On 4 November 2018, the UK government and the Competition and Markets Authority (“CMA”) issued a press release confirming that they will examine the practices of retailers that target online consumers and charge them different prices for the same product through personalised pricing. Their research will cover a range of products sold online “such as holidays, cars and household goods”. The announcement is unsurprisingly silent as to whether legislative changes or changes to the CMA’s enforcement policy will result.
This is the latest in a line of UK government and CMA initiatives regarding personalised pricing. On 31 October 2018, the Financial Conduct Authority (“FCA”) announced an investigation into personalised pricing for motor and home insurance policies after finding that insurance companies were price discriminating between customers; and on 8 October 2018, the CMA published a Working Paper on the ‘use of pricing algorithms to facilitate collusion and personalised pricing’ (see our recent Covington Competition Blog post).
This latest development should be seen against the background of a broad discussion across the EU as to the application of the competition rules to the online sector. The UK has commissioned a report from a group led by Harvard professor Jason Furman to consider the potential opportunities and challenges the emerging digital economy may pose for competition as well as competition policy and will make recommendations early next year (see Digital Competition Expert Panel: terms of reference). In Germany, Justus Haucap, Wolfgang Kerber, Heike Schweitzer and Robert Welker have already finished a study on a potential reform of the German law on abuse of market power. The challenges that the digital economy poses to competition law was one of the main parameters considered by the authors when making their recommendations (see the summary of the report’s recommendations in English and the full report in German). And at EU level, Commissioner Vestager has commissioned a report from a three person expert group which will focus on the future challenges of digitisation for competition policy.
What is personalised pricing?
Personalised pricing refers to a practice whereby different customers are asked to pay different amounts for the same product depending on what retailers consider that each customer is capable and willing to pay (see OECD Background Note on Personalised Pricing in the Digital Era, 12 October 2018). The OECD Background Note points out that personalised pricing can be beneficial for consumer welfare because it allows companies to lower prices for consumers who otherwise would not buy – or could not afford to buy – certain products, while preserving the companies’ profitability by charging higher prices to consumers who would purchase their products irrespective of price increases. The OECD Background Note also mentions potential concerns, in particular in the digital world where personalised pricing may be implemented in a non-transparent way: such practices may lead to customer exploitation, create a perception of unfairness or even demotivate customers from making their purchases online.
The UK Government’s and CMA’s concern
“Unfairness” in the digital market seems to be the UK regulator’s key concern: the main goal of the CMA’s research is to identify whether undertakings are using the power of new technologies to treat consumers – “particularly the vulnerable ones” – unfairly.
According to the press release, the research will mainly focus on whether and how retailers use personal consumer data such as address, marital status, birthday and travel history to estimate consumers’ willingness to pay, and charge prices accordingly. In particular, it will try to explore (i) how widespread personalised pricing is; (ii) which mediums (e.g. search engines, apps or comparison tools) businesses use in applying it, and (iii) whether those practices prevent consumers from getting the best deal online.
Is personalised pricing a competition law issue?
The press release does not expressly refer to the application of competition law to personalised pricing but this was addressed by the CMA in its Working Paper of 8 October 2018 which looked at personalised pricing in the context of collusive conduct.
The CMA’s Working Paper described a potential collusive personalised pricing scenario where cartelists share and use data about each customer’s willingness to pay and share and use pricing algorithms to set personalised prices. In this scenario, the cartelists would act like a joint monopolist price discriminating between customers.
However, the CMA’s report concluded that whilst collusion on personalised pricing cannot be excluded, it is unlikely in practice. Prices that vary per customer are less likely to be transparent to competitors, thereby impeding collusion. In particular in retail markets, the report sees a tension between (i) the transparency and the level of information needed to explicitly coordinate over many personalised prices, and (ii) the opacity needed to evade detection by competition authorities and to prevent customer resistance against personalised prices.
The Working Paper’s legal assessment of joint setting of personalised prices is uncontroversial. Whether collusion on personalised pricing occurs in practice will be an empirical question.
Abuse of dominance
The Working Paper does not address the issue of unilateral personalised pricing. However, this may be a significant part of the research into personalised pricing in the online retail sector that has been announced.
Art. 102 TFEU prohibits price discrimination by dominant undertakings, where that discrimination has an effect on competition. It does not, however, mean that dominant undertakings cannot set different prices for different customers. Abusive price discrimination can be defined as the practice of selling the same product to different buyers at different prices, where that discrimination has an effect on competition, and in circumstances where the price differential is not objectively justified, for example, by different costs of supply or – at least as is common in the offline world – different demand. It is not yet clear whether the difference in degree of fully personalised pricing in the online world – theoretically having perfectly personalised price discrimination – would lead to a different conclusion.