Horizontal

agreements

Julija Jerneva

Was Adam Smith right?

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices.”

Points of interest

• Price fixing

• Market sharing

• Collusive tendering

• Resource pooling

• Information exchange

Structure of analysis

• Agreement

• Undertakings

• De minimis

• Object/effect

• Article 101(3)• Block exemption (unless hardcore restrictions)

• Individual exemption (all conditions must be met, no hardcore restrictions)

De minimis

• Commission Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) of the Treaty establishing the European Community (de minimis)

• 10% for horizontal agreements

• 15% for vertical agreements

Object cases• The object-category consist of “obvious restrictions of

competition”• European Night Services v Commission, Joined cases T-374-375/94,

384/94

• The “object” rule can be described as a presumption rule: • if object is found, harmful effects on competition are presumed

• certain types of agreements under normal market conditions always, or almost always, restrict competition

Object cases

• Horizontal agreements:• fixing prices

• sharing markets

• limiting output

Effects cases

• All cases, not falling within the “object box”

• Negative effects on competition within the relevant market are likely to occur when:

• the parties individually or jointly have or obtain some degree of market power and

• the agreement contributes to the creation, maintenance or strengthening of that market power or allows the parties to exploit such market power.

Horizontal Arrangements

• Article 101(3)

• Commission Guidelines

• R & D Block Exemption Regulation (Reg 1217/2010)

• Specialisation Block Exemption Regulation (Reg. 1218/2010)

Price Fixing

• An agreement amongst ‘competitors’ to raise, fix or otherwise

maintain the price at which goods or services are sold

• Can occur directly or indirectly

• Prohibition applies to both purchase and selling prices

• Frequently includes a policing mechanism

Price fixing

• Wholesales/retail price

• Commission fees

• Discount levels

Nintendo

• In the time from 1991 until 1998, Japanese producer of videogames Nintendo and seven its official distributors in Europe cooperated to preserve artificially large price differences in Europe.

• parallel sales, imports and exports controlled.

• The merchants which allowed parallel export were punished by providing smaller deliveries or boycotting them.

• United Kingdom prices were 65% lower than in Germany and the Netherlands.

Vitamin Cartel

• In 2001, the European Commission inflicted a money fine to companies (among them also Hoffman-La Roche) for participation in cartels, which were made with a purpose to decrease the competition in vitamin industry.

• Duration:10 years

• Violation: fixing prices

The banks’ case in Latvia

• Total fine: LVL 5 495 462,19

• 22 banks

• MIF – „Multilateral Interchange Fee” (commission for the transactions in the POS terminals and internet

• MSC – „Merchant Service Charge” (service fee, charged to a retailer)

The payment system “at issue”

Payment system

Issuing bankReceiving bank

Retailer Card holder

Price minus

retailer’s fee

(MSC)

Price, plus account

management fees,

yearly fees, etc.

Goods or services

Price minus (MIF)

fee fee

Tests (to be?) used

• HACR - („Honour All Cards Rule”)

• Merchant indifference test (compare the customer paying w/cash or card)

• Issuer cost approach

Market Allocation

• An agreement between ‘competitors’ to divide markets amongst themselves

• In such schemes, competitors• allocate specific customers or suppliers to one another;

• allocate territories to one another; and/or

• allocate types of goods or services to one another

Collusive Tendering

• Firms agree, in advance, who will submit the winning bid on

tender

• Forms of collusive tendering include bid suppression, cover

bidding and bid rotation

• Often accompanied by sub-contracting

• Often found in engineering, construction and State tenders where

firms compete for very large contracts

Information exchange

• Characteristics of the market (concentration level, transparency, stability, symmetry of costs, complexity of product, etc)

• Type of information (how specific, how recent, aggregated/individualised, market coverage, public/non-public)

• Frequency of exchange

Research and development• Concerns: slowing down of innovation; increased possibility of coordination,

reduced competition; foreclosure

• R & D Block Exemption Regulation (Reg 1217/2010):

• Competing undertakings - 25% market share cap

• Parties must have access to results for research/exploitation (research bodies/universities can be confined to research)

• Parties must be free to conduct R&D in unconnected fields and to challenge other party’s IP (however right to terminate R&D agreement)

• Hardcore restrictions:

• Setting production/sales targets

• Limitation of other R&D activities

• Specialisation re exploitation of results

• Restricting of manufacturing, sales, licensing

• Fixing prices

• Restriction of territory

• Restriction of active sales and reselling

Specialization

• Specialisation Block Exemption Regulation (Reg. 1218/2010):

• Competing undertakings• Unilateral specialisation; reciprocal specialisation; joint

production• 20% market share cap

• Hardcore restrictions• Fixing of prices (except for fixed prices to immediate customers

in the context of joint distribution)• Limitation of output or sales, unless:

• Setting of sales targets in the context of joint distribution

• Agreed output if unilateral or reciprocal specialisation

• Setting of capacity/production volumes if joint production

• Allocation of markets or customers

Production agreements

• Horizontal and vertical

• Horizontal:• Joint production agreements

• Horizontal subcontracting agreements

• No substantial concerns if the market share of the parties is below 20%

Purchase agreements

• No substantial concerns if the market share of the parties is below 15%

• Main concerns: negative effects on the upstream/downstream markets

Commercialisation arrangements

• Joint sales, distribution or promotion of the goods

• No substantial concerns if the market share of the parties is below 15%

• Possible problems:• Price fixing

• Output limitation

• Market sharing

• Information exchange

Standartisation

• Technical/quality requirements; standard terms of business

• Conditions for legality:• Unrestricted participation in the process

• Transparency of adoption of the rules

• No obligation to comply (right to develop an alternative)

• Fair, Reasonable and Non-Discriminatory (FRAND) terms

• Good faith disclosure of the IPR of the participating companies

Other types of horizontal agreements

Joint Ventures

• Joint-Ventures: as for mergers, trade-off between market power and efficiency

• A special case: Research Joint-Ventures

• Because of spillovers and non-rivalry, R&D unlikely to attain socially optimal levels

• RJV may promote R&D by sharing costs and avoiding duplications, but: R&D may fall absent competition, and… collusion may extend to marketing and production

• Only RJV on basic research should be allowed

Cross-licensing

• Cross-licensing: when two firms allow each other to use their technology.

• When technologies are substitutable, it may be anticompetitive:

• firms have an incentive to set higher royalties to reduce competition in the marketplace.

• When technologies are complementary, cross-licensing may be indispensable.

• Suppose that two firms have ‘blocking’ (i.e., essential) patents. Then, production or new innovation requires both patents

Patent pooling

• When patents are complementary, better to have a single owner of all patents (“Cournot effect”: better a multiproduct monopolist than two independent monopolists when products are complementary).

• Patent pool: firm or organisation which owns the patent rights and licenses them to third parties as a package. If patents are complementary , this will keep royalties down.

• Patent pooling may also save on transaction costs (rather than having to negotiate with multiple parties, a firm has to deal with one party only).

Thank you!

• Julija Jerneva

• Mobile: +371 29131597