Travers Smith LLP

Price-fixing: the role of software

Question

Is technology changing cartels and cartel enforcement in the digital age?

Answer

The United Kingdom's competition watchdog, the Competition and Markets Authority (CMA), has urged online sellers and suppliers of automated re-pricing software to learn from the example of a seller on Amazon Marketplace which was fined £160,000 for engaging in illegal price-fixing.

What happened

The companies Trod and GB eye both used Amazon Marketplace to sell various products direct to consumers. They were competing sellers of posters featuring pop stars such as Justin Bieber and One Direction. GB eye was also active at the wholesale level as a supplier of posters and frames to other online retailers, including Trod.

Trod complained that GB eye was undercutting it on price, arguing that it was in GB eye's interest not to undermine the position of key customers of its wholesale business (which accounted for the majority of GB eye's turnover). This led both companies to enter into an arrangement not to undercut one another on price, which lasted from 2011 until 2015, when GB eye effectively ‘blew the whistle’ on Trod by reporting it to the CMA.

GB eye's whistleblowing meant that it was granted leniency by the CMA, giving it immunity from fines, provided that it cooperated fully with the investigation. Trod eventually reached a settlement with the CMA under which it agreed to pay a fine of £163,371 – although as Trod has now ceased trading, it remains to be seen whether this amount will be recovered. One of Trod's directors has also been disqualified from further directorships because of his involvement in the case.

What's new about this

In one sense, there is nothing new about this case – price-fixing has been illegal for many years in the United Kingdom and no one should be surprised that it applies to online sellers, just as it does to more conventional bricks-and-mortar operators. However, this may be the first case where a price-fixing arrangement was monitored and enforced using automated re-pricing software. Normally such software is used by a business to monitor competing sellers and adjust prices downwards so as to remain competitive (subject to various parameters designed to prevent selling at a loss and to avoid prolonged pricing at unsustainably low profit margins). However, in this case, GB eye and Trod configured their software to ensure that, where they sold the same products, they would not undercut one another.

There are two reasons why this is of particular note:

  • Software adds to the temptation. Re-pricing software arguably makes price-fixing arrangements much easier to monitor and enforce in the online environment than offline; this may make it particularly tempting for target-driven sales staff to enter into arrangements with competitors to keep prices up.
  • Software suppliers may be in the frame. Whilst the suppliers of the re-pricing software in this case had no involvement in the price-fixing arrangement, the CMA has stated that where such suppliers help their clients to reconfigure software so as to restrict price competition, they can be at risk of infringing competition law. This is likely to be challenging for the CMA to establish in many instances - except in fairly blatant cases where there is clear evidence that the supplier was well aware of the infringement.

What the future holds and how businesses should react

Looking further into the future, European Commission officials and other commentators have speculated that where companies use independently functioning (artificial intelligence) software, and that software learns how to coordinate pricing with others on the market, this too could breach competition law.

On the regulators' side, one could imagine a future where the CMA, European Commission and other enforcers make use of their own software to look for suspicious pricing patterns in online markets. In the words of Johannes Laitenberger (Director General, DG Competition at the European Commission) at a recent conference: in the future, enforcers will likely need to develop their own algorithms in order to "outwit the companies they have to monitor and keep in check".

Tom Sims is a trainee solicitor at Travers Smith.

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