Sector inquiries are investigations that the Commission decides to carry out in sectors of the economy or types of agreements when there are indications that competition may be restricted or distorted within the internal market.40
A sector inquiry is a systematic investigatory tool used to obtain a better understanding of the functioning of a given sector and the types of agreements used in this sector. Through this sector inquiry, the Commission sought to understand how the growth of e-commerce has influenced the choices made by companies regarding the distribution of their products and services and to what extent the growth of e-commerce has led to an increase in contractual restrictions or the emergence of new types of contractual restrictions.
Sector inquiries do not target specific companies. However, the results of a sector inquiry may point to potentially anti-competitive practices and the Commission may – following a sector inquiry – decide to open case-specific investigations. Thus, sector inquiries allow the Commission to set priorities in the enforcement of EU competition rules.
In view of the purpose and nature of the e-commerce sector inquiry, the data collected and presented in the Report should be read as summaries of the qualitative information obtained. They are not intended to be read as statistically relevant figures in the strict sense.
4. The main steps of the sector inquiry
Following the decision41 to launch the sector inquiry, the Commission started a large-scale fact finding exercise, on the basis of requests for information pursuant to Article 17 of Regulation 1/2003 ("questionnaires") between June 2015 and March 2016.
Questionnaires were sent to various actors in the EU in relation to online sales of both goods and digital content.
As an interim step, the Commission published in March 2016 initial findings on geo-blocking in an Issues paper.42 On 15 September 2016 the Commission published a Preliminary Report.43
The publication of the Preliminary Report was followed by a public consultation open to all interested stakeholders. The public consultation ended on 18 November 2016. Altogether, the Commission received 66 submissions.44
Interested stakeholders also expressed their views at a stakeholder conference in Brussels on 6 October 2016. The event provided an opportunity for different stakeholders to put forward their views on the Preliminary Report.
The sector inquiry is completed by the adoption of a Communication from the Commission to the Council and the European Parliament. The Communication is accompanied by this Report which summarises the main findings of the sector inquiry.
5. Analytical framework
The following paragraphs outline briefly the relevant analytical framework underlying the analysis of the data gathered in the sector inquiry. The aim is not to provide a comprehensive summary of the possible positive or negative effects on competition of contractual restrictions used in e-commerce, but to set the legal and economic background in the light of which the information provided during the sector inquiry will have to be read.
On the one hand, vertical restraints may affect the market structure and the intensity of competition, mainly through foreclosing markets, softening competition and facilitating collusion. Importantly, and as acknowledged in the Vertical Guidelines45, competition concerns with vertical restraints would normally arise only if there is insufficient competition at one or more levels of the supply chain. Moreover, an important objective which guides any assessment under European competition law is that of achieving an integrated internal market. As a result, the creation of obstacles to market integration is a concern with regard to vertical restraints.
In relation to goods, the sector inquiry examines the prevalence of certain distribution models, such as exclusive and selective distribution agreements, as well as contractual provisions limiting the ability of retailers (i) to sell cross-border within the EU, (ii) to sell on marketplaces, (iii) to use price comparison tools, and (iv) to set the retail price freely. Such provisions may restrict competition and may lead to the partitioning of the internal market in breach of the EU competition rules. A detailed assessment of the different restrictions and the applicable legal framework is presented in the sections dedicated to the specific restrictions.
In relation to digital content, the sector inquiry investigates the presence of territorial restrictions and geo-blocking in the online distribution of digital content, with a focus on music and audiovisual content. The sector inquiry also examines the prevalent copyright licensing models for online distribution and their possible impact on competition, in particular, with respect to market entry and the possibility of developing new business models or new services.
The focus is on exclusive licensing and in particular its modalities which, under certain conditions, could raise concerns of input foreclosure and the resulting reduction of competition at the distribution level.46 Exclusive licensing may also raise concerns about exclusion of actual or potential competing distributors at the distribution level.47 The issue of access to digital content and potential exclusion of digital content providers is particularly important given the nature of digital content distribution, where offering certain (premium) content may be necessary in order to attract customers.
