Transcript Vertical restraints

SECTION 5
VERTICAL RESTRAINTS
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Section 5 of the Competition Act, regulates both price and non-price
related restraints. It states:
“(1) An agreement between parties in a vertical relationship is prohibited
if it has the effect of substantially preventing or lessening competition in a
market, unless a party to the agreement can prove that any technological,
efficiency or other pro-competitive, gain resulting from that agreement
outweighs that effect.
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(2)
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(3) Despite subsection (2), a supplier or producer may recommend a
minimum resale price to the reseller of a good or service provided –
(a) The supplier or producer makes it clear to the reseller that the
recommendation is not binding; and
(b) If the product has its price stated on it, the words “recommended
price” appear next to the stated price.”
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The practice of minimum resale price maintenance is prohibited.
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(i) SECTION 5(1)
REQUIREMENTS
• an agreement between firms
• in a vertical relationship
• onus on complainant to show substantially
lessening/preventing of competition
• onus on respondent to show technological
efficiency and other pro-competitive gains.
• Balance between SLC and Efficiency gains.
• Rule of Reason approach.
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(ii) LESSENING/PREVENTING
Competition
• Identifying the competitive harm
National Association of Pharmaceutical
Wholesalers and Others/Glaxo Welcome (pty) Ltd and others (case 45/CR/Jul01)
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In a vertical agreement, there will always be two relevant
markets (upstream market and downstream market).
• The nature of competition in the respective markets.
• An analysis of the structure of the market and the relative
position of the parties in these respective markets
• The maturity of the market
• The level of trade
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(iii) Interbrand &
intrabrand competition
• Inter-brand competition refers to
competition between different brands.
• Intra-brand competition takes place
when competing wholesalers and/or
retailers sell the same brand
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(iv) Agreements that
Benefit Competition
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Lowering transaction costs
Assuring a steady supply of a key input
Eliminating negative externalities
Preventing “free riding”
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(v) Agreements that
Restrict Competition
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Eliminating Competition through
Foreclosure
Raising rivals costs
Tying Arrangements
Exclusive dealing
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(vi) Efficiency
Arguments
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In order to ensure that all resellers are equally incentivised to
push their brands by investing in efforts that enhance the
marketing and branding of a particular product or service,
suppliers award exclusive territories to each reseller.
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Exclusivity of supply is sometimes afforded to some resellers or
distributors in order to reward them for specific investments.
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The rule of reason test with regard to the vertical agreements is
one where the loss of intra-brand competition (the anticompetitive effect) must be weighed against any potential gain
in inter-brand competition (the pro-competitive benefit).
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(vii) Franchise
agreements
• A franchise agreement generally
limits intra-brand competition
between francisees- for eg,
restricting the number of
franchisees that operate in a
particular area, or by confining
franchisees to specific territories or
customer classes.
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(vii) Franchise
agreements (cont..)
Cancun Trading No24 CC v Seven-Eleven Corp SA Case I8/IR/Dec99.
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The respondent argued that the franchise operation should be viewed as a
single business entity or association and that it is not a vertical
relationship as contemplated by the Competition Act.
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The Competition Tribunal did not accept this view and confirmed that a
franchise agreement should be assessed as a contractual means of vertical
integration.
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The Competition Tribunal also confirmed that, given the vertical
relationship between franchisee and franchisor, the prohibition against
minimum resale price maintenance was also applicable to franchising
agreements.
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Section 5(2) Minimum
Resale Price Maintenance
• What is minimum RPM?
• May a supplier dictate margins or discounts to
resellers?
• What evidence is required to prove minimum RPM?
• Should the SA Competition Act impose a per se
prohibition on Minimum RPM?
• CASES:
• Federal Mogul,
• Toyota SA (consent Order)
• Leegins (US).
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Minimum Resale Price
Maintenance
• Minimum Resale Price Maintenance (RPM) refers
to any attempt by an upstream supplier to control
or maintain the minimum price at which the
product is resold by its customer.
• These rules prevent resellers from competing too
fiercely and by drive down profits.
• Minimum RPM is regarded as a form of vertical
price fixing.
