By Friso Bostoen and Liesbet Van Acker
As the corona pandemic instils more and more fear in the population, some of its economic effects are immediately noticeable. Two items—hand sanitizer and facemasks—have been in particularly high demand (and short supply). This has driven prices up to a level where one may wonder whether they are abusive in the sense of Article 102 TFEU. And consumers have not only been hoarding hand sanitizer and facemasks; they also form long lines at supermarkets to stock up on non-perishable foods and toilet paper. To meet the logistical challenge and prevent empty shelves, some supermarkets have proposed to coordinate their efforts. However, the question arises to what extent this is allowed under the cartel prohibition of Article 101 TFEU. This blog post addresses these two questions.
When do excessive prices become abusive?
A large part of the hoarding behaviour described above has been motivated by personal concerns. However, some buyers have been emptying shelves—in particular of hand sanitizer and facemasks—with the clear intention to make a profit. It has been reported, for example, that private label hand sanitizers ‘are being sold online for up to 5000 percent more than the original price’ (for up to €165). Thus, while some shelves may be empty, consumers can still find the products on online marketplaces such as eBay and Amazon—if they’re willing to pay a hefty premium, at least.
From the perspective of European economic law, these reports raise the question: could such excessive prices constitute an abuse of dominance in the sense of Article 102 TFEU? Indeed, many competition authorities have warned sellers with such language. For one, the Competition and Markets Authority has stated that it will ‘ensure that traders do not exploit the current situation to take advantage of people … for example by charging excessive prices’. The Luxembourgish competition authority has issued a similar warning, with an explicit nod to online sales platforms.
However, the bar for excessive pricing cases is high. First, the seller in question must be dominant. A dominant position is presumed in case of market shares exceeding 50% (above 40%, there is an indication of dominance). This hurdle is already a difficult one. The aforementioned sellers on online sales platforms (often small businesses) are nowhere near dominant. Even the largest producers of hand sanitizers (e.g. Purell) are not likely to be dominant (in particular due to the many available private labels). When it comes to facemasks, the situation is likely similar.
Secondly, the price must actually be excessive (or, in the words of Article 102 TFEU, ‘unfair’). According to the ECJ, a price is ‘excessive because it has no reasonable relation to the economic value of the product supplied’. In United Brands (recently confirmed in AKKA/LAA), the ECJ operationalized this basic formula by adopting a two-pronged test to determine whether a price is excessive. First, one has to examine whether the profit margin (price minus cost) is excessive. If that is the case, one then has to check whether the price is ‘either unfair in itself or when compared to competing products’. This comparison with competing products can take many forms, but the reference price is generally (i) the price charged by the company in different markets (where it does not have market power); (ii) the price charged by the company at a different point in time; and/or (iii) the price charged for comparable products by other companies in different markets.
Applying this test in times of crisis is not easy. Firstly, what is the current ‘economic value’ of those products that are in high demand? One could argue their value is now high, which would mean that a correspondingly high price is justified. Moreover, the result of the test is determined by the chosen point of comparison. In the case of facemasks, for example, the current price may not seem excessive when compared to the price charged in other markets or by other companies, simply because the price is currently high everywhere (in Europe). When comparing the price to the one charged at a different point in time (say, a year ago), however, the price will more easily appear excessive. Even then, however, the European Commission is cautious when it comes to pursuing exploitative abuses—its focus is generally on exclusionary conduct (the same goes for national competition authorities).
Given these difficulties, it may be more interesting to consider alternatives to excessive pricing cases. One alternative is to rely on ‘price gouging’ laws. These laws prevent sellers from charging excessive prices, whether they are dominant or not, in particular in times of crisis. However, their occurrence is mostly limited to the United States, where attorneys general are already ‘investigating price gouging in the wake of the COVID-19 public health emergency.’
In Europe, the closest alternative would be the Unfair Commercial Practices Directive (UCPD), which prohibits a practice when it is ‘contrary to the requirements of professional diligence [and] is likely to materially distort the economic behaviour with regard to the product of the average consumer’. The implementation is left to the Member States, although the UCPD does include a blacklist of ‘commercial practices which are in all circumstances considered unfair’. However, the UCPD is mainly aimed at misleading sales practices, rather than excessive prices (although national laws may be more expansive). Then again, there is no shortage of misleading practices that seek to capitalize on the fears of consumers, and the UCPD provides an important remedy to those.
Finally, while substantive law is crucial, enforcement is of equal—if not greater—importance. In that regard, it is interesting to note that various authorities do not only enforce competition law but also have consumer protection powers. The enforcement action that we are currently seeing often presents a mix of those. The Italian competition authority, for example, has sent a request for information to the main online marketplaces regarding ‘one the one hand, the alleged effectiveness of [hand sanitizers and facemasks] in terms of protection and/or counteraction against coronavirus and, on the other, the unjustified and significant increase in the prices of these products recorded in recent days.’ Is it up to the sales platforms to clarify how they will avoid misleading practices and disproportionate price increases. Platforms such as Amazon have certainly been trying to halt the tide of misleading/overpriced products, e.g. by banning listings (over 1 million already).
