MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 2 – the USA)

Following on from yesterday’s blog on the MasterCard / Visa decision, we’ve also taken a look at how the US is approaching antitrust issues in two-sided markets, with SCOTUS giving its first Opinion on these in the AmEx litigation (originally brought with the DoJ, but continued by only eleven states following the administration change). 

AmEx is a closed loop network, with AmEx holding relationships with Cardholders and Merchants.  In a 5-4 decision considering anti-steering provisions that prohibited merchants from avoiding fees by discouraging AmEx use at the point of sale, SCOTUS found no violation of the Sherman Antitrust Act (upholding the U.S. 2nd Cir. Court of Appeals).  SCOTUS was asked to determine whether the parties had met the burdens in a three step rule of reason analysis (plaintiff must prove anticompetitive effects; defendant must show a procompetitive justification; plaintiff must show that efficiencies could have been achieved through less restrictive means).  

The plaintiffs sought to argue that a market definition wasn’t necessary because they had offered evidence that showed adverse effects on competition.  The majority disagreed with this, and noted that the cases relied on by the plaintiffs for this proposition were horizontal restraint cases. Here, vertical arrangements were at issue, and given that they’re not always anti-competitive, the market definition was relevant.  

The majority held that the relevant market included both sides of the transaction, and it had to be shown that both sides of the transaction were harmed by the provision.  The Court stated that “a market should be treated as one sided when the impacts of indirect network effects and relative pricing in that market are minor”, and divided two-sided markets into two categories:

  1. Two-sided transaction platforms that facilitate a single, simultaneous transaction and are best understood as supplying that transaction as the product (such as those between AmEx Cardholders and Merchants); and

  2. Platforms where the two sides aren’t selling directly to each other (such as newspapers, where users are indifferent to the amount of advertising).

Further, with the first category, evaluating both sides would be necessary to assess competition; only other two-sided platforms can compete for transactions.  Non-transaction platforms often do compete with companies that do not operate on both sides.  Unfortunately for the plaintiffs, their evidence was insufficient as they had only focused on the increase to merchant fees.  This division will perhaps create some debate as to which category a platform falls into, and arguments around how strong indirect network effects are. 

The majority stated that in order to show that the provisions were anticompetitive, plaintiffs should have demonstrated that they increased the cost of credit card transactions above a competitive level, reduced the number of transactions, or otherwise stifled competition.  In fact, the majority found that the provisions were pro-competitive, as they helped maintain a competitor to MasterCard and Visa. 

The dissenting opinion, which included some persuasive points, wanted the US to follow other jurisdictions and take action against high fees charged by credit-card companies to Merchants, viewing the provisions as clearly anticompetitive.  It referred to findings by the District Court, and stated that a market definition was unnecessary because of direct evidence of anticompetitive effects (primarily that AmEx was able to keep increasing fees without losing any large Merchants), but the correct relevant market should have been only the one side – the services are complementary, not substitutes – and that the other side of the market should have come in at the second step of the rule of reason analysis.  This perhaps puts the dissenting justices more in line with the CoA’s approach.   

Dissenting, Justice Breyer further countered the view that the provisions were pro-competitive by stating that “if American Express’ merchant fees are so high that merchants successfully induce their customers to use other cards, American Express can remedy that problem by lowering those fees or by spending more on cardholder rewards so that cardholders decline such requests”.  

Back in the UK, the Merricks collective claim is attempting to show that harm was caused to consumers –not on the flip side of the market, but by Merchants passing on the cost of the MIFs to customers.  Although the CAT refused to allow the action, the appeal is due to be heard later this year.  Whilst there is quite a hurdle to jump in how to ensure consumers receive compensatory amounts rather than token sums of money, if the class is certified, the analysis of effects on consumers and the links between the different markets could make for interesting reading. 

(On a collective action side note…  After two years of build-up, it’s good to see that the first trucks collective claim has started rolling towards certification, and interestingly, is using a special purpose vehicle more typical of litigation in the Netherlands than the UK.)