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May a supplier dictate
margins or discounts to
resellers?
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Insisting that a product be resold at a specific margin, or limiting
the discounts that a reseller may offer, in essence restricts the
reseller’s ability to set a price and is accordingly prohibited.
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CUM Christian Book Stores v Maranatha Record CompanyConsent order
During 2003, Maranatha, a recording company and distributor of
Christian/Gospel music, admitted to the Competition Tribunal that
its retailers were not allowed to deviate by more than 10% from
the recommended retail price. This practice was found to amount
to minimum resale price maintenance.
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Minimum RPM-Evidence
required:
• The practice showing the minimum RPM
is implemented.
• A minimum resale price is relevant.
• Measures in place to enforce or maintain
the practice of minimum RPM.
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RPM-PER SE ILLEGAL
• Dr. Miles Medical Co v John D Park
& Sons Co. 220 U.S 373.
• Leegin Creative Leather Products.
Inc v PSKS, Inc d/b/a Kay’s
Kloset, No 06-480 (June 28, 2007)
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Leegin’s case
• Leegin did not deny the existence of an
RPM agreement.
• Instead, Leegin argued that its agreement
requiring retailers to sell at minimum
prices should have been analysed under
the rule of reason and that it should have
been allowed to submit evidence tending to
show the policies anticompetitive benefits.
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Leegin’s case- cont…
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In overruling its 1911 decision in Dr Miles Medical co v John D Park
& Sons Co 220 US 373 (1911), the court stated that it could not
reconcile Dr Miles per se treatment of resale price maintenance
(“RPM”) with the Court’s “traditional” rule of reason analysis
applied in Section 1 cases.
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The court stated that over the course of 30 years it had
“progressed away from [the dr miles] rationale, and that it no
longer made sense to analyse vertical non-price restraints and
maximum resale agreements under the rule of reason, while
continuing to treat RPM agreements as per se unlawful. (referring
to cases such as Continental TV Inc. GTE Sylvania Inc. 433 US 36.
57-59 (1977) and State Oil Co v Khan 522 US , 22 (1997), which
allowed non-price vertical restraints and maximum price restraints
to be analysed under the rule of reason respectively.
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Leegin’s case- cont…
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pro-competitive benefits
RPM may increase interbrand competition by encouraging
retailers to invest and promote a particular
manufacturer’s products, thus increasing competition at
the manufacturer level.
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RPM may encourage new entry by allowing manufacturers
of new product to incentivize retailers to promote a new
or unknown product to consumers.
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RPM may lead retailers to improve their performance if
the margins guaranteed by RPM could be revoked should
the retailer fail to meet the manufacturer’s expectations.
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Leegin’s case- cont…
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Anticompetitive effects
However, the Court also acknowledged that RPM could be used for anticompetitive purposes to harm
consumer welfare.
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First, the Court expressed concern about firms with market power using RPM agreements.The
court stated that manufacturers with market power could use RPM to discourage retailers from
selling or promoting competing products by smaller rivals. The Court also noted that retailers
with market power could use RPM agreements “to forestall innovation in distribution that
decreases costs.
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Second, the Court acknowledged that RPM could be used to facilitate a horizontal cartel at
the manufacturer level by making it easier to detect “cheating” because prices at the retail
level are more transparent than prices at the wholesale level).RPM could also be used to
facilitate a retailer cartel, and therefore, RPM arrangements that are requested by retailers
would raise concerns.
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Finally, the Court stated that RPM agreements may be anticompetitive if they are used by a
majority of firms in a market. Under such circumstances, the RPM agreements could “deprive
consumers of a meaningful choice between high-service and low-service outlets”.
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RPM IN SOUTH AFRICA
• Should the SA Competition Act
impose a per se prohibition on
Minimum RPM?
• Should the Act be amended?
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Section 5(3) Recommended
Retail price
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5(3) a supplier or producer may recommend a
minimum resale price to the reseller of a good or
service provided –
(a) The supplier or producer makes it clear to the reseller
that the recommendation is not binding; and
(b) If the product has its price stated on it, the words
“recommended price” appear next to the stated price.”
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