Antitrust Bites – Newsletter

ICA publishes preliminary report on investigation into algorithms in the passenger air transport sector

On 2 December 2024, in Bulletin No. 46/2024, the ICA published its preliminary report on the sector inquiry into air carriers using pricing algorithms for domestic routes to and from Sicily and Sardinia (IC56).

As the Authority indicated in the opening decision (see Antitrust Bites, November 2023 issue), the investigation focuses on the domestic routes connecting the Italian peninsula to Sicily and Sardinia. These routes are relevant in terms of volumes of passengers transported and because the routes are potentially affected by particularly pronounced price differentiation policies because of periods of peak demand, typically coinciding with summer and Christmas holidays.

The IC56 investigation is the first investigation to be launched following the introduction of the ICA's new powers by means of Law Decree No. 104/2023 (the Decreto Asset, which became Law No. 136/2023). The ICA can now, following sector inquiries, impose behavioural and structural measures on undertakings to address competition problems that hinder or distort the proper functioning of the market and harm consumers.

Through the IC56 sector inquiry, the ICA aims to analyse:

• how widespread air carriers' use of pricing algorithms in revenue management systems is and the features of these algorithms;
• the distorting effects on competition and harm to consumers that could result from undertakings using pricing algorithms; and
• the degree of transparency and comparability of airline ticket prices and of their components.

In the preliminary report, the ICA states that it found that all air carriers use revenue management systems for all the routes they operate, without applying special criteria, systems and price definition mechanisms for the domestic routes to and from Sicily and Sardinia. The ICA also found that the revenue management systems the undertakings use are based on traditional mechanisms and don't employ AI and machine learning techniques.

Analysis carried out on prices in 2023 for airline tickets to and from Sicily and Sardinia have shown a tendency to significant price increases at certain times of the year, such as holiday periods, weekends, long weekends and during summer, which are periods of peak demand. But, the ICA states that, in terms of price personalization, the analysis did not reveal – except for limited exceptions – the use of customer profiling practices based on information acquired during the connection concerning the type of device or browser used, the location of the connection and the browsing history. The analysis also revealed that the variability of airline ticket prices isn't only because of time-based dynamic pricing mechanisms but also because some air carriers use elasticity of demand tests, known as A/B tests. These tests, used to analyse the characteristics of demand, involve exposing different consumers to different prices simultaneously for the same product, using randomised selection techniques.

The Authority also observed that studies on the impact of pricing algorithms on competition and consumer welfare don't draw clear conclusions on the topic. On the one hand, algorithms increase undertakings' predictive abilities and optimise their decision-making processes. On the other hand, there's growing concern that the use of algorithms, especially when they're based on AI and machine learning technologies, could negatively affect competition, facilitating coordination between undertakings and unilateral anti-competitive conducts.

Finally, the Authority's inquiry revealed a lack of transparency and comparability of prices of airline tickets and ancillary services. The ICA noted that the ancillary services offered by the different air carriers aren't always uniform. None of the carriers under examination show the price of ancillary services on the first page of the flight search result and airline ticket price comparison platforms don't allow users to make a full comparison between different carriers' offers in terms of price.

The ICA also observed that the terminology air carriers use isn't uniform with regard to the factors of the final price referred to as "air fare," "taxes," "airport charges" or "other charges, taxes and surcharges."

Interested parties can submit comments on the preliminary report until 31 January 2025.

 

Below-threshold concentrations: Commission clears below-thresholds concentration referred under Article 22 EUMR by ICA

On 20 December 2024, the European Commission announced that it had unconditionally approved, under Regulation (UE) No. 139/2004 (EUMR), a below-threshold acquisition that had been the subject of a referral request submitted by the Italian Competition Authority (ICA) under Article 22(1) EUMR, and accepted by the Commission on 31 October (see Antitrust Bites – Newsletter).

Although this transaction didn't meet the turnover thresholds that would trigger the obligation to formally notify the operation to the Commission or to the ICA, it was examined since the ICA exercised its call-in powers, requesting the notification of the transaction, and submitted the referral request under Article 22 EUMR to the Commission on 30 September 2024.

The Commission accepted the referral request on 31 October 2024, a little over a month after its submission. The transaction was then notified to the Commission on 15 November 2024.

Following its analysis, the Commission approved the transaction – without opening an in-depth investigation, known as "Phase II" – concluding that:

• the acquiring company, despite holding a dominant position in the relevant market, lacks the technical ability and incentive to hamper the compatibility of its products with those offered by competitors;
• the target company doesn't currently hold a significant position in the relevant market, and customers will continue to have access to sufficiently credible alternatives with similar features.

 

Council of State annuls ICA decisions concerning unfair clauses due to lack of evidence

With four judgments published in the first half of December 2024, the Council of State, overturning the challenged judgments of the Lazio Administrative Court, annulled the decisions taken by the Italian Competition Authority (ICA). The ICA had sanctioned several companies active in the driverless short-term car rental sector for having included unfair clauses in their general terms and conditions. The clauses required the customers of the car rental companies to pay a sum of money to the companies in the event of a breach of road traffic regulations, which had been notified to the companies.

According to the ICA, the clauses used by the car rental companies were allegedly unfair since they integrated penalty clauses imposing the payment of disproportionate amounts of in the event of violations of vehicle traffic regulations.

The Council of State, while upholding the reasoning that led the ICA to find that the clauses in question constituted penalties, found an investigative deficit insofar as the ICA allegedly failed to prove that the amount of money owed by customers to car rental companies in the event of violations of vehicle traffic regulations was manifestly excessive.