MasterCard and Visa MIFfed as the Court of Appeal considers two-sided markets; SCOTUS itself is two-sided (Part 1 – the UK)

Whilst the Court of Appeal’s judgment in MasterCard / Visa, and the SCOTUS Opinion in AmEx may seem a little outside our usual area of focus, they are nevertheless decisions that relate to the operation of two-sided markets.  With multi-sided platforms in innovative technological markets, such as Google, Facebook and Uber, increasingly drawing antitrust attention, (see here, and here) there may be some helpful guidance to be drawn from long established industries such as banking and finance. 

This post comes in two parts, with today focusing on the MasterCard / Visa judgment, and tomorrow focusing on the AmEx litigation. 

The Court of Appeal judgment 

Both MasterCard and Visa operate four-party payment schemes:

  • Cardholders contract with an Issuer for a card to buy goods from Merchants;
  • Merchants contract with Acquirers to obtain payment from the Cardholders;
  • Issuers (mostly banks) contract with Acquirers (also mostly banks) to settle transactions.

The Issuers compete for the business of the Cardholders, and the Acquirers compete for the business of the Merchants; but each side is dependent on the other.  The MasterCard / Visa schemes operate as open loop networks, and those participating are subject to various rules – including a requirement to pay fees, including multi-lateral interchange fees (‘MIF’s), that are charged by the Issuer to the Acquirer, and ultimately paid by Merchants in each card transaction.  The MIFs could have been negotiated individually between the Issuer and the Acquirer, but in practice default MIFs set by MasterCard / Visa were used.   

This raised an interesting Article 101(1) question: do the schemes’ default MIFs amount to a restriction of competition by effect?  The European Commission thought so in issuing a 2007 decision against MasterCard in respect of cross-border card transactions, a decision which spawned a multitude of follow-on and standalone actions for damages against both MasterCard and (by analogy given the similarities between their systems) and VISA.  The CAT initially found for the Claimant in one damages action, but the High Court subsequently found for the Defendants in separate actions (MasterCard and Visa).  The Court of Appeal was tasked with addressing these inconsistent outcomes.

The systems themselves operate across three separate markets (an inter-systems market, an issuing market, and an acquiring market), and it was common ground that the relevant market was the acquiring market.  However, arguments raised by the parties (particularly the ‘death spiral’ argument, where MasterCard claimed that if it lowered its MIFs, Issuers would have switched to Visa and the MasterCard scheme would have collapsed) concerned effects on the inter-system market, and the issuing market.  The CoA held that the first question is whether the MIFs restricted competition in the acquiring market. The second question is then whether the MIFs were objectively justified, and at that point, it is legitimate to consider both sides of the two-sided market and the inter-system market. 

The CoA ultimately found that the fees were unlawful, and all three cases are to be remitted to the CAT for an assessment of damages, and a determination as to whether any objective justification applies.  Tomorrow, we’ll set out how the US Supreme Court came to the conclusion that provisions which affected Merchants’ transaction costs were not anti-competitive, with analysis turning on a definition of the market that has implications for all platforms.     

CAT judgment in Pfizer/Flynn: Was the CMA ‘unfair’ in its assessment of Pfizer and Flynn’s prices?

The principal issue is excessive pricing; … the reason for our conclusion is that the judge erred in holding that the economic value of the pre-race data was its competitive price based on cost +. This method of ascertaining the economic value of this product is too narrow in that it does not take account, or sufficient account, of the value of the pre-race data … and in that it ties the costs allowable in cost+ too closely to the costs of producing the pre-race data.

Thus concluded the Court of Appeal some 10 years ago in overturning a High Court judgment identifying an abuse of dominance through excessive pricing, in that case of pre-race data about British horse races.

The chequered history of excessive pricing cases has repeated itself in 2018, with the Competition Appeal Tribunal’s 7 June judgment in the appeals by Pfizer and Flynn of the CMA’s excessive pricing Decision in relation to phenytoin sodium capsules (we’ve previously covered this here, here, and here).   In a blow to the CMA’s ground-breaking case, the CAT has taken issue with the CMA’s analysis of abuse. As a result, it is considering whether to remit this part of the Decision (and consequential findings, such as the penalties imposed) back to the CMA, and essentially let the CMA try again.  

The CAT has succinctly summarised its main conclusions here.  The findings on market definition and dominance have been upheld, but the controversial findings on abuse have been set aside.  This post guides readers through the key points.

