International price discrimination and parallel importing - Time to take a deep breath? - Cartels, Monopolies

Price discrimination – charging different prices in different territories or to different customer segments – is a legal and accepted business practice in Australia.

However, in recent months, the international price discrimination practices of suppliers to Australian grocery retailers, and the parallel importing strategies adopted (or threatened) by those retailers in response, have emerged as key issues within the broader media debate about competition in the Australian grocery sector.

This article examines the underlying policy issues and potential competition law concerns that can arise from the tit-for-tat strategies of suppliers and retailers. We also consider the recent calls for changes to the Competition and Consumer Act 2010 (CCA) and conclude that any legislative response to international price discrimination is likely to have consequences for competition and efficiency and should be approached with extreme caution.

THE UNFOLDING DEBATE

The practice of multinational suppliers charging higher prices to retailers and consumers in Australia than in other countries is topical. For instance:

in May 2013, it was reported that Woolworths had established a dedicated parallel importing team and had sourced Unilever deodorants from Singapore at a 30-40% discount from Australian prices; ¹
also in May 2013, Coles publicly singled out Coca-Cola as a product that is available at a significantly lower price in Asia; ² and
on 29 July 2013, the House of Representatives Standing Committee on Infrastructure and Communications released a widely-anticipated report on the pricing of IT hardware and software in Australia. The Committee commented that foreign IT companies and copyright holders may charge Australian consumers over 50% more for products such as digitally downloaded software, computer games, music, movies, and e-books. ³ (Our article, IT Pricing and the 'Australia Tax' reviews the report in more detail)

Much of the discussion about international price discrimination has occurred in the context of a vigorous public debate regarding the competitiveness of Australian grocery markets and the behaviour of major supermarkets.

Various suppliers and industry groups have expressed concerns about terms of trade, de-ranging practices and the increasing proportion of private label products on supermarket shelves. The Australian Competition and Consumer Commission (ACCC) is currently investigating whether any of the major supermarkets' conduct breaches the CCA's prohibitions on misuse of market power and unconscionable conduct.

Recent public comments by major supermarkets regarding their suppliers' international price discrimination may, in part, be an attempt to deflect some of the public criticism of their negotiating practices.

Undoubtedly, the major supermarkets are also focused on sourcing products at the lowest cost to allow them to obtain a competitive advantage over their retailer rivals and, in that context, the prospect of parallel importing may provide additional leverage in supplier negotiations.

EVALUATING INTERNATIONAL PRICE DISCRIMINATION

International price discrimination is often portrayed as unfair 'gouging' of local consumers. In truth, it may be correct that suppliers are simply charging higher prices in Australia because that is what the market will bear and Australian consumers are less price sensitive.

However, pricing differentials across geographic markets may reflect other factors, such as:

differentials in the cost of doing business in different markets – such as taxes, labour and transport costs;
relative economies of scale in doing business in different sized markets;
relative levels of branding and marketing investments made by a supplier;
a cross-subsidy (of price-sensitive markets by price-insensitive markets) that facilitates entry into new markets or raises overall demand;
exchange rate changes since prices were set or suppliers' decisions to charge a premium for transactions in foreign currencies to reflect exchange rate risk; and/or
more or less onerous consumer protection laws or statutory guarantee regimes.

There is nothing inherently unlawful about price discrimination under Australian law. Even if international price discrimination simply reflects charging what the market will bear, this is not, of itself, a competition law concern.

Until 1995, there was a separate prohibition on price discrimination in section 49 of the CCA (at that time, the Trade Practices Act 1974). The repeal of that prohibition reflected a recognition that price discrimination can be pro- or anti-competitive depending on the circumstances and a belief that anti-competitive price discrimination could be adequately handled by the CCA's general prohibition on misuse of market power.

There is, however, little prospect of price discrimination between countries or regions constituting a misuse of market power under Australian law – primarily because it would need to be shown that the pricing had the purpose of damaging competitors or deterring competition, which is hard to envisage.

