Chinese Ecommerce Platforms’ Wide Retail Most-Favored-Nation Clauses

Ryan Zhu

In the e-commerce market, quite a few platform operators in China – such as JD, Gome, and PDD (PinDuoDuo) – require suppliers to accept a Wide Retail Most-Favored-Nation Clause (“RMFN Clause”).^[1]This Clause requires suppliers to promise the platform that it will grant it equally favorable terms as granted to any other platform. VIP.COM,^[2]the largest e-commerce platform in South China, also uses that Clause. This article shows the anti-competitive effects of RMFN clause gravely overwhelms the pro-competitive effects. In recent years, RMFNs have been scrutinized by the US Justice Department, the European Commission, as well as the national competition authorities of various EU member states.

China is the biggest E-commerce market in the world. However, China’s antitrust authorities ignore these RMFN Clauses, partially because no actual dispute has been raised by suppliers or consumers. Judge Ding Wenlian from Shanghai High People’s Court has written that antitrust authorities and courts shall be prepared for challenging that Clause.^[3]In this article I argue that RMFN Clause is a violation of Article 13 and Article 14 of Anti-Monopoly Law of China, which indicates that relevant authorities should regulate it.

Should China’s Anti-Trust Authorities Pay Attention to Wide Retail MFN Clauses?

RMFN Clauses are essentially agreements about pricing. For example, the RMFN Clause adopted by VIP.COM requires that the prices of the commodities shall not be higher than the selling price in other public sales channels. According to a report by E-Commerce Research Center^[4], in 2018, all the platforms that have over 1% market share, except T-mall, use the RMFN Clause.^[5] That means the RMFN Clause is well-recognized in the Chinese E-Commerce industry. Furthermore, although the RMFN Clause has both anti-competitive effects and pro-competitive effects, the former effects greatly outweigh the latter. The details are explained below.

(1) Anti-Competitive Effects

Generally, RMFN Clauses can lead to competitive harm, loss of consumer welfare and higher consumer prices. I will examine the overall adverse effects of the law by focusing on the first point, namely, the effects it has on competition. As will be discussed more extensively below, the potential competitive concerns associated with RMFNs generally fall into three categories:

reduced price competition;
deterring new market entrants;
facilitating collusion between horizontal competitors.

a. Reduce Price Competition

RMFN Clauses greatly damage price competition. Taking VIP.COM as an example, when VIP.COM intends to raise its platform fee, the supplier bound by the RMFN Clause cannot set a higher price in VIP.COM than in other platforms. Therefore, VIP.COM can increase the platform fee whenever it wants without worrying about the reduced competitive effect this might have on products sold through its platform. However, because of the common business practice, the elevated platform fee will eventually be passed on to consumers.^[6]

Moreover, if VIP.COM hopes to reduce the commodity price, it can reduce the platform fee to encourage suppliers to lower the price of goods. This strategy would only work, however, in the absence of the clause in the industry because the clause forces the supplier to incur unnecessary losses. Because RMFN Clause is widely used in the industry, the supplier who reduces the selling price in VIP.COM needs to match this price on other platforms, which will cause large unnecessary losses for them.^[7]

Therefore, having RMFN Clauses results in reducing price competition within the brand, which will eventually result in the loss of consumer welfare.

b. Deter New Market Entrants

As mentioned before, RMFN Clause will prevent the platform from cutting the commodity price by lowering the platform fee. The weakening of price competition will prevent small and medium-sized suppliers, which have high efficiency and aim at adopting low-cost and low-price business strategies, from entering the market. An economic model shows us that under these circumstances, potential entrants in the market may choose to abandon low-cost and low-price business strategies or be forced to align their original strategies with the current market style, i.e. high prices and high values model.^[8]This excluding effect is another reason why antitrust regulation is needed.

