On 28 March 2017, the CMA published an update paper in its market study of digital comparison tools. The one year market study was launched in September 2016 and this report marks the halfway stage.
The report finds that digital comparison tools (“DCTs”) offer substantial benefits in reducing hassle for consumers and increasing competition, but that there is “room for improvement”.
The market study may be followed by:
- Competition or consumer enforcement action in individual cases – this might affect not only the DCTs but also suppliers in the sectors that use DCTs;
- ‘Cross-sector principles for DCTs’, aimed at addressing the inconsistent and patchy regulatory rules currently applicable to DCTs across different sectors;
- Possible measures or recommendations to improve DCTs’ access to data in order to allow them to provide consumers with a better service.
The CMA does not intend make a market investigation reference. This means that the market study will not be followed by an 18 month root-and-branch review of whether the markets are sufficiently competitive.
The CMA is seeking comments on its update paper by 24 April 2017.
Which sectors does the market study cover?
The market study focuses on broadband, credit cards, energy, flights, home insurance and motor insurance. However, the CMA expects many of the issues to be common to DCTs outside its focus sectors, and any outputs from the market study are likely to have a wider impact.
What are the CMA’s competition concerns?
The CMA has identified the following contractual restrictions which it considers may give rise to competition concerns.
Wide MFN/price parity
A ‘wide MFN’ prohibits a supplier from offering its products more cheaply on its own website or on any other DCT.
It is unsurprising that the CMA is critical of wide MFNs.
A prohibition on wide MFNs was one of the key remedies imposed by the CMA in its private motor insurance (“PMI”) market investigation. The CMA was concerned that wide MFNs reduce DCTs’ incentives to compete on commission and to innovate.
Wide MFNs have also been criticised (and in some cases prohibited) by numerous European competition authorities in relation to hotel online booking.
However, the CMA is yet to conclude that wide MFNs constitute a competition law infringement. In the PMI market investigation, the CMA found they were a ‘feature of the market’ having an adverse effect on competition, which allowed the CMA to impose a remedy. Under the market investigations regime, the CMA did not need to conclude that they were unlawful in order to prohibit them.
Narrow MFN/price parity
A ‘narrow MFN’ prohibits a supplier from offering its products more cheaply on its own website, but allows the supplier to do so through other DCTs/sales channels. The CMA finds these are more prevalent in the home insurance, credit cards and flights sectors.
The CMA is concerned that narrow MFNs may harm competition by lessening/eliminating competition from the supplier’s own website.
Alternatively, narrow MFNs may replicate the effects of a wide MFN. The CMA’s theory is that if a supplier wishes to protect the competitiveness of its own website, a narrow MFN may force it to increase its prices across all DCTs. The CMA is investigating whether this concern is borne out in practice.
The CMA acknowledges that narrow MFNs may deliver consumer benefits, by helping to prevent freeriding on DCTs’ investments and helping to sustain DCTs’ business model by maintaining their credibility.
Although the CMA has not said that narrow MFNs constitute a competition law infringement, that they are even highlighted as a potential concern is likely to cause significant consternation for some DCTs.
Interestingly, in many of the European hotel online booking cases, the competition authorities have been prepared to accept narrow MFNs provided that the parties removed wide MFNs.
Restrictions on placing Google search advertising
The CMA has also raised potential competition concerns that some agreements between DCTs and suppliers – particularly in the broadband sector – restrict suppliers’ ability to advertise on Google’s search pages (through Google’s search advertising function AdWords).
A key part of many suppliers’ marketing campaigns is bidding, through Google AdWords, to place an ad on Google’s search page when a consumer searches for a particular term. The DCT agreements contain restrictions on this:
- Narrow non-brand bidding: the DCT and supplier will not bid on each other’s brand name when the search term only includes that brand name (for example, “Brand X”);
- Wide non-brand bidding: the DCT and supplier will not bid on each other’s brand name when the search term includes that brand name alone or with other words (for example, “Brand X” or “Compare Brand X deals”; and
- Negative matching: the DCT and supplier will add each other’s brands to their ‘negative keywords’ which prevents their ad appearing when the search term includes that brand name alone or with other words.
The CMA considers that all three types of restriction may lessen competition. Its concern is, for example, that an agreement that a supplier’s brand will not appear when a consumer searches for a DCT may reduce the competitive pressure felt by that DCT. The CMA has acknowledged though that there may be efficiency justifications for these restrictions.
The CMA’s main focus appears directed at negative matching agreements as the CMA says that these have greater scope for consumer harm and are likely to be harder to justify.
This is an interesting issue for the CMA to raise at this stage. The CMA previously decided not to pursue an investigation referred by Ofgem, the energy regulator, as to whether particular restrictions on search bidding gave rise to a competition law infringement on the basis that the CMA did not view this as an administrative priority. However, it appears that having looked in detail at this issue on a market-wide basis they are concerned that particularly negative matching could raise competition issues. If the CMA does ultimately decide that this is an issue then this could have broad implications not just for DCTs and suppliers but also for other advertisers.
Non-resolicitation clauses prevent a DCT from contacting a customer who has purchased the supplier’s products from that DCT, in respect of the same product, for a certain period of time. The CMA finds these are common in home insurance and also appear in the energy sector.
The CMA considers that these may reduce competition between suppliers and may reduce innovation by DCTs. The CMA acknowledges that there may be efficiency justifications for non-solicitation clauses. However, the CMA comments that “it is not clear to us that non-resolicitation clauses that go beyond the start of the renewal period of the consumer’s initial contract with the supplier are necessary to project the supplier’s investment.”
What should businesses do?
Given the potential competition concerns highlighted by the CMA, businesses should review their agreements for competition law compliance. The CMA is clearly suspicious of wide MFNs and negative matching restrictions in particular.
Should the CMA take enforcement action, it seems likely that this would start within the focus sectors. But this is not necessarily the case, for example if the CMA sees evidence of wide MFNs elsewhere.
Parties whose agreements contain these restrictions should consider them carefully – the lawfulness of any such restrictions will require case by case assessment of the impacts and any justifications.
Any interested party can also submit a response to the consultation, including suppliers and DCTs from outside the focus sectors. A response is likely to have greater influence if supported by evidence of competition working well or otherwise.