OFT rules that Dixons' activities do not infringe UK competition rules

The Office of Fair Trading ("OFT") has ruled that agreements between electrical retailers Dixons and major PC manufacturers, Compaq and Packard Bell, to sell certain products exclusively do not infringe the UK competition rules. This is the OFT's third decision under the 1998 Competition Act.

Rival vendors (including The John Lewis Partnership) filed a complaint with the OFT alleging (i) the agreements with their exclusivity provisions adversely affected competition in the UK and (ii) Dixons held a dominant position in the market which position it was abusing by continuing to implement the agreements.

Vertical agreements - those between businesses at different levels of the supply chain such as the agreements between Dixons and Compaq and Packard Bell - are excluded from the Competition Act's prohibition on agreements that affect competition, as they do not generally give rise to competition concerns unless one or more of the companies involved possesses market power on the relevant market. However, the DGFT can claw back this exclusion where he considers the agreement would be anti-competitive. In this case, the OFT found there were insufficient grounds to exercise the power to withdraw the exclusion.

The OFT carried out an in-depth examination into the market for the supply of home PCs to UK consumers. It defined the market to include sales via high street retailers, specialist retailers, retail parks, mail order, sales over the Internet and other direct methods of sale. The OFT found that overall the market was competitive: it was not highly concentrated and barriers to entry were not high. A wide range of well known brands of PCs is available to consumers through a variety of outlets. In general, consumers do not appear to have a strong preference for any one brand in particular, nor for purchasing through any one type of outlet. Thus, consumers buy PCs at a wide range of prices and from a wide variety of sources.

As to the question of dominance, the OFT found that Dixons' market share of the whole retail market was significantly less than 40 percent - the level below which the OFT considers it unlikely that an individual company will be dominant.

In assessing Dixons' position in the market, the OFT also considered the conditions of competition in the market to ascertain whether Dixons is able to act to an appreciable extent independently of competitors and consumers. As already mentioned, the OFT found that the market structure was not highly concentrated, not segmented by brand or by direct and retail channels, and that market shares moved over time. There was evidence that significant growth is possible in a short space of time and that entry barriers to the market are not high. There is a large and growing pool of "experienced" buyers. Most manufacturers described the market as one which is price sensitive and where margins have declined in recent years. As the rapid product innovation cycle (estimated to be around 6-12 weeks) was expected to continue, competitive pressure from the discounting of "older" stock will remain. These factors indicate that Dixons is not free to behave to an appreciable extent independently of its competitors and consumers. Thus, the OFT found that Dixons is not dominant in the market for the supply of new home PCs. As a result, there was no possibility of an abuse in this case.

The decision demonstrates the significance of the definition of the relevant market. The OFT defined the market to include sales through high street retailers and sales direct from manufacturers, where Dixons' market share was significantly less than 40 percent. John Lewis argued that its research had shown that 70 percent of PCs were sold on the high street and that of these, 57 percent were sold through Dixons. If its market share had been found by the OFT to be above 50 percent, Dixons would be presumed to be dominant in the market.

The OFT's decision is in line with the results of its survey of the home PC market in 1999, when it concluded that the market for home PCs in the UK was competitive and stated that "no single manufacturer or retailer has market power."

John Lewis has yet to announce whether or not it will appeal the decision.

For further information, please contact Marianne Walsh by e-mail at marianne.walsh@cms-cmck.com or by telephone on +44 (0)20 7367 2654.