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December 21, 2023

The Most Favored Customer Clause In The Online Retailing Sector

I. INTRODUCTION

With the significant increase in sales realized on online platforms in our country and also in the world, online platforms have become one of the important retailers in terms of trade and this has led to a significant increase in competition in the electronic commerce scene. E-marketplaces, which are e-commerce platforms that bring sellers and consumers together on the internet and mediate the shopping between these groups, are one of the actors with the greatest impact on the competitive environment, in this regard. As a matter of fact, as the Competition Authority (“Authority”) stated as in the Final Report on the Sector Review of e-Marketplace Platforms (“Report”), evaluates that e-marketplaces are prone to monopolization much faster than traditional markets due to their structure and functioning, and states that they risk timely competition intervention and the protection of competition in the long term. Indeed, the Report emphasized that platform ownership gives the e-marketplace an enormous power to direct the behavior of consumers, manage the behavior of sellers and determine its own behavior by taking all these parameters into account. 

Accordingly, the most favored customer (“MFC”) clause, which is defined by the Authority as “the obligation of the supplier to offer more favorable prices and agreement terms offered to other buyers to the favored buyer”, is one of the instruments that e-marketplaces can include to the agreements to enable them to manage the behavior of sellers. 

 

II. THE NATURE OF MFC CLAUSES IN VERTICAL AGREEMENTS AND GROUP EXEMPTION FOR MFC CLAUSES

Pursuant to the Block Exemption Communiqué on Vertical Agreements  No. 2002/2 (“Communiqué”), vertical agreements are defined as “agreements concluded between two or more undertakings operating at different levels of the production or distribution chain, with the aim of purchase, sale or resale of particular goods or services” .The competition limiting clauses in these agreements, which the Authority defines as “vertical limitations”, are exempted from the general prohibitory provisions applicable to agreements limiting competition, concerted practices and decisions to the extent that they meet the conditions set forth in the Communiqué. 

In this context, since the MFC clause, which is a type of vertical limitation, do not always have the same effect on the competitive market, they are subject to different exemption evaluations for each concrete case. 

As a matter of principle, the Authority has accepted that an agreement that includes an MFC clause will be considered within the scope of the exemption, provided that the market share of the party in whose favor this clause is established in the agreement does not exceed 40% and the other conditions specified in the Communiqué are met. However, the Guidelines on Vertical Agreements provides  assessments regarding which conditions may raise competitive concerns and it is stated that the imposition of retroactive MFC clauses, MFC clauses in concentrated markets, and situations where the market share of the parties in the market is higher than their competitors, may raise competitive concerns, whereas competitive concerns may not arise in cases where the level of concentration or the market share of the contracting parties is low.

 

III. EVALUATION OF MFC CLAUSES IN LIGHT OF BOARD DECISIONS

In the online retailing sector, the MFC clause is generally seen in the agreements which have been concluded between the e-marketplace and the seller, as the seller’s commitment that the price used in the sales to be made on the relevant e-marketplace will not be higher than the sales price to be used in other sales channels. Therefore, the MFC clause in this context affects the sale price of the product to the final consumer

In addition, the Competition Board (“Board”), which also considers the effect of MFC clauses on price competition and the entry of new platforms into the market, states in its decisions that MFC clauses can be considered as restricting competition even in the case of low market shares in online platform markets and that online platform services are not considered as a substitute for traditional or other channels in the relevant market definition. 

In this respect, along with market dominance, there are two types of MFC clauses that the Board accepts as a criterion in its evaluations, especially in the online retailing sector. These are;

  • “Narrow MFC Clauses” are the clauses that stipulate that the conditions applied by the supplier in its own sales channel shall be applied to the buyer in the same way.
  • “Broad MFC Clauses” are the clauses that stipulate the application to the buyer of the prices and/or non-price conditions applied to the buyer’s competitors in addition to its own sales channel.

In this context, the Board, assesses that narrow MFC clauses would not raise competitive concerns, and therefore an exemption to the clauses would be applicable, whereas broad MFC clauses would not be authorized by the Board due to competitive concerns in its decisions regarding MFC clauses.

As a matter of fact, within the scope of the investigation conducted by the Board regarding Yemeksepeti, which imposes MFC clauses in its merchant agreements, the Board concluded that narrow MFC clauses, which consist of Yemeksepeti’s practices regarding the conditions offered in its own channels, do not cause competitive concerns since they are intended to protect economic value, whereas broad MFC clauses, which prevent the offering of better/different sales and service conditions on competing platforms, cause competitive concerns as they create an exclusionary effect in the market and will be considered as abuse of dominant position. 

Likewise, in the Booking decision, where the Board evaluated the practice of “best price guarantee”, the effectiveness-generating features of the MFC clauses in the competitive market, their competition limiting effects and negative consequences for the market were examined in more detail under the headings; the Board concluded that the MFC clauses imposed by Booking, commission rates limit the competition in the online accommodation booking platform services market and had the effect of closing the market to competitors, as well as restricting intra-brand and inter-brand competition

On the other hand, in another decision of the Board, the Board concluded that there was no infringement since Kitapyurdu did not have sufficient market power and the actual practice did not have a limitative effect on competition, regarding the MFC clauses that the highest discount would be applied to the agreements concluded with publishers and distributors. This decision of the Board is also significant in terms of examining the distinction between peer MFC clauses and exclusive MFC clauses in broad MFC clauses and defining retail MFC clauses that have a direct impact on consumers as “platform MFC clauses”.

 

IV. CONCLUSION 

MFC clauses, which are a type of vertical limitations within the scope of vertical agreements, may not only have competition limiting effects depending on many variables, but may also be efficient. Therefore, when evaluating MFC clauses, the Board takes into account the market position of the party benefiting from the clause, the effects created within the framework of the characteristics of the market and the condition, and states that the potential competition limiting effect is directly proportional to the market power of the undertaking. 

In the context of the online retailing sector, when the Board decisions are analyzed, it is seen that online platforms are not considered as substitutes for traditional channels and the relevant market definition is made separately to determine the dominance. The Board, which also considers platform economics when examining the MFC clauses, prioritizes the effect on the conditions of entry to the market in online sectors, and in this framework, the Board considers the broad MFC clauses imposed by dominant platforms as restricting competition.

 

References: 

Doğan, Cihan; Sanlı, Kerem Cem. “Narrow Platform MFCConditions in the Context of Competition Law and Economics ”, İstanbul Law Magazine, 80 (1), 117-152, Acceptation Date: 08.02.2022. 

Competition Board, K. 15-12/161-M T. 18.03.2015. 

Competition Board, K. 16-20/347-156 T. 09.06.2016. 

Competition Board, K. 17-01/12-4 T. 05.01.2017

Competition Board, K. 20-48/658-289 T. 05.11.2020.

Competition Authority, I. Audit and Enforcement Department. “E-Marketplace Platforms Sector Review Final Report”, April 2022, Ankara. (Date of Access: 04.09.2022)

Competition Authority. ” Glossary of Competition Terms “, 2019. (Date of Access: 04.09.2022)

Competition Authority. “Guidelines on Vertical Agreements”, Date of Adoption: 29.03.2018, Decision No: 18-09/179-RM(1). (Date of Access: 04.09.2022)

Authors

Gökçe Ergün

Gökçe Ergün

Lawyer

Yaren Türe

Yaren Türe

Lawyer