemsrsquo ie in-novative products such as electronics toys sporting equipment and apparel Productsin the Amazon Exclusive store cannot be found anywhere else online except the manu-facturer or brandrsquos own website At the same time the store wants to provide a plat-form for brands and innovators to launch their products into the market

A more explicitly disruptive strategy is the use of shop-specific instead of genericbar codes Shoppers with smartphones use very popular scanning applications whileshopping at retail locations and search for alternative potentially cheaper productsonline To block this comparison shopping some retailers use bar codes that areunique to the retailer This prevents consumers from scanning a bar code with theirsmartphones and searching online for a lower price even if identical products arebeing offered elsewhere50 Others offer their own scanning app which directs theshopper to products desired by the retailer An example if such an app is lsquoSephora toGorsquo offered at the shoprsquos website since 2010 It automatically redirects the shopperto information on sales promotions and new products51

From a competition law perspective strategies to disrupt product comparabilitymight artificially increase search costs for consumers and force them to buy sub-optimally This might be the case of shop-specific bar codes Furthermore when con-sumers are artificially locked into brick and mortar stores they are not able to make pur-chases maximizing their surplus Again this limits intra-brand competition in particular

More generally the Internet has a potential to open markets Choice on theInternet is larger and prices are typically lower than in a brick and mortar storeBusiness strategies that restrict sales on the Internet thus have a potential to depriveconsumers of the benefits offered by online retailing

Empirical findings on free-ridingAmple evidence exists of the empirical relevance of free-riding behaviour Some ofthe more anecdotal evidence is related to advertising by retailers and suppliers incen-tivizing such behaviour Figure 4 shows an ad by an online retailer Dixons in the UKwhich explains how the shopper should make use of the showrooms at the Oxfordstreet but finalize the purchase at Dixonsrsquo online store

48 The state of private label around the world Nielsen November 2014 However we need to note thatthere disruption of free-rider behaviour is just one of many reasons for this development

49 Analysis Designers at Debenhams celebrates its 21st birthday Retail Week 12 September 2014 byGemma Goldfingle

50 Kalyanam and Tsay (n 42)51 Further price-obfuscation strategies are described in G Ellison and S Fisher Ellison lsquoSearch

Obfuscation and Price Elasticities on the Internetrsquo (2009) 77 (2) Econometrica 427ndash452

Competition policy in modern retail markets 17

A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

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tinue

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40 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-TF1
  • jnv030-FN28
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  • jnv030-FN30
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  • jnv030-FN64
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  • jnv030-FN69
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A label encouraging vertical free riding is presented in Fig 5 It informs the shop-per about the manufacturerrsquos website where carpets can be purchased direct from fac-tory and thus retailers can be circumvented

While anecdotal evidence is manifold52 rigorous empirical evidence is rather lim-ited A recent assessment of free-rider effects based on a representative German

Figure 4 Example of an ad encouraging shoppers to horizontal free-riding (offlineonline)

Source Dixonrsquos ad in the UK market Posted on 23 June 2010 downloaded on 1 October 2015 from httpwwwnewretail-

blogcomare-your-customers-stealing-service

52 Another example is given by Hamelmann Haucap and Wey (n 46) 3 In this example a hotel is promot-ing direct booking from its own website instead of using an hotel booking platforms They also cite some

18 Journal of Antitrust Enforcement

consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

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38 Journal of Antitrust Enforcement

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le3

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Competition policy in modern retail markets 39

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le3

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tinue

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40 Journal of Antitrust Enforcement

Tab

le3

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tinu

ed)

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me

Rel

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-FN1
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
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  • jnv030-FN45
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consumer panel has been offered by Handel digital Online-Monitor 2014 Figure 6compiled from that source shows the potential free-rider effects for various productcategories

According to Fig 6 find potential for free-riding in 18ndash26 per cent of all onlinepurchases which is to say in up to around one quarter of such purchases consumersresearch the product exclusively or partially offline

For offline purchases we find equally high numbers for some product categoriessmaller numbers for others The potential for free-riding varies between 2 per centfor lsquofashion amp lifestylersquo to 26 per cent for lsquoelectronics amp technicsrsquo Note that due toad-based business models actual free-riding (that is unpaid provision of services)most likely is significantly lower in the case of online research and offline purchasethan the other way round

These free-riding figures should be interpreted with caution thought We shouldnote first that the findings summarized here show potential free-riding between dif-ferent channels and not free-riding between retailers within a channel On the otherhand to the extent that firms implemented multichannel strategies part of the cross-channel purchasing behaviour may occur within onlineoffline retail channels of asingle firm However given the limited implementation of multichannel strategies inGermany at this point in time the effect is likely to be small

These estimates are consistent with the free-riding rates reported in the study ofvan Baal and Dach (2005)53 Those authors surveyed a representative group ofaround 1000 online buyers (50 per cent online50 per cent offline) in Germany ontheir last purchase For offline purchases they found that 31 per cent of buyers re-searched products online before buying offline 69 per cent researched offline only

Figure 5 Note on a label encouraging shoppers to vertical free-riding

Source The authors

studies finding a so called lsquobillboard effectrsquo a hotel benefits from being place on a hotel booking site evenif no bookings arrive via this page (see n 45)

53 Sebastian Van Baal and Christian Dach lsquoFree Riding and Customer Retention Across Retailersrsquo channelsrsquo(2005) 192 J Interactive Marketing 75ndash85

Competition policy in modern retail markets 19

Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

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36 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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d)

40 Journal of Antitrust Enforcement

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le3

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ed)

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me

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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Two-thirds of those who researched online did so at competitorsrsquo websites ie theyfound a total of circa 20 per cent free-riders among those who purchased offline (al-though not controlling for ad-based payments) For online purchases about 26 percent buyers researched offline while the remainder stayed online Most buyers whoreceived advice offline purchased at a competing firm In total they found circa 25per cent free-riders among those who purchased online

A US consumer survey from 2013 by Accenture54 found significantly higher free-riding according to that study 78 per cent shoppers browsed online and purchasedoffline (ie lsquowebroomedrsquo) in the 12 months before the latest survey while 72 per centwent to a physical store to see a product and then purchased online (ielsquoshowroomedrsquo)

The large scale of webrooming is also illustrated by the size of offline sales whichwere affected by research online compared to the total online sales According to astudy by Boston Consulting Group55 sales with webrooming in 2010 were largerthan total online sales in Germany by 131 per cent in France by 188 per cent and inItaly by 140 per cent In the UK webrooming sales were 10 per cent smaller thantotal online sales The study argues that sales with webrooming are a potential mar-ket for online retail if consumers switch to online shopping entirely Thus growth ofonline retail can be expected potentially to the detriment of traditional retailing

Halbach and Eckstein (2013) provide evidence of the growing scope of webroom-ing from a survey of shoppers in Germany Austria and Switzerland conducted in

Figure 6 Research and purchase patterns in consumer durables in Germanymdashpercent ofinstances with cross-channel free-riding for several product types

Source Handel digital Online-Monitor 2014 HDE Note Online purchases are defined as all purchases made via the

Internet

54 lthttpsnewsroomaccenturecomnewsmore-us-shoppers-plan-to-buy-from-stores-but-want-the-in-store-shopping-experience-to-match-convenience-of-online-accenture-study-findshtmgt accessed 15 July 2015

55 The Internet Economy in the G-20 Boston Consulting Group March 2012

20 Journal of Antitrust Enforcement

December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

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tinue

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Competition policy in modern retail markets 35

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le3

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Competition policy in modern retail markets 37

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le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

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38 Journal of Antitrust Enforcement

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le3

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d)

Competition policy in modern retail markets 39

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le3

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tinu

ed)

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me

Rel

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able

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ing

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able

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ing

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

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rand

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rice

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ury

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nce

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le

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01

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tric

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odel

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ooks

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le

01

20

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ivox

2015

DE

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ce-

com

pari

son

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form

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ener

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ovid

ers

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PC

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rgy

pric

eco

mpa

riso

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able

0

20

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ceT

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thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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December 2012 and compare it to their earlier results in 201156 The share of pur-chases with webrooming increased from 23 per cent in 2011 to 321 per cent in2012 and reached 502 per cent of the turnover of traditional retail At the same timethe share of showrooming decreased from 27 per cent in 2011 to 114 per cent in2012 accounting for 149 per cent of the turnover in online retail only

