The Competition Commission of Singapore (CCS) has recently launched on 16 August 2017 a handbook to help ASEAN member states and businesses address and navigate competition law issues relating to e-commerce. I was there at the Competition Law Conference when Trade Minister Lim Hng Kiang launched it by entering a pin code into a federated locker (Singapore’s nation-wide infrastructure to boost last mile delivery services).
Here are some helpful pointers from the Handbook for businesses, especially e-commerce startups operating in South-East Asia (SEA) and ASEAN countries, to consider in ensuring they do not flout competition laws, which may result in heavy financial penalties and expenditure of significant time and resources in assisting in investigations.
Startups and Competition Law
As a preliminary note, I have observed that many startups and SMEs do not realise that some of their practices or contractual terms may be anti-competitive and thus flout competition law. E.g. stipulating a minimum price (Resale Price Maintenance) or exclusivity clauses. Also, some startups may not realise that because they are venturing into, or even creating, new markets completely, they may actually be in positions of dominance. There’s nothing wrong with being a dominant market player. But if there are practices which amount to abuse of dominance, then it could flout competition rules.
3 main types of anti-competitive conduct
Examples of actions that could be deemed as anti-competitive conducts across each of these areas in E-commerce markets include the following:
- Coordination with competitors (horizontal agreements): e.g. agreements to fix prices on an online platform, limit supply, or share customers. Note that such coordination need not be express or written agreements; even tacit ones can constitute coordination.
- Anti-competitive agreements by businesses at different levels of supply (vertical agreements): e.g. manufacturers fixing or restricting the price that retailers can sell on online marketplaces (Resale Price Maintenance), long exclusivity contracts.
- Unilateral anti-competitive conduct by individual businesses (abuse of dominance) — selling a significant share of products or services in a market and exploiting this position: e.g. tying or bundling to create or raise barriers, refusing to supply, or increasing switching costs for consumers.
The laws on the above types of anti-competitive conduct differ across the ASEAN countries. For example, in Singapore, there is actually an exemption on restraints against vertical agreements (paragraph 8(1) of the Third Schedule to the Competition Act exempts vertical agreements from the section 34 prohibition, unless the Minister makes an order otherwise). Also, an agreement that would otherwise breach the section 34 prohibition may be permitted if it can be shown to have a “net economic benefit”. Another example
Another example of differences in competition laws across ASEAN countries is what constitutes dominant market share. In Singapore, CCS Guidelines suggest market share of 60% and above as constituting a dominant position, though this is not definitive–lower market share can still make it dominant. In Vietnam, there is a presumption that: (a) market share of 30% and above on its own as a single enterprise; (b) collective market share of 50% and above together with 1 other enterprise; (c) collective market share of 65% and above between 3 enterprises; or (d) collective market share of 75% and above between 4 enterprises, constitutes dominant position. In Indonesia, it would be: (a) market share of 50% and above on its own as a single enterprise; or (b) collective market share of 75% and above between 2 or 3 enterprises.
Coordination with competitors (horizontal agreements)
Here are some questions businesses should consider in auditing its competition law compliance (adapted from the Handbook).
a. Do your employees have contact with competitors (whether through online communication channels or in person or otherwise)?
Employees should be trained and closely monitored. Contact by itself is not wrong, but they may wittingly or unwittingly be communicating e.g. regarding bidding or pricing behaviour and thus amount to coordination.
b. Do your employees communicate with competitors, e.g. at industry events or trade association meetings?
As in (a).
c. In your market, do employees move frequently between competing businesses?
If yes, the likelihood of sharing confidential information is increased. Any employee who has recently worked for a competitor, or is leaving to join a competitor should be trained on what is and is not appropriate to share with their new employer.
d. Do you ever work alongside competitors?
If so, competition law relating to horizontal agreements should be thoroughly reviewed, and employees working closely with competitors should be trained on what is and is not allowed, including sensitive information that shouldn’t be shared.
e. Do you use algorithms to adjust prices subject to movements in your competitor’s prices?
If so, it should be determined whether or not the supplier of the algorithm also supplies competing firms. The mechanics of the algorithm should also be fully understood i.e. do competitors who use the same supplier also have similar responsive pricing.
Case Study: Trod/GB Eye (US, UK)
In 2015, the US and UK competition authorities prosecuted Troy Ltd and its founder for fixing prices vis-a-vis GB Eye Ltd in the sale of posters and frames on Amazon marketplace. Price-fixing algorithms were used to automatically implement this agreement on the platform. Both agreed to not undercut each other’s prices for posters and frames on the Amazon marketplace. Both parties were using different re-pricing software systems, but were able to collude. GBE implemented a rule in its software that if Troy Ltd had a price set, and there was no other seller on Amazon with a lower price, GBE would match Trod Ltd’s price, so long as this price was not below GBE’s independently set minimum price for the product. Through the implementation of such rules, the two businesses were able to sell 99% of their products at the same price at one particular point in time.
f. Do you explicitly or implicitly agree with your competitors a limit to supply?