What was the CMA actually arguing?

In its Decision, the CMA sought to apply the Court of Justice’s United Brands ‘two-limb’ test for excessive and unfair pricing, and it was on this that the grounds of appeal focussed.  

During the appeal hearing, however, the CMA seemed to place greater emphasis on the comparison of prices before and after the Pfizer-Flynn agreement, perhaps in reliance on AG Wahl’s opinion in the AKKA/LAA case that competition authorities should have flexibility to determine their own framework for assessing prices.  While the CAT acknowledged that significant price increases over time may be a useful indicator of a potential competition problem, and a reason for starting an investigation, this “should not be confused with the test for unfair pricing itself” (439).  This therefore does not seem to be an easy route for the CMA to take on remittal.

The CAT’s analysis of the United Brands test

Taking the CAT’s approach to the two limbs of the United Brands test separately:  

(i) Whether the difference between the costs actually incurred and the price actually charged is excessive 

The CAT did not conclude that facts established by the CMA could not give rise to a finding of excessive prices.  Rather, it was the CMA’s narrow approach to the assessment of excessive pricing which could not support such a conclusion.  The CMA’s use of only a Cost Plus methodology resulted in a price that would have existed under conditions of “idealised competition”, rather than in the ‘real world’.  If the Cost Plus figure was not the normal competitive price, then it was not the right price for the purposes of the United Brands test.  Instead, the CAT should have looked at wider evidence to establish a benchmark price (or range) based on circumstances of “normal and sufficiently effective” competition.  If the Decision is remitted back to the CMA, it may use Cost Plus as part of the methodology, but it will also need to put those theoretical figures in their full market and commercial context.   

As to the benchmark figures themselves, which used the PPRS derived 6% return on sales, the CAT seemed to accept the PPRS was a potentially relevant indicator, but found the CMA placed too much reliance on it – particularly as Department of Health evidence expressed doubts as to its relevance.  The CAT cautioned that the PPRS was intended to apply in different circumstances to those in this case.  

(ii) Whether a price has been imposed which is either unfair in itself or when compared to competing products

The second limb of the United Brands test appears to give regulators two options: the issue here was whether these were genuine alternatives (as the CMA had only considered the first, ‘unfair in itself’), or whether the CMA should have considered both.  The CAT found that, although the CMA did not need to succeed under both to show a price was unfair, it did need to consider whether the alternative would show a price is one that undermines the basis of a finding of unfairness, in particular where a party under investigation has raised the issue.  While the CAT does not refer to the recent Intel judgment of the CJEU, there is a flavour of its ruling here.  

The CMA had determined that there were no products which could provide a ‘meaningful comparison’, but the CAT found that the CMA’s argument to support this was at fault, and it should have considered the suitability of comparators in more depth.  In particular, tablets produced by Teva were around twice the price of the Pfizer-Flynn Capsules; but this price came from an agreement with the Department of Health which reflected the economic value of the Teva tablets.  Even though those tablets were accepted by the CAT to be outside the relevant market as defined, they appeared to be sufficiently comparable to be worthy of more in-depth consideration.  The contrast drawn between the narrow function of market definition and the wider consideration of competitive constraints relevant in considering abuse is an important and sensible contribution to Article 102 case law generally.

The CAT found that the question of the ‘economic value’ of the Pfizer-Flynn Capsules (which the CMA had considered separately) was best addressed in the context of the ‘Unfairness Limb’.   The CMA had found that the economic value did not exceed the Cost Plus price it had calculated, and considered that there were no non-cost factors which served to increase it.  However, the CAT expressed concern that the evident economic value derived from the benefit patients received had been rejected.  Although the CAT acknowledged that patients did only have limited choices, the CAT found that the CMA should still have attempted a qualitative assessment of this benefit.  Assigning a monetary value to this benefit and assessing by how much it should be reduced due to patients’ limited choices is likely to be difficult.    

Findings of abuse set aside

The CAT decided that further assessment of competitive conditions using information beyond the scope of the Decision would be required.  For that reason, the CAT could not make its own findings as to whether there was an abuse by either company.  Instead, it has provisionally proposed to remit the abuse section Decision back to the CMA, but will now fix a further hearing for the parties to address it on this point.  