I V A N T I T R U S T E N F O R C E M E N T mdash A R E A S O F C O N F L I C TOver recent years competition authorities of the European Commission FranceGermany and the UK as well as courts have been reviewing a number of antitrustcases related to non-food retailing focusing specifically on the selective distributionin the intersection of offline and online retailing

In sub-Section lsquoEU legal provisionsrsquo we summarize the legal provisions in Europeaccording to the current Regulations and Guidelines57 This policy has not alwaysconsistently been applied in the case law however An overview of those cases isavailable in sub-Section lsquoList of relevant casesrsquo58 In the following sub-SectionlsquoProduct characteristics prone to free-ridingrsquo we describe characteristics of productsmaking them prone to free-riding Finally we rank the products affected by currentantitrust enforcement according to those characteristics in sub-Section lsquoRanking ofProductsrsquo By showing which of those product characteristics attract the most atten-tion by the competition authorities we identify areas of conflict as here free-ridingoffers a potential justification that does not seemmdashat least easily somdashto be acceptedby the authorities

EU legal provisionsWithin the legal context a set of contractual provisions set by a manufacturer restrict-ing the number of authorized distributors and limiting the possibilities of resale iscalled a selective distribution systems Selective distribution systems are consideredvertical restrains in the European legal context and are assessed under Article 101 ofthe TFEU According to the recent vertical block exemption regulation (VBER)which was adopted in 201059 selective distribution systems are exempted from theprohibition of Article 101 TFEU when the manufacturer holds a market share ofbelow 30 per cent on its related sales markets and the retailer less than 30 per centon the related procurement market The block exemption also requires that no

56 J Halbach and A Eckstein Das Cross-Channel-Verhalten der Konsumentenndash Herausforderung undChance fur den Handel ndash Koln (2013) The study was based on the results of a survey conducted inDecember 2012 in an online panel on a group of 2500 representative consumers from Germany Austriaand Switzerland Furthermore 500 consumers aged below 30 years and owning a smartphone weresurveyed

57 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices (lsquoVBERrsquo) Guidelines on VerticalRestraints (2010C 13001) (lsquoVertical Guidelinesrsquo)

58 This list is based on Internet research on the websites of the relevant competition authorities We also re-searched the concurrences lthttpwwwconcurrencescomBulletingt accessed 15 July 2015 andMlex lthttpwwwmlexcomgt accessed 15 July 2015 websites and articles in law and economics jour-nals The research was carried out in the spring and summer of 2015

59 Commission Regulation (EU) No 3302010 adopted 20 April 2010 on the application of art 101(3) ofthe TFEU to categories of vertical agreements and concerted practices

Competition policy in modern retail markets 21

hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

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dlsquoN

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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hardcore restrictions60 form part of the selective distribution system and excludesspecific obligations from becoming covered by the block exemption61 In the contextof online retailing the Commission considers per se restrictions on the use of theInternet as a distribution channel as a hardcore restrain equally re-routing of cus-tomers based on localization information (eg based on credit card information) tospecific retailers are considered hardcore restrains dual pricing strategies charginghigher wholesale prices for products being sold online than for products sold offlineequally qualifies as a hardcore restrain

Selective distribution systems which fall outside of the VBER have to be assessedwithout any negative presumption according to the criteria given in the VerticalGuidelines For those cases it has to be assessed whether the selective distributionsystem brings about an appreciable restriction of competition under Article 101(1)Criteria like the nature of the agreement market position of the parties entry bar-riers etc have to be assessed62 If Article 101(1) applies an exemption of the prohib-ition rule can be granted within the framework of Article 101(3) Here it needs to beassessed whether the anti-competitive effects are outweighed by pro-competitive ef-fects63 Specifically under Article 101(3) it has to be assessed whether objectivebenefits in terms of efficiencies are produced by the agreement whether the agree-ment is indispensable for reaching those efficiencies whether the customers receive afair share of the benefits and finally whether the agreement allows the parties thepossibility to eliminate competition with respect to a substantial parts of the productsconcerned

Specifically in relation to selective distribution system the Vertical Guidelines sin-gle out three main possible competition risks namely a reduction of intrabrand com-petition foreclosure of certain types of distributors like discounters and softeningor of competition and facilitation of collusion between suppliers and buyers With re-spect to potential efficiencies the vertical guidelines specifically single out free-riderproblems or the need to build a brand image64 The relevance of those problems areconsidered to depend on the nature of the product and are considered strongest forlsquonew products complex products products whose qualities are difficult to judge be-fore consumption (so-called experience products) or whose qualities are difficult tojudge even after consumption (so-called credence products)rsquo

In conclusion the Vertical Guidelines suggest that distribution systems which relyon qualitative criteria65 like product related training of personnel services providedat the point of sale or the range of products being offered do typically not fall under

60 Retail price maintenance is for instance considered a hardcore restriction Art 4 of the VBER offers a fulllist of restrictions which are considered hardcore See also the Vertical Guidelines paras 47ndash64

61 So called excluded restraints like non-compete obligations the duration of which is indefinite or exceeds5 years While the excluded obligation is not covered the VBER continues to apply to the remaining partsArt 5 of the VBER offers a full list of excluded restraints and paras 65ndash69 of the Vertical Guideline an in-tuitive description thereof

62 Para 111 of the Vertical Guidelines63 Paras 122ndash27 of the Vertical Guidelines64 Para 185 of the Vertical Guidelines See also para 107(a) (c) and (i) of the Vertical Guidelines which

offer a more comprehensive discussion of free-rider effects certification issues and brand building65 Selective distribution systems which in addition apply quantitative criteria like minimum or maximum

sales or fixing the number of retailers are seen more critical

22 Journal of Antitrust Enforcement

the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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case

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fille

dlsquoN

otap

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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the prohibition rule of Article 101(1) TFEU This is the case if the nature of theproduct requires selective distribution system in place objective and non-discrimin-atory criteria for the selection of authorized dealers and that the restrains do not gobeyond what is required66 Within the context of offlineonline retailing theCommission considers the requirement of brick and mortar distribution network asa criterion for becoming an authorized retailer potentially being justified for specificproducts Also quality requirements may apply to a retailerrsquos website if a retailerwants to distribute the product online as well Per se prohibiting online sales forauthorized retailer is considered a hardcore restrain though As in the offline worldactive sales to specific customer groups might be excluded in a selective distributionsystem passive sales have to be accepted though67 Re-selling between authorized re-tailers may not be suppressed68

List of relevant cases

Prohibition of any online salesOnline retailers may induce price competition they may also free-ride on pre- orpost-sale services in brick and mortar stores This may reduce incentives to invest insuch services or signal low quality through low prices thus damaging the brandimage of a high-end expensive product Manufacturers may thus have incentives toban online sales leading to such efficiencies The ban however could in turn softenintra-brand competition and foreclose certain retailers This trade-off has been inves-tigated by competition authorities in numerous cases

The landmark case in the EU was Pierre Fabre Dermo-Cosmetique which wasnot allowed to use a contractual clause requiring sales of cosmetics and personal careproducts in the physical space where a qualified pharmacist was present69 TheEuropean Court of Justice rejected the view that the need to provide individual ad-vice to customers and ensure their protection against the incorrect use of productstogether with the protection of the brand image justifies a ban on Internet sales

In the earlier Yves Saint Laurent case from 2001 the European Commissionapproved a selective distribution system for perfumes The criterion for selecting dis-tributors was operating retail sales points where customers can receive advice andpersonal attention However Yves Saint Laurent Perfumes (YSLP) authorizedapproved retailers already operating a physical sales point to sell via the Internet aswell This distribution system was considered to satisfy the exemption conditions setby the Regulation 279099 which was valid at this point in time70

French courts applied the same understanding in several cases relating to perfumeand cosmetics manufacturers In 2008 the Paris Court of Appeal confirmed that the

66 Para 175 of the Vertical guidelines67 The distinction of active and passive sales is relevant for exclusive distribution systems only68 EU Commission Memo138 20 April 2010 lsquoAntitrust Commission adopts revised competition rules

for vertical agreements frequently asked questionsrsquo69 Case C-43909 Pierre Fabre Dermo-Cosmetique SAS v President de lrsquoAutorite de la concurrence and Ministre

de lrsquoEconomie de lrsquoIndustrie et de lrsquoEmploi Judgment of the Court (Third Chamber) of 13 October 201170 To our understanding this assessment would also hold under the new Regulation No 3302010 See sub-

