On 24 July 2018, the European Commission ("Commission") imposed fines on four electronics manufacturers for fixing the prices of their online retailers. In assessing the impact of resale price maintenance, the Commission also focused on the use of pricing algorithms by retailers. The decision is a further indication that algorithms are a high priority for competition authorities.

The Commission imposed fines on manufacturers from Japan, Taiwan and the Netherlands. The Commission found that the manufacturers restricted the freedom of online retailers to set their own resale prices for electronic products (e.g. notebooks, headphones, speakers, kitchen appliances, vacuum cleaners or hair dryers) in violation of Article 101(1) of the Treaty on the Functioning of the European Union ("TFEU").

Fixed or minimum resale prices not permissible under competition law

Article 101 (1) TFEU prohibits agreements between companies that restrict competition and expressly cites direct and indirect fixing of selling prices. The prohibition also applies to suppliers and retailers (i.e. the vertical relationship between companies at different market levels). Resale price maintenance is a hardcore restriction (Art. 4 lit. a) of the Vertical Block Exemption Regulation), which as a rule cannot be exempted from the prohibition in Article 101 (1) TFEU.

Maximum retail prices and recommended retail prices are lawful, but fixed or minimum resale prices are not permitted. Resale price maintenance can also occur when manufacturers exert pressure or threats of sanctions on retailers. Such measures are particularly effective when combined with price monitoring systems.

Threats, sanctions and monitoring tools

According to the Commission, the fined electronics manufacturers acted in this way. The manufacturers intervened with online retailers who offered products at prices the manufacturers considered to be low. Such retailers faced threats or sanctions such as blocking of supplies. According to the Commission, the manufacturers also used sophisticated monitoring mechanisms that effectively enabled them to track resale prices and react swiftly in the case of price decreases.

In its first resale price maintenance fines decisions in years, the Commission imposed fines totaling over EUR 111 million. Higher fines were not levied because of the manufacturers' extensive cooperation with the Commission.

Pricing algorithms and their impact on overall online prices

This decision is particularly noteworthy because the Commission expressly emphasised the impact of pricing algorithms, noting that many online retailers use pricing algorithms to automatically adapt their retail prices to those of competitors. The Commission is of the view that pricing restrictions imposed by manufacturers on individual low-price online retailers typically have a broader impact on overall online pricing for the respective consumer electronics products.

Hence, pricing algorithms have kept price levels high in the online market. Ultimately, the resale price maintenance in the relationship between supplier and retailer also has horizontal effects between the retailers.

Competition authorities have algorithms in their crosshairs

Algorithms have been high on competition authorities' list of priorities for some time, albeit in a different context. In a vertical case between suppliers and retailers, the Commission's decision focuses on the intensifying impact of resale price maintenance through pricing algorithms used by the restricted retailers themselves.

Algorithm-based monitoring systems

The antitrust discussion in vertical cases focuses primarily on algorithm-based monitoring systems, which suppliers can use to monitor the resale prices of retailers. If manufacturers use such monitoring systems to swiftly issue pressure or sanctions against retailers when underpricing is detected, the threshold for de facto resale price maintenance can be exceeded.

Algorithms used as 'assistants' in competition law violations

Furthermore, competition authorities are focusing on algorithms that are being used as "assistants" in horizontal price fixing. Specifically, this may include companies that:

  • use algorithms to transmit strategic information to competitors or to analyse strategic information received from competitors,
  • fix their prices and agree on the use of a specific algorithm to implement this price fixing,
  • agree to instruct a specific IT service provider to program the same algorithm for each company.

The alleged spare parts cartel mentioned in the media also appears to fall into one of the last two categories. Two French car manufacturers are said to have used – as agreed and in conjunction with an IT service provider – the same pricing algorithm to adjust prices for spare parts.

Commissioner Vestager: Companies cannot hide behind a computer program

The widely publicised statement by Competition Commissioner Margrethe Vestager that "companies can't escape responsibility for collusion by hiding behind a computer program" is also valid for the examples mentioned above. Algorithms used in this way violate competition law and can be targeted by competition authorities with the existing competition law tools.

Artificial Intelligence and self-learning algorithms

Whether this also applies to Artificial Intelligence (AI) and so-called self-learning algorithms, which coordinate prices and could themselves be – so to speak – the "offenders", is currently the subject of heated debate.

Self-learning algorithms are computer programs that process information and continuously learn. If such algorithms were to learn autonomously (i.e. without further interaction of the companies) that it makes economic sense to adapt to prices published online by competitors, an agreement or concerted practice between companies would be questionable – and thus the application of the prohibition in Article 101(1) TFEU as such. It may be decided that prices adapted in this way are the result of parallel decision making permitted under competition law.

German Monopolies Commission recommends sector inquiries into algorithms

Whether and to what extent current law must be adapted in these cases is now the subject of debate. In its latest report of July 2018, the German Monopolies Commission (Monopolkommission) highlighted the risks of pricing algorithms and argued specifically for increased market observation through sector inquiries.