c. Facilitates Collusion

The RMFN Clause also facilitates collusion between horizontal suppliers under certain circumstances. The most typical case is the Apple e-book case in America.^[9]The United States Court of Appeals for the Second Circuit held that Apple played a key role in reaching a horizontal monopoly agreement between publishers. Theoretically, the implementation of the horizontal monopoly agreement needs two pre-conditions. Firstly, the negotiation cost needs to be relatively low. Apple’s disclosure of its price information to each publisher greatly reduced the cost of a horizontal monopoly agreement between publishers. If there is an exchange of industry information between publishers, it is highly likely that they will engage in coordinated behavior. Secondly, participators shall have the ability to detect and punish cheating participants in time. The RMFN Clause facilitates publishers to monitor each other’s pricing behavior.^[10]Therefore, the very existence of MFNs can be used as a signaling strategy between horizontal competitors to communicate that they do not intend to engage in aggressive price competition, which constitutes collusive behavior.

(2) Pro-Competitive Effects

Despite their various anti-competitive effects, RMFN Clauses also have efficiency-generating functions. The existing academic literature provides a consensus that the following benefits may be achieved through the use of RMFN Clauses.^[11]

a. Reduce Transaction Costs & Avoid Contracting Delay

The wide use of RMFN Clause greatly reduces the search cost, one facet of transaction cost, for consumers. Taking Gome as a typical example, Gome also adopts RMFN Clause in its “Management Regulations for Platform Commodities”. After that, Gome issued the “Requirement for the Upgrade of the Nine Commitments of Worry-Free Shopping Service” document, which generally promises that if customers find a lower price of the same goods from other channels, they will be compensated by Gome.^[12]The precondition for this promise is the RMFN Clause between Gome and its suppliers. If a lower price is found from other platforms, Gome will pay the difference and demand compensation from the supplier for breach of contract. Therefore, the application of the RMFN Clause will give the platform the confidence to make the lowest price guarantee promise. Consumers do not need to compare the commodity price from platform to platform, which avoids contracting delay and promotes the transaction.

b. Avoid Free-Riding & Promote Non-Price Competition

The RMFN Clause may create efficiency and fairness preventing low-quality platforms from free-riding on the marketing, promotion activities and high-quality services provided by other platforms. For example, VIP.COM may invest huge resources in promoting and publicizing its products and providing excellent before-sales service. Other e-commerce platforms that do not provide such services can enjoy the benefits with no cost. In the same market, VIP.COM undoubtedly takes more cost, and the corresponding product price will be higher. But the products it provides are essentially the same as other platforms’, and consumers will tend to buy products with lower price. As a result, VIP.COM is at a disadvantage in competition.

According to competition law theory, to avoid the phenomenon of free-riding, manufacturers must give individual sellers the right to sell products exclusively within a certain geographical area.^[13]The RMFN Clause is similar to the exclusive sales rights under competition theory. Although the suppliers do not promise that they will not supply VIP.COM’s competitors in a certain geographical area, they actually promise that they will not give VIP.COM’s competitors a more favorable price.^[14]Therefore, VIP.COM need not be concerned because its competitors cannot offer a lower price for the same product. The RMFN clause requires suppliers to set the same price across platforms. The RMFN Clause will effectively avoid low-cost and poor-service business strategies, and the free-riding phenomenon will also be eliminated. Since the existence of the clause neutralizes inferior platforms’ (the free riders) use of lower prices as a means to gain a competitive edge over other platforms, it forces them to utilize different means that pertain to the quality of the service to gain that competitive edge.

The growth of e-commerce has made RMFN a hot topic in competition law. Some academics and practitioners in Europe and America point out that considering the severe anti-competitive effects of the RMFN Clause, antitrust authorities need to scrutinize RMFN Clauses.^{^[15]}As mentioned before, competition authorities have already responded to several RMFN Clauses that are widely applied in a variety of sectors such as online hotel bookings, online sale of e-books, and price comparison websites for motor insurance. Therefore, China’s Antitrust Authority should at monitor the specific RMFN Clauses that are adopted by a large number of platforms.