Section lsquoEU legal provisionsrsquo

Competition policy in modern retail markets 23

fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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le3

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fille

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN75
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fragrance producer Pacific Creation could restrict online sales to only those distribu-tors who run a brick-and-mortar store71

The French competition authority fined BangampOlufsen for prohibiting its author-ized distributors to sell the brandrsquos products online in 2012 In March 2014 the ParisCourt of Appeal reduced the fine by almost 99 per cent due to limited effect of illegalconduct on the market72 Earlier in 2006 several French Hi-Fi and Home Cinemaequipment suppliers committed themselves to amend contracts with distributors inorder to allow online sales73

Restriction of sales in third-party online platformsOnline sales by third-party platforms are considered particularly harmful for brandimage since platforms are widely associated with lsquoflea marketsrsquo trading inferior prod-ucts Consequently manufacturers of branded goods may see their brand imagesundermined by sales through third-party platforms In recent years a long series ofsuch cases has been assessed by both the Bundeskartellamt (the German competitionauthorities) and German courtsmdashwith ambiguous outcomes the Amer judgment of2009 (see below) approved a selective distribution system while many subsequentjudgments and decisions have prohibited comparable systems What follows is a briefoverview of leading cases

Amer is the manufacturer of the prominent ski brands Salomon and AtomicAmer prohibited sales of its products in online bidding markets Its selective distribu-tion system was considered legal by a judgment of a German higher regional court in200974 This decision contrasts with a number of other decisions taken by Germancourts The district court (Kammergericht) of Berlin for instance judged illegal theselective distribution system of Scout a manufacturer of branded school bags Scoutwas fined for a clause in its contracts with retailers forbidding them to supply onlinebidding platforms like eBay75 In the courtrsquos view these platforms were no moreharmful to Scoutrsquos brand image than end-of-season sales to an offline discounterSince Scout accepted the latter the court reasoned it also had to accept the formerSimilarly Deuter a branded sports and backpack manufacturer was fined for pro-hibiting resellers from selling its bags through Internet platforms and from makingits prices accessible to price-comparison search engines76

Again Sennheiser a German high-quality manufacturer of headphones andmicrophones formerly supplied only those retailers that had their own online andoffline branches and that guaranteed they would not supply third-party platforms

71 Noelle Lenoir Dan Roskis and Marie-Laure Combet lsquoThe Paris Court of Appeal Confirms thePossibility for a Fragrance Manufacturer to Exclude Pure Players and to Restrict Internet Sales within itsSelective Distribution Network (PMC DistributionPacific Creation)rsquo e-Competitions Bulletin (18 April2008)

72 Cedric Manara lsquoThe French Competition Authority Fines a Manufacturer which Prohibited InternetSales by its Distributors (Bang amp Olufsen)rsquo e-Competitions Bulletin (12 December 2012)

73 Ombline Ancelin and Charles Saumon lsquoThe French Competition Council Agrees to Commitments fromHi-Fi and Home Cinema Equipment Suppliers in order to Allow their Selective Distributors to Carry outOnline Selling (Hi-FiHome Cinema)rsquo e-Competitions Bulletin (5 October 2006)

74 OLG Munchen 02072009 U(K) 48420875 KG Berlin 19092013 2 U 80976 LG Frankfurt aM 18062014 2-03 O 15813

24 Journal of Antitrust Enforcement

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

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rict

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ird

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ara

1751

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-06

280

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(con

tinue

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38 Journal of Antitrust Enforcement

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le3

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ed)

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ena

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evan

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tinue

d)

Competition policy in modern retail markets 39

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le3

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tinu

ed)

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me

Rel

evan

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tsb

rand

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ility

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ility

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ay)

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ices

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edia

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able

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2015

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ooki

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ing

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le

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Hot

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

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efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

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ury

stat

usqu

aliti

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arch

qual

ities

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erie

nce

qual

ities

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denc

equ

aliti

es

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SD

E20

132

015

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lboo

king

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CH

otel

book

ing

Not

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le

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20

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vate

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orin

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ance

2014

UK

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orin

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nce

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le

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oks

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odel

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2015

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ce-

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son

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W

hene

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rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF1
  • jnv030-FN28
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  • jnv030-FN30
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  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
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  • jnv030-FN73
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  • jnv030-FN75
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  • jnv030-FN77
  • jnv030-FN78
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  • jnv030-FN85
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  • jnv030-FN117
  • jnv030-TF3

The Bundeskartellamt did not view the claimed efficiencies such as building andmaintaining brand image through presentation of the product and the quality of pre-and post-sale services as justifying the restrictions77

Equally the distribution systems of Adidas and Asics manufacturers of premiumsports shoes did not allow retailers to make products available to open Internetmarketplaces defined as Internet platforms allowing sales between customers salesof damaged goods and platforms offering identical products from many retailers inparallel78 More specifically the companies prohibited use trademarks and brandnames for marketing their products on such third-party websites Here as well theGerman competition authority did not consider the claimed efficiency of assuredquality standards to justify the companiesrsquo practice In response both firms gave upthe practices and allowed retailers to sell in open Internet marketplaces and to usecompaniesrsquo brand name and trademarks in marketing

Comparable adjustments were required from Casio a major manufacturer of digi-tal cameras79 and Coty a perfume manufacturer80

In France in 2008 sports shoes by Puma were considered by the Tribunal deGrande Instance de Strasbourg to be technical products which required investmentsin research and development and had a specific image in the eyes of consumersthereby justifying the selective distribution network Internet resales were thereforenot allowed81

The same year a French Court condemned eBay to pay damages to perfume mak-ers Christian Dior Kenzo Givenchy and Guerlain for a violation of their selectivedistribution networks This was confirmed in May 2012 by the French SupremeCourt82

Rebates favouring offline channelsThree judgments in Germany dealt with rebates conditioned on online sales

Dornbracht a manufacturer of luxury sanitary fittings provided rebates to re-tailers that agreed not to resell to online retailers In the judgment of the Dusseldorfhigher regional court in 2013 such a rebate system leads to distortion of competitionbetween brick and mortar and online retailers83

Two other rebate systems were scrutinized by the Bundeskartellamt in 2013Gardena a midprice manufacturer of gardening tools implemented a rebate systemin which only brick and mortar retailers were able to receive the highest rebate84

Similarly Bosch Siemens Haushaltsgerate a producer of appliances granted rebates

77 Bundeskartellamt Case report 24102013 B7-113-378 Bundeskartellamt Case report 19082014 B3-1371279 OLG Schleswig 05062014 AZ 16 U (Kart) 1541380 LG Frankfurt a M 12092014 AZ 2-03 O 1281381 Romain Ferla lsquoA French Court of Appeal Rejects a Request to Forbid Internet Resellers to Sell a

Supplierrsquos Products Considering that the Legality of its Exclusive Distribution Network is not Established(Brandalley Over Stock Puma)rsquo e-Competitions Bulletin (24 June 2008)

82 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

83 OLG Dusseldorf 13112013 VI-U (Kart) 111384 Bundeskartellamt Case report 05122013 B5-14413

Competition policy in modern retail markets 25

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
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  • jnv030-FN10
  • jnv030-FN11
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  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
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  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
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  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
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  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
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  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
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  • jnv030-FN99
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  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
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  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
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  • jnv030-TF3

advantageous to offline shops85 In both cases the authorities considered the rebatesharmful to effective competition The firms presented efficiency arguments that therebate system compensates for higher costs of offline retailers The Bundeskartellamtrejected the justification as in its view less distortive measures were available namelyfixed payments

Restricting the use of price-comparison sites and price advertising onlinePrice-comparison sites establish extensive price transparency in retail markets forstandardized products prices of many products specifically branded products areeasily comparable Practices restricting freedom of retailers to advertise prices onlinethus reduce price transparency and increase search costs for consumers They softenintra-brand competition by reducing incentives to discount

