79/12     10 September 2012

The Office of Fair Trading has today published a report which explores the competition implications arising from price relationship agreements such as 'price match' or 'lowest price' guarantees.

In a conventional competitive environment, sellers set their prices independently taking account of the prices charged by rivals. However, some sellers choose to adopt pricing policies or enter agreements that limit their freedom to price independently, and that link their prices to those charged by rivals for the same or similar competing products.

The report, prepared for the OFT by LEAR, examines the various forms these agreements can take, their potential benefits and anti-competitive effects, drawing on economic literature and relevant case law. The OFT will present the findings today at a joint workshop held by the US Federal Trade Commission and Department of Justice on the implications for antitrust policy and enforcement of 'most-favoured nation' (MFN) clauses, which are a type of price relationship agreement.

The report focuses on three types of agreement:

• Across-Sellers Agreements - for example when a retailer promises its customers to match or beat a price the customer may find for the same, or a similar, product from other sellers. 
• Across-Customers Agreements - for example, when a manufacturer is contractually obliged to offer a retailer the best price it offers to any other retailer. These agreements are sometimes referred to as MFNs.
• Third Party Agreements - these are price relationship agreements entered into by a manufacturer and a retailer (or a platform and a seller) that determine the price paid by the customer. For example, an agreement whereby the retailer undertakes to set the price at which it resells a manufacturer's products with reference to the price at which it sells the products of a competing manufacturer. Another example that is particularly prevalent in the online sector is an agreement that requires the seller to sell a good or service on an online platform at a price that is not higher than the price the seller charges on other platforms.

The report suggests that while some types of price relationship agreements could be attractive to buyers, they could also have a softening effect on competition. For example, shoppers offered a 'lowest price' guarantee may not bother to shop around as much as they would otherwise, thus reducing the downward pressure on prices. Furthermore, if a rival of a 'lowest price' retailer knows that any price reduction will quickly be matched or beaten, the incentive to lower prices may be reduced.

The report also found that certain agreements could discourage or prevent new entrants from gaining a foothold in the market. For example, the existence of parity agreements between online platforms could prevent new platforms from attracting buyers by charging lower prices.

Amelia Fletcher, OFT Chief Economist said:

'This report provides an excellent reference on the competition implications of various types of price relationship agreements. In recent years, the OFT has focused more closely on the possible anti-competitive impact of these agreements, and will continue to consider enforcement activity where we find that competition is harmed.'

NOTES

1. Download the report Can 'Fair' Prices be Unfair? (pdf 2.8Mb) prepared for the OFT by Laboratorio di Economia, Antitrust, Regolamentazione (LEAR).
2. Online platforms are websites that act as some sort of market-place and allow buyers and sellers to meet and trade directly.