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Vertical restraints: the European part of the policy failure.

Abstract

This article advances several reasons why EU competition policy on vertical restraints has been a failure. First, the distinction between price and nonprice restraints is inconsistent, since the economic effects of both practices are similar. Second, EU competition law creates a number of inefficiencies that cause a negative impact on social welfare; an example is the ban on absolute territorial protection that does not allow a full protection from free-riding. Third, it is doubtful that the inefficiencies of EU competition law can be justified by the market integration goal, since the rules may turn out to be ineffective in reaching this objective. Fourth, EU competition law on vertical restraints has created negative side effects: it has put an end to experimentation and innovation of competition rules at the member-state level and induced private interests groups to spend a lot of effort in lobbying national regulators. The example of resale price maintenance for books serves as an illustration of the latter problem. Several of the above pitfalls have been indicated by Richard Markovits in his treatise on U.S. antitrust law and EU competition law. These criticisms are supported in this paper and further expanded by a discussion of additional errors that have made the EU competition rules on vertical restraints a policy failure.

Keywords

EU competition law, vertical restraints, block exemption, black list, market integration, harmonization, resale price maintenance

I. Introduction

Both U.S. antitrust law and EU competition law historically were understood as prohibitions to protect equally intrabrand competition and interbrand competition. The former refers to the competition between distributors offering a branded product of a given manufacturer within a given vertical structure (production-wholesale-retail). The latter involves rivalry between producers of different brands: either competition between different vertical structures or in-store competition through multibranding. The dominant, even though controversial, story on the competitive effects of vertical restraints--i.e., agreements between firms active at different levels of the distribution chain--is that interbrand competition will mitigate any anticompetitive exercise of market power by the manufacturer imposing vertical restraints on its distributors. Nevertheless, at times antitrust law has been hostile to restrictions of intrabrand competition (in particular, resale price maintenance), even in the absence of anticompetitive effects on interbrand competition.

In spite of several policy shifts, particularly in recent decades, the rules on vertical restraints both in U.S. antitrust law and EU competition law have not ceased to provoke criticisms from antitrust practitioners and academic commentators alike. In his remarkable treatise on the economics and the application and interpretation of both antitrust regimes, Richard Markovits censures U.S. antitrust law on vertical restraints as a general error of U.S. courts. He advances both "ends" and "means" reasons why restrictions of intrabrand competition should not be deemed to violate the Sherman Act. According to Markovits, U.S. antitrust law generally allows economic actors to convert the competitive advantages they were able to obtain through superior performance into seller surplus in ways that do not manifest interbrand anticompetitive intent. Also, efforts to restrict the use of intrabrand restraints will usually not benefit consumers, as such rules can be easily circumvented and may ultimately deprive consumers from presales and postsales services that they desire. (1) Regarding EU competition law, Markovits advances similar criticisms and asserts that a stricter attitude towards intrabrand restraints cannot be justified by the goal of achieving market integration, which differentiates EU competition law from U.S. antitrust law. (2) Markovits's critical view of the EU competition regime invites comments from European practitioners and scholars.

This article takes up the latter challenge and focuses on the European part of the vertical restraints policy failure. At the outset, Markovits should be commended for having taken up the effort to discuss the peculiarities of EU competition law. Sometimes, U.S. scholars seem to regard EU competition law merely as a copy of U.S. antitrust law or a less interesting study object because of its shorter history. A common opinion in the U.S. is that competition rules were introduced in Europe after the Second World War in order to undo the cartelized industry structure of Nazi Germany, whereby the Sherman Act served as an example. This vision of things neglects that there was a strong tradition of competition policy in Germany since the 1930s, which originated from the close cooperation of economists and lawyers at the University of Freiburg. The ensuing ideas of the so-called Ordoliberal School have exerted a clear impact upon rule-making by the European Courts up until today. (3) For a correct understanding of EU competition law, ordoliberalism is as important as Chicago economics is for a proper comprehension of U.S. antitrust case law. Next to the ordoliberal ideas, the political goal of creating a common (internal) market has shaped EU competition law in ways that differ from U.S. antitrust law. Interestingly, in spite of their conceptual differences, both legal regimes have made the mistakes that Markovits forcefully criticizes. Even though the rules have changed over time, a large part of the antitrust story on both sides of the Atlantic shows persisting worries about restrictions of intrabrand competition. This has consumed resources away from antitrust practitioners, courts, enforcement authorities and academic scholars that likely cannot be justified from the perspective of a welfare maximizing competition policy.