Roma a manufacturer of mobility scooters in the UK prohibited retailers fromselling or advertising certain models of its product range online The British Officeof Fair Trading (OFT) found that the aim was to maintain a certain price level acrossRomarsquos retailer network86 Similarly OFT found that another manufacturer of mobil-ity scooters Pride illegally prevented its retailers from advertising prices that devi-ated from its recommended retail price online87

In Germany as mentioned Deuter prohibited retailers from using price-compari-son sites or making pricing information available at such sites and two suppliers ofsports shoes Adidas and Asics imposed bans on the use of brand-related searchterms for search-engine advertising88 All these practices were as indicated con-sidered anticompetitive by the German competition authorities

In France in 2007 10 cosmetic manufacturers committed themselves to removethe clauses in contracts with their selected distributors which prohibited internetsales and the use of brand names in search engines (Bioderma et al89) Also thewatch manufacturer Festina committed itself to modify selective distribution agree-ments as regards access to the network and advertising on the Internet90

Exclusive territoriesmdashGeoblockingThe focus of the European Commissionrsquos competition inquiry into cross-bor-der e-commerce launched in March 2015 is on restrictions in cross-borderpurchases like geoblocking91 Geo-blocking identifies consumers by their

85 Bundeskartellamt Case report 23122013 B7-111386 OFT infringement decision Mobility scooters supplied by Pride Mobility Products Limited prohibition

on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201487 Decision of the Office of Fair Trading Mobility scooters supplied by Pride Mobility Products Limited

prohibition on online advertising of prices below Pridersquos RRP CE9578-12 27 March 201488 Bundeskartellamt report of 2804201489 French Competition Authority The French Competition Authority accepts the commitments taken by

10 companies of the cosmetic industry to introduce more competition into online sale of their products(Bioderma amp Roge Cavailles) 8 March 2007 e-Competitions Bulletin March 2007

90 Laura Cerny and Francois Doridou lsquoThe French Competition Council Accepts Commitments to ModifySelective Distribution Agreements as Regards Access to the Network and Advertising on the Internet(Festina)rsquo e-Competitions Bulletin (24 July 2006)

91 Margrethe VestagermdashCommissioner for Competition Speech at the Bundeskartellamt InternationalConference on Competition Berlin 26 March 2015

26 Journal of Antitrust Enforcement

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

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Competition policy in modern retail markets 35

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le3

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rict

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36 Journal of Antitrust Enforcement

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le3

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erSD

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tinue

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Competition policy in modern retail markets 37

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le3

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tinu

ed)

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ena

me

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evan

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38 Journal of Antitrust Enforcement

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le3

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tinu

ed)

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ena

me

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evan

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d)

Competition policy in modern retail markets 39

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le3

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tinu

ed)

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me

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evan

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ility

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edia

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otap

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able

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0

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com

DE

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ho

telb

ooki

ngndash

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CH

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ing

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icab

le

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king

com

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king

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PC

Hot

elbo

okin

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able

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edia

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15h

otel

book

ing

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otel

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ing

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icab

le

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20

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2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

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rice

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efo

rth

ety

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lpro

duct

(EU

Ror

asst

ated

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Lux

ury

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usqu

aliti

esSe

arch

qual

ities

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erie

nce

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ities

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denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
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  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
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  • jnv030-FN21
  • jnv030-FN22
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
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  • jnv030-FN88
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  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
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  • jnv030-FN111
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  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

residence address IP-address or credit card details and redirects their purchaserequests to particular (national) business channels This allows restriction ofaccess based on user location and thus effective geographic price discrimin-ation This strategy de facto replicates territorial restrictions in the offlineworld92

Welfare effects of such price discrimination are ambiguous as compared touniform pricing some consumers pay more others pay less and additionalconsumers are served Moreover there are costs associated with cross-bordertransactions due to differences in privacy copyright and consumer laws acrosscountries These cost differences could justify retail price differences

Geoblocking has recently been widely discussed in Australia by the CompetitionPolicy Review Panel In its final report in March 2015 the panel recommended thatgeoblocking (and other international price discrimination) not be legally prohibitedInstead it recommended educating consumers in ways of legitimately circumventinggeoblocking93

Resale price maintenanceRPM can likewise be used to limit price competition in online markets

In the online hotel booking market the OFT established that hotel chains pre-vented online travel agents from offering discounts to their customers94

Commitments were agreed allowing online travel agents and hotels to offer dis-counts on rates for hotel rooms This decision was however appealed by a price-comparison platform Skyscanner and overturned by the Competition AppealTribunal in 2014 on the grounds that it introduced restrictions on priceinformation

In Germany in 2015 the Bundeskartellamt fined United Navigation amanufacturer of portable navigation equipment for using RPM in itscontracts with retailers In this case prices of online retailers were particu-larly closely monitored95 RPM agreements were also found to be used by themattress manufacturer Metzeler Schaum GmbH with both offline and onlineretailers96

92 See for example Verboven Frank lsquoEfficiency Enhancing or Anti-Competitive Vertical RestraintsSelective and Exclusive Car Distribution in Europersquo (2009) Cases in European Competition Policy TheEconomic Analysis 219ndash44

93 lsquoAttempts to prohibit international price discrimination should not be introduced into the CCA on ac-count of significant implementation and enforcement complexities and the risk of negative unintendedconsequences Instead the Panel supports moves to address international price discrimination throughmarket solutions that empower consumers These include removing restrictions on parallel imports[ ] and ensuring that consumers are able to take lawful steps to circumvent attempts to prevent theiraccess to cheaper legitimate goodsrsquo (Competition Policy Review Final report Mach 2015 p 63)

94 The UK OFT issues statement of objections against two online travel agents and one hotels group foralleged restrictive practices (Bookingcom Expedia and Intercontinental Hotels Group) 31 July 2012 e-Competitions Bulletin July 2012 art No 49684

95 Bundeskartellamt lsquoBuszliggeld wegen vertikaler Preisbindung bei portablen Navigationsgeraten verhangtrsquo reportof 12052015

96 Bundeskartellamt Bundeskartellamt lsquoWeiteres Buszliggeld wegen vertikaler Preisbindung im Matratzenfallverhangtrsquo report of 06022015

Competition policy in modern retail markets 27

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
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  • jnv030-FN6
  • jnv030-FN7
  • jnv030-FN8
  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
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  • jnv030-FN37
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  • jnv030-FN39
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  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
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  • jnv030-FN45
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  • jnv030-FN49
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  • jnv030-FN51
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  • jnv030-FN53
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  • jnv030-FN57
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  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
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  • jnv030-FN111
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  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

This strict policy of the German competition authorities has some tradition be-hind it In 2003 the battery producer Ansmann was fined by the authorities forenforcing minimum resale prices for products sold on eBay97 In 2009 they statedthat stationary opticians should not be shielded from Internet competition andfined contact lens provider CIBA for establishing minimum resale prices and re-stricting Internet and wholesale sales of its products98 Hearing aid producerPhonak was fined by the Bundeskartellamt in 2009 for RPM99 In 2010 theauthorities imposed a E25 million fine on Garmin Deutschland GmbH a produ-cer of portable navigation devices and on one responsible individual for establish-ing a resale price maintenance system In 2013 a cosmetics producer WALAHeilmittel GmbH was fined for RPM Its contracts with retailers included specialclauses restricting Internet sales100

The lsquoagency modelrsquo in the digital-books marketOnline retailing in the e-book market has generated a series of antitrustcases enforced by several competition authorities101 These cases were tied tothe introduction by Apple of the so called agency model for digital books (amodel based on a proposal by publishers) Under the agency model Apple acted asan agent for book publishers which retained the right to set end consumer pricesThe model was accompanied by a MFN clause guaranteeing Apple the lowest pricein comparison to competing e-book platforms

The concern put forward by competition authorities in the EU and the USA wasthat the agency model (in conjunction with the MFN clause) served as apublishersrsquo commitment device to charge higher prices to Amazon which is theleading online retailer of e-books

Before Applersquos entry into this market Amazon used a loss leader strategy forbestselling e-books in order to boost adoption of its e-book reader Kindlethereby securing its leading market position Publishers concerned at Amazonbecoming too strong and potentially also entering the publishing marketpromoted Applersquos entry through the agency model (and the MFN clause) whileat the same time making a commitment to bargain more toughly with Amazon

