The return of the MFN clauses – platform ranking as an enforcement mechanism for price parity

The MFN cases of the past few years have delivered a series of uncoordinated cases that created a fragmented approach towards MFN clauses. Nowadays it would appear that there is a growing consensus in Europe that wide MFN clauses should be prohibited which, also led major platform like Expedia to abandon these pricing strategies. The recent claim put forward by Nustay indicates, however, that the wide MFN clauses are finding their way back into practice via the platform search result ranking. The question is now whether this (light) price-parity mechanism will be scrutinized in the same manner as the MFN clauses given their functional similarity.

MFN clauses and (EU) competition law

MFN clauses traditionally refer to the contractual terms agreed between companies at different levels of the value chain generally targeting the pricing strategies of the seller, which commits to offer its goods or services to the buyer on terms that are as good as the best terms offered to other third party buyers. Accordingly the buyer that is party to such an agreement is guaranteed to receive the best price offered by the seller at all times.

Although these contractual restrictions have been around for quite a while it is not until the past few years that they made headlines after being implemented by major online platforms such as Amazon, Booking.com and Expedia. The application of the MFN clauses in the context of online platforms is, however, a little different. The relationship between the online platform and its trading parties is not one of buyer-seller with regard to the goods or services offered on the platform by the platforms’ trading partners. Consequently, the MFN clauses in the context of online platforms concern the price of goods or service offered by various sellers or service providers across competing sales channels.

In practice, the MFN clauses in the case of online platforms were classified as either ‘wide’ or ‘narrow’ clauses depending on the scope of the commitment they covered. Accordingly, when covered by a wide MFN clause sellers or service providers must offer their goods or services on the contracting platform on terms that are as good as the best terms offered on any other third party platform or on the website and/or web-store of the platforms’ trading parties. In the case of narrow MFN clauses sellers or service providers were free to offer lower prices on third party competing platforms, however, not on their own website and/or web-store.

Despite the differences in the economics involved in the case of online platforms, their use of MFN clauses are considered to raise similar anti-competitive concerns as the more ‘traditional’ MFN clauses. Accordingly a seller on Amazon or a hotel on Expedia have little incentive to reduce their prices on competing platforms if they must match these prices on both (or more) platforms by virtue of the MFN clauses they are bound to. This lack of incentives to implement different prices across platforms relaxes therefore price competition among platforms. This coordinative effect of MFN clauses leads also to an exclusionary effect as new entrants are hampered from setting up new platforms. For such entrants, the MFN clauses make it more difficult to compete on price with respect to the fees charged from sellers or service providers and eventually on the final price paid by the end consumer, which would be required in order to ‘steal away’ the customers and trading partners of the platforms using MFN clauses.

Due to these anti-competitive concerns multiple NCA’s have indicated that MFN clauses in the case of online platforms can constitute an infringement of art. 101 TFEU and/or 102 TFEU. As a result of this approach the use of wide MFN clauses generally seems to be either prohibited or abandoned throughout the EU. The legality of narrow MFN clauses still remains a matter of debate in multiple member states, however, France for example has chosen to ban both types of MFN completely. While it would appear that online platforms have no choice but to slowly abandon the use of (wide) MFN clauses the recent claim of Nustay, filed to the Commission against Expedia and Booking.com, indicates that these companies have found a creative work-around that allows them to achieve similar results without having to use a contractual obligation.

Nustay vs. Expedia & Booking.com    

Nustay is a Danish online booking platform founded in 2014 that entered the market with a business model based on low commissions for hotels that often translate into lower prices for consumers. The entrance of Nustay to market and its growing success is to a great extent the result of the prohibition of wide MFN clauses (and a successful Google ads campaign). In the absence of such clauses Nustay was able to offer hotels better deals than leading platforms such a Booking.com and Expedia leading to better offers for consumers allowing it to gain popularity quickly despite the existing presence of well-established and better known players. However, the growing success of Nustay is currently at risk as Booking.com and Expedia, allegedly, try to reintroduce the effect of wide MFN clauses on pricing via their ranking mechanisms. Accordingly, hotel owners which indeed provide Nustay with better offers than competing platforms, resulting in the display of lower prices for consumers on Nustay, get a lower ranking in the search results on Booking.com and Expedia making it harder for them land bookings by consumers.

Due to the implementation of this strategy, Nustay claims to have received requests from more than a thousand hotels to increase their final prices on the platform after being pressured by Expedia and Booking.com. The intention of taking into account the pricing of hotels on third party competing platforms for the purpose of ranking was communicated earlier this year by Expedia when forced to abandon its MFN clause for hotels in Australia. Accordingly, while both companies refuse to comment on the complaint made by Nustay, it appears that at least Expedia peruses (or intends to pursue) this ranking strategy. The question is off course whether such practices may constitute a competition law infringement, and if so of which provision?

Should ranking be allowed to depend on cross-platform pricing?

The ranking of search results on a given platform is an integral part of the platforms’ governance, which is paramount to the success of the platform (see previous post on this here). In essence the display of offers and/ or information by the platform to its customers (mainly end consumers) constitutes an important aspect of the platforms’ intermediary match-making services, where the relevance of the ranking for these customers represents a great deal of the quality of the platform service. Accordingly, intervening in the choice of the selection criteria that determine the ranking should not be taken lightly as it is a direct intervention in a platforms’ freedom to determine the quality of its service.