2. How Should China’s Anti-Trust Authority Respond to Wide RMFN Clauses?

Under the Anti-Monopoly Law of China, there are three different legal regimes which are relevant and applicable here.

(1) Under The Horizontal Monopoly Agreement

Prof. Huang Yong, an expert of State Council Antimonopoly Commission, holds that the RMFN Clause in the Business to Consumer (“B2C”) e-commerce business mode violates Article 13(1)(1) of the Anti-Monopoly Law of China, which prohibits a fixed commodity price agreement.^[16]Although the RMFN Clause is essentially a vertical economic arrangement, it can be regulated by the horizontal monopoly agreement theory if the RMFN Clause’s restrictive effect on competition is concentrated on the conspiracy of horizontal operators, and if the effect of promoting competition is not significant in a specific case. If it does not meet the exemption conditions set out in Article 15 of the Anti-Monopoly Law, the RMFN Clause will be banned.^[17]

As to e-commerce platforms, there are countless suppliers cooperating with platforms such as VIP.COM. Under the Consumer-to-Consumer (“C2C”) mode, suppliers are single and powerless. The possibility of horizontal collusion is low. But for the B2C mode, the platform is only used as a sales channel. The supplier is an operator with a certain market share under the physical network. The RMFN Clause may serve as a tool for horizontal collusion and supervision purpose. In these occasions, it probably violates Article 13 of the Anti-Monopoly Law of China.

(2) Under Abuse of Dominant Market Position

In China’s anti-monopoly judicial practice, as pointed out by Supreme People’s Court Judge Liu Guixiang, now judges use the “three-step” test to identify abuse of dominant market position. Firstly, define the relevant market scope. Secondly, identify whether the defendant has dominant market position in the relevant market. Lastly, identify whether the defendant abused the dominant market position.^[18]

As to the second issue, Judge Liu Guixiang illustrates that judges now tend to use “the ability of the operator to control the market” standard. They no longer rely solely on market share. The factors considered by the judge mainly include the basic conditions and characteristics of the relevant market, market barriers and the ability of the operator to control the market.^[19]

Based on the above criteria, it is difficult for VIP.COM and other platforms to be seen as market dominators. Firstly, T-mall, which occupies 55% of the market share, does not set RMFN Clause in its agreement with the supplier. This means that any individual platform which adopts the RMFN Clause does not dominate the market shares. Secondly, as to the basic conditions and characteristics of the market, the domestic E-commerce market of China is facing a reshuffle and is gradually evolving in the direction of standardization, quality and diversification. The competition among platforms is really intense. Thirdly, in terms of market barriers, the Internet market is typically a dynamic market. The market barrier to E-commerce platforms is not very high. For example, the market valuation of unicorn enterprises, i.e. great start-up companies, represented by “PDD” and “Red”, reached billions of dollars within four or five years. Platforms with large market shares may also rapidly lose their market position due to the innovative business model of unicorn enterprises. Lastly, in terms of the ability to control the market, judges now use the following standard to determine an enterprise’s ability to control the market: if an enterprise is not affected by its competitors when determining its sales policy, that enterprise has the controlling ability.^[20]In our case, as we discussed before, it is undoubtedly difficult for VIP.COM to meet this standard. Therefore, the second step of the abuse of dominant market position test is not met. The effects of the RMFN Clause cannot be identified as constituting an abuse of the dominant market position.

(3) Under The Vertical Monopoly Agreement

Article 14 of the Anti-Monopoly Law prohibits business operators from reaching any agreement which fixes the price of commodities for resale to a third party with their trading parties. Considering the pro-competitive effect of vertical monopoly agreement, now most antitrust authorities around the world tend to use the “rule of reason” test for the regulation of RMFN Clause. This test means doing a case-by-case assessment of the potential harm and efficiency benefits.^[21]If the potential harm outweighs the potential benefits, and the exemption conditions stipulated in Article 15 of the Anti-Monopoly Law are not met, the RMFN Clause should be considered illegal.