The structure of this article is as follows. After this introduction, the first section summarizes current EU competition law on vertical restraints. The discussion of these rules is somewhat more elaborate than the relevant chapter in Markovits's book in order to include additional details that are needed for a proper assessment of Markovits's criticisms. The next sections elaborate the major criticisms regarding the prohibition of intrabrand restraints. Section II addresses the pitfalls of the current European regulation: the inefficiencies caused, its ineffectiveness and its inconsistency. Section III focuses on the market integration goal of EU competition law and questions the claim that the existing rules can be justified by this goal. Section IV discusses additional perverse effects of the EU competition rules at the member-states' level. They result from both undesirable harmonization and measures taken by national legislators to circumvent the EU competition regime of vertical restraints. Section V concludes.

II. EU Competition Law on Vertical Restraints

European competition law in the field of vertical restraints has been characterized always by a high degree of regulatory intervention. Article 101 of the Treaty on the Functioning of the European Union (TFEU) (formerly Article 81 EC Treaty) prohibits agreements restricting competition that negatively affect interstate trade. At the same time, the scope of the prohibition is limited by the possibility to exempt particular agreements from the ban on cartels, provided they do not contain hard-core restrictions (price-fixing, market sharing, output limitations). Since the landmark Grundig/Consten case, it has been firmly established that Article 101 TFEU covers both horizontal and vertical agreements. (4) In addition, the requirement that interstate competition must be affected has been interpreted very broadly: also agreements between undertakings (manufacturers and retailers) located in the same EU member-state may come within the scope of the prohibition, particularly when a network of restrictions creates a cumulative effect hindering interstate trade. (5) Consequently, exemptions have become necessary to clear vertical restraints which are not de minimis. (6)

A. The History of Block Exemptions

The European Commission has used the instrument of the block exemption in order to avoid the need for an individual appraisal of an insurmountable number of agreements. Originally, block exemptions were contained in Regulations that covered only a specific type of agreements: exclusive distribution agreements, (7) exclusive purchasing agreements, (8) franchising agreements, (9) and motor vehicle distribution and servicing agreements. (10) The old group exemptions were drafted in formal legalistic terms. They contained both a white list and a black list of clauses: the former could be inserted into contractual agreements without losing the benefit of the block exemption; the latter, when inserted, had the effect of making the agreement illegal and void. The white list had a straitjacketing effect: to avoid infringements of EU competition law, firms were given an incentive not to include grey clauses that were not explicitly exempted. The legal regime was further complicated by the case law of the European Court of Justice (ECJ), which introduced criteria to judge the legality of vertical restraints for which there was no explicit block exemption. With respect to selective distribution, the ECJ initiated a controversial distinction between qualitative and quantitative requirements. When the selection of dealers was based on the former criteria, the agreements remained outside the scope of the prohibition. Conversely, the selective distribution was held to violate the cartel prohibition if the number of dealers was restricted.

A clear departure from the old regime occurred in 1999 when the European Commission, as part of its exercise of "modernization" of competition law, introduced a new general block exemption. (11) Regulation 2790/1999 replaced three of the previous block exemptions and introduced new rules covering all vertical restraints (but still excluding the distribution of cars (12)). The "modern" style of regulation heavily rested on the premise that the ability of a vertical agreement to produce anticompetitive effects hinges predominantly on the market power of the manufacturer making use of such restraints. This market power is assessed by calculating the supplier's market share. Regulation 2790/ 99 thus introduced a presumption of legality (safe harbor clause) benefiting manufacturers having a market share not exceeding 30%. However, this safe harbor provision was no longer applicable if the manufacturer had included blacklisted clauses in its distribution agreements. If the market share was higher than 30%, a full individual assessment under Article 101 (1) TFEU remained necessary and a prohibition would follow if the conditions of Article 101 (3) TFEU were not satisfied. The black list contained, among others, prohibitions of vertical price fixing (resale price maintenance) and absolute territorial protection; it was (highly) unlikely that these hard-core restrictions are permitted by way of individual exemptions.

Since June 2010, a new version of the block exemption regarding vertical restraints is in force (Regulation 330/10). (13) The new regulation is largely shaped after its predecessor: it also provides a safe harbor clause based on market shares and a similar black list of hard-core restrictions. The most striking innovation is that not only the market share of the supplier but also the market share of the buyer on the market where it purchases the contract products must be 30% or lower. The exemption applies to restrictions of competition contained in agreements or concerted practices entered into between two or more undertakings each of which operates at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell, or resell certain goods or services (Article 2 (1) Regulation 330/10). (14) Critically, the safe harbor provisions of the block exemption rely on two crucial parameters: the level of market power involved, assessed by a market share criterion, and the nature of the vertical restraint. For a proper understanding of the EU competition rules on vertical restraints, a more detailed legal analysis of both crucial assessment criteria is provided below.