Given the policy issues surrounding price increases in the pharmaceutical sector, remitting the Decision for more a comprehensive analysis with the benefit of further clarity in a novel area (from the CAT and the CJEU in AKKA/LAA) is probably the best outcome for all concerned – although the recent closure of the regulatory ‘loophole’ that allowed unregulated price-rises perhaps reduces the long-term benefit.  This ‘have another go’ approach was also the outcome in the CAT’s first hearing for a collective proceedings order – another novel area where policy objectives would have been frustrated by an outright refusal.    

There have been immediate knock-on effects: the CMA has indicated that other active investigations it has in the area may now be severely delayed.  The end of the CMA’s investigation into hydrocortisone seemed to be in sight, and it will be interesting to see how the CMA proceeds with that, as well as the Pfizer / Flynn case.  

The CAT’s difficulties in applying the United Brands test are also likely to be of interest to the Commission, given that it has opened an excessive pricing investigation (into Aspen Pharma) – its first of that type in the pharmaceutical industry.

But while the CMA will clearly have its work cut out (assuming the CAT goes ahead with the remittal), it should not be assumed that this judgment is the end of the story for excessive pricing cases in the UK.  

Excessive pricing spreads to Denmark - a cautionary tale about exclusive licensing

Following cases in Italy, the UK and before the European Commission, the Danish authorities have reached an abuse of dominance finding against CD Pharma (CDP). 

CDP was found to have imposed price increases of up to 2,000% on supplies of Syntocinon, without any justification in terms of increased costs. The product, used in connection with childbirth, is long off patent. 

Two points mark this case out from other excessive pricing investigations.

First, this is as much a cautionary tale about exclusive licensing as it is about excessive pricing. In acquiring an exclusive licence to what appears to be a ‘must stock’ product for hospitals CDP acquired a dominant position, leading to the risk of abuse. 

While exclusive licensing between non-competitors generally does not raise competition concerns, it is notable that Commission guidance refers specifically to the justification for exclusive licensing as the bringing of a new product to market. In the case of an old product which does not require further development, the basic justification for the exclusivity appears to be missing. In this case, if competitor Orifarm had been able to approach the manufacturer of Syntocinon rather than having to purchase from CDP as the local distributor, there would have been a greater chance of price competition on the Danish market. 

Second, the Danish authority is alive to the wider (umbrella) harm caused by the pricing strategy which extend beyond the period of direct infringement. The press release refers to the risk of permanent price increases - in particular where products are procured through periodic tender processes. This could be a significant point in any attempt by the Danish authorities to seek damages in  respect of the abuse. 


Excessive Pricing: Aspen lose their appeal in Italy – and are in the Commission’s crosshairs

Last year we reported the Italian’s take on excessive pricing (here), where South African pharmaceutical Aspen was in the firing line for increasing the price of four cancer drugs by a hefty 300% – 1500%. The Italian Market Competition Authority (AGCM) found that this amounted to an abuse of dominance by artificially inflating the price of the drugs, which had long been off patent. The company was fined €5.2 million in October 2016. 

On 14 June 2017 Aspen lost all grounds of its appeal against the AGCM decision (the judgment – in Italian only – is here).

This loss for Aspen was set against a troubling back drop for the company: not only had the South African Competition Commission announced an investigation into Aspen, Pfizer and Roche for suspected collusion over cancer drug prices just days earlier, but on 15 May 2017 the European Commission opened a formal investigation into Aspen in relation to excessive pricing of five cancer drugs. 

The Commission’s press release states that – in addition to investigating the apparently ‘significant and unjustified’ price hikes applied to Aspen’s products – the Commission is also looking at the way in which Aspen threatened to withdraw the drugs in issue from Member States.  This was also an influential fact in the AGCM decision and subsequent appeal ruling by the Italian Appeal Court. 
 
The separate statement recording the opening of proceedings suggests that the Commission’s focus is wider than simply the negotiation of prices with national health authorities. It notes that Aspen’s negotiation practices “have included reducing the direct medicine supply and/or threatening supply reductions, as well as defining EAA-wide stock allocation strategies and implementing them in cooperation and/or agreement with local wholesalers”. It has been a while since stock management has been subject to scrutiny by the Commission, and this is likely to be an unwelcome development for the industry more widely. For now, it is probably safe to assume that this aspect of the investigation is ancillary to the primary case on pricing issues.

