Selective distribution systems are usually put in place in place to ensure that authorized distributors fulfil a certain quality standard, thereby avoiding losses in consumers’ brand valuation. Selective distribution systems often include clauses that allow manufactures to achieve better channel coordination in terms of prices, advertising, services, etc. A common way to do so is to restrict their selective retailers in advertising or pricing practices (e.g. to ensure that advertising campaigns or sales are coordinated).
The paper – which can be found here – looks at recent German and EU cases on selective distribution systems, and tries to understand the differences between them. In the Asics case, the German Bundeskartellamt (BKartA) ruled that a selective distribution system by sport shoe manufacturer Asics, which included restrictions regarding online advertisement and price search engines, infringed competition law. By contrast, in the Coty case the European Court of Justice ruled that relatively similar clauses in the selective distribution system of a beauty products manufacturer were compatible with competition law.
The paper is structured as follows:
- In the first section, the paper reviews the distribution systems of Asics and Coty.
In Asics, the system prohibited authorised dealers from allowing a third party to use Asics brand names. The goal was to guide customers to the website of authorised dealers, even if this prevented authorised dealers from advertising on search engines and on supporting price comparison websites. In addition, Asics’s selective distribution system also prohibited dealers from using online market places to sell Asics’ products.
The Coty selective distribution system had similar clauses – in particular, Coty’s selective distribution system prohibited its distributors from selling its products on online market places such as amazon.com or price comparison websites where consumers could buy the product directly.
- The second section reviews the effects of these selective distribution systems on both intra- and inter-brand competition.
This section begins with an overview of the anticompetitive effects of these schemes. First, they reduce the ‘searchability’ (sic) of dealers, making it harder for consumers to find them, and thereby reduce intra-brand competition. There are two mains reasons why manufacturers may want to reduce intra-brand competition: (i) even if inter-brand competition is weak, a manufacturer suffers from fierce competition between its dealers if contracts between the manufacturer and each of the dealers are secret. This secrecy creates an incentive for each dealer to try to pay as low a franchise fee to the manufacturer as possible in order not to be undercut by other distributors benefitting from better terms from the manufacturer. As such, manufacturers have incentives to dampen intra-brand competition; (ii) weaker intra-brand competition also dampens competition between different brands. If brand manufacturers steer consumers exclusively towards their own online presence and are able to charge higher prices there, rival brands will follow suit. This will lead to a higher price and profit level in the industry in general.
On the pro-competitive side, however, there are also a number of potential justifications for the implementation of selective distribution systems such as these. The first one is to avoid free-riding by distributors, and to ensure quality and service investment by retailers. For both Asics and Coty products, providing services to consumers is an essential part of the company’s success. For example, Asics’ sport shoes are experience goods which may require advice from experts. Coty’s perfumes need to convey an aura of luxury and need to be displayed in adequate atmosphere. Providing these services is costly for dealers. With fierce competition from own-brand rivals, a dealer cannot recoup this investment. The second reason is that such clauses allow better channel coordination by manufacturers, with implications for the manufacturers’ brand. For example, price comparison websites may lack functionality or advice, which reflects badly on the product’s reputation.
- The third section compares the Asics and Coty
Despite similarities in the respective selective distribution systems, the decisions in Asics and Coty were very different. Whereas the BKartA held that Asics’s clauses were hard-core restrictions of competition, the European Court of Justice found that Coty’s restrictions were legal. The author argues that these diverging rulings can be explained by several differences in the nature of the products in question.
As regards Asics, the BbKartA found that the anticompetitive effects largely overwhelmed any procompetitive effects of the selective distribution system. As there is a large number of sport shoes available in the market, both from brand and non-brand manufacturers, a ban on online advertising makes it very difficult for retailers belonging to the selective distribution system to be found. A prohibition to use online market places or price comparison engines, which reach a very large number of potential consumers, has similar effects. The procompetitive effects of such restrictions are minor when it comes to running shoes. For example, it is unlikely that there will be a significant reduction in the brand image of Asics when its shoes are sold through third parties.
In Coty, on the other hand, the court found the procompetitive effects to be decisive. The European Court of Justice emphasised the brand image and the aura of luxury that the products of Coty convey, and how that image could be damaged by sales over third-party internet platforms. Coty’s beauty products have immaterial characteristics that need to be preserved to allow consumers to distinguish them from the products of non-branded manufacturers. The ‘selection of goods, advertising, and sales presentation’ by Coty contributes to this luxury perception, and is therefore essential.
Comment: This is a short overview of two cases on selective distribution cases that describes why they were decided differently.
While the reasoning of the cases is said to be based on economic theory, the decisions seems to have come down to subjective assessment of qualitative evidence – such as the perception of ‘luxury’ and the likely impact of using certain sales channels on a company’s brand. While this may have an impact on legal certainty, it also seems to justify the adoption of an effects-based approach to online selling bans, as is argued in the next paper.