In “The Prohibition of Price Parity Clauses and the Digital Markets Act,” Martin Peitz of the University of Mannheim explains the challenges of analyzing price parity clauses and how the European Union decided to harmonize the different approaches adopted by national competition authorities by including a general prohibition of these clauses in the Digital Markets Act (DMA).
Online platforms, from Booking.com to Amazon or Apple have frequently used price parity clauses to promote sales on their platforms, but their procompetitive or anticompetitive effects are not always clear as it depends on the scope of the clause.
Price parity clauses stipulate that sellers on a platform cannot set higher retail prices on that platform than in a certain set of alternative sales channels. This may include certain direct sales channels or other indirect sales channels provided by competing platforms. For these clauses, the effect isn’t clear. Yet, where there is a consensus among regulators and academics is that wide-price parity clauses, this is when sellers must not offer a lower price through any other channel (including direct and indirect channels) are anticompetitive.
Thus, at first glance, it may look surprising that the prohibition of price parity clauses, in general, is included in the DMA. By prohibiting price parity clauses in the DMA, it will arguably be much easier to avoid that they arise in the first place and fewer public resources will be needed to go after those gatekeepers employing them. Price parity clauses may also be seen as particularly problematic when invoked by gatekeeper platforms as addressed by the DMA and thus justifying a per se approach for those platforms.
The basic argument by which price parity clauses are anticompetitive is straightforward. Consider first a single platform that charges fees on the seller side and competes against the direct sales channel. If the platform obliges sellers on its platforms not to offer a lower price in the direct channel, consumers are not inclined to use the direct channel if the platform offers some convenience benefit.
The platform will then set a high fee and extract a large fraction of seller profits if many consumers do not check for products in the direct sales channel when the product is not visible on the platform. If price parity clauses were prohibited the platform’s fee setting would be constrained because the sellers would serve consumers in the direct channel if the fee were too high. The idea here is that once consumers find a product they like on the platform, they are inclined to check for this product outside the platform.
Martin’s article also aims at predicting the effects of this prohibition for gatekeepers. Looking at what happened in Germany after some price parity clauses were forbidden for hotel reservations, the results indicated that conversation rates in the platform didn’t change much despite the absence of the clauses. This, despite the rates charged by the platform to hotels didn’t change either. Interestingly, the platforms found a different way to attract customers and keep the same number of reservations without the price parity clauses, a recommender system. All that was needed was sufficient data and a recommendation algorithm that works in the best interest of the platform.
Then, the platform no longer needs price parity clauses and achieves the same or a similar outcome. The prohibition of price parity clauses might therefore turn out to be ineffective.
Yet, the DMA also addresses practices that serve as substitutes to price parity clauses. Recital 37 of the DMA ends with “… it should not be accepted that gatekeepers limit business users from choosing to differentiate commercial conditions, including price. Such a restriction should apply to any measure with equivalent effect, such as for example increased commission rates or de-listing of the offers of business users.”
Therefore, in addition to prohibiting price parity clauses, the DMA also deals with other practices that have the same effect trying to have a more dynamic effect to cover future practices.
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