The Interactive Media in Retail Group has written to manufacturers like Philips and Sharp about an alleged 10% mark up on wholesale prices charged to etailers compared with high street sellers. But is this contrary to UK competition law? Osborne Clarke competition partner Simon Neill considers.
Interactive Media in Retail Group ("IMRG")
In November 2005, the IMRG complained to the OFT that certain electronics manufacturers were charging online retailers around 10% more for wholesale goods than traditional high street retailers. This 'dual pricing' strategy, which the IMRG believes stifles competition, forces smaller online retailers out of business and raises prices for consumers, is allegedly designed to narrow the price differential between internet and 'bricks and mortar' retailers.
The IMRG has not named the manufacturers involved and the OFT has so far declined to confirm which, if indeed any, companies are being scrutinised. However, according to media reports, Sharp, Panasonic, Hitachi and Philips are amongst those believed to have received communications from the IMRG ahead of a potential meeting with the OFT.
Internet shopping is expected to amount to £5 billion, or 9% of all retail sales, this Christmas, and online sales of electronic goods now account for 20% of the market. In response, the larger retailers are putting pressure on the manufacturers to offer more attractive deal terms in the wake of falling high street prices. Equally, certain brand manufacturers, such as Sony, have a commercial interest in protecting their exclusive branded retail outlets.
Perhaps inevitably, when the existence of dual pricing first came to light, it prompted widespread cries of foul play. However, manufacturers argue that dual pricing is not intended to push up online prices. Instead, they assert that it is simply designed to offer an incentive to high street retailers to invest in training staff and promoting the brand in their stores.
Dual pricing and competition law
Despite the brouhaha, dual pricing is unlikely to infringe competition rules. Indeed, in the absence of the manufacturer holding, either individually or collectively, a dominant position in the relevant market, such a policy will only be anticompetitive if it has been agreed between two or more manufacturers – in which case such behaviour would constitute an illegal price-fixing cartel.
Under competition rules, a non-dominant company can generally charge whatever its customers will pay. Equally, it is entitled to discriminate between different customers or categories of customer by, for example, setting different prices regardless of volumes being supplied. Indeed, a non-dominant company is generally entitled to refuse to supply particular customers altogether.
Where a company is either individually collectively dominant (which broadly equates to a market share in excess of 40%), competition law prohibits certain forms of pricing practices – such as price discrimination, non-linear discount structures, excessive pricing and cross-subsidisation – unless such behaviour can be objectively justified. For example, charging less for a train ticket during off-peak hours, while clearly a form of price discrimination, is objectively justifiable.
The same principle is equally true of dual pricing. While clearly a form of price discrimination, it will only constitute an abuse of a dominant position where there is no objective justification for the price differentiation. The key question is whether a dominant manufacturer would be objectively justified in treating "bricks and mortar" retailers differently from on-line retailers. Although untested, an argument along the lines that additional discounts to high street retailers are appropriate where the retailers provide a higher service standard (such as a dedicated sales person) may well be sufficient.