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Agreements between firms at different stages of supply chain:
- Exclusive distribution;
- Exclusive purchase;
- Franchise;
- Selective Distribution;
- Resale Price Maintenance (RPM)
- Traditional suspicion questioned by Chicagoans
- Coase (1937) Firms and markets alternatives
- Choice depends on transaction costs
- Bork (1966) Restricting competition among retailers not in manufacturers interest.
- Chicago view vertical restraints should be per se legal
- Aspects of Chicago view have been questioned.
- Double Marginalisation
- Input Substition
- Free Riding
- But there are counter arguments
- Double Marginalisation Needs only maximum RPM
- Free Riding Does not arise in many cases
- Other arguments for
- Marvel and McCafferty - 'quality certification'
- VRs may serve strategic purpose.
- 2 broad approaches:
- Market foreclosure
- Raising rivals costs
Tirole (1988, p.193):
'Though market foreclosure is a 'hot' issue among those concerned with antitrust proceedings and with regulation, economists still have a very incomplete understanding of its motivation and effects. Nor can they always successfully explain why a particular tool is employed to achieve foreclosure.'
Foreclousure subject of considerable research in recent years.
- Freezer exclusivity
- Mars claim strategic means of raising rivals costs and foreclosing entry
- Rejected
- Rule of reason test applied
- Alternative legitimate explanation for agreements
- Evidence of successful entry
- For an economic analysis see M.McDowell, (1996): An Ice Cream War: Bundling, Tying and Foreclosure, European Journal of Law and Economics, 3: 197-220.
- Vertical restraints restrict intrabrand competition but generally promote greater interbrand competition
- Economics suggests that whether or not they are anti-competitive will depend on circumstances in specific case.
- Suggests appropriate response is case by case assessment.
- Traditional focus in analysis of VRs has been on possible market power at supplier level.
- Growth in buyer power of multiple retailers in past decade.
- May use VRs for foreclosure purposes.
- Still relatively little focus on this.
- Is there evidence of market power?
- Is there evidence of strong interbrand competition?
- Is there evidence of efficiencies?
Dobson and Waterson (1996)
, 372 US 253 (1963) Supreme Court stated that it did not 'know enough of the economic and business stuff out of which these arrangements emerge' to be certain whether they restricted competition or represented 'the only practicable means a small company has for breaking into or staying in business.' Whether or not arrangements were anti-competitive had to be based on facts in each case.
- White Motor Co. v. United States
United States v. Arnold, Schwinn et. al. , 388 US 365 (1967) About turn by Court vertical restraints illegal per se.Continental TV Inc. et. al. v. GTE Sylvania Inc. , 433 US 36 (1977)'when interbrand competition exists.....it provides a significant check on the exploitation of intra-brand market power because of the ability of consumers to substitute a different brand of the same product.' Vertical restraints should be judged on rule of reason basis.
- Case 56/65 La Technique Miniere v. Maschinenbau Ulm GmbH, [1966] ECR 235 ECJ expressed view that if an agreement, considered in its economic and legal context, cannot be said to have the object of restricting competition:
- 'the consequences of the agreement should then be considered and for it to be caught by the prohibition it is then necessary to find that those factors are present which show that competition has in fact been prevented or restricted or distorted to an appreciable extent.
- The competition in question must be understood within the actual context in which it would occur in the absence of the agreement in dispute. In particular it may be doubted whether there is an interference with competition if the said agreement seems really necessary for the penetration of a new area by an undertaking.'
- Implied a 'rule of reason' approach to vertical restraints.
, joined cases 56 and 58/64 [1966] ECR 299. ECJ appeared to take a somewhat different view.
- Consten and Grundig
'Although competition between producers is generally more noticeable than that between distributors of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 8[1](1) merely because it might increase the former.'
ECJ subsequently flirted with Rule of Reason
, Case 23/67 1973 ECR 77
- Brasserie de Haecht v. Wilkin I
ECJ held that exclusive purchase agreements were not by their nature contrary to Article 81(1). Did not infringe Article 81(1), unless it could be shown that there was a significant degree of market foreclosure due to a network of such agreements, in which case an individual agreement must be shown to contribute significantly to that foreclosure.
'Because of concerns over threats they pose to market integration and the ambiguous nature of their impact on competition, Commission policy has been to apply Article [81(1)] relatively widely to vertical restraints.' (EU Commission, 1997, p.v.)
