Competition Policy towards Vertical Restraints in Europe and the United States

Empirica

Volumn 24, Issue 1-2, 1997, Pages 37-52

  Comanor, William S ^a,b   Rey, Patrick ^c,d,e  

^a UNIVERSITY OF CALIFORNIA   (United States)

^b UNIVERSITY OF CALIFORNIA   (United States)

^c UNIVERSITY OF TOULOUSE CAPITOLE   (France)

^d CEPR   (United Kingdom)

^e CREST   (France)

Author keywords

Competition policy; International policy differences; Vertical restraints

Indexed keywords

COMPETITION POLICY; INTERNATIONAL COMPARISON; POLICY STANDARDS; VERTICAL RESTRAINTS;

EUROPE; USA;

EID: 0031418866     PISSN: 03408744     EISSN: None     Source Type: Journal    
DOI: 10.1023/a:1006857823997     Document Type: Article

References (49)

1. For an extensive review of the economic analysis of vertical restraints, see P. Rey, The Economic Analysis of Vertical Restraints, mimeo, and Caballero and P. Rey, The Policy Implications of the Economic Analysis of Vertical Restraints, Economic Papers, European Commission, D.G. II, forthcoming.
2. For an extensive review of the economic analysis of vertical restraints, see P. Rey, The Economic Analysis of Vertical Restraints, mimeo, and Caballero and P. Rey, The Policy Implications of the Economic Analysis of Vertical Restraints, Economic Papers, European Commission, D.G. II, forthcoming.
3. U.S. v. Arnold, Schwinn & Co. 388 U.S. 365 (1967).
4. Reprinted in Trade Reg. Rep. CCH 13,105.
5. George A. Hay (1987) 'The Interaction of Market Structure and Conduct', in Donald Hay and John Vickers (eds.), The Economics of Market Dominance. Oxford, UK: Blackwell, pp. 116-117.
6. 65 Antitrust & Trade Reg. Rep. BNA 250, Aug. 12, 1993.
7. 465 U.S. 752, 761.
8. 485 U.S. 717, 724 (1988).
9. Isaksen v. Vermont Castings, Inc., 825 F.2d 1158 (7th Cir., 1987), cert. denied, 486 U.S. 1005 (1988).
10. Christine A. Varney, "Vertical Restraints Enforcement at the FTC", Utah, January 16, 1996.
11. Robert Pitofsky, "An Antitrust Progress Report for the FTC: Past, Present and Future", Washington, D.C., March 4, 1996.
12. United States of America, Federal Trade Commission, In the matter of Toys R Us, Inc., Complaint, Docket Number 9278, May 22, 1996.
13. United States v. Microsoft Corporation, Complaint filed in the U.S. District Court for the District of Columbia, July 15, 1994.
14. United States v. Microsoft Corporation, Stipulation filed in the U.S. District Court for the District of Columbia, July 15, 1994.
15. For a useful discussion of network externalities, see Michael L. Katz and Carl Shapiro, 'Systems Competition and Network Effects', Stanley M. Besen and Joseph Farrell, 'Choosing How to Compete: Strategies and Tactics in Standardization' , and S.J. Liebowitz and Steven E. Margolis, 'Network Externality: An Uncommon Tragedy', all in The Journal of Economic Perspectives 8, Spring 1994, pp. 93-150.
16. For a useful discussion of network externalities, see Michael L. Katz and Carl Shapiro, 'Systems Competition and Network Effects', Stanley M. Besen and Joseph Farrell, 'Choosing How to Compete: Strategies and Tactics in Standardization' , and S.J. Liebowitz and Steven E. Margolis, 'Network Externality: An Uncommon Tragedy', all in The Journal of Economic Perspectives 8, Spring 1994, pp. 93-150.
17. For a useful discussion of network externalities, see Michael L. Katz and Carl Shapiro, 'Systems Competition and Network Effects', Stanley M. Besen and Joseph Farrell, 'Choosing How to Compete: Strategies and Tactics in Standardization' , and S.J. Liebowitz and Steven E. Margolis, 'Network Externality: An Uncommon Tragedy', all in The Journal of Economic Perspectives 8, Spring 1994, pp. 93-150.
18. Complaint, p. 8.
19. Ibid.
20. Some commentators have suggested that Microsoft could achieve the same exclusionary effects through an extreme use of quantity discounts, and that this practice is explicitly not enjoined by the agreed upon consent decree. See Kenneth C. Baseman et al. (1995) 'Microsoft Plays Hardball: The Use of Exclusionary Pricing and Technical Incompatibility to Maintain Monopoly Power in the Markets for Operating System Software', The Antitrust Bulletin XL, Summer 1995, pp. 302-304. However, the decree did include the following provision: "Nothing in the final judgment, however, in any way sanctions Microsoft's structuring any volume discount whose purpose and effect is to impose de facto requirements contracts or exclusive arrangements on the OEM". United States v. Microsoft Corporation, Proposed Consent Decree, filed in U.S. District Court for the District of Columbia. Despite this statement, the final result in this case leaves the door open for personalized quantity discounts, which can have similar anti-competitive effects.
21. Baseman, p. 273n.
22. Ibid.
23. For a fuller discussion of European competition policy and case law towards vertical restraints, see the OECD Report on Franchising (1994).