Meanwhile, back in the UK, the date for an appeal of the (now-published) Pfizer/Flynn decision has been set by the Competition Appeal Tribunal – a four-week hearing is due to start on 30 October. 

Antitrust authorities are increasingly interested in pricing algorithms

A few months ago, we considered whether pricing algorithms might be the European Commission’s next antitrust target (here). The Commission had warned companies about the risks of using algorithms to collude, and indicated that pricing software formed part of its investigation into consumer electronics.

Since then, the Commission has published its Final Report on the E-commerce Sector Inquiry (“Final Report”, see our commentary here). This specifically identifies the wide-scale use of pricing software as something that may raise competition concerns, noting that the “availability of pricing information may trigger automatised price coordination” (13).  The Final Report also claims that comments from retailers point to manufacturers making use of retail price maintenance.  It suggests that pricing software may make it easier for manufacturers to retaliate against retailers that deviate from desired pricing, which may even limit the incentive for retailers to deviate from pricing recommendations in the first place.  The Final Report also considers that pricing algorithms could facilitate or strengthen collusion between retailers – the algorithms make it easier for retailers to detect any deviations from prices implemented under a collusive agreement (33).

At the start of this month the Commission announced an investigation into whether the clothing manufacturer and retailer Guess illegally restricts retailers from selling cross-border within the EU.  It seems likely that this investigation arose out of information the Commission received through the E-commerce Sector Inquiry. Bearing in mind the Commission’s comments on pricing algorithms in the Final Report, there is real potential for subsequent investigations into their use.   

OECD Roundtable

Further insights into the Commission’s current thinking can be drawn from the OECD Roundtable currently taking place on ‘Algorithms and collusion’ (see here).  The Commission's contribution paper identifies the potential harmful effects that pricing algorithms may have in both vertical and horizontal contexts, namely by facilitating collusion and making collusion easier to enforce.  It expands upon the concerns identified in the Final Report, offering by way of example a scenario where retailer A is adhering to retail price maintenance, and retailer B is monitoring and matching retailer A’s prices using pricing software (16).  This is said to show how artificially high prices caused by retail price maintenance can easily spread to other ‘innocent’ retailers through the use of pricing software.  

The paper notes that where firms are using algorithms to engage in explicit collusion, it is clear that the firms are still liable for their behaviour.  It suggests that to a large extent, pricing algorithms can be analysed under traditional EU competition law.  However, it also spends some time discussing the issue of tacit collusion, where there is no anti-competitive agreement involved and therefore the conduct of non-dominant companies acting independently falls outside the EU competition law framework.  Does algorithmic pricing make tacit collusion more pervasive and more effective?  If so, how should competition authorities respond? 

As the paper recognises, this is an area of on-going debate.  Nevertheless, it considers potential options such as whether the market itself may correct ‘algorithm-enabled tacit collusion’ through the development of ‘consumer algorithms’ that could track prices and even identify ‘maverick’ sellers not engaging in algorithmic pricing that consumers could purchase from.  It also explores whether changes to the law on tacit collusion might be effective, or whether the interpretation of ‘communication’ should be expanded in order to bring algorithm-enabled price matching within the scope of Article 101 TFEU.

The UK CMA's contribution to the Roundtable has less of a focus on pricing algorithms. It identifies a few potential theories of harm that may apply to the use of algorithms more broadly:

  • Facilitating the implementation or maintenance of a collusive agreement.
  • Facilitating behavioural discrimination (e.g. price discrimination where consumers are set individual prices based on algorithmic assessment of the highest price that consumer is likely to pay).
  • Reinforcing dominance or raising barriers to entry (relating to the typical requirement for large volumes of data to make an algorithm effective).
The CMA recognises that algorithms can give rise to many consumer benefits. However, it also notes that they could lead to competitive or consumer harm in novel, untested ways, and that it is challenging to detect and understand the exact effect of complex algorithms, particularly given that they rapidly evolve (whether through constant refinement from developers or via ‘self-learning’).