On the other hand, vertical restraints may benefit customers, mainly, but not only, through allowing companies along the supply chain to internalise external effects arising either vertically (between a supplier and its distributors) or horizontally (between distributors or between suppliers). Vertical restraints may also help avoiding hold-up in case of relationship-specific investments, alleviate capital market imperfections and, more generally, reduce transaction costs.48 Dynamic considerations related to investments in the creation of new products may also be relevant for the assessment of certain vertical restraints.49
Vertical externalities arise because of the complementary nature of the role of suppliers and distributors in the process through which goods and services reach customers. The decisions and actions taken at the different levels of the supply chain determine aspects of the product offering such as price, quality, service level and marketing, which affect not only the company taking the decisions but also its commercial partners at other levels of the supply chain.
For instance, retail investment in assuring a particular quality or brand image and, more generally, the offering of demand-enhancing customer services, such as promotion, pre-sale advice by specialised selling staff, or post-sale assistance, do not only benefit distributors but also their suppliers. However, a distributor deciding independently on the level of such services will not take into account the profits accruing to the supplier from each additional sale or from maintaining a reputation for high quality. Hence, he may choose a suboptimal level of these services from the point of view of the supplier and, under certain conditions, also from the point of view of customers.
Similarly, independent retail price setting may lead to higher retail prices and lower joint profits compared to a situation where decisions of suppliers and distributors were to be coordinated with a view to maximising their joint profits.50
Horizontal externalities may arise between distributors of the same product when a distributor cannot appropriate fully the benefits of his (costly) sales effort. For instance, demand-enhancing pre-sale services offered by one distributor, such as personalised product advice, may lead to increased sales from competing distributors offering the same product and, thus, create incentives among distributors to free-ride on costly services provided by others. For example, customers may visit a brick and mortar shop to try out a product or obtain other useful information on the basis of which they take the decision to purchase, but then order the product online from a different distributor.
The possibility of such free-riding and the respective inability of the distributor that offers customer services to appropriate fully the benefits, may lead to suboptimal provision (in terms of quantity and/ or quality) of such services from the point of view of the vertical supply chain.51
In the presence of such externalities, suppliers have the incentive to control some aspects of the distributors' operations. In particular, through establishing common ownership of the different levels of the supply chain (vertical integration) or through employing different vertical restraints, suppliers could internalise the abovementioned external effects, increase the joint profit of the vertical supply chain and, under certain circumstances, consumer welfare.
For example, granting exclusivity or setting up a selective distribution system may be a way for suppliers to alleviate free-riding and to restore the incentives of retailers to increase sales effort. Imposing price restraints could achieve the same objective.52 Free-riding concerns among retailers and the need for exclusivity may be particularly relevant in cases where establishing a new brand or an existing brand in a new market requires substantial (sunk) investments on the retailer side.53
A selective distribution system may also help suppliers build reputation for high quality and convey a desired brand image.54 Sometimes it may be important for a supplier to signal its quality through limiting its distribution to certain distributors that have a reputation for selling high quality products only55 and this can be achieved, for example, through exclusive or selective distribution.
Vertical restraints could also be employed to deal with opportunistic behaviour that may arise with the so-called relationship-specific investments, i.e. investments that have little value outside the specific vertical relationship.56
Once such investment has taken place and to the extent that it is largely sunk, the party which bears the cost of the investment could find itself in a weak bargaining position vis-à-vis its trading partner who may have an incentive to engage in opportunistic renegotiation of the terms of the deal. In anticipation of this, the incentives to invest are likely to be weaker and, therefore, the level of investment may be suboptimal from the point of view of the vertical supply chain.
Such situations may arise with respect to investments made both by distributors and by manufacturers. For instance, distributors may have to invest in special retail facilities, which cannot be used for the distribution of other manufacturers' products. Granting exclusivity could be a way for manufacturers to provide sufficient investment incentives to distributors.
Finally, exclusivity may contribute to the alleviation of problems related to the presence of asymmetric information in the context of capital provision.57 Such considerations could be particularly relevant for the digital content sectors, where one may encounter high uncertainty on the demand side and high sunk production costs on the supply side.
Often the same objective could be achieved through different vertical restraints but their effectiveness in solving the problems mentioned in the previous paragraphs and the extent to which customers benefit will depend on the specific circumstances of the vertical relationship.
Different vertical restraints can also play a complementary role, as sometimes the impact of a vertical restraint may be limited when it is employed in combination with another type of vertical restraints.58
The sector inquiry is not case-specific and does not aim at assessing in detail whether certain restraints are justified in the context of a particular vertical relationship but rather to provide insights into the motivation of companies to employ vertical restraints in relation to e-commerce and to explain the considerations viewed by the Commission as relevant for the analysis of those restraints.
