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This article is written by Vanya Verma from Alliance University, Bengaluru. This article covers horizontal agreements along with the comparison of regulations of horizontal agreements particularly in the European Union, Japan and China on various grounds.

Introduction

Horizontal agreements are the restrictive agreements between competitors that operate at the same level of the production/distribution chain. Horizontal agreements constitute per se violations if their object or effect is likely to affect the prevention, distortion or restriction of competition directly or indirectly. 

The most significant and common types of anti-competitive horizontal agreements include price-fixing, bid-rigging, market allocation/sharing and refusal to deal (group boycotts). Such horizontal agreements usually take the form of a cartel, which is explained in a separate sub-category.

Horizontal agreements for the exchange of competition-sensitive information may, depending on circumstances, qualify as anti-competitive horizontal agreements. Whether an agreement is legally binding is irrelevant in the scope of the competition law assessment;

A non-binding understanding between the direct competitors may, depending on circumstances, amount to a restrictive horizontal agreement.

Comparison of regulation of horizontal agreements in Japan, EU and China

Grounds for comparison

Japan

European Union

China

Special rules and exemptions that apply to the assessment of anti-competitive agreements between competitors in digital markets

Although the JFTC (Japan Fair Trade Commission) examines the features of digital markets in comparison to other industries when enforcing the AMA (Anti-Monopoly Act), anti-competitive agreements between competitors in digital markets are not subject to any special rules or exemptions.

The assessment of such agreements is governed by ordinary EU competition rules; there are no unique rules or exemptions for digital agreements.

Shortly, the Commission may propose a new legislation and amend recommendations, driven in part by the economy’s increasing digitization. The Commission is now reviewing whether and how to revise the R&D Block Exemption Regulation, the Specialisation Block Exemption Regulation, and its Horizontal Co-operation Guidelines concerning horizontal agreements in particular.

In the case of anticompetitive agreements between competitors in digital markets, there are no specific restrictions or exclusions. Business operators with competitive relationships are forbidden from engaging in the following horizontal monopoly agreements under Article 13 of the AML (Anti-Monopoly Law):

  • Fixing or changing commodity or service prices; limiting the production or sales volume of commodities or services;
  • Dividing the sales market or the raw material procurement market;
  • Restricting the purchase of new technology or new equipment or the development of new technology or new products; 
  • Jointly boycotting transactions with others, and other monopoly agreements as determined by the courts.

Horizontal monopolistic agreements are severely forbidden unless the business operators can demonstrate that the relevant agreement fits within one of the AML’s Article 15 exemptions:

  • Improving technologies or researching and developing new products;
  • Improving product quality, lowering costs, increasing efficiency,
  • Unifying product specifications and standards, or implementing a division of labour based on specialisation;
  • Increasing the operational efficiency and competitiveness of small and medium-sized businesses;
  • Realising public interests such as energy conservation, etc.
  • Resolving issues relating to a significant reduction in sales or obvious overproduction during a recession;
  • Protecting legitimate interests in overseas commerce or foreign economic cooperation, or other circumstances stipulated by laws and the State Council.

Addressal of horizontal restrictions by the competition authority on access to online platforms

The JFTC has taken a couple of enforcement actions against the online platform access restrictions. The JFTC has recently taken the following enforcement actions: in 2018, the JFTC achieved an agreement with a private rental home platform to resolve potential anti-competitive activity. The JFTC expressed worry about a contract between the platform and the room providers that limits the room providers’ capacity to give information to the platform’s competitors through the use of the API (application programming interface).

Horizontal limitations on access to online platforms have not been the subject of any enforcement actions by the Commission.

While not specifically competition legislation, the platform to business regulation puts several obligations on suppliers of online intermediation services (i.e., platforms). When a platform restricts the enterprises’ capacity to offer products and services to consumers through ways other than the platform, the platform must provide reasons. In its Digital Services Act proposals, the European Commission may incorporate access to a “gatekeeper” platform.

So far, no case has been addressed or adjudicated by the enforcement agency involving horizontal limits on access to online platforms, notably in the form of forbidding the platform from hosting rival products or services.

In China, however, a new type of online platform access limitation has emerged: the ‘choosing one from two (or exclusive dealing), in which an online platform limits its suppliers or users from dealing with other platforms using exclusive contracts and technological means. In internet sectors such as online retail, food delivery, and social media, the practice of “picking one from two” has become common. The competition authorities have been keeping a careful eye on such behaviour, noting that the ECL (Export Control Law), AML (Anti-Money Laundering) and AUCL (Anti-Unfair Competition Law) all expressly ban exclusive dealing and “choosing one from two” conducts. Even though competition authorities have explored using the AML to control exclusive agreements, no penalties have been imposed under the AML. This is mostly owing to the challenges of demonstrating an online platform’s dominating market position in the relevant market, which may necessitate large resources to conduct economic analysis. As a result, authorities frequently use the AUCL and the ECL to restrict such behaviour. Specifically, Article 35 of the ECL prohibits e-commerce platforms from restricting or imposing unreasonable conditions on deals, deal price, or an operator’s deals with other operators on its platform, or imposing unreasonable fees on its platform operators, through contracts or technologies; Article 12 of the AUCL prohibits a business operator from misleading, deceiving, or compelling its users to modify, close, or uninstall internet products or services legally provided by another operator.