Despite this, the CMA appears to be more comfortable than the Commission in its ability to combat this sort of issue. It notes that “the flexible, principles-based UK competition law framework has to date shown itself able to accommodate technological change, and to be capable of flexible and effective use to tackle a wide range of novel competition harms” (43). It plans to invest in in-house technological expertise and new digital forensic tools in response to the challenges posed by the use of algorithms.

Conclusion

These two OECD contribution papers were prepared for a Roundtable discussion – they do not reflect the Commission’s or the CMA’s official stance on pricing algorithms.  However, they provide an interesting insight: these authorities are clearly paying a good deal of attention to the potential competition issues raised by algorithms.  Coupled with the increasing enforcement activity by the Commission in the e-commerce sector, pricing algorithms continue to be one of the trending topics in competition law in Europe. 

Transparency may undermine online competition: Commission’s Final Report on the E-commerce Sector Inquiry

On 10 May 2017 the European Commission published its Final Report on the E-commerce Sector Inquiry, together with accompanying Q&As, and, for those who want something rather longer, a Staff Working Document

The inquiry, launched over 2 years ago, and part of the wider Commission Digital Single Market Strategy (see our earlier comment here) has gathered evidence from nearly 1,900 companies connected with the online sale of consumer goods and digital content.
The Report’s main findings

  • Price transparency has increased through online trade, allowing consumers instantaneously to compare product and price information and switch from online to offline. The Commission acknowledges that this has created a significant ‘free riding’ issue, with consumers using the pre-sales services of ‘brick and mortar’ shops before purchasing products online. 

  • Increased price transparency has also resulted in greater price competition both online and offline.  It has allowed companies to monitor prices more easily, and the use of price-tracking software may facilitate resale price maintenance and strengthen collusion between retailers.

  • Manufacturers have reacted to these developments by seeking to increase their control of distribution networks though their own online retail channels, an increased use of ‘selective distribution’ arrangements (where manufacturers set the criteria that retailers must meet to become part of the distribution system) and the introduction of contractual restrictions to control online distribution.
How about changes to competition policy? 

The Report does not advocate any significant changes to European competition policy, but rather confirms the status quo. The key point of interest are as follows: 

  • Selective distribution – whilst the Commission has not recommended any review of the Vertical Block Exemption Regulation (‘VBER’) ahead of its scheduled expiry in 2022, the Commission notes that the use of selective systems aimed at excluding pure online retailers, for example by requiring retailers to operate at least one ‘brick and mortar’ shop, is only permissible where justified (for example in respect of complex or quality goods or to protect suitable brand image).

  • Pricing restrictions – dual pricing (i.e. differential pricing depending on whether sales are made online or through a bricks and mortar outlet) will generally be considered a ‘hardcore’ (or object) restriction of competition when applied to one and the same retailer, although it is capable of individual exemption under Article 101(3) TFEU, for example if the obligation is indispensable to address free-riding by offline stores.  

  • Restrictions on the use of marketplaces – the Report finds that an absolute ban on the use of an online marketplace should not be considered a hardcore restriction, although the Commission notes that a reference for a preliminary ruling is pending before the CJEU (C-230/16 - Coty Germany v Parfümerie Akzente).

  • Geo-blocking – a re-emphasis of the existing position on territorial and customer restrictions – active sales restrictions are allowed, whereas passive sales restrictions are generally unlawful. Within a selective distribution system, neither active nor passive sales to end users may be restricted. The Commission also make clear that companies are free to make their own unilateral decisions on where they choose to trade.

  • Content licensing – the significance of copyright licensing in digital content markets is noted, as is the potential concern that licensing terms may suppress innovative business practices.  

  • Big Data – possible competition concerns are identified relating to data collection and usage. In particular, the exchange of competitively sensitive data (e.g. in relation to prices and sales) may lead to competition problems where the same players are in direct competition, for example between online marketplaces and manufacturers with their own shop.  
What happens next?

The Commission has identified the need for more competition enforcement investigations, particularly in relation to restrictions of cross-border trade.  It is expected that more investigations will be opened in addition to those already in play in respect of holiday bookings, consumer electronics and online video games. In a more novel approach, the Commission’s press release also name-checks a number of retailers (in particular in fashion) who have already reformed their business practices “on their own initiative”.
  
