The Australian Competition and Consumer Commission has issued a draft determination proposing to grant conditional authorisation to Tooltechnic Systems (Aust) Pty Ltd (Tooltechnic) to set minimum retail prices on Festool power tools for three years.

The ACCC is seeking submissions from interested parties in relation to its draft determination, before making a final decision. Submissions are due by 7 November 2014.

This is the first ever application for authorisation to set minimum retail prices, a practice known as resale price maintenance, under the Competition and Consumer Act 2010 (the Act).

Tooltechnic is the exclusive importer and wholesaler of Festool power tools, which are complex, highly differentiated products that require a high level of both pre- and post-sales services.

“The ACCC recognises that resale price maintenance will result in some customers facing a higher retail price for Festool products,” ACCC Chairman Rod Sims said.

“However, the ACCC notes that customers will still have a very wide range of alternative trade quality power tools available to them and, given this, Tooltechnic has little incentive to set minimum retail prices above competitive levels since this would likely reduce sales of Festool products.”

The ACCC accepts that resale price maintenance can, in certain circumstances, address market failures and thereby generate benefits to the public. One type of market failure can be caused by “free riding”, which occurs where some retailers can gain the benefit of, or free ride on, the services offered by other retailers. This creates a risk that retailers who do offer pre- and post-sales services will not achieve a sufficient return on the sales of their products to continue to provide these retail services.

In this case, the ACCC accepts that there is a market failure caused by the free riding of some Festool retailers.

“The ACCC considers that resale price maintenance is likely to limit free riding by encouraging Festool retailers to offer better services to attract customers. This will allow some customers to make more informed decisions in purchasing trade quality power tools and to continue to have the choice of a premium trade quality power tool accompanied by a high level of post-sales services,” Mr Sims said.

“The ACCC accepts that it is inherently difficult to determine the precise extent to which resale price maintenance will encourage a greater provision of pre- and post-sales services by retailers. However, the key issue here is the apparent incentives facing Tooltechnic. With only a very small share of the market, Tooltechnic needs to judge whether higher service levels will outweigh lower prices in attracting sales.”

On balance, the ACCC considers that in these particular circumstances the public benefit resulting from the increase in retail services will likely outweigh the clear, but limited, detriment resulting from the fact that some customers will face a higher retail price for Festool products.

“Given that this is the first authorisation application for resale price maintenance, and that it is difficult to weigh the public benefits and detriments before the conduct is in place, the ACCC proposes to grant authorisation for three years rather than the five years sought by Tooltechnic,” Mr Sims said.

“Further, the ACCC proposes to impose conditions which require Tooltechnic to provide the ACCC with certain information during the period of authorisation. This will allow the ACCC to monitor the impacts of resale price maintenance over that time and will inform consideration of any future application for reauthorisation by Tooltechnic.”

Authorisation provides statutory protection from court action for conduct that might otherwise raise concerns under the competition provisions of the Act. Broadly, the ACCC may grant an authorisation if it is satisfied that the conduct will be likely to result in such a public benefit that it should be allowed to take place.