The Council of State clarified that to qualify a clause as unfair, it's not sufficient that a penalty clause is identifiable and that the amount stipulated by it is disproportionate, as it must necessarily be “manifestly excessive” in its amount. In this regard, it recalled that the appreciation as to the excessiveness of the amount fixed by the penalty clause should be based on the assessment of the creditor's interest in performance. According to the Council of State, the ICA omitted this assessment, failing to investigate important elements like the renter's interest in fulfilling the obligation to diligently drive the vehicle to contain the risk of the vehicle being affected by measures that would preclude its enjoyment in the future (eg seizures), to reduce the frequency and severity of accidents, and to avoid incurring the higher costs of handling the file.

The Council of State specified that the assessment of the manifest excessiveness of the sum is objective in nature, disregarding the economic situation of the debtor and the reflection that the penalty could have on their assets. It also censured the ICA's reasoning where it inferred the excessive onerousness of the amount from the magnitude of the economic value of the specific rental contract and the amount of the penalty imposed for the individual infringement, since the renter's operating costs aren't dependent on these elements.

According to the Council of State, the ICA, by failing to value these factors, failed to prove the manifestly excessive nature of the amounts stipulated in the clauses, preventing the operation of the presumption of vexatiousness and resulting in the measures being annulled.

 

New EU Directive on liability for damages caused by defective products comes into force

On 8 December 2024, Directive (EU) 2024/2853 on liability for damages caused by defective products came into force.

The Directive establishes common EU-level rules regarding the liability of economic operators for damages caused to individuals by defective products, and the procedures for compensating damages. It replaces the current framework, established in the EU in 1985, while preserving its core structure and updating it to account for technological advancements in recent decades and new sales methods.

Among the key innovations introduced by the Directive is the expansion of its scope of application. The definition of "product" now also includes digital manufacturing files and software (with related updates). However, free and open-source software developed or supplied in a non-commercial context is still excluded. Additionally, with regard to the digital sector, the category of affected economic operators has been broadened, allowing online platforms to be held liable, under certain conditions, for products sold even when they act solely as intermediaries between producers and consumers.

Another key innovation concerns the category of compensable damages, which now includes the destruction or corruption of data, and compensation for the costs necessary to recover or restore such the data.

Regarding the burden of proof, in continuity with the previous regulatory framework, the injured person has to demonstrate the defectiveness of the product, the existence of damage, and the causal link between the defect and the damage suffered. The Directive introduces several legal presumptions to ease the burden of proof, particularly in cases where technical complexity makes it extremely difficult to prove the defect or causal link. To support compensation claims, the injured person has the right to access relevant evidence held by the manufacturer.

Member states will have two years to transpose the Directive into their national legal systems, with the new provisions applying to products placed on the market or put into service starting 9 December 2026.

 

EU Court of Justice rules on standard of proof for qualifying an agreement as restrictive of competition by effect

In its judgment of 5 December 2024, in Case C-606/23, the Court of Justice of the EU ruled on a preliminary reference made by the Latvian Regional Administrative Court regarding the interpretation of Article 101 TFEU. The judgment clarifies questions on the standard of proof required to qualify an agreement as restrictive of competition by effect.

The request for a preliminary ruling stems from a dispute concerning a fine imposed by the Latvian Competition Authority on KIA Auto (the sole authorized importer of cars of the KIA brand in Latvia). The dispute concerned the alleged conclusion of a vertical agreement on warranty terms with authorized dealers and repairers of KIA brand automobiles. This agreement made the validity of the automobile warranty conditional on the exclusive use of authorized repairers and KIA-origin spare parts, incentivizing vehicle owners to carry out repairs and maintenance exclusively at authorized representatives of the automobile manufacturer, and using only original spare parts.

The Authority held that the agreement restricts competition by effect, emphasizing that the standard of proof applicable didn't require actual effects to be demonstrated. The negative effects on competition would be derived from the very nature of the restrictive clauses, and it wouldn't be necessary to prove the effects which actually occurred.

The referring court stayed the proceedings to ask the Court of Justice whether Article 101(1) TFEU should be interpreted to mean that the national competition authority, to classify an agreement as restrictive of competition by effect, has to demonstrate the existence of actual and real restrictive effects on competition or if it's sufficient to demonstrate solely the existence of potential effects on competition.

Recalling its settled case-law, the court reminds that the concept of conduct having an anticompetitive “effect” comprises any conduct that has the actual or potential effect of appreciably preventing, restricting or distorting competition.

To assess the effects of an agreement between undertakings, it's necessary to consider the actual situation in which the agreement takes place, in particular the economic and legal context in which the undertakings concerned operate, the nature of the goods or services affected, and the real conditions of the functioning and the structure of the market or markets in question.

The counterfactual scenario, envisaged on the basis of the absence of that agreement, must be realistic and credible. In any case, the court makes it clear that both realistic and credible character of the counterfactual scenario doesn't call into question the possibility of taking into account purely potential effects of an agreement between undertakings to examine whether it constitutes a restriction of competition by effect.

The court clarified that to qualify an agreement as restrictive of competition by effect, it isn't necessary for national competition authorities to demonstrate the existence of specific and actual restrictive effects on competition. On the contrary, it's sufficient to demonstrate the existence of potential restrictive effects, provided they're “sufficiently appreciable.”