Under the “rule of reason” principle, the factors to be measured mainly include the following aspects: 1. The purpose of restricting competition; 2. The motivation of the contract parties to adopt the RMFN Clause; 3. The market power of the contracting parties; 4. The competition status of the relevant market; 5. Market barriers; 6. The ability of competitors in the same industry to cope with the consequences of restricting competition; 7. The competitive effect of RMFN Clause on suppliers; 8. The effect of promoting competition; 9. The effect of restricting competition. All of the above factors are non-deterministic factors. A comprehensive measurement of the above factors is required.

We can use the factors above to analyze the RMFN Clause adopted by E-commerce platforms. On the one hand, considering the rise of unicorn enterprise in recent years, the market threshold is also not high. As we discussed in the abuse of dominant market position part, the market power of the platform in the e-commerce market is also not prominent. On the other hand, in terms of purpose and motivation, there is less doubt that E-commerce platforms adopt this clause with the purpose of restricting competition. What’s more, the RMFN Clause will indeed cause great damage to price competition. Suppliers and platforms are reluctant to sell at a reduced price. To some extent, they have the anti-competitive effect of resale price maintenance, and their damage to the competition is greater than the promotion effect. In summary, the “Commodity Price Standard” is largely at risk of violating the Anti-Monopoly Law.

To conclude, the RMFN Clause poses a great threat to customer welfare and is likely to violate Article 13 and Article 14 of the Anti-Monopoly Law of China. Nowadays, e-commerce platforms have an increasing influence on our daily life. China’s antitrust authorities should at least keep their eyes on the well-used Wide Retail Most-Favored-Nation Clauses in the e-commerce industry and scrutinize that when necessary.

^[1]Another kind of RMFN Clause is called Narrow RMFN Clause, under which the price comparison only exists between the platform and supplier’s own website. The Narrow RMFNs do not raise substantial concerns, mainly because they do not restrict prices advertised through other platforms. Therefore, this article focuses on the Wide RMFN Clause.

^[2]Vip.com, which headquartered in Guangzhou, is the world’s largest online discount retailer and the third largest e-commerce platform in China. Vip.com has established a flash sales model that becomes one of the three major business models in China e-commerce space, available at https://viva.Vip.com/act/supportContactEn-pc?wapid=vivac_799.

^[3]See Legal Daily, Hot Discussion On the Professionalism of China’s Anti-Monopoly Civil Litigation Trial, available at http://news.ifeng.com/a/20140625/40881155_0.shtml.

^[4]E-Commerce Research Center is a famous and well-recognized E-commerce think tank in China.

^[5]See E-Commerce Research Center, First Half of 2018 China Online Retail Market Data Monitoring Report, available at http://www.100ec.cn/detail–6474412.html.

^[6]See Oxera, Most-favored nation clauses: Failing out of favour?, available at https://www.oxera.com/getmedia/c4ffdd7c-e35f-4466-a5a0-0a56cc2dc94b/Most-favoured-Nation-clauses_1.pdf.aspx?ext=.pdf.

^[7]See Gönenc, Gürkaynak·Ayse Güner·Sinan Diniz·Janelle Filson, Most-favored-nation clauses in commercial contracts: legal and economic analysis and proposal for a guideline, Eur J Law Econ (2016), available at https://link.springer.com/article/10.1007/s10657-015-9515-y.

^[8]See Boik, A. and Corts, K.S., The Effects guideline of Platform MFNs on Competition and Entry, 59 J.L. & Econ. 105 (2013), available at https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=RES2015&paper_id=41.

^[9]In United States v. Apple Inc., the Department of Justice, along with thirty-three states and U.S. territories, alleged that Apple conspired with five of the six largest publishing companies in the United States to raise, fix, and stabilize retail prices for e-books. Prior to the launch of the iPad in January 2010, Apple signed agency agreements with the Publisher Defendants to sell the Publisher Defendants’ e-books in Apple’s iBooks Store. The agreements utilized a principal-agency model, price tiers, and a most favored nation clause which guaranteed Apple the lowest retail price that the Publisher Defendants offered to any of their retailers. Through these agreements, prices in the e-book industry increased by 50% or more “virtually overnight”. United States District Court for the Southern District of New York found that Apple violated Section 1 of the Sherman Antitrust Act’s prohibition of unreasonable restraints of trade by participating in and facilitating a horizontal price-fixing conspiracy with the Publisher Defendants to raise e-book prices.

