THE CHALLENGES TO COMPETITION OF PRICE RESTRICTIONS IMPOSED BY MANUFACTURERS ON ONLINE RETAILERS

The purpose of the paper was to study the legal features of maintaining the price of goods during resale. By this design, the author understands the agreement or concerted ac© CC BY C. Youchinson, 2019. 132 ISSN 2072-8557 Вестник Московского государственного областного университета. Серия: Юриспруденция 2019 / No 1

tion of independent market participants on the establishment of a minimum or fixed price. The author argues that currently there is an increase in the number of online retailers who are dissatisfied with the fact that manufacturers indicate to them what minimum price should be set for the product or what advertised price to use. They believe that such recommendations hinder the realization of their competitive advantages, limiting the possibilities of offering lower prices for goods. On the other hand, manufacturers provide various rationales for price recommendations, for example, the desire to protect the image of a brand and the need to avoid cannibalization of traditional distribution channels with online stores. Procedure and research methods: the author used a comparative approach and modeling method. Results of the study: the author summarized the discussion of scientists and practitioners about whether manufacturers can influence retail prices by setting different wholesale prices for retailers depending on the intended product sales channel (traditional trade or via the Internet). Theoretical /practical value: the author argues that charging different (wholesale) prices from different retailers is generally considered as a normal element of competition. The use of a double pricing system for the same (hybrid) retailer is generally considered an explicit (classic) restriction according to VBER. Keywords: e-commerce, resale price maintenance, e-commerce retailers, brick-and-mortar sale channel, hybrid retailers, recommended retail prices, EU competition law, Vertical Block Exemption Regulation, dual pricing.

Introduction
Resale price maintenance (RPM) is agreements or concerted practices between independent undertakings that establish a minimum or fi xed price.
An increasing number of e-commerce retailers 11 complain about the fact that they receive indications from manufacturers of what minimum price they should apply or which advertised price they should use. Th ey argue that such recommendations hinder their competitiveness limiting their ability to off er lower prices.
On the other hand, manufacturers tend to justify the existence of pricing recommendations out of various considerations such as image and brand protection, return on R&D investments or the necessity to 1  avoid the cannibalization of the brick-andmortar sale channel by the online one 2 .
However from a marketing standpoint well justifi ed RPM might be. Th ere's currently a debate as to whether price restrictions imposed by manufacturers on e-retailers comply with EU competition rules.
More specifi cally, the question arises as to whether manufacturers can infl uence retail prices by charging diff erent wholesale prices to retailers depending on the channel where the product is intended to be resold.
Elements of answer to this question can be found in the Sector Inquiry into trade of consumer goods («goods») and digital content in the EU 3  work of the Commission's 'Digital Single Market Strategy for Europe 1 . One of the objectives of the sector inquiry is to better understand the prevalence and characteristics of pricing recommendations by manufacturers to online retailers and the importance of dual pricing depending on the channel (offl ine or online) where the product is intended to be resold. In order to collect the relevant data, manufacturers and retailers were asked about their pricing policies and their respective roles in setting those policies. Th e respondents operate on markets of 14 Member States 2 . According to the fi ndings of the sector inquiry, there's a widespread use by manufacturers of pricing recommendations to retailers across the EU (I). It remains to be seen whether such practices are compatible with EU competition rules (II), particularly when they imply the charging by manufacturers of diff erent (wholesale) prices to the same hybrid retailer, depending on whether he sells those products via the online or offl ine channel (III).

I. The widespread use of pricing recommendations to retailers by manufacturers
Th e EU Commission has asked retailers to provide information concerning their pricing policies and the role of manufacturers in their price setting. Manufacturers, in turn, were asked about their input to retailers' pricing policies. 1

A. Price setting at retail level
38% of retailers report that manufacturers recommend resale prices, while less than 10% report being provided with a discount range or receiving indications from manufacturers to apply the same retail price both online and offl ine 3 . A smaller proportion of retailers receive indications of what minimum price they should apply or which advertised price they should use 4 .
Th e proportion of retailers reporting recommendations from manufacturers on resale prices varies according to the category of product in question.
At least a third of the retailers in each product category (with the exception of house and garden) receive some form of price recommendations from manufacturers. Th e highest proportion of retailers that do so are those active in clothing and shoes, followed by those selling sports equipment and then consumer electronics 5 .
Manufacturers report about an even more widespread use of recommended retail prices: four out of fi ve manufacturers use price recommendations to distributors 6 .

