European Commission Preliminary Report on the E-commerce Sector Inquiry

November 2016 Mehveş Erdem
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Introduction

The European Commission (“Commission”), on May 6, 2015 introduced a sector inquiry with regard to electronic commerce (“e-commerce”) of consumer goods and digital content in the European Union (“EU”). This inquiry is part of the Commission’s Digital Single Market Strategy that is designed to provide some leverage in the digital economy. It aimed to understand new market trends, as well as possible competition restrictions that could emerge with the development of e-commerce and business practices.

On September 15, 2016, the Commission published its Preliminary Report on the E-commerce Sector Inquiry (“Report”)[1]. In the Report, it is stated that EU is the largest e-commerce market in the world; therefore, its preliminary findings would give an idea of the Commission’s concerns and tips to the players in the market.

The Report is mainly focused on two issues - e-commerce of consumer goods and digital content. This newsletter will focus on the preliminary key findings of the Commission that are stated to be effective on distribution strategies, and to give rise to competition concerns.

E-commerce in Goods

The Commission has obtained information from a variety of market players, such as retailers, manufacturers, and online payment service providers operating in categories, including clothing, electronics, household appliances, computer games, software, media, healthcare, cosmetics, etc., in order to conduct its inquiry and form it’s Report.

Price Transparency

In light of this inquiry, the preliminary findings of the Commission conclude that online price transparency is the feature that most affects players and customers. Price transparency has multiple effects, both negatively and positively. It is said to directly affect behaviors of customers. Customers could, in short time, compare products and their prices online, and move from one channel to another, which would help the customer to avail him/herself of the best deal; therefore, this aspect works advantageously for the customer. However, this could also give rise to free-riding.

Free-Riding

It is highlighted in the Report that free-riding is a major concern to both retailers and manufacturers. Consumers tend to switch between online and brick and mortar shops after benefiting from their differing services. A customer may compare prices online and find the best deal without facing the burden to search prices and then purchase the product from a brick and mortar shop. These types of behaviors have led manufacturers and retailers to grant exclusivity and to create selective distribution systems.

Price Competition

Price competition that is created by the ease of comparing prices have had negative effects on competition in terms of quality, brand and innovation, besides its benefit to customers. Quality and brand are very important features in terms of inter-brand competition, and are a key concern for manufacturers.

Price transparency is also closely monitored by the companies. It is concluded in the Report that most of the retailers track online prices, and two-thirds of them do so through a software program. Retailers use these prices to adjust their own prices according to their competitors’ prices.

Selective Distribution

It is noted that there is an increasing trend to adopt a selective distribution system whereby manufacturers set criteria for quality in order for retailers to become part of their network, and sales to unauthorized retailers are prohibited. Manufacturers reported that they use this system to control distribution quality and price as a result of the development of e-commerce.

The Report concludes that it might become necessary for the Commission to scrutinize provisions that are restrictive, especially those included in selective distribution agreements.

Vertical Restraints

The growth of e-commerce has also led to the increase of vertical restraints used by manufacturers. These restraints may be seen as pricing restraint, restrictions to sell online or cross-border.

In terms of cross-border sales, preliminary findings on restrictions point out that retailers resort to geo-blocking in order to limit cross-border online sales. Almost 12% of retailers advise that they use cross-border restrictions at least for one of their product categories. Such restrictions can be realized in various forms, including oral communication.

E-commerce of Digital Content

Licenses and their availability are key factors in digital content markets. Licensing agreements are used to define the scope of the rights within technological, territorial and temporal scopes. Exclusivity is noted to be widely used. The Report further emphasizes that long-term exclusivity agreements may foreclose the market, especially if they include provisions that extend the term of the exclusivity.

The preliminary findings question whether there is an opportunity for new online business models and services to develop, or for smaller businesses to grow into other markets, due to current licensing practices.

The Report points out that competition restrains with respect to licensing agreements should be interpreted independently, case by case, by considering the product and the relevant market.

Conclusion

The final report will be published in the first quarter of 2017. Prior to the publication, stakeholders are invited to comment on the Report. The Commission pointed out that it may need to review EU anti-trust rules as pricing, restrictions on online sales, territorial restrictions, selective distribution agreements, and anti-competitive regulations following the inquiry.

[1] http://ec.europa.eu/competition/antitrust/sector_inquiry_preliminary_report_en.pdf.

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