Slide 1

Dr Cristina Caffarra Online Geographic Discrimination: Unfair, anticompetitive? antitrustitalia lunch discussion Friday, 16 October 2015 1 Slide 2 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 The Big Antitrust Rollback. 1.The Unfinished Business with the Vertical Guidelines coming to haunt us with a vengeance in the online world 2.The Return of Discrimination as an Abuse 3.The Internal Market agenda forever lurking, and now official mainstream goal (Digital Single Market Strategy, online inquiry) 4.The Existential Battle to claw back power from the Internet Giants / The Platforms (antitrust is not effective enough) 5.Consumers reaction against use of personal information => Antitrust enforcement in online space in danger of becoming less effects-based and more ideological than ever 2 Slide 3 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Outline Econ 101 on price discrimination Geo-filtering in Audiovisual: a preview of things to come? A broader perspective on where we are in dealing with restrictions of online distribution 3 Slide 4 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Economists view of price discrimination Price discrimination = price differences that do not reflect differences in costs Usually reflects firms attempting to price according to different willingness to pay of different consumers or groups of consumers Geographic price discrimination is a form of third degree price discrimination meaning discrimination on the basis of identifiable customer types Nothing particularly special about online versus offline geographic price discrimination we are in a new digital world, but the story is the same For third-degree price discrimination to be effective firms must be able to prevent arbitrage (resale by low value consumers to high-value consumers) and other ways for consumers to circumvent discrimination (ability to buy in cheaper locations from more expensive locations) Online this often means geo-blocking (i.e. preventing consumers in one country from accessing or buying from sites in other countries) 4 Slide 5 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 not per-se anti-competitive or harmful to welfare Normal business conduct in most traditional markets Firms seek to maximise profits by pricing to reflect differences in willingness to pay of different consumers nothing objectionable about this Notion that only cost differences can justify price differences is wrong pricing decisions depend on demand-side factors as well as supply factors Effects on consumer welfare (compared to uniform pricing) ambiguous a priori Some consumers may pay less and others may pay more, and new groups of consumers may be served: overall effects on consumers are unclear ex ante eliminating restrictions which support price discrimination may lead prices to converge but not necessarily decline on average case by case assessment Indeed, price discrimination can significantly enhance consumer welfare May allow firms to supply additional customer groups: greater incentives to supply at lower prices in low income countries that overwise may not be supplied at all In some cases, without the ability to price discriminate firms may not produce at all (if fixed costs cannot be recovered effectively) or there may be less variety produced 5 Slide 6 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 A blueprint for online distribution? Passive sales in the Audiovisual sector ( Cross-Border Access to Pay TV Content) Murphy judgment did not overturn territorial licensing of EPL football, but clauses/laws resulting in absolute territorial licensing EPL not obliged to license to multiple broadcasters in a territory, but cant limit cross-border sales of satellite decoder cards to prevent passive sales Competition law isnt the only factor at work: the EPL still owns the copyright on its logo and aspects of its coverage (albeit not the matches themselves) Son of Murphy: SO to studios/Sky, extending Murphy logic to Hollywood movies. Claims not to object to territorial licensing per se, but to activities (like geo-filtering) which prevent cross-border purchases of pay-TV content = Its OK to licence content exclusively on a territory (and therefore restrict active cross border sales). But clauses designed to restrict passive sales (i.e. individuals ability to purchase pay TV content in other countries) are per se, by object infringement 6 Slide 7 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Geo-filtering as anticompetitive by object? Commission makes clear its goal is not the removal of territorial licensing Consistent with previous studies (e.g. CRA for DG MARKT) highlighting consumer benefits of territoriality But difficult to reconcile this with view that geo-filtering requirements preventing passive selling are anticompetitive by object (i.e. that they are so obviously anticompetitive that no assessment of their effects is required remember Cartes Bancaires?) Once the benefits of territoriality are recognised it is surely an empirical question whether geo-filtering is necessary to harness these benefits: -Local supply to more countries; -Investment in content; -Minimising transaction costs. 7 Slide 8 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Benefits of cross-border price discrimination 8 Rather than pay 800 a month to Sky in the UK Mrs Murphy paid Nova in Greece 700 a year Strict territorial licensing supports large price differentials based on variation in willingness to pay In a world with cross-border purchases arbitraging behavior by consumers gives producers incentive to close these price differentials. For example, by: Raising wholesale prices in Greece Raising barriers to cross-border purchasing (e.g. require Greek commentary/dubbed movies) or even withdrawing content altogether Opportunities for price arbitrage will raise prices where they are low, and may create incentives to degrade availability of content from certain countries No presumption that consumers will be better off Slide 9 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Direct harm to consumers in low-WTP countries? 9 These trade-offs are well known in the literature on price discrimination Negative overall effects more likely when benefits (less arbitrage in core markets) outweigh costs (lost sales in smaller, low-WTP countries), i.e. Countries are small relative to core markets: doesnt take many British consumers buying from Malta to make serving this market unprofitable Countries have low prices relative to core markets: freer cross-border purchasing likely to make the 12x price differential that motivated Mrs Murphy unsustainable Content is of cross-border appeal: risks greatest when consumers watch content in form accessible in other countries (e.g. subtitled Hollywood films) Content is niche in one country, but premium elsewhere (no cheap test match cricket in Bulgaria) Not just a theoretical concern: the EPL took similar actions post-Murphy (e.g. requiring local language commentary and limiting 3pm broadcasts) Slide 10 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Other potential unintended consequences 10 Dynamic effects on incentives for content production: Content producers typically pre-sell their output to TV distributors. This is an important revenue stream for content producers. It is also important to note