Such agreements should be reviewed and assessed as to whether they constitutes illegal cartel behaviour.
g. Do you agree to terms with an online platform that are common across competitors? Do these terms restrict the price that you are able to sell your goods/services at? Or are you a platform that sets terms for business users, and do these terms restrict the price that users can sell goods or services at?
This may amount to horizontal coordination among competitors.
Anti-competitive agreements by businesses at different levels of supply (vertical agreements)
a. Do you require your retailers to enter into exclusive contracts for long periods of time?
In some countries, this may be treated as an anti-competitive agreement.
Case Study: Online Food Delivery (Singapore)
In response to complaints made to CCS, its investigations revealed that an online delivery food provider had entered into exclusive agreements with certain restaurants, which prevented the restaurants from using other providers’ services. CCS found that competition has not been harmed. However, CCS stated it would continue to closely monitor the market as such exclusive agreements can be problematic in future.
Case Study: Garuda/Abacus (Indonesia)
In August 2000, Garuda and Abacus formed an agreement that travel agents must use an Abacus terminal when making Garuda flight bookings, thus imposing a barrier on other providers of similar systems.
The Indonesian competition authorities deemed that this agreement constituted a breach of Art. 14 of Indonesian Competition Law (Vertical Integration). It was highlighted how Garuda owned a significant number of shares in Abacus and that some individuals sat on the board of directors for both firms. The decision was upheld by the Indonesian Supreme Court.
Case Study: SISTIC (Singapore)
In 2010, CCS found that SISTIC had abused its position of dominance in the ticket service providers market. It was calculated that SISTIC had a persistent market share of 85-95% in this market.
SISTIC was found to have abused its position of dominance through its exclusivity agreements with certain venues. For example, key venues such as The Esplanade and Singapore Indoor Stadium were required to use SISTIC as the sole ticket provider for all events.
b. Does your business impose restrictions on retailers and online marketplaces that sell your products? E.g. the retail price they can sell at, who/where they can sell to, conditions that must be met for them to be able to sell the product, the quantity of the product they must buy/sell.
The rules and their interpretations pertaining to such scenarios vary across different countries. It may flout anti-competition laws.
Case Study: Pierre Fabre (France)
Pierre Fabre is a manufacturer of luxury cosmetic products sold primarily through pharmacies. Distributors were restricted to sell its products only from a physical location with a qualified pharmacist present, despite the products not being medicines. Retailers were therefore prevented from selling online. The European Court of Justice (ECJ) held that the ban restricted competition as it reduced the ability of a distributor to sell the products to customers outside its territory.
c. Do you set a recommended retail price to your retailers or a minimum advertised price, and do you monitor compliance to this?
If so, such behaviour may be deemed to be equivalent to Resale Price Maintenance (RPM), conduct that is prohibited in some jurisdictions. If the recommended retail price is enforced (i.e. with threats of negative consequences for businesses who do not comply e.g. withdrawal of supply or reduction in sales), it is likely to constitute RPM.
Case Study: LEGO (Germany)
In January 2016, the German competition fined LEGO €130,000 for RPM Strategies. The firm was found to have enforced recommended prices by threatening to punish businesses which did not comply with the removal of discounts on wholesale prices.
Case Study: Catering Equipment and Bathroom Fittings (UK)
ITW Ltd, was fined over £2m in June 2016 for using RPM strategies for online sales. Specifically, ITW implemented a minimum advertised price and threatened dealers with higher wholesale prices or the withdrawal of supply if the suggested pricing structures were not followed.
d. Do you exclude or restrict retailers from selling online?
Such conduct may be deemed anti-competitive in some jurisdictions.
Case Study: BMW (UK)
In January 2017, BMW changed its policy following the threat of UK Competition & Market Authority (CMA) investigating into an alleged exclusion of online sales. In particular, carwow, a provider of online comparison tool, had complained to the CMA that BMW UK had prevented dealers from listing BMW and MINI cars on its portal. Following discussions between carwow, the CMA and BMW, BMW made a commitment to allow dealers to list BMW and MINI cars on carwow and other internet platforms.
e. Do you treat retailers operating online differently from retailers with physical stores?
Such conduct may be deemed anti-competitive in some jurisdictions.
f. Do you charge different wholesale prices (or different incentives) to retailers depending on whether products are sold online or offline?
As in (e).
Case Study: Bosch (Germany)
In December 2013, Bosch was alleged to have made rebate offers which favoured offline only retailers as opposed to retailers selling both online and in brick-and-mortar stores. The higher the turnover so-called hybrid retailers made from online channels, the lower their rebates would be. Bosch made commitments to put a stop to this, so the German competition authority ceased its investigations. The authority acknowledged that a manufacturer is allowed to agree with his dealers on quality requirements for the sale of his products, but in this specific instance retailers were restricted in their choice of sales channel and incentivised to limit online sales.
g. Do you exclude or restrict retailers from selling on online platforms such as marketplaces?