^[10]See Chen Yunliang, Chen Ting, Research on Proof of Collusive Behavior in Monopoly Agreement, 10 Political Science and Law, 2008, available at https://wenku.baidu.com/view/4a76a98a3c1ec5da51e2705c.html.

^[11]See Gönenc, Gürkaynak·Ayse Güner·Sinan Diniz·Janelle Filson, Most-favored-nation clauses in commercial contracts: legal and economic analysis and proposal for a guideline, Eur J Law Econ (2016), available at https://link.springer.com/article/10.1007/s10657-015-9515-y.

^[12]See NetEase News, Gome launched the “Nine Promises of Worry-Free Shopping” to ensure quality and quantity, available at

http://news.163.com/15/0807/03/B0CTEELJ00014Q4P.html.

^[13]See Wang Xiaoye, Wang Xiaoye’s Thoughts on Anti-Monopoly Law, Social Sciences Academy Press, 2010, page 142, available at https://book.douban.com/subject/4832039/.

^[14]See Jonathan B. Baker, Judith A. Chevalier, “The competitive consequences of most-favored-nation provisions”, 27-SPG Antitrust 20 (2013), available at http://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1280&context=facsch_lawrev.

^[15]See, for example, Oxera, Most-favored nation clauses: Failing out of favour?, available at https://www.oxera.com/getmedia/c4ffdd7c-e35f-4466-a5a0-0a56cc2dc94b/Most-favoured-Nation-clauses_1.pdf.aspx?ext=.pdf.

^[16]Article 13 of Anti-Monopoly Law: The competing business operators are prohibited from reaching any of the following monopoly agreements with each other:1. Fixing or changing the price of commodities…, available at http://www.gov.cn/flfg/2007-08/30/content_732591.htm.

^[17]Article 15 of Anti-Monopoly Law: Where the business operators can prove that a monopoly agreement reached by them falls under any of the following circumstances, the monopoly agreement shall be exempt from Articles 13 and 14 of this Law:

1. For the purpose of improving technologies, researching, and developing new products;

2. For the purpose of upgrading product quality, reducing costs, improving efficiency, unifying product specifications or standards, or carrying out professional labor division;

3. For the purpose of enhancing operational efficiency and reinforcing the competitiveness of small and medium-sized business operators;

4. For the purpose of realizing public interests such as conserving energy, protecting the environment and providing disaster relief, etc.;

5. For the purpose of mitigating the severe decrease of sales volume or obviously excessive production during economic recessions;

6. For the purpose of protecting the justifiable interests of the foreign trade or foreign economic cooperation; or

7. Other circumstances prescribed by the law or the State Council.

Where a monopoly agreement falls under any of the circumstances prescribed in Items 1-5 and is exempt from Articles 13 and 14 of this Law, the business operators shall also prove that the reached such an agreement shall not substantially restrict competition in the relevant market and can enable the consumers to share the benefits from the agreement.

available at http://www.gov.cn/flfg/2007-08/30/content_732591.htm.

^[18]See Liu Guixiang, Judicial Considerations of the Abuse of Dominant Market Position Theory, 5 China Legal Science, 2016, available at http://www.iolaw.org.cn/showNews.aspx?id=62337.

^[19]Id.

^[20]Id.

^[21]See Oxera, Most-favored nation clauses: Failing out of favour?, available at https://www.oxera.com/getmedia/c4ffdd7c-e35f-4466-a5a0-0a56cc2dc94b/Most-favoured-Nation-clauses_1.pdf.aspx?ext=.pdf.

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