B. The Market Share Criteria

In any assessment of the legality of vertical restraints, the first question to ask concerns the market shares of the contracting parties on both the supply side and the demand side of the relevant market. Distribution agreements may escape the prohibition of Art. 101(1) TFEU without the need to invoke the group exemption (Regulation 330/2010) if they have a negligible market impact or have been concluded between small or medium-sized companies. Vertical restraints pose no competition concerns if the market share of the contracting parties is de minimis--i.e., not above 15%. Additionally, the European Commission considers that-subject to cumulative effects issues and hard core restrictions-agreements between small and medium-sized undertakings are normally not capable of appreciably restricting competition and affecting trade between member-states. Proceedings will normally not be opened, unless in the rare case in which small and medium-sized undertakings hold a dominant position in a substantial part of the internal market. (15)

If vertical restraints are imposed by larger companies, a double market share test must be applied. Regulation 330/2010 introduces a presumption of legality (safe harbor) if (1) the manufacturer has a market share not exceeding 30% on the market where it sells the contract goods and (2) also the buyer has a market share of 30% or less on the market where it purchases the contract goods, provided that the manufacturer and the distributor do not include a number of blacklisted clauses (hard-core restraints) in their distribution agreements. It must be stressed that, differently from the former regulation, which applied only a market share test on the supply side, now both the supplier's and the buyer's market share must each be 30% or less. Besides this double market share test, the structuralist approach is also relevant for the decision to withdraw the benefit of the group exemption. The European Commission has this power when similar vertical restraints cover more than 50% of the relevant market.

C. The "Black List"

Regulation 330/2010 does not apply to certain hard-core restraints; these restrictions are included in a "black list." Hard-core restraints do not profit from the benefit of the group exemption. The black list mentions (1) resale price maintenance, (2) market partitioning by territory or customer group, (3) restrictions of sales to end users by members of a selective distribution network, (4) restriction of cross-supplies within a selective distribution system, and (5) restrictions preventing end users, independent repairers, and service providers from obtaining spare parts directly from the manufacturer. Even though there is no final condemnation, Regulation 330/10 introduces a quasi per se prohibition since it is explicitly stated that the agreements are unlikely to fulfill the conditions of Article 101(3). (16) From a comparative perspective, the blacklisting of resale price maintenance and vertical territorial restraints is remarkable. Under U.S. antitrust laws the latter practices are judged under the rule of reason. The strict attitude of EU competition law towards both "hard-core" restraints is commented on below.

Even though price recommendations and maximum price fixing are admitted if the market shares of the participating parties (seller and buyer) do not exceed the threshold of 30%, (17) Regulation 330/10 introduces a quasi per se ban of vertical minimum price fixing. The prohibition of resale price maintenance covers both direct agreements on fixed or minimum resale prices or agreements achieving resale price maintenance through indirect means, such as fixed distribution margins, maximum discount levels, rebates dependent on the observance of a given price level or the termination of deliveries as a response to a given (too low) price level. The European Commission explains that resale price maintenance can be made more effective when combined with information systems or measures reducing the buyer's incentives to lower the resale price. (18) In its Guidelines on vertical restraints, the Commission states that the prohibition of minimum resale price maintenance is based on its serious anticompetitive effects: facilitation of collusion among sellers or buyers, softening competition at different levels of trade, ensuing price increases, foreclosure of smaller rivals, and reducing dynamism and innovation at the distribution level. Even though it is unlikely that the conditions of Article 101(3) TFEU can be fulfilled, the European competition authority acknowledges that supplier-driven resale price maintenance may lead to efficiencies. For example, in the case of experience and complex products, resale price maintenance may help to prevent free-riding. However, the (heavy) burden of proof that minimum retail prices achieve important distribution efficiencies lies upon the manufacturer. (19)

