Developments in Vertical Agreements

• Published date: 01 December 2010
• DOI: 10.1177/0003603X1005500407
• Date: 01 December 2010
• Author: Nikolaos Vettas
• Subject Matter: Article

Developments in

vertical agreements

BYNIKOLAOS VETTAS*

This article discusses issues related to vertical agreements. I focus on

recent developments in the treatment of such agreements by

European Commission competition law, including the new vertical

agreements Block Exempt Regulation and the accompanying

Guidelines that came into effect in June of 2010. The main structure of

the old Regulation has been maintained. The general direction of the

changes in the Regulation and especially in the Guidelines is in line

with a more effects-based and economics-based approach to

competition policy that has been adopted gradually in the EC over

the last decade as well as with the developments in the United States

concerning the treatment of resale price maintenance. However, since

it is extremely unlikely that vertical agreements that involve only

firms with small market shares will have an anticompetitive effect,

the adoption of a de minimis approach for all vertical agreements

appears advisable for the future.

THE ANTITRUST BULLETIN:Vol. 55, No. 4/Winter 2010 :843

* Professor, Department of Economics, Athens University of Economics

and Business; Research Fellow, Centre for Economic Policy Research, UK; and

Member of the Economic Advisory Group in Competition Policy, European

Commission, DG-Competition.

AUTHOR’S NOTE: I am grateful to the editor of this special issue, Ioannis Kokkoris, for

his guidance and comments. I am solely responsible for the exposition of the

arguments here.

© 2010 by Federal Legal Publications, Inc.

I. INTRODUCTION

Vertical relations have received increasingly more attention from the

view point of competition policy over the last years. One reason is

that buyers, as well as sellers, in many important markets are

becoming larger and increasing their market power. The vertical

agreements reached between such sellers and buyers will play a cru-

cial role in determining the market outcome in the final market and

the welfare of the final consumers. A second reason is that the verti-

cal agreements used have become increasingly complex and varied

in nature—details in such agreements can often make an important

difference. A third reason, in part a result of the first two develop-

ments, is that there is increasing recognition among policy makers

that most—if not all—types of such agreements are neither com-

pletely procompetitive nor completely anticompetitive and that

there should be an economics-based evaluation of their implications

for the markets and the consumers. Thus, we are moving (albeit

only gradually) away from a more formalistic approach that often

appears de facto to support the per se legality or illegality of certain

types of agreements.

In this article, I discuss some of the fundamental economic issues

relating to vertical agreements, focusing on their treatment by Article

101 of the Treaty on the Functioning of the European Union (TFEU),

that is, agreements between “upstream” and “downstream” firms

that do not necessarily have a dominant position in their markets. In

particular, I discuss the new Block Exemption Regulation applicable

to vertical agreements that has recently been adopted by the Euro-

pean Commission and the new accompanying Guidelines. Both

entered into force on June 1, 2010. I also relate the approach to these

vertical agreements to the approaches followed by other aspects of

competition law and policy and place them in the broader context of

an economics approach. Finally, I suggest that the recent revision of

the Block Exemption Regulation (BER) and the Guidelines, while

moving in the right direction, have not reached far enough. In partic-

ular, I believe that it should have been recognized in the Regulation

that it is extremely unlikely—and probably impossible—that there is

harm in the market and to consumers as a result of any type of verti-

cal agreement if all the firms involved have a small enough market

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share, thus essentially favoring a de minimis approach to such agree-

ments. Perhaps, such an approach can be adopted in the future.

The remainder of the article is structured as follows. Section II

reviews the relevant legislation and recent changes in regulation and

the law applicable to vertical relations. Section III presents a quick

introduction to the main economic analysis of vertical relations,

explaining the reasons that will make firms engage in some particular

form of vertical trade and the positive and negative implications for

competition policy. In section IV we turn our attention to the new

BER applicable to vertical agreements in the EC and the new accom-

panying Guidelines. In section V, I present a critical evaluation of this

new BER, examining both its positive aspects and also areas where

additional improvement relative to the old Regulation could have

been possible. Parts of this evaluation draw upon the relevant opin-

ion submitted to the Commission by the ad hoc subgroup of the Eco-

nomic Advisory Group in Competition Policy. Section VI concludes.

II. VERTICAL RELATIONS AND EC COMPETITION POLICY

A. The nature of vertical relations

Vertical relations refer to the relationships between firms that

trade with each other along a “chain” that moves from upstream

(further away from the final consumer) to downstream (closer to the

final consumer). These firms are typically suppliers of goods (or

services) and their distributors (wholesalers and retailers) and, more

generally, sellers and buyers when the buyers are not the final

consumers but purchase intermediate goods for further processing or

distribution. In some cases, the firms involved may choose to proceed

to a vertical merger. In other cases, the firms maintain their

independence. Trade between them may then take a simple form in

which a single unit price is arranged (constant per unit of quantity

sold, or linear pricing) or the relationship may be a more complex

one, in which case the need arises in competition policy to study

these vertical agreements more carefully. These include more

elaborate pricing schemes, such as two-part tariffs, quantity discounts

(or other such forms of nonlinear pricing), royalties and rebates, other

forms of vertical restraint, such as resale price maintenance (RPM)

VERTICAL AGREEMENTS :845