Many manufacturers are annoyed by the fact that their distributors sell products via their own online stores. After all, online sale has an impact on offline sale. Some manufacturers use ‘dual pricing’ in an attempt to discourage distributors from selling products via their own website. In December of last year the Bundeskartellamt (BKA) published three case reports in which it explained why it found the dual pricing systems used by three German companies to be in contravention of the ban on cartels.
Dual pricing
Dual pricing refers to the practice by which a manufacturer charges different prices for the same product or same service. The manufacturer charges a higher price for the product or service when sold online than when the same product or service is sold via a physical shop. The same effect can also be achieved by using a discount system in which a lower discount is given if the products or services are sold via an online store.
Case reports from the BKA
The German companies Gardena (gardening tools), Dornbracht (sanitary ware) and Bosch Siemens Hausgeräute (household appliances) tried to use dual pricing to discourage distributors from selling products via their own online stores. Manufacturers believe that selling via an online store depreciates the product’s image. Sales via online stores are also displacing sales via physical shops to a certain extent. Consumers go to a physical shop to see the product and then purchase it online at a lower price. In the three case reports the BKA, the German competition authority, explains that in its view, dual pricing may not be used to counter online sale by distributors.
These case notices are not the only publications on this topic from the Bundeskartellamt. In October of last year already the Bundeskartellamt published the discussion memo entitled Vertikale Beschränkungen in der Internetökonomie. In this discussion memo as well the BKA asserts in no uncertain terms that dual pricing in relation to online sale is not permitted under competition law.
Sale via an online store is considered passive sale. Passive sale involves customers who approach the distributor on their own initiative. It follows from the European Block exemption on vertical cooperation that a ban on passive sales is a so-called hardcore restriction. That is why a ban on online sale is also a hardcore restriction. In this context, the Guidelines for vertical restraints corresponding to the block exemption explains that a manufacturer is in principle not permitted to charge a higher price for products or services sold via an online store. Sometimes online sale results in substantially higher costs for the manufacturer than the offline sales. For instance, if on-site installation by the distributor is included in offline sales and this is not the case for online sales, the latter sales channel can result in more complaints from customers and claims under the guarantee with respect to the manufacturer. In this kind of situation, dual pricing may be permitted, according to the Guidelines.
Especially in the case of Bosch Siemens Hausgeräute the BKA investigated whether the exception referred to above was a factor. The BKA came to the opinion however that dual pricing does not entail any efficiency benefits. Furthermore it said there were less drastic ways of evening out the higher costs of offline sales.
Dutch cases
In 2005 the provisional relief courts in Arnhem and Zutphen found that the dual pricing system used by ATAG (household equipment) for online and offline sales was permissible. ATAG had argued that sale via an online store resulted in higher costs for it. Customers who bought equipment via an online shop frequently phoned ATAG for explanations. On many occasions equipment was not installed properly, which meant that ATAG’s after-sales organisation had to make repairs. According to the provisional relief courts this justified dual pricing. The District Court of Zutphen confirmed this once again in a main action in 2007. In 2009, in its Sector scan of Signals in internet sales, the Netherlands Authority for Consumers & Markets (ACM) concluded that dual pricing in and of itself is not prohibited, unless there is abuse of a dominant economic position.
Conclusion
The Dutch courts and the ACM seem to have a different view of dual pricing than the BKA. This is striking, all the more since the Dutch courts’ justification for considering dual pricing to be permissible in the case of ATAG is explicitly mentioned in the Guidelines.
There is certainly not an absolute ban on dual pricing. The BKA’s case reports do underscore however that a manufacturer must investigate very carefully whether dual pricing is permitted in its situation. It must be able to be objectively demonstrated that “online sales result in substantially higher costs for the manufacturer than the offline sales”. If these substantially higher costs can be demonstrated, it must additionally be investigated whether these costs can be reduced in another, less restrictive manner.
By: Eric Janssen