The second blacklisted clause regards territorial and customer restrictions. Also market partitioning by territory can be the result of both direct obligations, such as the duty not to sell to certain customers in certain territories and indirect measures, such as reduction of discounts and termination of supplies to dealers selling outside their appointed territory. There are four exceptions to the hard-core restriction of market partitioning by territory or customer group. The first exception involves the prohibition of active sales by a buyer to a territory or customer group that has been allocated exclusively to another buyer. Whereas passive sales--i.e., responding to unsolicited requests from customers responding to general advertising or promotion--should always be allowed, actively approaching potential customers may be prohibited. The latter includes direct mail, unsolicited e-mails and actively approaching a specific customer group or customers in a specific territory. (20) The second exception is the restriction of direct sales to end users by a buyer operating at the wholesale level of trade. Third, resellers taking part in a selective distribution system may be prohibited to sell to unauthorized distributors within the territory reserved by the supplier to operate that system. However, cross-supplies between authorized retailers must remain possible. Given the increasing importance of the internet, in its Guidelines the EU Commission has explained how the concepts of active and passive sales are to be interpreted in the context of internet trade. (21)

III. The Pitfalls of EU Competition Law: Inefficiencies, Ineffectiveness, and Inconsistency

In the literature, Regulation 2790/1999 was welcomed as a considerable improvement on the "old-style" system. Since the "new-style" block exemptions no longer contain a white list the "straitjacketing" effect has been avoided, so it was argued. (22) The use of a market share cap was (and still is) seen as in line with a '"more economic approach' in order to escape from the discredited and formalistic regulations of the past." (23) Here, a more critical approach is taken. (24) As explained in the previous section, Regulation 330/2010 is largely shaped after its predecessor: it contains a safe harbor clause based on the market shares of both supplier and buyer and a black list of clauses that are presumed illegal. Hence, EU competition law in the field of vertical restraints remains characterized by a high degree of regulatory intervention. The outcome of the last two revisions (1999, 2010) has been reregulation rather than deregulation. This outcome is worrisome since competition mies preferably should be facilitative rather than regulatory; they should guide and protect rather than control the competitive process. Below, three criticisms are further elaborated: the inefficiencies created by the block exemption, its ineffectiveness, and its inconsistency.

A. The Inefficiencies of Regulation 330/2010

Generally, economists plead in favor of an effects-based approach focusing on both the potential anticompetitive effects and efficiency benefits of vertical restraints. A large theoretical literature has emerged that explains vertical restraints as devices to cope with externalities, to cure principal-agent problems, and to reduce transaction costs. (25) Also the risk that vertical restraints, in particular resale price maintenance, may cause anticompetitive effects horizontally (reduction of interbrand competition) has been acknowledged in the theoretical literature. (26) When theories diverge, the real-life effects of vertical restraints are ultimately an empirical issue. Here, the larger part of the literature seems to indicate that the potential of efficiency savings is larger than the negative impact on competition. (27) If economic insights are to be taken seriously, this implies not only that formalistic rules based on the legal form of the business relationships must be avoided. It also leads to a rejection of simple rules such as per se (il)legality of (certain types of) vertical restraints. Any legal rule must take into account that vertical restraints have an ambiguous impact on economic welfare, depending on the context in which they are used.

EU competition law does not allow a full efficiency analysis of vertical restraints. A balancing of procompetitive and anticompetitive effects, such as under the U.S. rule of reason, is not possible. Whereas one may observe a slightly more tolerant attitude towards territorial restrictions and customer restrictions, vertical minimum price fixing remains subject to a quasi per se prohibition. Clearly, there is no perfect harmony between competition economics and competition law. The latest Guidelines on vertical restraints consolidate a highly detailed and often legalistic approach. The European Commission argued that "economic theory cannot be the only factor in the design of policy.... [S]trict economic theory must take place in the context of existing legal texts and jurisprudence." (28) As a consequence, many of the long-standing economic criticisms directed towards the old regulations (29) remain valid after the legal reforms.

In the EU policy debate, legal certainty is often advanced as the ultimate justification for form-based rules. This argument is short-sighted: simple mies, such as market share criteria and a black list come at a cost. The inefficiencies resulting from simplistic mies may outweigh the gains in terms of legal certainty. Some balancing between efficiency gains and costs of uncertainty will always be needed in order to create optimally differentiated rules. (30) It may be doubted whether the market share criterion and the black list deserve the latter qualification.

