Vertical agreements and competition law

1. Verticalagreementsandcompetitionlaw Doc. dr. sc. Jasminka Pecotić Kaufman Universityof Zagreb-FacultyofEconomicsandBusiness, Department ofLaw jpecotic@efzg.hr Universityof Zagreb-FacultyofLaw Course: CompetitionLaw 13.12.2011

2. Verticalagreements • Purchase or sale ofgoods or servicesbetweenundertakingsthatoperate at a differentleveloftheproduction or distributionchain • Producer - retailer • Producer - wholesaler • Most commontypesofverticalagts • Distribution (exclusive, selective), franchisecontract, exclusivepurchase • Olderapproach (US, EU) • Anyrestriction on freedom to operate on themarket = competitionissue • Restrictiveapproach – until 2004 mandatorynotification to theCommission • More recentapproach – Chicago School • Restrictionsimposedbyproducers to distributersjustifiedbybusinessinterestsofproducers • No effects on competition • Moderneconomicapproach • Interventiononlyifcertainlevelofmarket power • Interventionbased on effects, notaccording to typesofagts

3. Verticalrestraints • Examples • Producersells to one distributoronly (exclusivedistribution) or to limitednumberofdistributers (selectivedistribution) • Resale price maintenance (RPM) • Distributersnotallowed to purchaseandresellgoodsfromsuppliers’ competitors(non-competeobligation) • Suppliers’ obligation to supplyonlytocertainbuyer (exclusivesupply) • Positiveeffectsofverticalrestraints • Penetrationof new markets • Free-riding • Inter-brand / intra-brandcompetition • Dangerousifnotsufficientinter-brandcompetition • Lessdangerousifnon-concentratedmarket

4. Blockexemption (BE) • Jointly no more than 30% marketshare + no hard-corerestraints • No prohibitionunderArt 101 • Ifhard-corerestraint • No BE available • Jointlylessthan 15% + no hard-corerestraints • Art 101 notapplicable(de minimis) • Marketsharehigherthan30% • No automatic prohibition, effectsassessed

5. VerticalagtsandArt 101 • Notperse prohibited • Case-by-caseassessment • Art 101/1 • Prohibition: agt + effect on tradebtwMS+ (substantial) restrictionofcompetition as object or effect • Art 101/3 • Exemption: 4 criteria – benefitsoutweighanticompetitiveeffects • Individual/blockexemption(30%) • If more than 30% marketsshare, notprohibited, but thoroughlyassessed • Hard-corerestraints • De minimis (15%)

6. Relevantlegislation • Regulation 330/2010 • Guidelines on verticalrestraints(2010) • Internet sale=cross-bordersale • BER –Regulation330/2010 • Exclusivedistribution, selectivedistribution, exclusivepurchase, franchising, exclusivesupply • Tranferoftechnology • R&D • Specialization • Insurance • Motor vehicles • Line maritime transport • Air transport

7. Inter-brandcompetition • Competitionbtwdifferentbrands • Ifmarketnotconcentrated, assumedthatverticalrestraints (excepthard-corerestraints) have no substantive negative effect • Ifmarketconcentrated, restrictionofintra-brandcompetitionmaysubstantially limit consumerchoice

8. Intra-brandcompetition • Competitionbtwdistributerscarryingthe same brand • As a rule, lessharmthanfromrestrictionsofinter-brandcompetition • However, ifnotsufficientinter-brandcompetition, restrictionofintra-brandcompetitionmay limit consumerchoicesubstantially

9. Restrictionsregardingresale price • Restrictionofintra-brandcompetition • Anticompetitivepractice • If all producersinanoligopolisticindustry limit freedomto put resaleprices – thismakes a horizontal price agreementeasier • Distributers= horizontalcartel • Pro-competivepractice • Byfixing minimum retail price theproducereliminatespricecompetitionandforcesdistributers to focus on non-price competition

