On 24 September 2014, the Competition and Markets Authority ("CMA") released a report on the private motor insurance market. The report considers, inter alia, the question of whether price parity clauses (known also as "most favoured nation" or "MFN" clauses) contained in agreements between private motor insurance companies ("PMIs") and car insurance price comparison websites ("PCWs") might have anti-competitive effects.
The CMA distinguished between two types of MFN clauses which benefit PCWs: (i) narrow MFN clauses; and (ii) wide MFN clauses. Narrow MFN clausesstate that the price of the PMI's products on its own website will never be lower than the price of those products on the PCW with which the PMI is contracting, while the PMI's prices on other PCWs may be lower. Wide MFNs state that the PCI's price in all other sales channels (including other PCWs) will never be lower than the price on the PCW with which the PMI is contracting.
The CMA observed that a narrow MFN clause might lead to adverse effects on competition if imposed on a PMI with an important own sales channel (e.g., own website), as such a clause might constrain competition between the PMI's own sales channel and the PCW. Also, a series of narrow MFNs imposed on a PMI might have the effect of imposing a floor price in respect of a PMI's own product. In the case at hand, however, the majority of PMIs that had a significant own sales channel were not using PCWs. Due to this fact, the CMA concluded that narrow MFNs were unlikely to reduce competition in the case at hand.
In contrast, the CMA found that wide MFN clauses caused competition concerns in such a case. The CMA observed that the use of wide MFN clauses was combined with an "agency" pricing model, under which PMIs set the prices to final consumers of their products sold through PCWs, and PCWs were remunerated by commission fees negotiated with PMIs. This eliminated any price competition between PCWs (as, owing to the agency model, the price charged to final consumers was set by PMIs), and prevented PMI-driven price competition across different PCWs (as, owing to the wide MFN clauses, PMIs could not offer lower prices through some PCWs and not through others). As a result, the CMA found that the wide MFNs softened competition between PCWs. In addition, the CMA observed that wide MFNs deterred PCW market entry, as a new entrant would not be able to grow its market share by offering prices to consumers for PMI products lower than the prices available through other sales channels. Similarly, the wide MFNs were considered to reduce the incentives for incumbents and entrants to innovate as innovative PCWs would not be able to grow market share by passing on cost reductions to consumers in the form of lower prices. Finally, the wide MFNs were thought to lead to higher commission fees (and in turn higher prices for consumers), as PCWs – not able to induce PMIs to offer them lower prices in exchange for a lower commission – would not compete with one another on the level of commission fees.
The CMA found no pro-competitive effects associated with the wide MFNs. As a result, the CMA decided to remedy the adverse effect on competition by prohibiting: (i) wide MFNs; and (ii)behaviour by large PCWs which seeks to replicate the anticompetitive effects of wide MFNs.
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