Branding and competition law
Good brand positioning is vital in the fiercely competitive travel industry, allowing an organisation to create an image of reliability and quality. However, the natural desire to retain a competitive edge – and the profit margins it creates – must not be used to justify practices which run the risk of falling foul of competition law: brand owners and their distributors need to be aware of where the legal limits lie.
Working in an inherently international industry, travel professionals must be particularly sensitive to the issue of parallel trade. Keeping national markets apart allows brand owners to sell their products and services at differentiated prices in each country and protect distributors from cross-border competition. However, preventing parallel trade within the EU is prohibited under European competition law, as it counts as illegal “market sharing”.
Therefore, brand owners must not prohibit their distributors from selling to customers in other countries – at least when the customers approach them. Even placing restrictions on the use of online or distance selling can often be problematic, if not illegal.
For example, a customer should be allowed to shop around online for the best deals on flights, hotels and rental cars, without service providers forcing their retailers to refuse to deal with customers from other EU countries, or re-routing them to their domestic distributor so as to partition the market. Competition law also affects strategies for pricing of branded products.
A company using a network of distributors must not dictate the retail price of its products, especially by setting minimum prices, as this would be viewed as unlawful “resale price maintenance”.
Distributors must be left to set prices competitively and independently. Retailers should take care not to agree to resale price maintenance, since they would be implicated along with their supplier.
However, where a retailer simply acts as an agent, taking a commission for brokering the deal between the brand owner and the consumer, then it is legal for the brand owner to determine the price.
Businesses with particularly strong brands, whose market power is so great that they can be considered dominant, might have extra obligations under competition law.
If a company that’s dominant in one market tries to sell other services by bundling its offerings into one package, that could be seen as being anti-competitive.
The emergence of low-cost airlines has given rise to a specific competition issue, with the more “traditional” players meeting the perceived threat by changing their strategies on brand positioning, imaging and pricing.
This shift presents the major European airlines with a tough challenge, since they may be regarded as dominant in their respective national or regional markets.
As such, these airlines are not free to reduce their prices on a route – especially not below the point of recovering their costs – in order to “starve out” a new competitor.
In a recent case, Scandinavian airline SAS Braathens was fined by the Norwegian Competition Authority for “predatory pricing” after its price reductions meant a smaller competitor had to leave some domestic routes.
But the court of appeal overturned the decision, finding that SAS couldn’t be restricted from reinventing its marketing and pricing policy.
Brand owners, licensees and distributors need to factor competition law into all strategic decisions, or risk unwittingly making agreements that could land them with massive fines.
And, with the most serious infringements, such as price-fixing cartels, potentially leading to prison sentences, it is all to easy to see how competition can have a serious impact on brand image. n
Catriona Munro is a partner in the EU & Competition team of Maclay Murray & Spens, a leading commercial law firm;
e-mail: catriona.munro@mms.co.uk
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