Vertical Restraints Dr Patrick Krauskopf Swiss Competition Commission

Vertical Restraints Dr. Patrick Krauskopf Swiss Competition Commission (COMCO) National Training Workshop on Competition Policy and Law organised by CUTS International & Coordinated by CUTS Institute for Regulation and Competition (CIRC), Botswana, 25 – 27 July, 2007

Agenda I. III. IV. Introduction Main concepts Vertical restraints evaluation Conclusions

I. Introduction (1) Ø Initial situation ü ü ü Markup Not enough variety Low quality Lack of effective competition Surplus redistribution Isolated markets

I. Introduction (2) Ø Reasons to create vertical restraints ü Producers do not sell their products directly ü Existence of different market agents (dealers, wholesalers, retailers) ü Reduction of transaction costs ü To guarantee the stability of the offer ü Coordinated practices

I. Introduction (3) Ø Tools ü Competition promotion ü Market liberalization

I. Introduction (4) § Sanctioned activities in the E. C. (Art. 81 RT), and in Switzerland (Art. 5. 1/5. 4 LCart). 1. Legal framework Switzerland. 1. Cartel Act (LCart) 2. Communication on vertical restraints (07/2007) 3. Communication on vertical restraints in the automobile sector (10/2002). 4. Explanation notes

II. Main concepts (1) Ø Vertical restraints: Agreements (with or without compulsory force) between economic agents at different levels of the production line. (E. g. wholesalers and retailers). Ø Regulation of purchase conditions, sales / resale of products and services. Ø The firms taking part in the agreement do not compete directly (“no-competitors” agreement).

II. Main concepts (2) Ø Vertical restraints are produced when one (or several) enterprises are capable to behave independently and to impose: üResale prices (fixed or minimum prices) üRestrictions concerning territories and/or consumers üRestrictions regarding end consumers sales üRestrictions on freedom to contract

II. Main concepts (3) Horizontal agreement Vertical agreement Producer A Inter-brand Wholesale Inter-brand competition Retailer Intra-brand competition Consumers B

II. Main concepts (4) Ø Intra-brand competition: Competition between suppliers that sell the same product or the same brand. ü E. g. : cars distribution. Ø Inter-brand competition: Different producers sell through retailers. ü E. g. : soda drinks.

II. Main concepts (5) Ø Double profit problem: ü Producer and supplier have market power (can raise prices). ü Vertical restraints / vertical integration could raise economic efficiency. Ø “Free-riding” problems in providing services: ü “Horizontal” externality (between retailers) ü Examples: quality standards, providing information, publicity.

II. Main concepts (6) Ø South Africa: 0. 35 Example: “Coke” price Coke Botswana: 0. 40 Namibia: 0. 30

II. Main concepts (7) Ø Selective distribution systems ü According to this agreement between supplier and retailer: a) The supplier selects his authorized retailers according to predefined criterions b) The retailer can not resale to unauthorized retailers

III. Vertical restraints evaluation (1) 1. 2. Not all vertical agreements are illicit. Use of “Rule of reason” or “Per-se rule” for evaluating the agreement 3. Analysis procedure: 1. Detection of vertical agreement which threatens free competition. 2. Relevant market definition. 3. Verification of restrictive behavior 4. Anticompetitive effects > benefits. 5. Abuse of dominant position?

III. Vertical restraint evaluation (2) § Establishment of criterion to evaluate potential effects of vertical agreements: a) “Per-se rule” b) Rule of reason Ø Effects of vertical restraints: ü Qualitative ü Quantitative Ø Cases of minor importance Ø Justifications

III. Vertical restraint evaluation (3) a) “Per-se rule” Ø Ø Presumption of elimination of competition Can not be justified by economic reasons Exhaustive list with examples of practices There are no exceptions as to the size of the enterprise or its market share.

III. Vertical restrictions evaluation (4) b) Rule of reason Ø Behavior importance ü Territory and sales limitations, limitation of end consumers sales and cross distributions ü Creation of obstacles for distribution of products ü Non-competition clause for more than 5 years / or for more than one year after the expiration of the vertical agreement

III. Vertical restraint evaluation (5) Ø Cases of minor importance: ü ü Ø Agreements which do not exceed 10% of the relevant market. Exception: cases where competition is limited by cumulative effects of similar vertical distribution nets. Justifications: ü ü ü Agreement allows an efficient organization of the distribution net. Necessary to reduce production or distribution costs; and Agreement does not eliminate efficient competition.

III. Vertical restraint evaluation (6) Per – se prohibition? Yes No ¿Is the vertical agreement important ? Permitted agreement No Ye o s N Yes Does the agreement exceed 10% of the relevant market? Ye s Is the organization of the distribution net efficient? No Illicit agreement

IV. Conclusions ü Not all vertical agreements are illicit. ü Use of “Per-se rule” for the most serious cases. ü It is important to clearly inform which agreements will be considered anticompetitive and how they will be evaluated.

Thank you For further information, please do not hesitate to contact: Mr. Patrick Krauskopf: patrick. krauskopf@weko. admin. ch Ms. Katrin Emmenegger: katrin. emmenegger@weko. admin. ch