B. The reasons put forward by manufacturers to justify the use of pricing recommendations
To better understand why pricing recommendations are so widespread, manufacturers were asked to explain the main 3 8% of retailers reported to be provided with a discount range while 7% retailers reported receiving the indication from manufacturers to apply the same retail price online and offl ine. Proportions are calculated out of all 1051 responses to the questionnaire. 4 5% of retailers reported receiving indications of what minimum price they should apply while 3% stated they received indications about what advertised price they should use. 5 Proportions are calculated out of all retailers active in a given product category. 6 Proportions are calculated out of all manufacturers (251) that responded to the questionnaire. considerations behind the decision to recommend retail prices to distributors.
Manufacturers express the view that the price of a product is the most immediate way to communicate its quality to the customers and have provided a number of reasons for recommending retail prices. Th ese are as follows: a) Image protection and brand positioning.
First of all, manufacturers explain that level of recommended retail prices is chosen in order to refl ect a certain brand/ product image or to strengthen the image or its perceived value. Th is is reported to be particularly true for premium products and for luxury brands, although manufacturers active in all product categories have argued that there is a strong link between recommended retail prices and brand/ product positioning 1 .

b) Return on R&D investments
Manufacturers further explain that products tend to be designed and manufactured taking into consideration an estimated retail price level. Th erefore, their investments in research and development as well as other manufacturing costs are inextricably linked to a given recommended retail price 2 . c) Marketing strategy. Recommended retail prices are set also on the basis of market studies that allow manufacturers to gauge customers' willingness to pay. Manufacturers state that they have a better understanding than retailers of the price a customer would be prepared to pay for their products and, therefore, are better placed to evaluate 1  market conditions and develop a marketing strategy, which includes the price of the products. Market knowledge, manufacturers explain, is particularly important when a product is launched 3 . d) Avoiding cannibalization of the brick-and-mortar sale channel by the online one Manufacturers explain that recommended retail prices may help avoiding or reducing cannibalization across channels and geographies. Some manufacturers consider it important to support the brick-and-mortar channel by preventing online prices from falling below a certain level 4 .
Having highlighted the widespread use by manufacturers of pricing recommendations to retailers, the Commission then assessed whether and under what conditions those recommendations violate EU competition rules.

II. Pricing recommendations under EU competition rules
Resale price maintenance (RPM), i.e. agreements or concerted practices between independent undertakings that establish a minimum or fi xed price (or price range), are considered restrictions of competition by object under Article 101(1) TFEU 5 .
Under Article 4(a) of the VBER, the block exemption provided by the VBER does not apply to vertical agreements that, 3 Ibid. Paragraph 564. 4 Ibid. Paragraph 567. 5  either directly or indirectly, have as their object RPM. Th is is without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fi xed or minimum sale price as a result of pressure from, or incentives off ered by, any of the parties 1 .
Any effi ciencies RPM may lead to in particular cases, are to be evaluated on the basis of the specifi c circumstances of the case 2 .
Th e practice of recommending a non-binding resale price or requiring the retailer to respect a maximum resale price is covered by the VBER provided that the market share thresholds set out in the Regulation are not exceeded 3 and that the recommended price or the maximum price do not amount to a fi xed or minimum sale price as a result of pressure from, or incentives off ered by, any of the parties 4 .
As explained in the Vertical Guidelines, in the case of contractual provisions or concerted practices that directly establish the resale price, the restriction is strictly forbidden 5 . However, RPM can also be achieved through indirect means. When providing pricing recommendations it is important that manufacturers do not take actions, such as providing fi nancial or other business incentives to retailers that follow the recommended prices or, on the contrary, apply measures discouraging or threatening retailers not to follow such prices, as this would interfere with the freedom of retailers to set their fi nal prices to customers independently. Th is type of interventions may entail the recommended retail price or make the maximum retail price become equivalent to a minimum or fi xed price.
Another aspect of the ongoing debate on the compatibility of pricing recommendations with EU competition rules concerns the question of whether manufacturers can infl uence retail prices by charging diff erent wholesale prices to retailers depending on the channel where the product is intended to be resold. Th is question will be examined in section III.