97 Daniela Seeliger lsquoThe German Federal Cartel Office Imposes Fines on Two Manufacturers forInfringing the Prohibition to Influence Retail Sale Prices in an Anticompetitive Way (SwissphoneTelecommunications Ansmann Energy)rsquo 23 September 2003 e-Competitions Bulletin September2003 art No 31731

98 Tobias Caspary lsquoThe German Federal Cartel Office Fines E 115 Million a Contact Lens Provider forFixing Minimum Resale Prices and Restricting Internet and Wholesale Sales of its Products (CIBA)rsquo 25September 2009 e-Competitions Bulletin September 2009 art No 29823

99 Bundeskartellamt Bundeskartellamt imposes fine on hearing aid manufacturer Phonak GmbH reportof 15102009

100 Bundeskartellamt Case report 6052014 B2-5214101 Pola Karolczyk lsquoThe US DoJ Announces to Continue Investigations into the E-book Industry for

Alleged Price-Fixing Conspiracy (Apple)rsquo 11 April 2012 e-Competitions Bulletin April 2012 art No45943 Pola Karolczyk lsquoThe European Commission Opens Formal Proceedings to Investigate Sales ofE-books (Hachette Livre Harper Collins)rsquo 6 December 2011 e-Competitions Bulletin December 2011art No 41873

28 Journal of Antitrust Enforcement

than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

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Competition policy in modern retail markets 35

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Competition policy in modern retail markets 37

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38 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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le3

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ices

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com

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edia

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K20

12h

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able

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com

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ooki

ngndash

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ing

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le

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able

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le

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2015

hot

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able

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tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

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ena

me

Rel

evan

tpr

oduc

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rand

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rice

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rth

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lpro

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ury

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erie

nce

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ities

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denc

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aliti

es

HR

SD

E20

132

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lboo

king

-BP

CH

otel

book

ing

Not

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icab

le

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20

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vate

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orin

sur-

ance

2014

UK

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Mot

orin

sura

nce

Not

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icab

le

02

01

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er

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oks

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tric

ity

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13

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cym

odel

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ooks

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icab

le

01

20

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ivox

2015

DE

pri

ce-

com

pari

son

plat

form

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ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
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  • jnv030-TF1
  • jnv030-FN28
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  • jnv030-FN30
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  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
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than before The overall impact of this agreement had the potential to raiseend-consumer prices for the publishersrsquo e-books

The e-book cases ended with settlements on both sides of the Atlantic Remediesrequire the cancellation of the agency model and of the MFN clauses Discounts byretailers have to be accepted by publishers under specific conditions102

Price parityMFN clausesLarge online retailers can use their market power to negotiate price parity clausesguaranteeing them the lowest online prices

Amazon has been a target of several investigations in this area Competitionauthorities in the UK and in Germany scrutinized Amazon because of its price-paritypolicy which prohibited suppliers from offering lower prices on other online saleschannels103 Both authorities dropped the investigation when Amazon made a com-mitment to stop using this kind of contractual clause

In several European countries antitrust cases related to most MFN clauses arepending These clauses have been imposed on hoteliers by leading hotel bookingplatforms (eg HRS Bookingcom Expedia) Hotels guarantee platforms the lowestprices the highest possible room availability and best booking and cancellations con-ditions Again a trade-off between potential pro- and anti-competitive effects is evi-dent here these strategies may reduce search costs for customers and limit verticalfree-riding behaviour By contrast they may establish a common price level and thusexclude intra-brand competition Even though the Bundeskartellamt and Dusseldorfhigher court found these clauses to be illegal they were still used by Bookingcom inearly 2015104 While the German authorities rejected the settlement offered byBookingcom it was accepted in France Sweden and Italy in April 2015 and will beimplemented in all four countries105

In the UK the CMA examined MFN clauses in the private motor insurance mar-ket106 The inquiry differentiated between narrow MFNs (price comparison websitesand insurance providersrsquo own websites and wide MFNs (different price comparisonwebsites or other sales channels such as telesales) The CMA considered the latterproblematic and sought an end to clauses restricting a motor insurerrsquos ability to priceits products differently on different channels

In Germany Verivoxmdasha price comparing platform for electricity and gasmdashusedbest-price clauses in contracts with energy providers After the intervention of the

102 Jeffrey May lsquoThe US DoJ Proposes Remedy to Address Antitrust Violations in the E-book Market(Apple)rsquo 2 August 2013 e-Competitions Bulletin August 2013 art No 55071

103 Bundeskartellamt Case report 9122013 B6-4612104 Bundeskartellamt lsquoBestpreisklauseln von HRS verstoszligen gegen deutsches und europaisches Kartellrecht

- Oberlandesgericht Dusseldorf bestatigt den Untersagungsbeschluss des Bundeskartellamtesrsquo report of09012015

105 Financial times Bookingcom in European settlement over hotel prices Malcolm Moore in London andAdam Thomson in Paris 21 April 2015 A legal perspective is offered by P Akman lsquoA Competition LawAssessment of Platform Most-Favoured-Customer Clausesrsquo CCP Working Paper 15ndash12 Centre forCompetition Policy 2015 and Ariel Ezrachi lsquoThe Competitive Effects of Parity Clauses on OnlineCommercersquo Working Paper Oxford University October 11 2015 1ndash36

106 Private motor insurance market investigation Final report CMA 24 September 2014

Competition policy in modern retail markets 29

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
  • jnv030-FN8
  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
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  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
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  • jnv030-FN24
  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
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  • jnv030-FN43
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  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
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  • jnv030-FN55
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  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
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  • jnv030-FN87
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  • jnv030-FN89
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  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

Bundeskartellamt in 2015 the company voluntarily removed the clauses from thecontracts

Product characteristics prone to free-ridingRetailing delivers products with significantly different product characteristicsCharacteristics such as size and weight and shelf life strongly affect transportationcosts and hence influence the relevance of online retailing In addition eco-nomic characteristics or qualities of a product also strongly impact the type ofretailing

In the following we introduce the most important categories of product character-istics categories distinguishing them from standard products These are luxury- orstatus-good characteristics on the one hand product characteristics related to someuncertainty about product quality on the other hand (search- experience- and cre-dence-good characteristics)

Those product characteristics define the type of complementary servicesand efforts required and the degree to which this is so for a retailer tosell the products effectively Accordingly products exhibiting these characteris-tics to a large degree will be potentially affected by externalities and free-ridereffects

Luxury- status-good characteristicsA status good is a good for which the willingness to pay is higher than any direct util-ity gained from its consumption This can arise due to special consumer preferencesthat push the consumer to manifest his belonging to one or another social group107

Veblen phrased it as follows lsquoIn order to gain and to hold the esteem of men wealthmust be put in evidence for esteem is awarded only on evidencersquo108 Typical ex-amples of such goods are watches jewellery handbags cars and electronic or sportsgadgets The phenomenon of status goods is an economically significant one Visibleconsumption expenditures comprise for instance roughly 12 per cent of US house-hold total expenditure109

Several terms have been coined to describe different types of status goods Whenconsumers want to be like most othersmdashlsquoto keep up with the Jonesesrsquomdashthere is abandwagon effect If to the contrary consumers want exclusiveness there is a snob ef-fect More technically a so-called Veblen effect may arise when consumerrsquos utility isa function of both consumption and status110

107 Harvey Leibenstein lsquoBandwagon Snob and Veblen Effects in the Theory of Consumersrsquo Demandrsquo(1950) 64 (2) Quart J Econ 183ndash207

108 Veblen (1934) quoted from Laurie S Bagwell and B Douglas Bernheim lsquoVeblen Effects in a Theory ofConspicuous Consumptionrsquo (1996) 86 (3) Am Econ Rev 349ndash73

109 Kerwin K Charles Erik Hurst and Nikolai Roussanov lsquoConspicuous Consumption and Racersquo (2009)1242 Quart J Econ 425ndash67

110 Depending on the type of competitive interaction different market equilibria can arise in markets withstatus goods Bagwell and Bernheim (n 107) show that under perfect competition a Veblen effectoccurs ie goods with the same intrinsic utility are sold at different prices This effect is achieved throughexcessive product quality which in turn leads to welfare loss due to wasteful production Veblen effectscan equally be shown for imperfect competition In addition to the quality distortion described abovesome form of cross-subsidization between customers occurs (from status seeking customers to others)