that: Even small-scale films have costs in the tens of millions Business case for films is marginal (e.g. only 7% of UK films are profitable) Appropriate rates of return and incentives for content production appear to be the reason the Commission does not object to territorial licensing itself. But it is clearly an empirical question as to whether the additional revenue generated by geo-filtering results in benefits to consumers through this channel Transaction costs: Murphy judgment shows that copyright legislation acts as a back stop to many of the activities objected to by the Commission. Risk introducing a web of monitoring activity and litigation (e.g. over what constitutes an active vs. a passive sale). If copyright likely to prevent most cross-border sales anyway then this seems unlikely to be a victory for consumers Slide 11 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 A preview of things to come in online commerce Major drive to extend single market principle to online commerce: Digital Single Market Strategy, DG Comps eCommerce sector inquiry Coincides with roll-back of enforcement to concerns about forms of discrimination, instead of anticompetitive foreclosure: no rationale based on exclusionary abuse of market power (we dont call for abolition of price discrimination in all other contexts) Preserving inter-country price differences by restricting online cross-border arbitrage (buying cheaper goods elsewhere from more expensive locations) just perceived as unfair and for that reason per se objectionable No acknowledgment of ambiguous effects on overall consumer welfare, nor of the potential implications for local production, innovation and investment Single market rationale is not competition policy as we normally understand it, indeed can conflict with competition policys overarching goal of promoting consumer welfare But the train has left the station 11 Slide 12 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Holding back a sensible approach to online distribution Antitrust treatment of online pricing decisions remains a big troubled area generally Shortcomings of the Vertical Guidelines back to haunt us on hyperdrive in the online world at a time when online distribution is growing exponentially, multisided platforms, firms rethinking distribution formats and experimenting with multichannels -Not enough recognition of the pro-competitive rationale for most VRs, and the impossible job of proving efficiencies -Prohibition of restriction of passive sales when everything online is deemed passive -Prohibition of dual pricing when other tools are also unavailable -Excessive preoccupation with short term price competition and too little with market dynamics, at the expense of innovation/ experimentation, undermining new distribution formats 12 Slide 13 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Presumption VRs are efficiency-enhancing not yet established enough Why would manufacturer want to leave money on the table and give a better margin (lower price) to b&m retailer? Because getting sales service for free and buying cheaper elsewhere creates free-riding problem. Cannot separately price for service, cannot sign contracts mandating effort (incomplete contract problem), cannot give retailer lump sum (moral hazard problem): need commission on sales to incentivise effort Free-riding prevalent online: set-up costs are small, and more difficult to set standards and anticipate all ways in which online retailer may do things you dont like, and to police this so potential for free riding is much greater. Competition authorities continue not to accept contractual incompleteness which is essential to understanding organisational structures and business models dismiss efficiencies out of hand 13 Slide 14 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Prohibition of passive sales restrictions VG prohibit restrictions by manufacturer/licensor on ability of licensed distributor in a territory to sell (passively) in other territories, and internet sales almost always regarded as passive. Active/passive sales distinction was a compromise in the pre-internet world where passive sales where tiny, but in the online world this is helped push into the object box pretty much everything that is online restrictions Regional price differentiation and protection of local distribution and prices from outside free-riding is a lot harder. 14 Slide 15 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Prohibition of dual pricing VG also restrict manufacturers ability to charge distributors different prices for online and offline sales Dual pricing would be a decent alternative to incentivise certain sales efforts in situations where other instruments are not available (RPM) Reaction: vertical integration into distribution in Europe: flagship stores and renting shop-in-shop modules in department stores. Purpose is to regain control over vertical chain, including online pricing. This development is induced as a reaction to concerns about enforcement in this area, may lead to foregoing or restricting a lot of innovation that could take place online 15 Slide 16 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 Everything is RPM now RPM concerns have re-emerged by expansion of internet retail platforms: various cases on price parity clauses in which sellers agreed with one platform they would not sell at lower prices elsewhere: -Cases involving online travel agents Expedia and Booking.com requiring hotels not to sell rooms on other sites more cheaply). Strong reaction to these clauses on ground they may constitute RPM by the back door all of the bad bits of RPM without the good bits. But efficiency considerations not taken into account Will we have a natural experiment in France and ITALY?? 16 Slide 17 Online Geographic Price Discrimination, and More Besides Cristina Caffarra 16 October 2015 No robust theories of harm in many of these cases What are the theories of harm? Typically no useful theory of harm except it restricts competition, it prevents prices from being reduced But competition law is not supposed to protect a particular business model or particular distributors, or even lower prices per se. It should prevent anti- competitive acts that restrict competition between competitors. Vertical conduct can, under certain circumstances, lead to such a restriction (e.g. through leverage of market power). But why go against firms who are not dominant in their choice of business model? Since when is it the task of politics to promote certain distribution models? We should have COMPETITION between alternative ways of organizing distribution. Some will restrict more, some less, let the best one win. Rules as they are make it difficult for manufacturers in an online world to achieve the vertical control that they were supposed to get from the more economics-based Vertical Guidelines, and the result is more vertical integration and less innovation. 17 Slide 18 Dr Cristina Caffarra 18 London Tel +44 (0)20 7664 3700 99 Bishopsgate London EC2M 3XD United Kingdom Brussels Tel +32 (0)2 627 1400 143 Avenue Louise B-1050 Brussels Belgium Paris Tel +33 (0)1 70 38 52 78 27 Avenue de lOpra 75001 Paris France Sydney Tel +61 (0)2 9779 1500 Level 23, Tower 1 520 Oxford Street Bondi Junction NSW 2022 Australia Email: ccaffarra@crai.com www.crai.com/ecp