III. The practice of dual pricing in the light of EU competition law
EU competition rules distinguish the situation where the manufacturer sets a diff erent (wholesale) price for the same product, to the same hybrid retailer (selling both online and offl ine), depending on whether that retailer sells those products via the online or offl ine channel and the case where the manufacturer sets a diff erent (wholesale) price for the same product to diff erent retailers.
Charging diff erent (wholesale) prices to diff erent retailers is generally considered a normal part of the competitive process 1 .
Dual pricing for one and the same (hybrid) retailer is generally considered as a hardcore restriction under the VBER.
In other words, if a manufacturer forbids a hybrid retailer to sell a product for a diff erent price depending on whether he sells it via the online channel or the offl ine one, such a practice will be considered as a breach of Article 101 (1) TFEU as it limits the possibility of the retailer to sell the product via the Internet.
Nevertheless, Paragraph 64 of the Vertical Guidelines explicitly envisages the possibility for dual pricing agreements to fulfi ll the conditions of Article 101(3) TFEU where, for instance, sales via one of the sales channels lead to substantially higher costs for the manufacturer than sales via the other channel.
Th is, for instance, could be the case, where it can be shown that a dual pricing arrangement is indispensable to address free-riding between offl ine and online sales channels in the case of hybrid retailers that are part of the distribution network of the manufacturer. 2 While hybrid retailers may internalize part of the externality occurring across sales channels, they may nevertheless remain subject to free-riding by other retailers. Th eir 1 Unless diff erent wholesale prices to (online) retailers have the object of restricting exports or partitioning markets. 2 Free-riding by pure online sellers on services provided offl ine can be addressed by other means, such as price diff erentiation. incentives to invest in costly sales eff ort in the offl ine channel may therefore be negatively aff ected, similarly to the case of pure brick and mortar retailers.
Th e example provided is not the only possible situation in which the criteria of Article 101 (3) TFEU could be fulfi lled. Let's take the case of a product which would require a quite complicated installation. If it's sold offl ine, such a sale may require the services of a professional in charge of the installation. Th ere's a good chance that the client may be satisfi ed and that he won't make any claim. If it's sold online, the client may have to make the installation himself. In case he doesn't do it well, he may believe that the product is at fault and ask for its replacement. Since dealing with such an aft er sales claim implies extra cost for the supplier, EU competition authorities admit that, in such a case, the supplier can set a higher price for the sale online than for the sale offl ine. Such a tolerance is an exception to the rule according to which there shouldn't be any dual pricing depending on the type of channel where the product is intended to be resold.

Conclusion
Resale price maintenance is one of the practices manufacturers may make use of in response to the increased online price competition and, in particular, to the high online price transparency and low search costs for customers, allowing them to swift ly compare prices 3 .
By observing a minimum retail price, both manufacturers and retailers may minimise the impact of quick online price erosion, thereby protecting both the level of the wholesale price the manufacturers can ask for the product, and the profi t margins retailers can expect 1 .
At least a third of the retailers in each product category covered by the sector inquiry report to receive some form of price recommendations from manufacturers 2 .
Agreements that establish a minimum or fi xed price (or price range) are a hardcore restriction according to Article 4(a) of the VBER 3 and a restriction of competition by object under Article 101(1) TFEU 4 .
Non-binding pricing recommendations or maximum resale prices are covered by the VBER as long as the market share thresholds are respected and they do not amount to a minimum or fi xed resale price as a result of pressure from or incentives off ered by the parties involved in the vertical relationships 5 .
Nearly 30% of manufacturers indicate that they systematically track the prices of their products sold via independent retailers. Others do so in a targeted manner (on certain products, key markets). 67% of the respondent manufacturers use manual tracking, while nearly 40% make (also) use of price-tracking soft ware to track prices. Almost a third of respondent retailers report that they normally comply with the price indications given by the manufacturers while slightly more than a quarter say that they do not comply 6 .
Th e increased price transparency through price monitoring soft ware may facilitate or strengthen collusion between retailers and thereby impact a competition 7 .
While manufacturers oft en voice their intention to create a level-playing fi eld between online and offl ine sales channels, taking into consideration potential diff erences in cost levels, dual pricing (setting diff erent wholesale prices depending on the sales channel) is rarely considered as a viable option due to the risk that a dual pricing strategy could be in breach of Article 101(1) TFEU 8 .
Charging diff erent (wholesale) prices to diff erent retailers is generally considered a normal part of the competitive process. Dual pricing for one and the same (hybrid) retailer is generally considered as a hardcore restriction under the VBER. Nevertheless, the European competition authorities admit the possibility of exempting dual pricing agreements under Article 101(3) TFEU on an individual basis, for example where a dual pricing arrangement would be indispensable to address free-riding or where the aft er sale cost might be higher for the sale of a product online than for its sale offl ine . 6