The advent of big data analytics has favoured the emergence of forms of price discrimination based on consumers’ profiles and their online behaviour (i.e. personalised pricing). This paper, available here, analyses this practice as a possible exploitative abuse by dominant online platforms. It concludes that such practices can have ambiguous welfare effects, and be subject to a case-by-case analysis. It also argues that competition law is more suitable than omnibus regulation – particularly data protection and consumer law – to tackle the negative effects of personalised pricing, particularly because competition authorities could negotiate with online platforms different kinds of behavioural commitments that could significantly tame the risks of personalised pricing.
Section II looks at price discrimination in online markets.
Economists typically distinguish between three different types of price discrimination. First-degree price discrimination takes place when a firm is able to discriminate perfectly among its customers. Second-degree price discrimination means that the firm discriminates between its customers by granting discounts once a specific purchase quota is achieved (“non-linear pricing”). Third-degree price discrimination takes place when the firm charges different prices to different groups of customers.
Traditionally, first-degree price discrimination was considered de facto impossible: sellers could not have enough information to accurately differentiate the price of a product or service for each customer. While online platforms cannot sufficiently “guess” the individual willingness to pay (yet), big data analytics increasingly allow online platforms to divide their customers into smaller and smaller groups. This has led to increased levels of price discrimination, often coupled with other forms of personalisation.
Section III discusses the welfare effects of price discrimination.
The economics’ literature has recognised that a firm can implement an effective strategy of price discrimination when three cumulative conditions are fulfilled: the firm has some degree of market power; the firm can prevent arbitrage; the firm can estimate the consumer’s valuation of a product and adjust its price accordingly.
In practice, imperfectly competitive markets where a number of online platforms have some degree of market power are most common in the digital world. The impact of price discrimination in imperfect competitive markets varies on the basis of the categories of information that the competing platforms have access to, as well as on the brand preferences and search costs that online consumers face. The ambiguous effects of price discrimination on consumers’ welfare show that there is no reason to ban a priori forms of personalised pricing in digital markets.
Section IV evaluates whether (and how) price discrimination may amount to an abuse of dominance.
A dominant firm breaches Art. 102(c) TFEU when it applies “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Price discrimination clearly falls within the scope of “dissimilar conditions”. Such discrimination can take different forms: besides classical discrimination in the form of different retail/wholesale prices, the dominant company can discriminate its customers via selective price cuts and target rebates. The concept of ‘equivalent transactions’ was addressed in cases such as United Brands and British Airways. To determine whether transactions involving the same product are indeed “equivalent”, competition authorities should analyse factors relevant to determine the nature of the product/service sold by the dominant company to its customers and assess whether the different supply costs faced by the dominant company made the transactions “equivalent”. The concept of “competitive disadvantage” has also been interpreted by the CJEU in cases such as British Airways and Clearstream. Traditionally, the Court has “presumed” that price discrimination places the customer who pays the higher price for the same product/service at a competitive disadvantage in comparison to the “other trading partners” (i.e. the customer’s competitors).
Recently, the MEO decision – which I reviewed here – changed the law on “competitive disadvantage” and extended the effects-based analysis of Art. 102 TFEU to exploitative abuses. In line with Intel, the Court in MEO ruled that the competition enforcer should take into consideration “all the relevant circumstances” to determine whether price discrimination could produce a competitive disadvantage. However, the standard of legal proof is different in the two judgments. While in Intel the CJEU indicated a list of conditions that the Commission should consider during the administrative procedure to rebut the initial presumption of anticompetitive abuse, in MEO those same conditions must be considered when establishing whether one of the elements of the infringement is present – i.e. the existence of a competitive (dis)advantage. This puts the burden of proof squarely on the competition enforcer in discrimination cases. Further, the language of the Court in MEO is ambiguous in relation to a number of issues, such as what the required threshold is that a competition agency should satisfy in order prove the presence of a competitive disadvantage.