There are at least three reasons to doubt the appropriateness of the market share criterion. First, market shares are at best a crude proxy for market power and no reliable indicator for diagnosing the anticompetitive consequences of vertical restraints. Market shares may be informative to signal competition problems in homogeneous products markets but are less useful to assess the degree of competitiveness of goods markets characterized by little or moderate concentration and high product heterogeneity. (31) The rules of the block exemption apply to markets that may come close to the conditions of monopolistic competition: there are a relatively large number of suppliers each enjoying some degree of market power thanks to the position of their brands. In such scenario, the market definition exercise is fraught with difficulties and the calculation of market shares will not be a reliable indicator. (32) Second, even if the problems regarding the definition of the relevant market could be overcome, it is not straightforward why the market share of the buyer as a purchaser of the contract goods should be the relevant criterion. Would it not make more sense to look at the market share of the buying firm on the market where it resells the goods rather than its share on the market where the contract goods are purchased? The Guidelines on vertical restraints pay insufficient attention to the peculiarities of buying power. The effects on competition differ depending on whether retailers enjoy monopsony power towards competitive suppliers or retailers have bargaining power against powerful suppliers. In the first scenario, retailers may reduce demand which results in allocative inefficiency and a deadweight loss. In the second scenario, however, the countervailing power of buyers may improve social welfare. Supermarkets may pass on the discounts they obtain from manufacturers to end-consumers if competition on the downstream markets is sufficiently strong. However, these beneficial effects of buying power may not materialize if supermarkets enjoy market power on the latter markets. (33) Hence, also the market share on the market where the buyer resells the goods is relevant for assessing whether there is effective competition as required by Article 101 TFEU. Third, a static approach resulting from the use of market shares will turn out ill-suited to incorporate considerations of dynamic efficiency, which are crucial in markets where new distribution formats arise thanks to the development of internet sales. All in all, market shares are used for reasons of legal certainty but not because of their intrinsic reliability to identify and assess competition problems. However, the certainty brought about is relative given the difficulties of identifying the relevant antitrust market. On top of this, the structuralist approach creates scope for inefficiencies that are unlikely to be made good by reducing legal uncertainty.

The black list may provide some legal certainty to firms, but again it does so at the expense of aggravating the economic inconsistencies of the block exemption. The European Commission is aware of these discrepancies: the latest Guidelines take a more open approach to the consideration of efficiency savings. However, resale price maintenance keeps its unlucky status as a "mortal sin" from the market integration perspective. The same assessment applies to absolute territorial exclusivity. In both cases the potential for arguing efficiency arguments is limited, if not excluded. Vertical minimum price fixing is de facto prohibited since the burden of proving efficiency savings is very high. The parties must "convincingly demonstrate that the RPM agreement can be expected to not only provide the means but also the incentive to overcome possible free-riding between retailers on these services and that the pre-sales services overall benefit consumers as part of the demonstration that all the conditions of Article 101(3) are fulfilled." (34) Absolute territorial protection remains another "mortal sin" of EU competition law. A manufacturer may appoint an exclusive distributor in certain territories provided that "passive sales" to such territories are permitted. This means that distributors must be free to sell and deliver goods in response to unsolicited requests from individual consumers, including these over the internet. Only "active sales," which follow upon the initiative of distributors in other territories, may be prohibited. By contrast, an absolute territorial protection including both active and passive sales cannot be organized. According the European Commission's policy, an exception may be granted to distributors willing to introduce products in new markets for a period of maximum two years. However, the free-riding problem is not necessarily limited in time and temporary territorial protection is thus no guarantee that distribution efficiencies will be preserved.

B. Ineffectiveness

Different types of vertical restraints are substitutes for each other. This important insight seems to have been lost in the EU policy discussion. Resale price maintenance offers a clear example. In case of price competition at the retail level, discount stores could take a free-ride on the promotion expenses of specialized stores, thus threatening the survival of the latter. Manufacturers may wish to set a minimum price below which retailers are not allowed to resell the product in order to induce the latter to provide presales services. If minimum retail prices are not allowed by competition law, manufacturers have different alternatives at their disposal. These include unilateral refusals to deal, exclusive territories, contractual arrangements, subsidizing dealers' efforts, and taking over the marketing from the retailers. Manufacturers may substitute the former devices for resale price maintenance because of the more lenient prohibition applying to unilateral refusals to deal, which requires proof of a dominant position under Article 102 TFEU, or exclusive territories, which include at least protection from active sales. Manufacturers may also decide to evade the application of the competition rules altogether by way of contractual agreements, subsidizing dealers, or taking over the marketing efforts from the latter. The substitution effects caused by the prohibition of resale price maintenance are worrisome. It is not the task of a competition authority acting as a regulator to decide which distribution method should be chosen. If one of the alternatives is chosen for purely legal reasons, inefficiencies will ensue. Distorted business judgments will follow when manufacturers decide to evade the application of Article 101 TFEU if there is no economic reason for distinct rules.