10. Some rules to assessverticalrestraints • As a rule, exclusivearrangements more negative for competitionthannon-exclusivearrangements • Compare: obligationofpurchaser to buy only one brand v. obligation to buy minimalquantitieswhichleavespossiblity to purchasefromcompetitors • Verticalrestraintsrelated to brandedgoodsinprinciple more negative thanthoserelated to non-brandedgoods • Negative anticompetitiveeffectsofverticalrestraintsamplifiedifseveralsupplierorganiseddistributionin a similarmanner on the same market (parallelnetworks)

11. Some rules to assessverticalrestraints • Verticalrestraintsneeded to penetrate new product/geographicmarketsinprinciplenotrestrictiveofcompetition • Up to twoyrsfromplacing a product on themarket, but notavailableifhard-corerestraintspresent • Incaseoftesting a new productincertainarea or on certain group ofconsumers, distributersmayberestrictedintheirfreedom to activellyselloutsidetestingarea for 1 year at most

12. Hard-corerestraints • Resaleprice maintenance (RPM) • Allowed: maximum, recommendedpriced • Prohibited: minimum, fixedprices • Restrictions as regardsterritoryinwhich distributer maysell or buyers to which it maysell • Exceptions: • Exclusivedistribution– restrictions on active sale on exclusivearea or to exclusivebuyersallowed, but passive sale must remainunrestricted • Selectivedistribution – restrictions to selltonon-authoriseddistributersallowed

13. Hard-corerestraints • Selectivedistribution • Restrictions on bothactiveandpassive sale allowed • However, notallowed to sellfromstorewhich is notanauthorisedstore • Selectivedistribution • Restrictions on distributers to sellto or purchasefromotherdistributorsinthenetwork (cross-supply) • Obligation to buy fromthesupplieronly – notallowed • Motor vehicles – spare parts • Purchaseof spare partsonlyfromproducer – notallowed

14. Exclusivedistribution • Only one distributer incertainarea or inrelation to certainbuyers • Distributornotallowed to operateinotherareas • Allowedif noabsoluteterritorialprotectionandnoprohibitionofexports, inparticularifmakingpenetration to new marketspossible • Affectsintra-brandcompetition • Marketsharing • Affectsinter-brandcompetition • Lackofintra-brandcompetitionproblematiconlyif no inter-brandcompetition • Marketshares – is marketconcentrated? • Marketssharesofparties(30%)

15. Exclusivedistribution • If new product or new markets, highmarketsharenotrelevant • Active/ passive sale • Active sale maybelimited (distributorprotectedfromintra-brandcompetition), inorder to motivatedistributortoinvestinexclusivearea or customer group • Passive sale maynotbelimited

16. Selectivedistribution • Sofisticatedproducts • Preservationofgoodwill • Brandedgoods, finalgoods • Selectionofdistributorswhichfulfillcertainconditions • Non-discriminatory, qualitativeconditions – notdisproportionate • Selectivedistribution • Producermaychoosedistributors on thebasisofcertaincriteriaandprohibit sale to non-authoriseddistributors • Active sale bydistributors to otherauthoriseddistributorsandfinalpurchasersallowedanywhere on internalmarket

17. Selectivedistribution • In general, no allocationofterritory • Distributorrestrictedbysupplierinresale • Distributornotallowed to selltoanyone, exceptfinalpurchasersandothernameddistributors • Restrictivebecause it restrictsplaceswheregoodssold • Canhavepositiveeffects (parasitism, mantainingthelevelofsales…) • Negative effect as a rulenotrelevantifinter-brandcompetitionstrong

18. Internet sale • Same rulesapply as regarding sale in stores • Allowed to set upanexclusive or selectivedistributionsystem • Restrictions as regardsactivesale to allocatedareas or groups ofpurchasersallowed • Allowed to requirethedistributortofulfillcertainqualitativecriteria • Examplesofhard-corerestraints • Distributorhas to automatically re-directpurhaserswhich are not on itsallocatedterritory • Distributorhas to stop Internet transactionifpurchasers’ address on credit card are not on distributors’ territory • Producerlimitsquantityofgoodsthatdistributormaysellover Internet • Producerchargeshigher price to distributor for goods to besoldover Internet