The Commission also highlights the need for a consistent application of the EU competition rules across national competition authorities.  It remains to be seen whether the Commission will seek to use its enforcement investigations to address inconsistencies such as those evident in the more interventionist stance of some national authorities (e.g. the Bundeskartellamt) in respect of issues such as pricing restrictions.

The Commission steps into the excessive pricing arena

An announcement by the European Commission last week resolves an open question about its view on the recent spate of pharma sector excessive pricing cases that have been seen in Italy and the UK.  The Commission has now confirmed that, following dawn raids across four member states in February, it has opened an investigation into Aspen Pharma for suspected breach of Article 102.  The concern is that Aspen’s pricing practices in relation to off patent drugs containing five ingredients used for treating cancer has led to unjustified price increases.  This overlaps with the Italian Market Competition Authority’s decision in October 2016 to fine Aspen €5.2 million for unfair price increases, which covered four of the five ingredients now under investigation (see here for our report).

This is the Commission’s first excessive pricing case in the pharma sector, following a trend set by the national competition authorities (including in the UK and US – although given that US antitrust does not apply to pure pricing issues, the US cases have tended to focus on another form of abuse (e.g. here) which led to the excessive prices).  

The EU NCAs have been well placed to deal with such conduct, as pharma markets are national in scope, and subject to significant regional differences resulting from the different formation of public health services.  However, setting the benchmark price is a difficult – and controversial – aspect in any investigation (see here for our thoughts on the CMA’s recent approach) and it will be of interest to see how the Commission tackles the issue, as its approach may well be followed by other NCAs.  

Bearing these points in mind, we will be particularly keen to see how the Commission deals with the following two points: 

  1. The definition of the relevant market and whether a company is dominant – before assessing whether its prices are excessive, a pharma company must first know whether it is dominant.  With diverging approaches on product market definition (definitions have been drawn from therapeutic / molecular / dosage level and from regulatory guidance), it can be difficult to make an assessment of dominance.  In Aspen’s case, it has found itself  one of few companies willing to manufacture low volume generic drugs, and despite low barriers to entry, no other companies have entered the market to exert a form of price control on Aspen.  It has perhaps therefore become dominant as a result of market failures.    
      
  2. How the Commission determines an acceptable level of profit (i.e., what is the meaning of ‘excessive’?).  While under patent protection, pharmaceutical product prices are generally constrained in some way (e.g. through profit caps under the UK PPRS), but in theory, profits could be competed upwards following patent expiry, even if overall prices decline (this is a key part of the argument raised by Pfizer and Flynn in their appeals of the CMA infringement decision).  The recent opinion of AG Wahl considering unfair prices (albeit in a copyright licence context) concluded that there is no single method of determining the benchmark, and acknowledges that there is a high risk of error, but a price should only be excessive if it is significantly and persistently above whatever benchmark is determined.  Whilst AG Wahl was unable to point to any guaranteed failsafe methods of analysis, he stated that an authority should only intervene when there is no doubt that an abuse has been committed. 

The investigation does signal that the Commission is keen to address the fairness of pricing in the pharmaceutical industry, but as with all such investigations, its approach should not be one of a price regulator.  Indeed, the Commission is at pains to point out that it is looking at a case where the price increases were extremely significant (100s of percent uplift).  It may reveal that a case-by-case approach is not appropriate, and the real issue is regulatory failure that will need to be corrected by legislation (such as that currently before the UK Parliament). 

Will pricing algorithms be the European Commission’s next antitrust target?

There has been considerable debate over the last year or so about the potential anti-competitive impacts of pricing algorithms. They could lead to discriminatory pricing, for example a company quoting different prices to different people based on an algorithmic analysis of their personal data, or cases of collusion, for example companies using algorithms to automatically fix prices. 

In a recent speech, Commissioner Vestager sounded a clear warning against the latter example: “companies can’t escape responsibility for collusion by hiding behind a computer program”. She also indicated that the use of pricing software forms part of the issues being investigated in the Commission’s new investigation into price-fixing in consumer electronics.

However, as pricing algorithms increase in complexity and sophistication, and their use becomes more prevalent, it will not be easy for competition authorities to establish where the use of such algorithms equates to actionable infringements of competition law.