30 Journal of Antitrust Enforcement

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

re

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Spor

tssh

oes

Asi

csG

el-

Cum

ulus

16at

omic

73

-13

0(i

deal

o)

01

21

Adi

das

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tssh

oes

Adi

das

ZX

700

48-1

10(i

deal

o)

01

21

Pum

aFR

2008

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tssh

oes

Pum

aIc

raT

rain

erSD

22

00-

748

5(i

deal

o)

01

21

(con

tinue

d)

Competition policy in modern retail markets 37

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Am

erSp

orts

DE

2009

re

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Spor

tsbr

ands

Sal

omon

and

Ato

mic

(ski

es)

Wils

on(b

alls

port

s)A

rcte

ryx

(clim

bing

)M

avic

(bik

-in

g)S

uunt

o(s

port

spr

e-ci

sion

)P

reco

r(fi

tnes

s)

DeM

arin

i(ba

seba

ll)

SkiS

alom

onX

-D

rive

80

FS(2

015)

ide

alo

329

90-6

204

3up

per

end

11

21

Deu

ter

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

rest

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Spor

tsba

gsD

eute

rT

rans

Alp

ine

308

9-99

90

(ide

alo)

02

10

Scou

tD

E20

13r

estr

ic-

tion

ofsa

les

toth

ird

part

yon

line

plat

form

Scho

olba

gsSc

ount

Nan

oFe

uerw

ehr

94-1

275

0(i

deal

o)

12

10

Hou

seap

plia

nces

Dor

nbra

cht

2013

DE

re

bate

sfa

vour

ing

offli

ne

Fitt

ings

-upp

eren

dT

ara

1751

0883

-06

280

74-

315

93(i

deal

o)up

per

end

21

00

(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gar

dena

DE

2013

re-

bate

sfa

vour

ing

offli

neG

arde

neq

uipm

ent

Law

nm

ower

Gar

dena

Pow

erM

ax42

E1

789

2-35

752

(ide

alo)

mid

rang

e

01

20

Met

zele

rSc

haum

DE

2015

RP

MM

attr

esse

sM

attr

ess

Pre

stig

eT

ubes

126

100

21

0cm

689

idea

lou

pper

end

01

21

Hea

lth-

rela

ted

prod

ucts

CIB

AD

E20

09R

PM

Con

tact

lens

esA

irO

ptix

Aqu

a-

150

6p

18

10-

329

0(i

deal

o)

00

12

Pho

nak

DE

2009

RP

MH

eari

ngai

dG

ener

ally

not

avai

labl

eon

line

00

12

(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Pri

deU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Pri

deM

obili

tyG

o-G

o3-

Whe

elSc

oote

r$7

22(a

maz

onc

om)

00

12

Rom

aU

K20

14r

estr

ic-

tion

ofon

line

adve

rtis

-in

gof

pric

e

Mob

ility

aid

Scoo

ter

Rom

aA

lcor

apound4

25-

595

(eB

ay)

00

12

Serv

ices

Boo

king

com

Exp

edia

IH

GU

K20

12h

otel

book

ing

ndashR

PM

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Boo

king

com

DE

2015

ho

telb

ooki

ngndash

BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Boo

king

com

FR20

15

hote

lboo

king

ndashB

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

Exp

edia

FR20

15h

otel

book

ing

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

HR

SFR

2015

hot

elbo

okin

g-B

PC

Hot

elbo

okin

gN

otap

plic

able

0

12

0

(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

e-bo

oks

elec

tric

ity

Seve

rale

-boo

kpu

b-li

sher

sE

U20

13

agen

cym

odel

and

MFN

E-b

ooks

Not

appl

icab

le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN21
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  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
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  • jnv030-FN81
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  • jnv030-TF3

Services that retailers can offer for these goods are related to the framing of prod-ucts building and maintaining brand image by presentation shopping event and visi-bility or maintaining certain price levels111

Products tied to quality-uncertaintyFor some goods buyers are uncertain about a productrsquos characteristics or qualitywhen they consider buying112 There is a range of variants of such goods

Search-good characteristics are attached to products whose quality can only beobserved by consumers upon inspection A typical example is fashion products Pre-sale services are essential for such goods because consumers want to touch and feelthe product before purchasing Offline retailers offer touch amp feel services throughtheir brick and mortar stores online retailers may mimic these services through con-venient delivery and return policies

Experience-good characteristics are attached to products whose quality canonly be observed by consumers upon consumption Typical examples are restaurantsand hotel services Recommendations and certification are services provided by re-tailers for such products Brand image and price as a signal of quality are also import-ant elements of effective marketing in this context

Credence-good characteristics are attached to products for which consumersare unaware of the quality necessary to fulfil their needs113 In cases where con-sumers of a product have only recognized fulfilment of certain needs not the qualityreceived expert sellers will have already recognized through diagnosis the qualityneeded by individual consumers Examples are health products or complex electronicproducts Products exhibiting those characteristics are prone to specific forms of inef-ficiencies114 Within this context retailers offer expert advice guarantees and repairservices

Ranking of productsIn this section we categorize current cases in terms of product qualities We haveranked quality intensity for products affected by the decision of authorities by the

which limits the need for status driven quality distortions and thus reduces wasteful productionAccordingly in this setting imperfect competition that is higher margins for suppliers can be welfareincreasing See also Miguel Diaz-Diaz and Luis Rayo lsquoSignalling with Imperfect Competitionrsquo mimeo2012

111 R Inderst and S Pfeil lsquoAn ldquoImage Theoryrdquo of RPMrsquo Working Paper 2014 builds on high prices as a sig-nal of quality and brand image and argues that manufacturers should control retail prices to achieve cer-tain efficiencies Retailers can support manufacturers in maintaining the high prices for example bystrategic product positioning on the shelves See also Inderst Roman lsquoPreise als QualitatssignalImplikationen fur das Preisbindungsverbot und seine Durchsetzungrsquo Wirtschaft und Wettbewerb 2014

112 Phillip Nelson lsquoInformation and Consumer Behaviorrsquo (1970) 78 (2) J Political Econ 311ndash29113 Michael R Darby and Edi Karni lsquoFree Competition and the Optimal Amount of Fraudrsquo (1973) 16 (1) J

L amp Econ 67ndash88114 Several inefficiencies can occur in such a situation overtreatment (extensive treatment although the

additional benefit is smaller than the additional cost) under treatment (insufficient treatment althoughthe additional benefit is greater than the additional cost) or overcharging (the charge is greater than thefactual treatment) See Uwe Dulleck Rudolf Kerschbamer and Matthias Sutter lsquoThe Economics ofCredence Goods An Experiment on the Role of Liability Verifiability Reputation and Competitionrsquo(2011) 1012 Am Econ Rev 526ndash55

Competition policy in modern retail markets 31

following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

oduc

tqu

alit

ies

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Ele

ctro

nics

Ans

man

nD

E20

03

RP

MB

atte

ries

and

rech

arge

rs

avai

labl

ein

mos

tof

reta

ilsh

ops

AA

Mig

non

12

V2

units

3

45-2

084

(Ide

alo)

00

00

Ban

gamp

Olu

fsen

FR20

12r

estr

ictio

nof

inte

rnet

sale

s

TV

and

soun

dup

per

end

HD

TV

Beo

Pla

yV

1-40

30

990

0-36

770

0

21

11

BSH

DE

2013

reb

ates

favo

urin

gof

fline

Hou

seho

ldap

plia

nces

ov

ens

was

hers

dry

ers

dish

was

hers

fri

dges

cof

-fe

em

achi

nes

vent

ilato

rs

hood

sir

onv

acuu

mcl

eane

rha

irdr

yer

Bra

nds

Bos

chan

dSi

emen

s(l

owm

id)

gene

rally

avai

labl

ein

mos

tre

tail

shop

s

Ele

ctri

cov

en

Bos

ch49

3-

1650

(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Gag

gena

uan

dN

EFF

(mid

up

per)

Ele

ctri

cov

en

195-

2248

(ide

alo)

21

11

Cas

ioD

E20

14r

estr

ic-

tion

ofsa

les

toth

ird-

part

yon

line

plat

form

Dig

italc

amer

asl

ow-e

nd79

90-

179

89(i

deal

o)0

21

0

Fes

tina

FR20

06r

estr

ic-

tion

ofon

line

sale

sre

-st

rict

ion

ofon

line

adve

rtis

ing

ofpr

ice

Wat

ches

mid

rang

eFe

stin

aW

atch

F167

601

10

9-13

9(i

deal

o)

