MFNs in the Digital Comparison Tools Market Study ACE Conference MFNs in the Digital Comparison Tools Market Study 16 November 2017 Alex Rutt and Borbala Szathmary CMA

Background DCTs market study In September 2016 the CMA launched a market study looking at Digital Comparison Tools (DCTs) such as Price Comparison Websites (PCWs). The final report was published in September 2017 and among others it looked at whether DCTs competed effectively with each other. This included looking at agreements between suppliers and DCTs that are likely to or could limit the strength of the competitive constraint on and between DCTs. Here we focus on our findings in relation to Most Favoured Nation (MFN) clauses specifically in the car insurance sector. We looked at two types of these clauses: wide and narrow MFNs (see next slides).

MFNs Wide MFNs

MFNs Narrow MFNs

Car Insurance The market investigation 2012-14: CC/CMA conducted a market investigation into private motor insurance (ie ‘car insurance’). In part this looked at the use of MFNs by Price Comparison Websites (PCWs). The investigation concluded that, in car insurance: wide MFNs soften price competition between PCWs likely leading to less entry, less innovation and higher commission fees, all leading to higher prices. that if there were any anticompetitive effects from narrow MFNs they were unlikely to be significant and efficiency justifications are more plausible than for wide MFNs. This led to a prohibition on the use of wide MFNs and equivalent behaviours by PCWs in car insurance.

 DCTs market study 𝒙 What’s new? Topic Wide – Anything new? Narrow – Anything new? Theory of harm 𝒙  Extended our analysis of when harm is more likely. Evidence Econometric analysis of commissions. Qualitative evidence on retail price discounting. Qualitative evidence on suppliers’ pricing intentions. Evidence of competitive constraints on DCTs. Efficiencies Extended analysis of when these may hold.

What’s new? Wide MFNs – theory Nothing – by creating a price floor across DCTs wide MFNs: may soften competition on commissions; and may reduce DCTs’ ability and incentives to enter and expand. In this presentation we focus on the former. Frugalfruit.com Comparefruit.com CFF CCF Orange supplier PDirect PCF PFF

What’s new? Narrow MFNs – theory Looked at two theories of harm, namely, that narrow MFNs may harm competition by: replicating the effect of a wide MFN. lessening or eliminating competition from the direct channel. For both a necessary condition is that that the narrow MFN is binding (ie, it must be that the direct price is higher than it would otherwise be).

What’s new? Narrow replicating wide Supplier must be willing to undercut their direct channel.

What’s new? Lessening or eliminating Other things being equal, we would have stronger concerns if DCTs are not facing constraints from other channels notably, from other DCTs. Relative constraint of the direct channel depends on three factors: the lower a supplier’s direct price compared to the supplier’s DCT price; the more consumers shop between DCTs and the direct channel rather than between DCTs; and the weaker the constraint from the direct channels of suppliers without narrow MFNs.

What’s new? Wide MFNs – Econometrics (1) Use and timing of the removal of wide MFNs in car insurance. DCT Use of MFNs Comparethemarket Used a combination of narrow, wide and no MFNs. All wide MFNs removed in mid-2015. Confused Used a combination of narrow, wide and no MFNs. All wide MFNs removed in late-2012. GoCompare Used a combination of narrow, wide and no MFNs. All wide MFNs removed in early 2015. MoneySupermarket Used narrow MFNs only.

What’s new? Wide MFNs – Econometrics (2) Our model specification 𝑙𝑛 (𝐶 𝑖𝑗𝑡 )=𝛽 𝑊_𝑀𝐹𝑁 𝑖𝑗𝑡 + 𝛿 𝑖𝑗 + 𝛿 𝑡 + 𝜀 𝑖𝑗𝑡 Data Covers the period 2010-2016 Commission data: calculated from DCTs’ commission revenue and sales volumes for each insurance brand for each year Information on the existence, enforcement and type of MFN clause for each DCT-insurer relationship (554 DCT-brand pairs)

What’s new? Wide MFNs – Econometrics (3) Results robust to sensitivity testing; e.g.: Testing for pre-removal effects Inclusion/exclusion of insurers with vertical relationship with the DCT Results consistent with qualitative evidence

Main competitive constraint on DCTs comes from other DCTs What’s new? Narrow MFNs – Evidence from car insurance Replication of wide MFNs? Many suppliers started to offer different prices on different DCTs. Those who are not willing to undercut their direct channel account for only a small proportion of sales on DCTs. Econometric analysis also suggests that narrow MFNs have not fully replicated wide. Lessening of competition from the direct channel? Car insurance market investigation DCTs market study Insurers have an incentive to price lower on DCTs than on direct channel (cost per acquisition, elasticity of demand)  direct is weak constraint on DCTs Insurers can have the incentive to set lower prices direct (lifetime value of customers) Main competitive constraint on DCTs comes from other DCTs

What’s new? Efficiencies and scope of MFNs (1) Narrow MFNs: Preserving DCTs’ credibility? But consumers value DCTs for a number of reasons besides low prices, including seeing a range of offers. Less valid argument for established DCTs Preventing free-riding by suppliers? Risk of consumers using DCTs as shopping windows and then going direct  DCT may not get reimbursed for lead generation Less of a concern if free-riding is difficult or if DCTs can be reimbursed for indirect leads MFN should not go beyond what’s necessary to achieve the efficiencies

What’s new? Efficiencies and scope of MFNs (2) Wide MFNs: As in the car insurance market investigation: no efficiencies that could not be achieved via less restrictive means (i.e. narrow MFNs) Credibility argument: our evidence shows that consumers don’t expect to see the same offers on different DCTs Free-riding: with platforms that invest in and provide similar services, unlikely No links on DCTs pointing to rival DCTs consumers are unlikely to click on a DCTs because of visiting another one

Conclusions We still have concerns that wide MFNs soften competition and this is supported by our econometrics. In certain conditions narrow MFNs may lead to harm, but these conditions do not appear to hold in car insurance. The plausibility of the efficiencies depends on the sector in question and we consider that the free-riding efficiency is more plausible in car insurance.

Appendix

CMA/OFT recent experience Amazon Marketplace Use of MFNs in contracts between Amazon Marketplace and third-party sellers. Article 101 TFEU / Chapter I CA98 investigation opened in October 2012 (parallel investigation by the BkartA), Amazon removed the clauses in August 2013. Hotel Online Booking Use of MFNs by Online Travel Agents (OTAs) in contracts with hotels. In July 2015 wide MFNs were removed across Europe by the two largest OTAs. In 2016/17 the European Competition Network (ECN) conducted a monitoring exercise (including CMA participation). Auction services Articles 101 and 102 TFEU and Chapters I and II investigation that looked at the use of MFNs by an auction platform. Party provided commitments not to use MFNs for a period of five years.