PARALLEL IMPORTING AS A RESPONSE TO INTERNATIONAL PRICE DISCRIMINATION

Price discrimination is only viable if the products cannot be arbitraged between low- and high-price markets. Although effectively impossible for services and often difficult for products like software, in respect of tangible consumer goods one option for retailers wishing to bypass high-priced domestic distribution channels is to source the product directly from overseas and 'parallel import' into Australia.

Like price discrimination, parallel importing can be pro- or anti-competitive depending on the circumstances.

Clearly, where products can be parallel imported at a lower landed cost than domestic sources, the ability for retailers to pass through some of the savings (which should occur in competitive retail markets) has the potential to provide immediate benefits for consumers.

By opening up other sources of supply, parallel importing may also increase competition between domestic suppliers of the same product (i.e. 'intra-brand' competition). In circumstances where there are limited competitive constraints from competing brands (i.e. 'inter-brand' competition), the benefits of that increased intra-brand competition may be significant.

However, parallel importing may give rise to a so-called 'free rider' problem. A multinational supplier and its authorised domestic distributors may make substantial investments in Australian promotional activities that develop brand recognition and loyalty. If a retailer parallel imports that supplier's products, it will benefit from (or free-ride on) those investments without contributing to their cost. This in turn may blunt the incentives of the supplier and authorised distributors to invest in promotional activity in the first place.

EXCLUSIVE DEALING AS A RESPONSE TO PARALLEL IMPORTING

A multinational supplier that finds itself competing against parallel imports of its own products has three main options:

do nothing;
seek to "shut down" the offshore source of supply, such as by imposing strict territorial and resupply restrictions on foreign customers and distributors; or
seek to prevent its domestic customers purchasing parallel imports by imposing on them exclusive purchasing obligations.

The latter two options both have the potential to contravene the CCA's prohibition on 'exclusive dealing'. Relevantly, exclusive dealing involves supplying goods on the condition that the customer agrees not to acquire other goods from a third party or accepts some limitation on its ability to resupply the goods (or refusing to supply because the customer will not agree to such conditions). Exclusive dealing is only unlawful if it has the purpose, effect or likely effect of substantially lessening competition in an Australian market.

Immunity in respect of exclusive dealing can be sought by notifying the conduct to the ACCC. In order to oppose a notification of this sort and deny immunity, the ACCC must be satisfied both that the notified conduct has the purpose, effect or likely effect of substantially lessening competition and that a public benefit would not arise from the conduct that will outweigh any lessening of competition.

Shutting down parallel imports at the source by imposing territorial and resupply restrictions in offshore supply and distribution contracts is likely to be logistically difficult for multinational suppliers to implement and enforce and may raise issues under foreign law. Even if those restrictions are imposed offshore, they are potentially within the scope of the CCA's prohibition on exclusive dealing. However, in practice, it is likely to be exceedingly difficult for the ACCC to identify, investigate and prosecute offshore distribution arrangements.

Alternatively, a condition imposed by a supplier on its Australian customers requiring the customers to deal exclusively with the supplier or not to purchase any of its requirements from an offshore source, will also constitute exclusive dealing.

Unlike attempts to shut down parallel imports at the source, the ACCC has a record of taking action against 'local' restrictions on parallel importing and has made clear that it regards parallel imports as a potential source of vigorous competition. Most notably:

in 2003, the ACCC successfully took action against Universal Music for instituting a policy of reviewing the trading terms of retailers that acquired parallel imported CDs. In that case, the Federal Court's decision attached particular weight to the potential deterrent effect of "nipping in the bud" incipient competition from parallel imports; and
in 2005, Nestlé lodged a notification with the ACCC relating to its response to parallel importing of its products by ALDI. Nestlé refused to supply certain products to ALDI because it had not agreed to display stickers and banners containing Nestlé-drafted warnings that the parallel imported Nescafé-brand coffee sourced by ALDI from Indonesia and Brazil had a different taste from Nescafé Blend 43 coffee produced for the Australian market.
Nestlé Australia claimed in its notification that its proposed warnings were aimed at alleviating potential consumer confusion, which constituted a substantial public benefit. The ACCC concluded that Nestlé's conduct was for the purpose of substantially lessening competition and was unconvinced that Nestlé's requirements were necessary to alleviate consumer confusion. In part because Nescafé was a well-known 'communicable' product, the ACCC also concluded that Nestlé's actions were likely to have the effect of substantially lessen competition.