Including cross-platform pricing for the of purpose ranking is therefore a rather sensitive matter. On the one hand it is quite clear the such practices, similar to wide MFN clauses, reduce the incentives of the platforms’ trading partners to make distinct offers across different platforms and thus likely to reduce price competition among such platforms and create a barrier to entry for new (low cost) platforms. In this sense the difference between such ranking strategies and the use of MFN clauses is mainly that there is no contractual obligation that prohibits price disparity across platforms. Beyond this formal aspect, however, it would appear that the two strategies are capable of creating similar undesired effects. Furthermore, if cross platform pricing is used to impact the visibility and /or attractiveness of the platforms’ trading parties in a more notable manner than the ranking alone such anti-competitive concerns are more likely to a intensify.

On the other hand, when considering the purpose of the ranking for customers it can be argued that taking cross platform pricing into account makes quite a bit of sense. By taking this aspect into account the platform displays the best priced offers that it can provide in comparison to competing platforms, which is evidently valuable for the platform customers (consumers) and can reduce their search and transaction costs. In such a scenario customers are assured that the first offers they see are likely the best ones to be found with respect to a specific product or service, reducing the need to turn to a meta-search engine to compare prices across platforms. Furthermore, it also allows platforms to reduce any free-riding by the platforms’ customers and trading parties in a less aggressive manner than wide MFN clauses allowing them to better recoup their investments in the improvement of the platform services.

As with most competition law cases, this issue will be a matter of (counter) balancing the anti-competitive effects with the efficiencies that can be generated by such practices. The final outcome of a comparable assessment is hard to predict. The resemblance of this approach to ranking with the wide MFN clauses in terms of potential effects is likely to qualify it as problematic in across the jurisdictions that banned MFN clauses. This is particularly true with respect to platforms with significant market power (such Booking.com and Expedia) that constitute unavoidable trading partners for sellers or service providers. At the same time the detrimental impact on competition is not as clear as in the case of wide MFN clauses as the ranking of offers on a platform does not always have a significant impact on competition among service providers (see on this previous post on Funda). Furthermore, the ranking on the platform can be often modified by the platform customers based on their own preferences and needs. Accordingly, the anti-competitive concerns raised by such a strategy depend to a great degree on the importance of the platform ranking for the decision making process of the platform customers. The higher the tendency to rely of the default ranking provided by the platform for the purpose of conducting a transaction the more likely that such ranking strategies will have a similar effect to wide MFN clauses. This off course also depends on the importance that the cross platform-pricing criterion is given in the process of establishing the ranking which often depends on multiple criteria.

What type of infringement are we dealing with – restriction vs. abuse?

Lastly, if such an approach to ranking is indeed implemented by platforms and may indeed have a detrimental effect on competition one must also determine under which provision would such practices fall. Similar to the MFN clauses, the choice to include cross platform pricing for the purpose of ranking may be part of the terms and conditions of the concerned platforms which will have to be communicated to the trading parties of the platform. If that is not already the case, it will have to be so once the P2B transparency regulation comes into force. Accordingly, one may argue that the matter of the ranking criteria should then fall under the scope of Art. 101 TFEU, as in the case of the MFN clauses, since they form part of the agreement between the platform and its trading parties. In such a scenario these practices could perhaps be considered as a restriction of competition by effect if such effects can indeed be proven. Alternatively, such practices could also be considered within the ambit of Art. 102 TFEU. Based on the available information about the case of Nustay, it would appear the trading parties of the platform i.e. the hotels were utilizing the possibility of making differentiated offers across platforms. It is not until Booking.com and Expedia, allegedly, started lowering the ranking of such parties that the hotels contacted Nustay with requests to raise prices. Accordingly, it would appear that in the absence of such a ‘punishment’ strategy the hotels would have persisted with their differentiated offers indicating the existence of some form of coercion and power asymmetry between the platforms and the hotels. Consequently, at least in the case of Booking.com and Expedia, such practices could (or should) be considered under Art. 102 TFEU as it has been seen in the case of the Amazon e-books MFN clause case. Such an enforcement choice would require, however, not only an effects analysis but also the finding of dominance that is rather cumbersome in the case of online platforms and that may be even more difficult if collective dominance would be required.

Conclusion

The recent complaint against Booking.com and Expedia, if pursued by the Commission, would require undertaking a complex competition law analysis for the purpose of finding an infringement of either Art. 101 or 102 TFEU.  However, despite these difficulties it may be worth pursuing this claim for the purpose of providing more guidance on the interaction between the platform ranking mechanism and competition law. This matter will eventually also have to be addressed in the current investigations concerning self-preferencing practices of platforms as well as in the future impact assessment of the P2B transparency regulation. Given the novelty of this (potential) problem, the focus of such an investigation and its outcome should therefore be on providing legal clarity for future cases which may even help sort out the current legal fragmentation concerning MFN clauses is also addressed in the context of this complaint.

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Daniel Mandrescu

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Ph.D. Fellow, Europa Institute, Leiden University

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