Cooperation in times of crisis?
Contrary to the above-described price evolution of hand sanitizers and facemasks, the prices in supermarkets have been steady (for now). Supermarkets are, however, dealing with a sales increase of up to 30%. The increase is even more dramatic when it comes to non-perishable goods such as pasta and canned food. To illustrate the increase in demand, pictures are surfacing online of enormous lines and empty shelves. In some instances, supermarkets even had to call the police to solve disputes between customers. A vicious circle of panic buying looms.
Not only consumers have voiced their concerns. Some supermarkets (for example in the UK) have already suggested cooperation to address logistical issues and shortages, and are expected to ask for a suspension of the competition rules. Other essential suppliers, such as pharmacies and hospitals, may also want to start cooperating. Moreover, collaboration between undertakings might even be encouraged, for example for the development of a vaccine. However, EU competition law generally prevents collaboration between competitors under article 101 TFEU, which raises the question: how flexible is this provision to deal with cooperation in times of crisis?
Art. 101(1) TFEU prohibits ‘all agreements between undertakings … and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market’. The Horizontal Guidelines further specify that, in all circumstances, undertakings should refrain from sharing their intentions for future prices and quantity changes. Although it might be tempting for undertakings to share or even coordinate their plan of action, this is considered a restriction ‘by object’, which means that a competition authority does not even have to examine its effects to consider it unlawful. Undertakings, including supermarkets, should thus be aware that contacts with competitors—even if the intention is noble—can and often will infringe the cartel prohibition.
Emphasizing that undertakings should still adhere to the competition rules in general is stating the obvious. Nevertheless, in the United States, the Department of Justice has issued a statement confirming that antitrust rules remain applicable and will be enforced. In the European Union, the Commission’s DG COMP has not issued any such statement, although it has already commented on the state aid rules. It seems reasonable to assume, however, that it will continue to enforce the antitrust rules with equal vigor.
The prohibition of Article 101(1) TFEU is thus still applicable, and supermarkets and other stores have to be wary of any form of coordination. Still, it is possible that certain collaborations aimed at remedying the corona crisis fall under Article 101(3) TFEU, which provides for an exemption from the prohibition. For an agreement to be exempted, it must produce efficiency benefits, allow consumers a fair share of those benefits, be indispensable, and not eliminate competition. In Pasteur Mérieux-Merck, the Commission has accepted the efficiency gains from cooperating in favour of public health. However, two problems arise when generalizing this decision. First, this was decided more than 20 years ago with little clarification since. Second, the case concerned vaccines, which have a more direct connection to public health than, for example, products in supermarkets. Although it is argued that the exemption does include other essential supplies such as food, we believe the exemption is unlikely to apply as of yet. Of course, should shortages become a more pressing problem, cooperation may indeed become ‘indispensable’ and therefore allowed.
Further, the exemption of Article 101(3) TFEU has been specified in a number of ‘block exemptions’, which offer undertakings more legal certainty when it comes to certain forms of cooperation. In light of the corona crisis, one block exemption is particularly relevant. When universities and laboratories work together to develop a vaccine, they can justify doing so under the R&D Block Exemption Regulation.
If the crisis worsens, undertakings might call for a similar block exemption for cooperation between supermarkets, pharmacies and other stores. In times of crisis, the Commission can move swiftly, as can be seen by the numerous proposals for regulations that have already been submitted, e.g. for a COVID-19 Response Investment Initiative. Such initiatives may balloon, as they did during the most recent financial and economic crisis. Over time, the Commission may well adopt measures allowing for cooperation between undertakings providing essential facilities.
Competition law remains an important limit to most forms of cooperation between competitors in times of crisis, at least for now. When it comes to combatting excessive prices, competition authorities’ power to curtail excessive prices appears narrower. However, just like we may see a softening of the cartel prohibition, we may see a broader interpretation of the excessive pricing doctrine. Moreover, if manufacturers—e.g. of hand sanitizer and facemasks—wish to curb price increases (and it appears that they do), competition law actually empowers them. The Vertical Block Exemption Regulation allows manufacturers to impose maximum prices on retailers, at least if the market share of neither party exceeds 30%). Of course, only price increases by their retailers are prevented that way—the resellers on online sales platforms are not bound by such restraints.
To conclude: an economic slowdown leads not to fewer but rather to crisis-specific anticompetitive practices—in these challenging times, it is all the more important that competition authorities continue to protect consumers.
See Friso Bostoen’s bio below.
Liesbet Van Acker is a Ph.D. researcher at the Institute for Consumer, Competition & Market of the KU Leuven. Liesbet has studied at the KU Leuven and Queen Mary University of London (exchange). She has completed a number of legal internships, among others with Allen & Overy and Van Bael & Bellis. Prior to joining the KU Leuven, she was a trainee at the European Commission (DG Competition).