In principle, it is possible for a supplier to notify restrictions on parallel importing on the basis of efficiency and free rider arguments (as opposed to the consumer confusion justification offered by Nestlé). It is well-accepted that, where there is effective inter-brand competition, a restriction on intra-brand competition that avoids free-riding issues and enhances the efficiency of a distribution system, may be pro-competitive.

However, such arguments would be likely to face a sceptical ACCC. The ACCC would likely require compelling evidence of the effectiveness of inter-brand competition, the extent of the free-riding problem and the potential enhancement of inter-brand competition, and possibly the reasonableness of differentials between Australian and foreign prices for the relevant products.

THE WAY FORWARD

In the aftermath of the recent press coverage of these issues, it was suggested by independent Senator Nick Xenophon that there should be legislative change to ensure that suppliers could not prevent customers from sourcing product offshore and that local retailers should be free to subvert international price discrimination practices. ⁴

In the same vein, the Parliamentary Committee report into IT pricing made a number of recommendations intended to undermine international price discrimination and/or encourage parallel importing. For example, the Committee recommended that:

the Australian Government investigate the feasibility of amending the CCA so that contracts or terms of service which seek to enforce international price discrimination by so-called 'geoblocking' (i.e. techniques to verify an IT consumer's location) are void and, if necessary, consider a ban on geoblocking; and
copyright and trademark laws be reformed where they currently have the effect of restricting parallel imports of genuine goods.

Although ultimately not recommended by the Committee, a number of further reform proposals were put to its inquiry, including:

prohibitions on price discrimination in the absence of reasonable grounds; and
price transparency regulations requiring suppliers to display the lowest international retail price of a good on packaging.

Any evaluation of legislative measures to prevent or discourage international price discrimination, or to enshrine a right to parallel importing, should seriously consider the potential inefficiencies that might result.

Both the Swanson and Dawson Committee reviews of the CCA noted that it is price flexibility that is at the heart of competitive behaviour. A legislative response would need to allow for the many possible explanations for price differential that do not simply involve 'gouging' (as discussed above). Those explanations are often product- or industry-specific.

It would also be necessary to consider the potential unintended consequences, particularly for a small open economy such as Australia. An insightful recent brief from RBB Economics ⁵ noted that the unintended effects may include:

in some jurisdictions, making it less attractive to cut prices because that may flow into jurisdictions where price discrimination is not tolerated;
creating incentives to sell different products in different markets to technically avoid a prohibition – losing scale advantages and potentially placing upward pressure on prices;
causing suppliers to divest brands in low cost jurisdictions to protect higher cost brands in high-cost jurisdictions; and
reducing incentives to build brand equity.

In this context, legislative change should be approached cautiously. Before acting, it should be demonstrated that the existing provisions of the CCA are incapable of appropriately resolving genuine disputes between suppliers and retailers in relation to international price discrimination and parallel importing. Australian consumers would be well served by a more judicious and less emotive public debate on international product distribution strategies.

Footnotes

¹'Woolies pays less by going offshore', Australian Financial Review, 1 May 2013.

²'Coles chief hits out at Coke', Australian Financial Review, 6 May 2013.

³"At what cost? IT pricing and the Australia tax". House of Representatives Standing Committee on Infrastructure and Communications: http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=ic/itpricing/report.htm

⁴'Unilever fights back over Woolies' price claims', Australian Financial Review, 4 May 2013.

⁵RBB Brief 42, Entering Uncharted Territory: the Commission's thinking on territorial supply constraints, May 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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