As a result, it could be argued that MEO has increased the burden that competition enforcers face in sanctioning forms of personalised pricing. In particular, in order to assess the presence of a discriminatory strategy, the competition authority would now need to prove that the price discrimination is a strategy systematically implemented by the online platform vis-à-vis certain customers. The regulator would need to analyse the inner logic of the firm’s algorithm to understand whether it systematically discriminates between different categories of consumers. Such an analysis would be a very complex task. Further difficulties would arise from the need to identify and outline the relevant counterfactual scenario. In view of these considerations, it is not surprising that no competition authority has ever pursued an investigation into behavioural discrimination in data markets, and it seems unlikely that any enforcement agency will make any such attempt to this regard in the near future.
Section V looks at possible competition remedies for personalised pricing.
If an antitrust agency found enough convincing evidence to sanction a dominant online platform, the issue of identifying suitable remedies would come up. A fine coupled with a cease-and-desist order would probably be an unwise solution, due to the lack of precedents in this area. In light of the new challenges posed by competition law enforcement in the digital economy, regulators should “guide” firms’ behaviour, rather than sanction it.
In particular, competition agencies can resort to commitments, and particularly “behavioural” remedies. Via a behavioural remedy, a firm commits to behave in a certain manner in the future in order to “prevent” a competition law violation (e.g. the firm might agree to continue to supply to a competitor for a certain period). The authors argue that, by working in cooperation with the dominant online platform, the competition authority could design four types of behavioural commitments to address the competitive concerns caused by personalised pricing: limiting the amount of personal data collected by the platform; requiring the platform to share customer data with competing platforms; introducing transparency requirements by the online platform when implementing a personalised pricing strategy; and requiring a platform to grant an opt-out right from personalised pricing to its customers.
Section V also considers a number of possible regulatory alternatives.
The behavioural remedies suggested by the authors borrow from other areas of law. In particular, while data protection law inspires the remedies concerning the limitation / sharing of customers’ data, transparency requirements and the opt-out rights borrow from the EU consumer law acquis. This reflects the close links of competition, data protection and consumer law in the data economy.
However, the enforcement of competition law in digital markets need not be limited by existing sector regulation, and the intervention of a competition authority in the digital economy would be particularly well suited to fill the “gaps” in the relevant regulatory framework. In doing this, competition authorities could and should dialogue with the relevant regulators (i.e. data protection/consumer protection authorities) in designing behavioural remedies. Besides filling the “gaps” in the regulatory framework, competition law intervention is also to be preferred in digital markets due to its case-by-case approach. Given the ambiguous effects of personalised pricing on consumers’ welfare, there is no reason to prohibit every form of personalised pricing. Unlike omnibus regulation, competition law would only sanction cases of personalised pricing that negatively affect the consumers’ welfare.
This is a clear, well-structured paper on how competition law could address personalised pricing. I particularly like how well it reads. I also enjoyed its discussions of possible legal constraints, potential remedies and regulatory alternatives.
However, by the end of it I was slightly surprised that the authors did not try to address in more detail when personalised pricing might amount to a competition problem. This is particularly striking given the detailed discussion of the case law on price discrimination that the authors engage in. The paper is useful in that it outlines this case law and the main challenges in bringing cases against discriminatory practices. It would be even more relevant if it tried to identify those situations in which such pricing practices might actually infringe competition law, beyond a general assertion that this will occur when price discrimination leads to an overall negative impact on consumers’ welfare.
In addition, I was not particularly convinced by the authors’ arguments regarding the balance of competition law and regulation. While I accept that the existence of regulation does not prevent competition law from applying, including when regulatory schemes are inefficient, this does not mean that competition law can or should simply intervene to ‘address’ regulatory gaps. This is an approach that has met with some support recently, but as I have made clear repeatedly, I do not think that competition authorities should act as general regulators of last resort, nor that competition law as it stands is well placed to close all such gaps. After all, even assuming that competition law can impose adequate remedies, it can only do so if the conditions for competition intervention are met. In this regard, the authors’ argument that competition law can play any an important role in this area seems to contradict their earlier opinion that investigations of behavioural discrimination in data markets are too difficult and that is oy unlikely that any enforcement agency will attempt to enforce competition law against such practices in the near future. Given this, it is not clear at all why we consider that competition law is preferable to regulatory intervention in this field – even before we go back to the simple fact that it is unclear whether personalised pricing will amount to an abusive practice in the first place, and that regulation across the board to prevent conduct that infringes values and interests other than consumer welfare may well be justified on its own terms.