'The heated debate among economists concerning vertical restraints has calmed somewhat and a consensus is emerging. Vertical restraints are no longer regarded as per se suspicious or per se pro-competitive. Economists are less willing to make sweeping statements. Rather, they rely more on the analysis of the facts of a case in question.' (EU Commission, 1997, p.iii)
'The fiercer is interbrand competition, the more likely are the pro-competitive and efficiency effects to outweigh any anti-competitive effects of vertical restraints. Anti-competitive effects are only likely where interbrand competition is weak and there are barriers to entry at either producer or distributor level.'
EU Commission (1997, p. iii)
- Current EU Block Exemption for vertical restraints sets 30% market share threshold
- UK Competition Act 1998, vertical restraints exempted except in case of dominant firms
- Competition Authority
- Declaration in Respect of Vertical Agreements and Concerted Practices D/03/001 effectively copies EU block exemption
- Treated more stringently than non-price restraints.
- US per se illegal
- 'The policy of treating resale price maintenance and impediments to parallel trade as serious violations of the competition rules would continue. It is proposed that they be treated as per se contrary to Article 8[1](1), as long as the agreement, concerted practice or decision concerned may affect trade between Member States. They are also unlikely to benefit from an exemption under Article 8[1](3).' EU Commission (1997, p.75)
- Alternative forms of vertical restraints should be treated the same. (Mathewson, G.F. and Winter, R.A., (1986): The Economics of Vertical Restraints in Distribution in J.E. Stiglitz and G.F. Mathewson eds., New Developments in the Analysis of Market Structure, London, Macmillan.
- Dobson and Waterson (1996, p13) subsequent research shows this not necessarily the case.
- Many of the arguments in support of RPM argue that it is designed to deal with principal-agent problems between manufacturers and retailers, e.g. double marginalisation, free riders etc.
- Frequently retailers who are in favour
- Raised prices. UK over the counter (OTC) medicines Abolition of RPM led to price cuts of up to 50%.
- UK Department of Trade and Industry (2001) A World Class Competition Regime, London: HMSO.
- Hindered innovation:
- Scherer and Ross (1990) RPM hindered development of supermarkets in many European countries.
- Walsh (1974) RPM ban facilitated growth of supermarkets in Ireland.
- Net Book Agreement
- UK OFT Football shirts case
- Competition Authority Statoil
- Competition Authority decision no. 336 (www.tca.ie)
- Clause (i) 'Except as provided in clauses (ii) to (iv) hereof and except as we may otherwise direct net books shall not be sold or offered for sale or caused or permitted to be sold or offered for sale to the public at less than the net published prices.'
- A net book defined in clause (vi) as a book which is published at a net price, i.e. at a price fixed by the publisher below which the net book shall not be sold to the public.
'In general, given the existence of the NBA, we would expect publishers to price similar products as though they were operating a cartel. The fact that they can fix the price of a specific title at any level they wish is very far from what is meant by 'conditions of free competition'. In conditions of free competition there would be constant downward pressure upon prices in order to clear the market, so that over time prices, on average, would rise more slowly than elsewhere in the economy where free competition did not exist.'
W. Allen and P. Curwen, (1991); 'Competition and Choice in the Publishing Industry', Institute for Economic Affairs, London, quoted in para 74 of CA decision.
- Manchester United, Football Association and Umbro
- Several retailers
- Fined for alleged fixing prices
- See earlier OFT interventions.
- Decision E/03/002 (www.tca.ie)
- Meeting Competition Clause
- Chicago Why would Statoil want to limit competition at retail level?
- Problems with the Authority model
390 US 145 (1968) subject to per se prohibition.
- Albrecht v. Herald Co.,
Scherer and Ross (1990, p.558): 'The most plausible reason why a manufacturer would wish to prescribe price ceilings binding its resellers is to avoid repeated marginalization........ Unless the ceilings are used as focal points to discourage undercutting, and hence to support price - raising collusion, it is hard to see how such behaviour could harm competition or consumers. Quite clearly it should not be illegal per se.'
(1997).
- State Oil Company v. Barkat U. Khan and Khan & Associates, Inc.
EU Commission block exemption. Possible questions New Zealand High Court in Tru Tone Ltd. v. Festival Record Retail Marketing Ltd , [1989] 2 NZLR, 554, arguments that maximum RPM were per se anti-competitive were rejected.
- Historic shifts in treatment of vertical restraints illustrates how economics has influenced legal treatment.
- EU policy in last 5 years shifted closer to US position.
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