Another troublesome substitution effect arises when manufacturers substitute agency agreements for distribution agreements. Again, legal differences may inhibit the choice of the most efficient distribution method. In contrast with a distribution agreement, where property is transferred from the supplier to the buyer, property in the contract goods bought or sold does not vest in the agent. Since the agent does not acquire property in the contract goods, his operations form part of the principal's activities, and the obligations imposed upon him fall outside Article 101(1) TFEU. In its Guidelines, the European Commission explains that an agent negotiates and/or concludes contracts on behalf of a principal, either in the agent's own name or in the name of the principal, for the purchase or sale of goods. However, if the agent bears financial and commercial risks (such as product liability claims, nonperformance by customers, etc.), the agent will be seen as an independent distributor, and the relevant agreement will be subject to the general prohibition of Article 101(1) TFEU. Three types of risk are material to the definition of an agency agreement: (1) contract-specific risks directly related to the negotiated and/or concluded contracts; (2) market-specific investments, which are usually sunk, and (3) risks related to other activities undertaken on the same product market. (35)

The most dramatic step to evade the legal problems concerning vertical restraints, in particular to legalize blacklisted clauses, in distribution contracts is vertical integration. In this way a hierarchical structure replaces the contractual agreements with its blacklisted clauses. If the manufacturer hires its own workers, Article 101(1) TFEU does not apply since employees are not independent undertakings. Even though integrating forward raises other legal issues, particularly the applicability of labor laws, many European firms active in interstate trade may decide to choose the latter option. The most illuminating example is the Grundig/Consten case itself, since ultimately Grundig decided to keep control over the distribution of its products in France by vertically integrating with the French distributor. From a competition policy perspective, such outcome seems counterproductive. A vertical merger causes a more permanent restriction of competition than contractual agreements that are limited in time.

C. Inconsistency

Currently, U.S. antitrust law is superior to EU competition law for reasons of internal consistency. Most striking under the current EU competition rules is the different treatment of various types of vertical restraints, which may all serve the same economic goal. In the U.S., the rule of reason, which allows for taking into account the economic effects of practices challenged under the U.S. antitrust laws, now governs all vertical restraints. This may avoid different legal treatments of various types of vertical restraints for which there is no economic reason. Historically, technical legal distinctions also permeated U.S. antitrust law. In the Schwinn case, the legality of distribution agreements turned on their legal form. Whereas agency and consignment were not covered by the prohibition, distribution agreements transferring property from the manufacturer to the dealer were caught by the Sherman Act. The underlying legal reason was that it should no longer be allowed for a supplier to control the distribution of its products once it has transferred ownership. (36) This property rights protection approach is still alive in the EU competition rules. The current Guidelines of the European Commission state that the obligations imposed on a commercial agent, which does not acquire property in the contract goods, fall outside Article 101 TFEU since the operations of the agent form part of the principal's activities. (37) In Sylvania, the U.S. Supreme Court emphasized that not the legal form of a distribution agreement but its economic impact should guide the assessment of its permissibility under antitrust law. (38) In spite of the economic consistency that the Sylvania case introduced for nonprice restraints, it would take thirty more years before the rule of reason has become accepted as the valid standard for equally judging price restraints. The final step towards a unitary regime was taken in the Leegin case, even though with a narrow majority. (39) In the latter case, the U.S. Supreme Court decided that also price restraints must be judged under the rule of reason. In this way, a different treatment of certain categories of vertical restraints, for which there is no economic reason, is avoided. With the judgment of the U.S. Supreme Court in Leegin, the different approaches in U.S. case law on vertical restraints have been reconciled with each other and internal consistency has been achieved.

It must be acknowledged that the design of an optimal legal regime for vertical restraints is not an easy task because of the ambiguous effects of these restrictions. In spite of these difficulties, the following policy lessons may be advocated upon the basis of a full-fledged economic analysis. First, the economic consequences of vertical restraints, and not their legal form, should be decisive in judging their conformity with the competition rules. Under current EU competition law, technical legal distinctions continue to play an excessively important role. Second, competition law should not hinder the achievement of efficiencies through vertical agreements. Only if there is a serious risk of anticompetitive consequences should antitrust authorities and judges intervene. Third, economic analysis does not provide a justification for the different treatment of price and nonprice restraints. Fourth, different types of vertical restraints can be substitutes for each other so that prohibitions can be circumvented by switching to the next best alternative. The example of resale price maintenance discussed above (Section II, B) illustrates that in case of a prohibition manufactures have several alternatives at their disposal to guarantee the provision of presales services.