Such conduct may be deemed anti-competitive in some jurisdictions.
h. Do you enter into ‘best price’ guarantees with retailers?
Such clauses may breach competition law in the country in which it is being implemented. In some countries, different forms (or all forms) of price parity or Most Favoured Nation (MFN) clauses may be prohibited. MFN clauses provide that a seller agrees to give the buyer the best terms it makes available to any other buyer.
In the context of online marketplace / listing platforms, there are 2 types of MFN clauses: narrow and wide. Narrow MFN clauses provide that the price quoted to the platform will always be competitive with the price of the seller’s own website. Wide MFN clauses provide that the price quoted on the platform will always be competitive with other prices available on other sales channels, whether on the seller’s own website or other distribution channels.
Case Study: Online Hotel Booking (Germany, UK)
In Dec 2015, the German competition authority prohibited Booking.com from applying its ‘best price’ clauses. The authority prohibited clauses which prevented hotels from offering lower prices on platforms competing with Booking.com as well as their own website. The authority also prohibited use of narrow MFNs, preventing travel websites from implementing clauses restricting hotels from offering lower room rates on their own online booking system, but allowing hotels to agree lower rates with other platforms. Booking.com has argued that narrow MFNs are required to prevent hotels from free-riding by using Booking.com to promote their hotels but offering a cheaper price on their own website. The French, Italian and Austrian authorities are following the German position, and are implementing new legislation to prohibit all MFNs in the hotel booking market.
The CMA in the UK has however decided that Booking.com must remove its wide MFNs, but permitted the use of narrow MFNs. In its view, narrow MFNs do not have a significant effect on competition and are likely to be necessary to ensure the benefits that online platforms offer consumers, such as the ease of comparing prices and switching between providers.
i. Do you restrict retailers from using price comparison websites (PCWs)?
Such conduct may be deemed anti-competitive in some jurisdictions.
Case Study: Asics (Germany)
In 2012, ASICS introduced a number of restrictions on retailers. Specifically, the following were prohibited: the use of the ASICS brand name by the retailers on third party websites (i.e. in adverts for that retailer); links from PCWs; and sales via online marketplaces. The German authority launched an investigation in September 2011, following complaints from various distributors. In its view, ASICS imposed restrictions which constituted a restriction of competition by object, and therefore violated Article 101 (1) of the TFEU.
In the eyes of the German authority, the prohibition of the use of brand names (ASICS), and restrictions on the use of PCWs constituted hardcore restrictions, and therefore could not be exempt under the VABER (vertical agreements block exemption). The authority also ruled that the prohibition of sales via online marketplaces was a hardcore restriction on competition, and again could not be deemed exempt under VABER. As this meant the restrictions were anti-competitive by object, there was no further inquiry into efficiency considerations.
Unilateral anti-competitive conduct (abuse of dominance)
a. Are you a business with a large share of any of the markets in which you operate or do you sell a significant share of the products/services traded in the market?
If so, you may be considered dominant in some jurisdictions. Certain types of conduct may be deemed anti-competitive when they otherwise would not. Note that the exact threshold or definition of dominance will vary among different countries.
b. Do you operate in an online platform/website through which you cover a significant share of the activity in the market (on any side of the platform)? E.g. transactions made, or platform users.
If so, you may be considered dominant even if the market share of the sales is not beyond the threshold for dominance.
c. Do you impose any restrictions on advertisers/retailers that sell through your platform? E.g. the price they can sell at, or restrictions on which other websites they can sell on.
Such conduct may be deemed anti-competitive in some jurisdictions.
d. Do you refuse to supply customers with no objective justification?
As in (c).
e. Do you use bundling or tying strategies, whereby you sell/package products that you have market power in alongside other products where competition with other firms is fiercer?
As in (c).
f. Do you impose terms on downstream firms? E.g. a minimum purchase quantity or an exclusivity clause.
As in (c).
g. Do you charge a price below average variable cost and how do you recoup these costs?
Some forms of below cost pricing may be considered predation, and, as such, infringe competition law.
Practical Legal Steps to Comply
Whether you are operating a business in Singapore only or across the region, you should audit your business practices to ensure compliance with competition laws. You may wish to implement a competition policy or standard operating procedure (SOP) covering:
a. scenarios when employees meet competitors;
b. communications with competitors (whether in person, or through online communication channels);
c. the review of agreements, terms or contracts before they are entered into;
d. a whistleblowing mechanism so employees can confidentially raise any competition policy and law concerns they might have, or ask for advice when in an uncertain situation.
More information on competition policy and law across ASEAN, and the rest of the world, are available at:
www.internationalcompetitionnetwork.org/working-groups/current/cartel/awareness/business.aspx
This note was written the assistance of Jerald Siew.