24. In 1969, the Commission issued Regulation 17 under which firms would be exempt from prosecution for past activities if they notified the Commission about their current inter-firm agreements. This regulation led to a huge number of notifications, which in turn encouraged the Commission to adopt the block exemption approach.
25. For the 1966 Court judgment, Grundig-Consten Joined Cases 56 and 58/84, (1966) ECR 299; for the 1964 Commission decision, it included OJEC 161, 20 October 1964, p. 2545.
26. Another case, Italy v. the Council and Commission of the EEC, Case 32/65, (1966) ECR 389, was also important for establishing the coverage of vertical agreements.
27. See Commission Regulations Nos. 123/85 for motor vehicle and servicing agreements, and Nos. 1983/83 and 1986/83 for exclusive dealing arrangements.
28. This limit on exclusive territories is inspired by the fundamental objective of the Treaty of Rome to promote the integration of national markets into a single market.
29. Metro v. Commission, Case 26/76, judgment of 25 October 1977, (1977) ECR 1875; and Metro v. Commission, Case 75/84, (1986) ECR 3021.
30. See for example, European Commission, Fifth Report on Competition Policy, paragraphs 12-13 and Thirteenth Report on Competition Policy, paragraphs 33-39. Also, a block exemption, Regulation No. 123/85, was adopted in 1984 for motor vehicle distribution and servicing agreements.
31. European Commission, Fifth Report on Competition Policy, paragraph 13, and Thirteenth Report on Competition Policy, paragraph 34.
32. Pronuptia v. Schillgalis (1986) ECR 353.
33. The Court also found that such provisions were "capable of affecting trade between Member States". Pronuptia judgment paragraph 27.
34. Pronuptia judgment, paragraph 24.
35. Similarly, distribution agreements in the motor vehicle, service station and beer outlet sectors did not qualify for the application of Regulation 4087/88 unless they give up the special provisions governing them under the Regulation on exclusive purchasing agreements. Commission Regulation (EEC) No. 1984/83. OJEC, 30 June 1983, Vol. L 173. However, a supplier may, for any given product, have both an exclusive distribution network and a franchising system.
36. Deutsche Phillips, 5 October 1973, OJL 293/40. Also see European Commission, First Report on Competition Policy, paragraph 55, for a similar, earlier decision, Agfa-Gevaert, EC Bulletin No. 2/1970, Part 2, Chapter 1, Sec. 5.
37. Court Pronuptia Decision, paragraphs 23 and 24.
38. See, however, the case where fixed prices for newspapers were exempted under Article 85.3 (Agences et messageries de la presse, 1987).
39. Before exempting the Pronuptia franchise agreement, the Commission caused to be abolished the clause that required the franchisee not to harm the brand image of the franchisor by his pricing level. [Pronuptia decision, OJEC 13, 15 January 1987 p. 39 paragraph 12(c).] On the other hand, it also considered that Article 85(1) was not contravened by the clause concerning indicative prices on promotional material nor by that which recommended the franchisee not exceed the maximum prices quoted by the franchisor in its advertising and promotions [Pronuptia decision, paragraph 26.]
40. Commission decision, OJEC 161, 20 October 1964 ("Commission Grundig Decision"): Court of Justice, Consten and Grundig v. Commission, Joined Cases 56 and 58/64, Judgment of 13 July 1966.
41. Commission Regulation No. 4087/88, Article 2.
42. Pronuptia decision, paragraph 12.
43. Commission Regulation 1983/83, Article 2.2(b).
44. The regulation however distinguishes the case of spare parts or accessories, which are to be treated in the same way as in the block exemption regulation for automobile distribution.
45. European Commission, Thirteenth Report on Competition Policy, paragraph 34.
46. Commission Pronuptia decision, OIL 13, 15 January 1987, p. 39 paragraph 27.
47. Although Article 85.1 expressly refers to agreements that "may affect trade between Member States and which has as their object or effect the prevention, restriction or distortion of competition", in practice all vertical agreements are considered to fall under this provision.
48. Based on economic analysis, this Report seeks to distinguish three types of situations: (1) "safe harbors" which cover small firms or new entrants which do not deserve attention from the competition policy authorities; (2) medium size firms which may be subject to less scrutiny and require a simple rule; and (3) a "danger zone" where dominant well-established firms are subject to a much closer and continuous attention.
49. There does exist a "de minimus" provision but its application is quite selective. This rule, moreover, does not remove the illegality of the arrangement, which can still be brought before the courts, but simply indicates that the Commission will not act when the firms involved are very small.