IV. The Market Integration Goal of EU Competition Law

The question addressed in this section is whether the objective of market integration, which is crucial under EU competition law, may explain the harsh treatment of minimum retail prices and absolute territorial restrictions. (40) Contrary to U.S. antitrust law, which lacks such an objective, EU competition rules have been conceived as an instrument to achieve integration of economies that were separated by national borders. The goal of market integration can be defined as the elimination of economic frontiers between two or more economies. Neither member-states nor private enterprises may engage in practices that are in conflict with or undermine the unification of the European market. The former should not maintain or issue regulations that hinder the four fundamental economic freedoms: free movement of goods, services, persons, and capital. If the market integration goal is to be respected, then also the latter should not be allowed to engage in practices that segregate the internal market along national borders. The removal of public barriers may not be made ineffective by the creation of private barriers. Competition policy should ensure that such substitution cannot arise.

A. Market Integration as a Goal in Itself

From an internal market perspective, efforts aimed at removing national regulatory barriers to the full deployment of the four economic freedoms should not be jeopardized by business conduct aimed at partitioning national markets. The treaty rules on the four freedoms prohibit state behavior hindering interstate trade that cannot be justified on public interest grounds. A classic example is national regulation on the composition of goods hindering free interstate trade. (41) These public barriers should not be replaced by agreements between producers limiting their commercial activities to particular member-states. Territorial restrictions granting exclusive distribution rights to dealers located in a specific geographic area (country or region) violate this fundamental principle of EU law. As explained in the previous section of this article, it is well known from the economic analysis of vertical restraints that they may generate efficiencies in the organization of distribution networks. However, it seems that in the EU this trade-off is not always explicitly recognized, and market integration tends to be pursued as a goal in itself.

The Treaty of Lisbon has reinvigorated the instrumental use of competition law and its subordinate role to the goal of market integration. The original Treaty of the European Communities recognized the vital importance of competition by mentioning in the Principles of the EC Treaty the establishment of "a system ensuring that competition in the internal market is not distorted" (Article 3(1)g EC Treaty). Progressively, the role of competition law evolved from an instrument to an objective of the Community. This upgraded role was reflected in the ill-fated Constitutional Treaty, which listed competition not only as a guiding principle but as one of the objectives of the EU. Competition was portrayed as the fifth freedom, next to the four existing freedoms (free movement of goods, services, persons, and capital). France objected to this evolution and wanted to downgrade the role of competition to that of a means to accomplish the broader tasks of the Union. (42) The new Article 3(3) TFEU states,
   The Union shall establish an internal market. It shall work for the
   sustainable development of Europe based on balanced economic growth
   and price stability, a highly competitive social market economy,
   aiming at full employment and social progress, and a high level of
   protection and improvement of the quality of the environment. It
   shall promote scientific and technological advance.


It is remarkable that this new formulation neither mentions the protection of competition nor the safeguarding of consumers' interests. (43) Today EU competition law is best understood as a means to accomplish the broader tasks of the Union: the internal market and the social market economy. Obviously, in this interpretation the discussion on the goals of competition law cannot be narrowed down to a U.S.-like debate on either total welfare or consumer welfare as the relevant normative yardstick. (44) Also, competition policy cannot be decided independently but must take account of various other economic and noneconomic (social, cultural) policies.

B. The Pitfalls of the Market Integration Goal

The view that competition law is an instrument to inhibit private agreements hindering the process of market integration has left EU competition law with a heavy legacy. Markovits rightly criticizes the EU approach for its inefficiency and ineffectiveness. Here, these criticisms are adhered to. Two points are crucial. First, the view of many EU competition lawyers supporting the desirability of the current regime for market integration purposes is biased since it is inspired by an ex post, rather than an ex ante perspective. Second, rules of competition law are a poorly suited instrument to achieve the goal of market integration. Both criticisms will be elaborated below.

