Vertical Restraints 2008

"The Pros and Cons of Vertical Restraints" was the theme of the volume and the international seminar in Stockholm on the 7th November 2008. The topic of the 2008 Pros and Cons conference was vertical restrictions. Five invited speakers gave presentations on the topic and as many discussants.

After a few introductory comments by Acting Director General Jan-Erik Ljusberg and chair Lucas Peeperkorn, DG Competition, the floor was handed to Margaret Slade. By means of a survey the actual effects of vertical contracts – in terms of quantities, prices and welfare – were quantified. The results suggested that, as long as parties voluntarily enter into contracts, welfare effects were positive. Slade suggested the burden of proof should be shifted to competition authorities.

The discussant, Christian Ewald of the German Bundeskartellamt, suggested that Slade’s results shouldn’t be considered a green light for all vertical contracts. After all, the vertical contracts in the study were deemed legal by a set of laws whose purpose is to eliminate harmful contracts.

Daniel O’Brien made two key observations, the first being that most theoretical results pertaining to vertical constraints that emerged prior to the mid 1980s can be condensed to the following statement: Combining substitutes is bad, combining complements is good, unless otherwise demonstrated. The second observation was that recent developments in the area have lead to a plethora of models, some of which predict negative effects on welfare, that are fragile in the sense that slightly different assumptions lead to completely different results.

There are usually considerable practical difficulties in establishing which conditions prevail in a given case. This means that many (in O’Brien’s view, most) recent models offer scant guidance for policy makers and competition practitioners. Given these two observations, O’Brien concludes that absent any compelling evidence (e.g. a relevant natural experiment) suggesting the contrary, competition authorities should not intervene against vertical restraints.

The contributors of the Pros and Cons 2008.
The contributors (back row, from the left: Christian Ewald,  Jan-Erik Ljusberg, Søren Gaard, Matthew Bennett, Lucas Peeperkorn, Valerie Meunier, Margaret Slade,  Patrik Rey, Joanna Goyder, Daniel O´Brien, Joao E. Gata,  Sten Nyberg. Not present: Paul Dobson.

On the theme of compelling evidence to the contrary the discussant, Valerie Meunier of Conseil de la concurrence, France, presented results of studies conducted in the wake of a change in French law. This change, the Galland law, effectively allowed the previously forbidden practice of RPM. In effect, this was a natural experiment. Welfare effects of this change seemed to be largely negative, thus suggesting that competition authorities should intervene against the practice of RPM.

Paul Dobson noted that not all vertical restraints are imposed by the upstream party. In several industries, e.g. retailing, vertical restraints initiated by the downstream party, called Buyer-Led Vertical Restraints (BLVR), have become increasingly prevalent. Dobson’s view of BLVR was largely benign. Competition authorities were, however, encouraged to display some degree of vigilance: while few BLVR practices are outright anti-competitive, there seems to be practices which dampen competition between retailers. The discussant, Søren Gaard of the Danish Competition Authority, largely agreed with Dobson but noted that it will, in practice, be difficult for a competition authority to intervene against BLVR, since market dominance in the retail market is unusual.

Patric Rey presented some results on price control in vertical relations. Even if there is competition among producers as well as retailers, RPM serves to facilitate collusion among producers. The theoretical model exhibits a multiplicity of equilibria. In some equilibria, the monopoly price will prevail. These are robust in the sense that they will remain equilibria even after retailer effort has been introduced in the model. The discussant, João E. Gata of the Portuguese Competition Authority, noted there was a bewildering array of equilibria. This makes it complicated to use the results as guidance for making policy.

In the light of the recent Leegin case in the US, where the long standing per-se prohibition against RPM was overturned, Joanna Goyder discussed the pros and cons of applying a rule of reason vs. de-facto prohibitions and block exemptions. Applying a rule of reason is not very attractive from legal point of view: it’s difficult to predict whether a particular contract is legal or not. In the absence of an applicable block exemption long, and therefore costly, procedures will potentially be required to clarify the legality of a given contract. On the other hand, relying on prohibitions and exemptions might rule out some socially beneficial contracts.

Do the benefits of applying a rule of reason outweigh the costs? Matthew Bennett of the UK’s OFT argued that the choice between and effects based approach and prohibitions need not be either or. RPM could remain an object infringement but be rebuttable on the basis that the theory of harm is not plausible in the relevant market context.

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