How might pricing algorithms be used?

A new book by Professors Ariel Ezrachi and Maurice Stucke have identified four scenarios in which pricing algorithms may promote anti-competitive collusion (see here; also developed in more detail in their book Virtual Competition). 

The first is where firms collude as in a traditional cartel, but use computers to manage or implement the cartel more effectively, or to monitor compliance, for example by utilising real-time data analysis. Competition authorities have already investigated this kind of subject-matter – for example, the CMA issued an infringement decision last year against two companies that agreed to use algorithms to fix prices for the sale of posters and frames on Amazon (see here).

The second example is a hub-and-spoke scenario whereby one pricing algorithm may be used to determine prices charged by numerous users. Evaluating this sort of issue is a current challenge for competition authorities. Last year, in Eturas, the CJEU held that travel agents participating in a platform that implemented a discount cap could be liable if they knew about the anti-competitive agreement and failed to distance themselves from it (see here).  An ongoing case in the US (Meyer v Kalanick) is examining Uber’s ‘surge’ pricing algorithm, which increases the price of an Uber journey as demand increases.  The claimants allege that this constitutes an implied horizontal price-fixing agreement.  

The examples seen so far involve relatively straightforward cases of the use of algorithms as an aid or means to fix prices (although the Uber example arguably involves only unilateral conduct, rather than collusion).  However, Ezrachi and Stucke’s final two scenarios move into more uncertain territory – what if there is no express collusion by the companies? 

In the third scenario, each firm independently adopts an algorithm that continually monitors and adjusts prices according to market data. Although this can lead – effectively – to tacit collusion, particularly in oligopolistic markets (those with a small number of sellers), there is no agreement between companies that could form the basis of an investigation.  However, there can evidently be an anti-competitive effect: if an online retailer can track the prices used by another online retailer for common products, and immediately adjust its own prices to match any discounts, it can prevent the second online retailer from gaining a reputation for lower prices. The incentive for either retailer to lower its prices is removed.  On the other hand, examples from the analogue world suggests that this kind of market review can be used to ensure lower prices for consumers, at least for now (think supermarkets’ price match promises…).

In the fourth scenario, machine learning and the increasing sophistication of algorithms expand tacit collusion beyond oligopolistic markets, making it very difficult even to detect when it’s happening.

The latter two examples pose obvious difficulties for competition authorities. If they do consider such actions to be anti-competitive, how would they prove the requisite intention to co-ordinate prices?

How will competition authorities react?

As discussed above, competition authorities have already undertaken investigations against companies using pricing algorithms in collusion. We have previously noted the CMA’s interest in developing digital tools to aid its investigations (here). It seems certain that such tools will be necessary as these algorithms become more sophisticated and harder to detect.

The actions of non-dominant companies in using pricing algorithms whilst acting independently do not fall within the current competition law framework, even if such use ultimately results in higher prices for consumers. Commissioner Vestager has accepted that “what matters is how these algorithms are actually used”. This sensibly suggests that for now the Commission’s focus will remain on the more clear-cut cases of collusion. Anything else is arguably a matter for policy and regulation rather than enforcement by competition authorities.

However, Commissioner Vestager also stated that “pricing algorithms need to be built in a way that doesn’t allow them to collude”, suggesting that they needed to be designed in a way that will oblige them to reject offers of collusion. It is unclear whether this means Commissioner Vestager intends to target the use of pricing algorithms more generally, or simply to drive home that the competition rules apply equally where collusion is achieved algorithmically.

The fourth scenario, where machine learning algorithms tacitly collude to fix prices, does sound speculative. However, recent developments such as Carnegie Mellon’s Liberatus beating four of the world’s best professional poker players (here) and Google Deep Mind’s AlphaGo victory against Lee Sedol (here) indicate that it might not be too far from becoming reality in the near future.

Back to the future: the Commission opens e-commerce competition investigations

True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.

The context to the investigations is the Commission's Digital Single Market Strategy and its related sector inquiry on e-commerce, which suggested that the use of online sales restrictions were widespread throughout the EU (previous posts here and here).

The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking). 

The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices.  Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question. 

Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry.  To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry.  Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.