Most favoured nation clauses (MFNs) are once again in the competition law spotlight. On 19 November 2020 the CMA announced a £17,910,062 fine for price comparison website Compare The Market over its imposition of wide MFNs in agreements with a number of home insurers during the period 1 December 2015 to 1 December 2017.
What is an MFN?
MFNs typically stipulate that a supplier will offer its good or service to the buyer at the same (best) price that it offers to any third parties. In the price comparison website context they tend to come in two forms:
- Narrow MFNs – the supplier agrees not to set a lower price on its own website compared to prices offered the comparison website.
- Wide MFNs – the supplier agrees not to set a lower price on its own website, or to offer a lower price to any other price comparison website (or other sales channel).
MFNs have been a repeat topic of interest for competition regulators over the last decade. For example, at least 10 national competition authorities in Europe (including the CMA) have investigated the use of MFNs in the online hotel booking market. A number of these investigations led to the companies involved offering commitments to limit their uses of MFNs. As recently as August 2020, Booking.com and Expedia voluntarily agreed to extend their commitments not to impose wide MFNs in the UK (i.e. they agreed not to prevent hotels from offering cheaper room rates on other online travel sites that compete with Booking.com and Expedia).
Why are MFNs a problem?
There are pro-competitive aspects of MFNs. If a price comparison website (PCW) is able to guarantee that it’s showing the supplier’s best price, it is incentivised to invest in its site to make sure it contains high quality features and content. It can also save the consumer time in searching, as it can be confident that the prices available for a specific product or service are the best that can be obtained. In the absence of an MFN there is a risk of free-riding. Consumers might use the PCW to research a product, but then buy it from another site that is able to offer a lower price because it hasn’t made those same investments in quality that helped the consumer identify which product best suited his or her needs. This behaviour arguably removes or reduces the incentive for the PCW to continue to improve its site, to the long-term detriment of consumers.
However, MFNs can also have restrictive effects on competition. They tend to remove the incentive for PCWs to compete on the percentage commission they take from suppliers. This is particularly an issue with wide MFNs. Because the PCW knows that any supplier listing on its site has to do so at its lowest price, it can negotiate the commission it takes on that supplier’s sales without considering how its commission compares to other PCWs. Even if a second PCW offers a lower commission for listings on its site, the supplier cannot reflect that in lower prices on the second PCW without also lowering its prices on the first PCW, where it still has to pay the higher commission. Therefore, there is little incentive for any PCW to offer a lower commission, and ultimately the result is likely to be higher costs for the end consumer.
Regulators have tended to distinguish between narrow and wide MFNs. The former are more likely to be justified because they tend only to bind the supplier’s own online channel, whereas the latter can bind all of the suppliers’ online sales channels, including any other PCWs, which makes it less likely that the pro-competitive efficiencies of avoiding free-riding will outweigh the restrictive effects of less competition on commission.
The Compare The Market decision
These concerns were reflected in the CMA’s decision (as summarised here; the full decision is not yet available). Compare the Market (CTM) had over a 50% market share during the relevant period, and the insurers covered by its network of wide MFNs accounted for approximately 40% of all home insurance sales made through PCWs. The CMA did not hold the clauses to be an infringement of competition law by their very nature. Rather, it analysed the effects of the wide MFNs, stating that:
- If insurers reduced their prices on a rival PCW below the prices offered on CTM, they had to fund an equivalent price reduction on CTM. Accordingly, several insurers refused to enter into promotional deals with CTM’s rivals or adjusted their prices following enforcement action by CTM. Absent the wide MFNs, insurers would have been able to reflect another PCW’s lower commission fees in their prices on that PCW and to freely target price reductions on CTM’s rival PCWs.
- As CTM’s rival PCWs were prevented from gaining a competitive price advantage over CTM for quotes from the relevant insurers, they had reduced incentives to lower their commission fees or otherwise seek to incentivise these insurers to offer them lower prices.
- CTM didn’t need to compete on the merits; it typically benefitted from any reduction in retail prices achieved by its rivals, without the need to lower its own commission fees or provide some other benefit to the insurers. It could also increase its commission fees without that leading to higher prices quoted on CTM compared to its rivals.
- CTM’s rivals were restricted in their ability to expand, because they could not obtain a price advantage over CTM. This inability to obtain a price advantage also led to less competitive pressure on retail prices between all insurers competing on PCWs.
The CMA concluded that CTM’s use of wide MFNs was likely to have resulted in less differential pricing across PCWs by insurers, together with higher commission fees and consequently higher retail prices, to the detriment of consumers using PCWs to purchase their home insurance.
Interestingly, the reason that the infringement ended on 1 December 2017 appears to be revealed in the CMA’s press release. This explains that on 30 November 2017, two months after the launch of the CMA’s investigation, CTM contacted the insurers to inform them it would no longer be enforcing the ‘wide most favoured nation’ clauses. Given the number of previous investigations into wide MFNs, it is perhaps surprising that CTM had continued to use them until this point. In any event, taking this action was not sufficient to dissuade the CMA from pressing ahead with an infringement decision. Presumably, the CMA wanted to set a precedent (and equally, although the MFNs were withdrawn, CTM does not appear to have offered to settle the investigation).
This won’t be the last word on MFNs. The European Commission is currently evaluating the Vertical Block Exemption Regulation and its accompanying Guidelines, as these are due to expire on 31 May 2022. The Commission’s Staff Working Document identifies MFNs as an area that national competition authorities have flagged as an area that the current regime does not give sufficient guidance.