Horizontal Restraints Jennifer Skilbeck July 2007 for National Training Workshops

Horizontal agreements defined Horizontal: operating in the same market at the same level of production/sales Eg an agreement between two retailers to sell televisions at the same price Vertical agreement: manufacturer agrees to sell televisions through one wholesaler only- different level of production/sales

General position Horizontal agreements almost always restrict competition to the detriment of the consumer, whereas… Vertical agreements may well assist market penetration

The usual legal provision Agreements between enterprises are unlawful if they restrict, distort or prevent competition Some restrictions are more anti-competitive than others There may be some exceptions

Meaning of “agreement” Written Oral Facilitated by associations of enterprises Between associations of enterprises “concerted practices”

“Agreements”: a wide definition Parties may play limited part; May not be fully committed; May have been under pressure from others to join cartel; Otherwise, easy to evade law

“tacit agreement”: Some UK definitions “joint intention to conduct themselves in a particular way” “the existence of a concurrence of wills” “one party manifests an intention to achieve an anti-competitive goal and the other tacitly accepts it”

“concerted practice” “knowing substitution of practical cooperation for the risks of competition” “reduction of uncertainty as to future conduct of the parties as a result of contact between them” “obtaining information that cannot fail to influence the competitive conduct of one of them”

Establishing a “concerted practice” 1 Did the parties “know” they were agreeing? Was market behaviour influenced by contact between parties? Was competition different from “normal”? Was it facilitated by there being only a few firms in the industry? Were they behaving secretively?

Establishing a “concerted practice” 2 Evidence: Emails Diary entries, including meetings Diary erasures Witness evidence Major increases or decreases in prices Parity of prices

Anticompetitive intention or effect Usually intention OR effect is sufficient Conditions different from “normal competition”

Geographic reach 1 The unlawful effect is usually only unlawful within national boundaries (including any free trade areas) It may take place in a very local market eg dentists, retailers

Geographic reach 2 US Foreign Trade Antitrust Improvements Act 1982: foreign nationals cannot use US law against US firms for acts that lessen competition abroad US Export Trading Company Act of 1982: procedure for US exporters to establish cartels if no effect on competition in US

“per se” restrictions (always unlawful) Pricing fixing – directly or indirectly (eg not departing from price lists; agreeing percentage price increases; agreeing permitted discounts)

Further “per se” examples Limiting production Sharing markets eg by territory or type of customer

Other examples Discriminatory trading conditions Tying unnecessary requirements Fixing trading conditions Limiting investment & innovation Collusive tendering Joint buying or selling Sharing information Restricting advertising Agreeing technical specifications

Information sharing Does it increase competition? Eg info concerning trade fairs, innovations abroad Does it decrease competition in terms and conditions? Eg reducing guarantees Does it include only the major players? Is the market small, making renegades more unlikely?

Trade associations They must not facilitate unlawful agreements through information sharing They must not agree terms for their members They must not make unlawful agreements with other similar associations

Exceptions: subject to “consumer benefit” Some may enable more efficient production through specialisation eg transport R&D agreements To reduce capacity To address shortages Joint purchaser or selling by small businesses

Example 1 Firms A & B want to introduce a new technology which offers economies of scale, and it is more efficient for them to produce jointly. It is not necessary for them to sell jointly as well.

Example 2 A franchisor has a number of franchised sandwich shops. The franchisees agree through him to buy the fresh produce from him only. This is a horizontal and vertical agreement. It is justifiable if it offers real benefits, which are passed on in lower prices.

Example 3 There are 6 -10 builders who are capable of doing major building work in the city. When one is too busy he puts in a high bid, “so that the public authority does not forget about him for the future” That is often part of an unlawful agreement with the other bidders to apportion work, and not to compete

Example 4 A number of small farmers co-operate to buy seed and fertiliser and obtain the same terms as larger buyers They require their members to buy exclusively through them Agreement lawful, but is the exclusivity justified on the facts?

Example 5 A number of small local suppliers of car paint form an association to tender to national car insurance companies Some of them agree to form a new smaller association in order to exclude some of them and increase the profits of the others Are the others still able to compete? If so, probably lawful.

Example 6 Competing bus companies run at the popular times on the popular routes and supply nothing in between They can co-operate to provide a service at less profitable times/routes only

Example 7 During an earthquake/flood emergency there is a shortage of transport Owners of transport can co-operate to ensure priorities are met efficiently

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