Consideration by the competition authority in the application of competition law to the use of algorithms, in particular to algorithmic pricing

The JFTC has yet to address how the AMA pertains to the use of algorithms, namely algorithmic pricing. The JFTC established a study group in July 2020, inviting scholars to investigate the matter, although it is unclear whether this will result in any policy documents that clarify the JFTC’s position.

The Commission hasn’t taken any enforcement measures using algorithmic pricing or algorithms in a horizontal environment. A submission to an OECD roundtable on Algorithms and Collusion in 2017, summarised its perspective on the usage of algorithms in a horizontal environment. It was discovered that algorithms can be applied in several horizontal scenarios. First, to keep track of the pricing agreed upon by competitors and to detect any deviations. Second, to put in place a price that has been agreed upon by separate collusion. The Eturas (2016) case, which was referred to the CJEU (Court of Justice of the European Union) by the Lithuanian courts, is an example of this. A common online trip booking system was used by several Lithuanian travel businesses, and the system administrator advocated installing a software rule (i.e., algorithm) that limited discounts. If it could be established that the travel companies were aware of the message, the CJEU considered this to be a coordinated practice under Article 101. The case focused on this awareness, specifically the existence of collusion, rather than the algorithm utilised to carry out the collusion. Third, the Commission found that algorithms can be used as a means of communication for explicit collusion (i.e., online competitors agreeing to use specific repricing parameters and strategies in their pricing algorithms to achieve aligned and higher prices, including through “hub and spoke” collusion and signalling). The Commission also considered a fourth scenario in which algorithms are employed to engage in tacit collusion (i.e., pricing coordination without human involvement), but decided that it was too early to go into detail about this possibility. The Commission’s submission states that pricing algorithms can be analysed to a great extent using traditional reasoning and categories used in EU competition law and that enterprises engaging in illegal pricing activities cannot escape culpability because their prices were set by algorithms.

The use of algorithms has presented new obstacles to antitrust enforcement in China, according to the Competition Authority, because the monopoly agreements generated by algorithms are difficult to identify and relevant evidence may be difficult to get during investigations. The SAMR (Substitution, Augmentation, Modification, and Redefinition) also stated that they would take a tough stance against anti-competitive behaviour, including reaching and enforcing monopoly agreements in the digital sector.

Despite this, the SAMR has not launched any investigations or imposed any penalties in connection with the usage of algorithms, including algorithmic pricing. The SAMR has not specifically addressed whether two algorithms could coordinate pricing without human intervention.

Consideration by the Competition Authority on the application of Competition Law to ‘hub and spoke’ information exchanges or data collection in the context of digital markets

In the context of digital marketplaces, the JFTC has not yet evaluated the application of Competition Law to ‘hub and spoke’ information transfers or data collecting. In general, ‘hub and spoke’ types of cartels are banned under the AMA, and there is no reason why the JFTC cannot enforce similar practices in the digital market.

In the context of digital markets, the Commission has taken no specific enforcement measures against the hub and spoke information exchanges. The Commission acknowledged in a submission to the OECD (2017) that a hub and spoke scenario could emerge, in which an online platform acts as a facilitator of horizontal collusion. It was specifically stated that the use of online platforms may enable information exchanges between platform users to secure certain margins or price levels and that platforms may facilitate infringements by imposing operational restrictions on the system that prevent undertakings from offering lower prices or other benefits to final consumers (as in the Eturas case considered by the CJEU. It was also suggested that platform operators make pricing tools available to merchants and retailers selling goods and services on their marketplaces, which, if applied consistently, may align prices.

So far, the Competition Authority has not considered or decided on any issue involving hub-and-spoke data collecting or information exchange in the context of digital markets.

Nonetheless, the hub-and-spoke information sharing may promote cartel or concerted behaviour amongst competitors, based on the understanding of AML  The State Administration for Market Regulation (SAMR) may assess whether any competitively sensitive information between competitors was transmitted through the hub and if such exchange resulted in convergent market behaviour to determine the presence of a cartel or concerted practices. It’s worth mentioning that the AML’s Draft Revisions include paragraphs prohibiting undertakings from organising and supporting other undertakings in achieving monopoly agreements, as well as the same sanctions for CJEU agreements. This new clause, according to many practitioners, is intended to regulate hub-and-spoke cooperation. The enforcement agency is anticipated to continue to pay special attention to this new sort of plot.

Other key issues emerged concerning the application of competition law to horizontal agreements in digital markets

The JFTC has yet to take action against horizontal agreements in the digital sector. Vertical constraint and unilateral conduct by huge web platforms are the subjects of its enforcement activities.

The Commission is also aware that algorithms can improve market transparency and be used to track anticompetitive vertical agreements, which can worsen market effects. When a supplier employs algorithms to monitor downstream retailers’ resale price maintenance and other suppliers monitor the market as well, the consequences of resale price maintenance can be exacerbated (refer to Commission’s case against Asus, Denon & Marantz, Philips, and Pioneer).

All the key issues have already been covered and there are no other major issues that have emerged concerning the application of the competition law to horizontal agreements in digital markets.

Conclusion

From the above discussion, we can differentiate the regulation of horizontal agreements between Japan, the European Union and China on the grounds of special rules and exemptions, access to online platforms, algorithms, data collection and sharing, and other issues.

References


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