12

11

Gar

min

DE

2010

RP

MP

orta

ble

navi

gatio

nde

vice

973

0-39

3at

idea

lo1

21

1

Hi-

Fia

ndho

me

cine

ma

FR20

06r

estr

ictio

nof

onlin

esa

les

Hi-F

iand

hom

eci

nem

aeq

uipm

ent

Not

appl

icab

le

12

11

Senn

heis

erD

E20

13r

e-st

rict

ion

ofsa

les

toth

ird

part

yon

line

plat

form

Hea

dpho

nes

and

mic

roph

ones

119

5-69

9at

idea

lom

id-

uppe

rpr

ice

rang

ebe

iam

azon

12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Uni

ted

Nav

igat

ion

UK

2015

RP

MP

orta

ble

navi

gatio

nde

vice

tw

obr

ands

Bec

ker

and

Falk

sim

ilar

toT

omT

oman

dG

arm

in

Bec

ker

51

19-

470

Tom

Tom

51

09-6

99

Gar

min

51

04-1

300

12

11

Am

azon

UK

onl

ine

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Am

azon

DE

2013

on-

line

plat

form

mdashM

FNE

lect

roni

csw

asto

ppr

oduc

tca

tego

ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

-tio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Lux

ury

perf

umes

Bra

nds

Adi

das

Pla

yboy

OP

IR

imm

elS

ally

Han

sen

Kal

vin

Cle

inC

hloe

D

avid

off

Mar

cJa

cobs

ph

iloso

phy

and

man

yot

her

Dav

idof

fCoo

lW

ater

Eau

deT

oile

tte

(125

ml)

22

46-7

0(i

deal

o)

21

00

Pie

rre

Fab

reD

erm

o-C

osm

etiq

ueE

U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

ictio

nof

on-

line

sale

sre

stri

ctio

nof

onlin

ead

vert

isin

gof

pric

e

Cos

met

ics

Not

appl

icab

le

11

20

Fre

nch

Per

fum

eM

aker

sFR

2008

re-

stri

ctio

nof

sale

sto

thir

dpa

rty

onlin

epl

atfo

rm

Per

fum

esN

otap

plic

able

2

10

0

Pac

ific

Cre

atio

nFR

2008

res

tric

tion

ofon

-lin

esa

les

Per

fum

esL

olita

Lem

pick

a10

0mlE

DP

Spra

y27

64-

719

5(i

deal

o)

21

00

(con

tinue

d)

36 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

qual

ities

Cre

denc

equ

aliti

es

Yve

sSa

int

Lau

rent

EU

2001

onl

ine

sale

sre

stri

ctio

n

Per

fum

esY

ves

Sain

tL

aure

ntL

rsquoHom

me

Spor

tE

aude

Toi

lett

e(1

00m

l)5

4-8

8(i

deal

o)

21

00

Spor

tseq

uipm

ent

Asi

csD

E20

14r

estr

ic-

tion

ofsa

les

toth

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22

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tinue

d)

Competition policy in modern retail markets 37

Tab

le3

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tinu

ed)

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ena

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Rel

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308

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10

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ird

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94-1

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per

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(con

tinue

d)

38 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

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ena

me

Rel

evan

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oduc

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ower

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Met

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ubes

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ucts

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eari

ngai

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ally

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labl

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00

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(con

tinue

d)

Competition policy in modern retail markets 39

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

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rand

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efo

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Exp

edia

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able

0

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0

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com

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ooki

ngndash

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CH

otel

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ing

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le

01

20

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FR20

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Hot

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hot

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okin

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PC

Hot

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okin

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able

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(con

tinue

d)

40 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

ety

pica

lpro

duct

(EU

Ror

asst

ated

)

Lux

ury

stat

usqu

aliti

esSe

arch

qual

ities

Exp

erie

nce

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ities

Cre

denc

equ

aliti

es

HR

SD

E20

132

015

hote

lboo

king

-BP

CH

otel

book

ing

Not

appl

icab

le

01

20

Pri

vate

mot

orin

sur-

ance

2014

UK

MFN

Mot

orin

sura

nce

Not

appl

icab

le

02

01

Oth

er

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oks

elec

tric

ity

Seve

rale

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kpu

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13

agen

cym

odel

and

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E-b

ooks

Not

appl

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le

01

20

Ver

ivox

2015

DE

pri

ce-

com

pari

son

plat

form

for

ener

gypr

ovid

ers

ndashB

PC

Ene

rgy

pric

eco

mpa

riso

nN

otap

plic

able

0

20

0

Sour

ceT

heau

thor

sN

ote

W

hene

ver

nopa

rtic

ular

bran

dor

prod

uct

was

conc

erne

dby

the

case

we

fille

dlsquoN

otap

plic

able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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following numbers 0mdashnot relevant 1mdashmedium (marked also with light grey back-ground) 2mdashhighly relevant (marked with dark grey background) Altogether wehave reviewed 41 cases (Table 3)

According to this admittedly subjective ranking115 there is only one case targetinga product that does not exhibit product characteristics prone to free-rider effects(Ansmann DE 2003 RPM) All other cases exhibit characteristics indicating signifi-cant free-rider effects as prevalent

Figure 7 ranks products targeted by recent competition law enforcement accord-ing to their characteristics As we can see some antitrust intervention is tied to prod-ucts with predominantly luxurystatus qualities and to products with credence-goodqualities However the majority of cases centre around products that exhibit searchand experience qualities

The lower attention of antitrust enforcement to products with strong luxury- sta-tus-good qualities may be due to two reasons First the competition authorities aremore open to accepting selective distribution systems in this context This percep-tion is particularly strong in France where the French Supreme Court went as far asfining eBay for violating selective distribution networks operated by several perfumebrands116 Second as mentioned before the suppliers of brands increasingly use theirown online shops as illustrated by a significantly faster turnover growth in onlineshops of manufacturers than of total online turnover117

In respect to products with credence-good qualities the reason for lower interven-tion may also be two-fold On the one hand competition-law enforcement for health-related products is still underdeveloped Given that specifically those products oftenexhibit credence-good character they may fall outside active competition law en-forcement On the other hand given the strong role of experts (physicists or IT con-sultants) in this field functional pricing in the form of direct payments to the expertmay be more common and may limit free-riding behaviour without violating compe-tition law

The two categories with the largest number of casesmdashsearch and experiencegoodsmdashare those where the antitrust practice is being tested On the one handmanufacturers test the required standards of proof for distinguishing betweensearchexperience and normal goods On the one hand internet platforms with largebuyer power take the lead in solving the free rider issues and introduce agency mod-els Competition authorities have been defining their position on these cases in re-cent months only The EU Commissionrsquos ambition to further sharpen herunderstanding of the underlying economic drivers is visible in currently initiated pol-icy initiativesmdashranging from the single digital market agenda the e-commerce sectorinquiry and the open consultation on digital platforms

115 Unavoidably there is some judgment in ranking individual products according to those product dimen-sions Furthermore the statistics count the number of cases while the number of affected firms maydiffer

116 Joseph Vogel lsquoThe French Supreme Court Rules on Selective Distribution Networks and Outside-Network Sales made on Online Auction Website (eBay)rsquo e-Competitions Bulletin (3 May 2012)

117 Numbers are for Germany between 2008 and 2013 Hedde (n 37)

32 Journal of Antitrust Enforcement

Tab

le3

Cas

escl

assi

fied

bypr

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tqu

alit

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Cas

ena

me

Rel

evan

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Exp

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Ans

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(Ide

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Ban

gamp

Olu

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FR20

12r

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nof

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TV

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dup

per

end

HD

TV

Beo

Pla

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1-40

30

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0-36

770

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2013

reb

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Ele

ctri

cov

en

Bos

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3-

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(ide

alo)

02

11

(con

tinue

d)

Competition policy in modern retail markets 33

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

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rice

rang

efo

rth

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Lux

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Exp

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Cre

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equ

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Gag

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dN

EFF

(mid

up

per)

Ele

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cov

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195-

2248

(ide

alo)

