Vertical agreements and competition law Doc. dr. sc. Jasminka Pecotić Kaufman University of Zagreb-Faculty of Economics and Business, Department of Law University of Zagreb-Faculty of Law Course: Competition Law

Vertical agreements Purchase or sale of goods or services between undertakings that operate at a different level of the production or distribution chain Producer - retailer Producer - wholesaler Most common types of vertical agts Distribution (exclusive, selective), franchise contract, exclusive purchase Older approach (US, EU) Any restriction on freedom to operate on the market = competition issue Restrictive approach – until 2004 mandatory notification to the Commission More recent approach – Chicago School Restrictions imposed by producers to distributers justified by business interests of producers No effects on competition Modern economic approach Intervention only if certain level of market power Intervention based on effects, not according to types of agts 2

Vertical restraints Examples Producer sells to one distributor only (exclusive distribution) or to limited number of distributers (selective distribution) Resale price maintenance (RPM) Distributers not allowed to purchase and resell goods from suppliers competitors (non-compete obligation) Suppliers obligation to supply only to certain buyer (exclusive supply) Positive effects of vertical restraints Penetration of new markets Free-riding Inter-brand / intra-brand competition Dangerous if not sufficient inter-brand competition Less dangerous if non-concentrated market 3

Block exemption (BE) Jointly no more than 30% market share + no hard-core restraints No prohibition under Art 101 If hard-core restraint No BE available Jointly less than 15% + no hard-core restraints Art 101 not applicable (de minimis) Market share higher than 30% No automatic prohibition, effects assessed

Vertical agts and Art 101 Not per se prohibited Case-by-case assessment Art 101/1 Prohibition: agt + effect on trade btw MS + (substantial) restriction of competition as object or effect Art 101/3 Exemption: 4 criteria – benefits outweigh anticompetitive effects Individual/block exemption (30%) If more than 30% markets share, not prohibited, but thoroughly assessed Hard-core restraints De minimis (15%) 5

Relevant legislation Regulation 330/2010 Guidelines on vertical restraints (2010) Internet sale=cross-border sale BER –Regulation 330/2010 Exclusive distribution, selective distribution, exclusive purchase, franchising, exclusive supply Tranfer of technology R&D Specialization Insurance Motor vehicles Line maritime transport Air transport 6

Inter-brand competition Competition btw different brands If market not concentrated, assumed that vertical restraints (except hard-core restraints) have no substantive negative effect If market concentrated, restriction of intra-brand competition may substantially limit consumer choice

Intra-brand competition Competition btw distributers carrying the same brand As a rule, less harm than from restrictions of inter-brand competition However, if not sufficient inter-brand competition, restriction of intra-brand competition may limit consumer choice substantially

Restrictions regarding resale price Restriction of intra-brand competition Anticompetitive practice If all producers in an oligopolistic industry limit freedom to put resale prices – this makes a horizontal price agreement easier Distributers = horizontal cartel Pro-competive practice By fixing minimum retail price the producer eliminates price competition and forces distributers to focus on non-price competition 9

Some rules to assess vertical restraints As a rule, exclusive arrangements more negative for competition than non-exclusive arrangements Compare: obligation of purchaser to buy only one brand v. obligation to buy minimal quantities which leaves possiblity to purchase from competitors Vertical restraints related to branded goods in principle more negative than those related to non- branded goods Negative anticompetitive effects of vertical restraints amplified if several supplier organised distribution in a similar manner on the same market (parallel networks) 10

Some rules to assess vertical restraints Vertical restraints needed to penetrate new product/geographic markets in principle not restrictive of competition Up to two yrs from placing a product on the market, but not available if hard-core restraints present In case of testing a new product in certain area or on certain group of consumers, distributers may be restricted in their freedom to activelly sell outside testing area for 1 year at most 11

Hard-core restraints Resale price maintenance (RPM) Allowed: maximum, recommended priced Prohibited: minimum, fixed prices Restrictions as regards territory in which distributer may sell or buyers to which it may sell Exceptions: Exclusive distribution – restrictions on active sale on exclusive area or to exclusive buyers allowed, but passive sale must remain unrestricted Selective distribution – restrictions to sell to non- authorised distributers allowed

Hard-core restraints Selective distribution Restrictions on both active and passive sale allowed However, not allowed to sell from store which is not an authorised store Selective distribution Restrictions on distributers to sell to or purchase from other distributors in the network (cross-supply) Obligation to buy from the supplier only – not allowed Motor vehicles – spare parts Purchase of spare parts only from producer – not allowed

Exclusive distribution Only one distributer in certain area or in relation to certain buyers Distributor not allowed to operate in other areas Allowed if no absolute territorial protection and no prohibition of exports, in particular if making penetration to new markets possible Affects intra-brand competition Market sharing Affects inter-brand competition Lack of intra-brand competition problematic only if no inter-brand competition Market shares – is market concentrated? Markets shares of parties (30%) 14

Exclusive distribution If new product or new markets, high market share not relevant Active / passive sale Active sale may be limited (distributor protected from intra-brand competition), in order to motivate distributor to invest in exclusive area or customer group Passive sale may not be limited 15

Selective distribution Sofisticated products Preservation of goodwill Branded goods, final goods Selection of distributors which fulfill certain conditions Non-discriminatory, qualitative conditions – not disproportionate Selective distribution Producer may choose distributors on the basis of certain criteria and prohibit sale to non-authorised distributors Active sale by distributors to other authorised distributors and final purchasers allowed anywhere on internal market 16

Selective distribution In general, no allocation of territory Distributor restricted by supplier in resale Distributor not allowed to sell to anyone, except final purchasers and other named distributors Restrictive because it restricts places where goods sold Can have positive effects (parasitism, mantaining the level of sales…) Negative effect as a rule not relevant if inter- brand competition strong 17

Internet sale Same rules apply as regarding sale in stores Allowed to set up an exclusive or selective distribution system Restrictions as regards active sale to allocated areas or groups of purchasers allowed Allowed to require the distributor to fulfill certain qualitative criteria Examples of hard-core restraints Distributor has to automatically re-direct purhasers which are not on its allocated territory Distributor has to stop Internet transaction if purchasers address on credit card are not on distributors territory Producer limits quantity of goods that distributor may sell over Internet Producer charges higher price to distributor for goods to be sold over Internet 18