OECD discussed impact of discounts upon competition

On 16 June 2016, the session of the Competition Committeeof the Organization for Economic Cooperation and Development (OECD) in Paris (France) included a Round Table about “Impact of discounts on competition”.

In OECD opinion, there is a big cross-country difference between evaluation of pro- and anticompetitive effects of discounts given by companies to their counteragents. In some cases discounts can stimulate demand for particular products, while in others – create unequal conditions and give preferences to particular categories of buyers.

The key speakers were Mr. Joseph Farrell, a professor at Berkley University and a former chief economist of the Federal Trade Commission, the USA; Ms. Ellison Johns, a professor at Royal London College; and Mr. James Venit, a counsel at “Skadden, Arps, Slate, Meagher & Flom LLP” law firm, Brussels, Belgium. Deputy Head of FAS Andrey Tsyganov also made a report at the session.

Andrey Tsyganov informed the Round Table that under Russian law discounts can be considered a violation of Clause 6 Part 1 Article 10 of the Federal Law “On Protection of Competition”, according to which when a company with market dominance fixes different prices (tariffs) for the same goods without any economic, technological or other justification, it is an abuse.  Such pricing policy can create discriminatory conditions against buyers that acquire similar goods at higher prices, other conditions being equal.

Economic entities with the dominant position use various promotion schemes for their buyers: discounts, bonuses, premiums. Typically, discounts are given for increased scope of purchasing, advance payment on the supply contract, expiring shelf life, and launching new goods on the market or offering benefits. Manufacturers or sellers usually determine the type, size, and periods of promotion payments for their counteragents independently. The most essential in investigating this category of cases is reasonable delineation between customary business practices and anticompetitive practices that lead to competition restriction.

FAS may recognize anticompetitive actions on giving discounts by a dominant economic entity only if such discounts are technologically or economically unjustified.

Andrey Tsyganov pointed out that to reduce the antimonopoly risks, the process of working with counteragents as well as commercial conditions justifying discounts, bonuses and premiums can be outlined in a particular document (a trading policy, a pricing policy, etc.) of a dominant economic entity. Drafting and publishing transparent economic policy applicable to all buyers reduces the risk of holding a company liable if FAS puts forward any claims.

At the same time practice shows that even with a formal pricing policy a company can have the following issues: insufficiently detailed criteria used to determine the prices for particular categories of buyers, absence of actual connection between the set criteria and their actual impact upon the goods costs or value, as well as artificially classifying particular buyers under a certain category without relevant economic or technological prerequisites.

Andrey Tsyganov gave an example of a case investigated in 2011 by Stavropol OFAS against “Zlenokusky Elevator” Ltd. upon elements of violating paragraph 6 Part 1 Article 10 of the Federal Law “On Protection of Competition”. The company had the dominant position on grain storage within the geographic boundaries of the Stavropol region. The economic entity fixed different prices for its services for different buyers.

Its corporate marketing policy specified that some customers can enjoy up to 20% individual discounts. Granting individual discounts, the company took into consideration long-term cooperation with customers, strategic importance of particular customers, and stored grain products stored at especially large-scale.

Having analyzed the conditions for individual discounts, OFAS arrived to a conclusion that such conditions do not meet the justification criteria due to absence of an understandable method of applying them; lack of clear criteria for determining a concept of “long-term positive cooperation with a customer”, using which it would be possible to establish the period during which one must cooperate with the company to get a discount; there is no mechanism for objective evaluation of strategically important customers and the limits for discount (mark-ups) deviation from the prices  provided for by the corporate tariff policy. Absence of clearly determined criteria allowed top executives of the company to arbitrary interpret the above concepts when concluding contracts and make decisions on granting individual discounts, applying prices as they wish, which resulted in fixing different prices for the same services without economic, technological and other justification.

Therefore, FAS found that the company violated Russian antimonopoly law. The decision was supported by Appeal and Cassation Courts.

“The case is a precedent since it shows businessmen at the local level that when dominating a particular market it is not possible to set trading and pricing rules by one’s own choice. In this context, competition advocacy and enforcement were combined”, summed up Andrey Tsyganov.