Casio’s record UK fine is early evidence of CMA switching on to digital abuses

Casio's UK antitrust fine is a warning to companies that the Competition and Markets Authority remains hot on the trail of manufacturers that dictate a price floor to retailers — but also a reminder of the potential for enforcers to fall behind as they strive to keep up with digital innovation.

The 3.7 million pound ($4.5 million) sanction this month was a landmark in that it was the biggest-ever imposed by the CMA over so-called resale price maintenance, or RPM — where a manufacturer uses agreements, threats or incentives to get retailers not to sell a product below a specified level.

For five years, Casio Electronics — a UK unit of Japan-based Casio Computer — put pressure on online stores to sell its electronic pianos and keyboards at or above a minimum price. It also pressed the retailers to inform on others that were discounting against Casio’s policy, reducing their incentives to offer discounts to consumers and leading to fear of retribution.

The fine on Casio Electronics and Casio Computer, agreed as a settlement, highlights the importance of enforcing against RPM to competition watchdogs. It also puts other companies and sectors on notice that similar market-pricing activity will bring commercial consequences.

At the same time, it underscores the challenges facing regulators in the burgeoning digital economy. The growing use of artificial intelligence — and especially the use of self-adapting algorithms — makes scrutiny of online prices trickier.

That warning is only getting louder, because enforcement is intensifying at home and abroad. Given the CMA's track record on cracking down on RPM, companies can't say they haven't been warned.

Clear warning

Casio's penalty continues a UK trend of noticeably rising RPM fines. In 2016, the CMA completed two RPM probes: In April it fined bathroom-fittings supplier Ultra Finishing 786,000 pounds ($875,000 today), and the following month it handed commercial refrigerator supplier ITW a fine of 2.3 million pounds. Then, in June 2017, it fined light-fittings company National Lighting 2.7 million pounds.

For the CMA, which says it receives a steady stream of RPM complaints, such vertical price-restricting behavior has a clear, two-sided impact: higher market prices and reduced choice for the consumer, and a disruption to normal competition.

It is prepared to use carrots and sticks to get companies to take its clampdown seriously: Casio saw its penalty discounted 20 percent after it admitted to the behavior and cooperated with the regulator. By contrast, National Lighting's fine was raised 25 percent because it failed to respond to a warning letter.

RPM offenses can have other regulatory repercussions. Also in 2016, the CMA issued its first director disqualification, banning Daniel Aston from acting as a company director for five years. He had been managing director at online poster-supplier Trod, which colluded with rival GB Posters not to undercut each other’s prices for posters and frames sold on Amazon’s UK website.

Regulators around the world, including in the EU, also appear to have RPM in focus in recent years.

Last year, the European Commission issued a cumulative fine of 111 million euros ($123 million) for online price fixing against four electronics companies — Asus, Denon & Marantz, Philips and Pioneer. The commission's first RPM decision since 2003, it flowed from an e-commerce sector investigation, which included online selling.

Antitrust agencies are typically wary of intervening in “normal” market mechanisms, including pricing, that are seen to reflect consumer demand and the ebb and flow of normal business competition. But the rise in RPM cases signals that regulators are increasingly ready to take action against suppliers that skew those market dynamics through forced pricing, especially when it comes to online commerce.

AI fears

The stepping-up of enforcement in online pricing is rooted in a wider concern: that market-tracking technology, driven by artificial intelligence, is outpacing the regulators.

Indeed, Casio used software to monitor the online retail prices of its keyboards and pianos in real time. That technology enabled “widespread compliance” with the company's pricing policy in its business ecosystem, the CMA found.

Regulators know this isn’t easy to police. Monitoring prices is a legal activity, though suppliers are cautioned not to stray over to the wrong side of competition law by dictating price levels to retailers.

The explosion of growth of the digital economy is both a boon and a curse to enforcers. Digital marketing and product sales have myriad consumer benefits. But the growing use of AI — such as self-learning pricing algorithms that operate autonomously, outside human agency — makes it easier for manufacturers to signal prices and so facilitates unlawful conduct.

The use of such computer algorithms — sets of rules used by computers in data processing — has become commonplace. They let companies collect and rapidly analyze swaths of market data, and then price products and services based a vast set of factors. While such tools can boost competition by making more products available, and encourage the introduction of products in response to demand, their use can equally enable price discrimination.

At base level, computer software that allows companies to beat their rivals' prices is a win for consumers looking for a bargain. But the very same programs can also spot competitors setting lower prices and encourage collusion to depress price pressure across the supply chain.

The European Commission's case against the four the electronics manufacturers shows the EU regulator as just as aware of these concerns. It found that they  used sophisticated algorithms to monitor distributor prices, and the results of this prompted rapid — and, ultimately, illegal — intervention by the companies. The impact was not just felt among the manufacturers and retailers involved, the commission said, but also broadly across online prices for consumer electronics products.

In the end, the risk is felt by companies as well as enforcers, whether the unlawful activity is intended or not.

Companies are realizing the antitrust compliance danger posed by so-called tacit algorithmic collusion in digital markets — where price-setting self-modifying technology tools learn to coordinate their activity outside human intervention — and where commercial activity leads to unintended or inadvertent coordination.

Fightback

Addressing these challenges isn't easy, but enforcers are up for the fight.

In the UK, the CMA has sharpened its gaze, now it has a specialized antitrust enforcement unit up and running to increase surveillance of data and the digital economy. For this, like other competition regulators, it is recruiting specialists in AI and behavioral economics to tackle online market behavior.

The regulator's work is aided by the UK government's push to have individual sector regulators — notably, the Financial Conduct Authority — develop customer-service performance metrics for companies and platforms.

Also focusing minds are recent government-led expert assessments of the potential for competition and consumer harm in digital markets. One recommendation from US economist Jason Furman, in his report for the UK government, was to create a new “digital markets unit” that, among other things, would impose a distinct enforcement regime on the largest tech companies.

Neither Furman nor the UK government has specified whether this digital markets unit should be a standalone body. Nor have they said whether it should be in the remit of the CMA, Ofcom or of the Information Commissioner’s Office.

Alongside all those developments sits a wider UK government review into competition policy, aimed at “modernizing consumer markets.” This includes a focus on digital technology, as well as a separate competition-policy paper. 

The CMA is striving to be ahead of the curve. It has asked the UK government to overhaul its regulatory scope across antitrust and consumer enforcement, looking for additional powers to impose fines and more-expansive inquiry timeframes.

And with Brexit in view, the watchdog knows a revamp of its toolkit will become ever more important: the complex antitrust cases involving digital industries currently reviewed in Brussels will fall into its lap after the UK withdrawal.

That will all put tackling RPM deeper into the enforcers' reach. Casio is the latest company to feel the regulatory heat, but it won't be the last.