21

11

Cas

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E20

14r

estr

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les

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part

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line

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Dig

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amer

asl

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90-

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89(i

deal

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21

0

Fes

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FR20

06r

estr

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sale

sre

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ofon

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adve

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Wat

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mid

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aW

atch

F167

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10

9-13

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deal

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12

11

Gar

min

DE

2010

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navi

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06r

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Not

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Hea

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5-69

9at

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12

10

(con

tinue

d)

34 Journal of Antitrust Enforcement

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

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Lux

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Exp

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Cre

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Uni

ted

Nav

igat

ion

UK

2015

RP

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Bec

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oman

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Tom

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99

Gar

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12

11

Am

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14N

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able

0

12

0

Am

azon

DE

2013

on-

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form

mdashM

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lect

roni

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asto

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ry20

14N

otap

plic

able

0

12

0

Per

fum

esc

osm

etic

sC

oty

DE

2014

res

tric

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nof

sale

sto

thir

dpa

rty

onlin

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rm

Lux

ury

perf

umes

Bra

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Adi

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ally

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sen

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vin

Cle

inC

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ph

iloso

phy

and

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Dav

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ater

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(125

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22

46-7

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21

00

Pie

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Fab

reD

erm

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osm

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U20

09

2011

res

tric

tion

on-

line

sale

s

Cos

met

ics

and

pers

onal

care

Ave

neSu

nSiti

vesu

ncr

eam

no

perf

umes

SP

F50thorn

(50m

l)

Am

azon

143

6id

ealo

114

-16

99

11

20

(con

tinue

d)

Competition policy in modern retail markets 35

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

sP

rice

rang

efo

rth

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(EU

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Lux

ury

stat

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arch

qual

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Exp

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ities

Cre

denc

equ

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es

WA

LA

Hei

lmit

telD

E20

13R

PM

and

onlin

esa

les

rest

rict

ion

Nat

ural

cosm

etic

sD

rH

anus

chka

faci

alcr

eam

Mel

isse

(30m

l)

Am

azon

178

9id

ealo

139

0-20

15

11

20

Bio

derm

aet

alF

R20

07r

estr

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 39

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
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  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
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  • jnv030-FN67
  • jnv030-FN68
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  • jnv030-FN72
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  • jnv030-FN77
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  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
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  • jnv030-FN86
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  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
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Tab

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

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  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
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  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
  • jnv030-FN113
  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

Tab

le3

(con

tinu

ed)

Cas

ena

me

Rel

evan

tpr

oduc

tsb

rand

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rice

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efo

rth

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38 Journal of Antitrust Enforcement

Tab

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Competition policy in modern retail markets 39

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
  • jnv030-FN8
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  • jnv030-FN18
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  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
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  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
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  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
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Competition policy in modern retail markets 39

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40 Journal of Antitrust Enforcement

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
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  • jnv030-FN12
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  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
  • jnv030-FN25
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  • jnv030-FN27
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  • jnv030-FN29
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  • jnv030-FN33
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  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
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  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
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  • jnv030-FN50
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  • jnv030-FN52
  • jnv030-FN53
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  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
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  • jnv030-FN72
  • jnv030-FN73
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  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
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  • jnv030-FN81
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  • jnv030-FN86
  • jnv030-FN87
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  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
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  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
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  • jnv030-FN108
  • jnv030-FN109
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  • jnv030-FN111
  • jnv030-FN112
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  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

Tab

le3

(con

tinu

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tpr

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40 Journal of Antitrust Enforcement

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dlsquoN

otap

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able

rsquo

Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
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  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
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  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
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  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
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  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
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  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
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  • jnv030-FN95
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  • jnv030-FN101
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  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
  • jnv030-FN113
  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

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Competition policy in modern retail markets 41

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
  • jnv030-FN8
  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
  • jnv030-FN113
  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3

C O N C L U S I O NIn this article we map out the alignment of product characteristics (also called lsquoprod-uct qualitiesrsquo) of products targeted by recent antitrust enforcement in EuropeFrance Germany and the UK with the likelihood of free-rider effects taking place

We find for luxury goods the clash between antitrust enforcement and businesspractice mostly being settled Potentially one reason is manufactures of luxury goodshaving vertically (re-)integrated retail channels This allows implementing free-ridingdisrupting strategies without violating competition law In the case of products withsearch and experience qualities we find increasing enforcement activity despite preva-lent free-rider effects indicating areas of conflict between pro-business justificationsand potential anti-competitive effects Increasingly for those products the intensityof antitrust enforcement as moved from manufacturer enforced restraints to re-straints enforced by Internet platforms Finally we consider it likely that credencegoods become a future area of antitrust conflict with health products being moreoften covered by competition law enforcement

According to this assessment competition authorities will have to sharpen theirunderstanding of free-rider effects for products with those characteristics and eventu-ally redefine their view on various contractual restraints

Figure 7 Characteristics of products targeted by recent competition law enforcement

Source The authors

42 Journal of Antitrust Enforcement

  • jnv030-COR1
  • jnv030-COR2
  • jnv030-FN1
  • jnv030-FN2
  • jnv030-FN3
  • jnv030-FN4
  • jnv030-FN5
  • jnv030-FN6
  • jnv030-FN7
  • jnv030-FN8
  • jnv030-FN9
  • jnv030-FN10
  • jnv030-FN11
  • jnv030-FN12
  • jnv030-FN13
  • jnv030-FN14
  • jnv030-FN15
  • jnv030-FN16
  • jnv030-FN17
  • jnv030-FN18
  • jnv030-FN19
  • jnv030-FN20
  • jnv030-FN21
  • jnv030-FN22
  • jnv030-FN23
  • jnv030-FN24
  • jnv030-FN25
  • jnv030-FN26
  • jnv030-FN27
  • jnv030-TF1
  • jnv030-FN28
  • jnv030-FN29
  • jnv030-TF2
  • jnv030-FN30
  • jnv030-FN31
  • jnv030-FN32
  • jnv030-FN33
  • jnv030-FN34
  • jnv030-FN35
  • jnv030-FN36
  • jnv030-FN37
  • jnv030-FN38
  • jnv030-FN39
  • jnv030-FN40
  • jnv030-FN41
  • jnv030-FN42
  • jnv030-FN43
  • jnv030-FN44
  • jnv030-FN45
  • jnv030-FN46
  • jnv030-FN47
  • jnv030-FN48
  • jnv030-FN49
  • jnv030-FN50
  • jnv030-FN51
  • jnv030-FN52
  • jnv030-FN53
  • jnv030-FN54
  • jnv030-FN55
  • jnv030-FN56
  • jnv030-FN57
  • jnv030-FN58
  • jnv030-FN59
  • jnv030-FN60
  • jnv030-FN61
  • jnv030-FN62
  • jnv030-FN63
  • jnv030-FN64
  • jnv030-FN65
  • jnv030-FN66
  • jnv030-FN67
  • jnv030-FN68
  • jnv030-FN69
  • jnv030-FN70
  • jnv030-FN71
  • jnv030-FN72
  • jnv030-FN73
  • jnv030-FN74
  • jnv030-FN75
  • jnv030-FN76
  • jnv030-FN77
  • jnv030-FN78
  • jnv030-FN79
  • jnv030-FN80
  • jnv030-FN81
  • jnv030-FN82
  • jnv030-FN83
  • jnv030-FN84
  • jnv030-FN85
  • jnv030-FN86
  • jnv030-FN87
  • jnv030-FN88
  • jnv030-FN89
  • jnv030-FN90
  • jnv030-FN91
  • jnv030-FN92
  • jnv030-FN93
  • jnv030-FN94
  • jnv030-FN95
  • jnv030-FN96
  • jnv030-FN97
  • jnv030-FN98
  • jnv030-FN99
  • jnv030-FN100
  • jnv030-FN101
  • jnv030-FN102
  • jnv030-FN103
  • jnv030-FN104
  • jnv030-FN105
  • jnv030-FN106
  • jnv030-FN107
  • jnv030-FN108
  • jnv030-FN109
  • jnv030-FN110
  • jnv030-FN111
  • jnv030-FN112
  • jnv030-FN113
  • jnv030-FN114
  • jnv030-FN115
  • jnv030-FN116
  • jnv030-FN117
  • jnv030-TF3