The number of conflicts between the goal of market integration and the aim of curing principal-agent problems and lowering transaction costs will be lower than expected if an ex ante perspective is used, rather than an ex post appraisal. If distributors are already active in various EU member-states, consumers will profit if they can shop around and buy the products in the member-state where prices are lowest. Prohibiting parallel imports then seems to interfere with market integration, causing substantial losses for consumers. The picture changes, however, if an ex ante perspective is adopted. How can companies willing to be active across the internal market persuade local distributors to make investments to establish a foreign brand in a new geographic market? To enter the market, it may be necessary to provide territorial protection to the distributor so that those investments can be recouped by charging a higher price. In the classic Grundig/Consten case, the European Commission adopted an ex post approach. Under an ex ante approach, different questions would have arisen. Would Consten have been interested in promoting the Grundig brand in France if it had known in advance that parallel imports may undermine the profitability of the necessary investments needed to develop an efficient distribution network? If lack of protection from free-riding deters firms from becoming distributors in some of the member-states, EU competition rules may have exactly the opposite effect of that for which they were enacted. These adverse effects may be overcome by taking account of economic insights. If no protection from free-riding is possible, future distributors may decide not to start up distribution systems in the first place. If distributors are deterred from conquering new markets, the legal regime for vertical restraints may harm, rather than further, market integration. Economic analysis warns against such perverse effects.

Second, it is highly questionable whether competition law is an appropriate tool to further market integration. In the EU context, the objective of market integration may be fully legitimate, but it should be pursued preferably by other legal instruments. Market integration is largely impeded by factors, such as fiscal disparities and different regulatory interventions by the member-states, that are external to concerns of competition policy. Illustrative examples are the car industry, where price differences are caused by differences in tax levels, and the pharmaceutical industry, where price differences are the consequence of different choices regarding health policy (existence of price caps, presence of single buyers). (45) Prohibiting companies active in the EU to adapt their sales policies to heterogeneous local conditions is nothing else but combating effects without reaching the causes of the existing disparities. Using rules of competition law to bring about price convergence by means of the arbitrage flowing from parallel trade comes down to imposing the costs of non-Europe on companies, whereas the primary responsibility of persisting price differences lies with the governments of the member-states.

C. How to Get Out of the Market Integration Conundrum?

Often the question has been asked how EU competition law, which was conceived in the 1950s and 1960s primarily for the purpose of market integration, will operate once most objectives of the internal market will be achieved. One may expect that the market integration goal loses importance as the economies of the member-states become more integrated. Will market integration lose its position as the primary goal in fairly well-integrated markets, and will the trade-off between market integration and efficiency goals be decided differently in such market surroundings? Interestingly, in the 2004 Guidelines on the application of Article 81(3) EC (renumbered: Article 101(3) TFEU), the European Commission no longer mentions market integration as an objective of Article 101 TFEU. Conversely, market integration is presented as an instrument that serves exactly the same goal as the protection of competition. In the words of the European Commission: "The creation and preservation of an open single market promotes an efficient allocation of resources throughout the Community for the benefit of consumers." (46) This change of perspective invites two critical comments. First, it may be deplored that the European Commission has not taken the opportunity to fully discuss the multiple tensions between the goal of market integration and competition. Some of the most perverse consequences of the prohibition of territorial protection have been mitigated. However, no indication has been given as to the line beyond which EU competition law will prohibit price discrimination because of the threat this practice poses to the single market, even in the presence of offsetting efficiencies (increase in output). Second, market integration does not necessarily improve (allocative) efficiency and consumer welfare. Parallel imports limit the scope for price differences; the ensuing price uniformity (average price) will have ambiguous effects on welfare. Consumers initially enjoying low prices will be hurt and consumers initially confronted with high prices will benefit from the resulting lower (average) price. Even though the welfare effects highly depend on market characteristics, a general conclusion is that rice uniformity imposed by parallel imports reduces total welfare when demand dispersion across markets is large. (47) The impact of parallel trade on consumer welfare is equally ambiguous. Since some consumers gain and others lose from uniform prices, the overall consumer surplus may either increase or decrease. If, in response to price uniformity, firms withdraw from high-elasticity markets more consumers, particularly the poorest, may face a reduction in product choice. The overall effect may be detrimental both in terms of efficiency (total welfare) and equity. (48) Today, it may be doubted whether the European Commission would still present market integration and competition law as two complementary tools for achieving allocative efficiency. The view contained in the 2004 Guidelines fitted into the approach, which was adopted by the ill-fated Constitutional Treaty, that competition law can be qualified as the fifth economic freedom of the European Union. The Treaty of Lisbon has reversed this promotion to a higher status and has reaffirmed the instrumentalist view that competition law is not a goal in itself but a means to achieve the objectives of the European Union, most prominently the establishment of an internal market (Article 3(3) TFEU).

Unfortunately, the case law of the European courts has not done much to resolve the nonnative conundrum that results from pairing the market integration goal and rules of competition law. In a number of cases relating to price discrimination in the pharmaceutical industry, the General Court (at that time, the Court of First Instance) was willing to downscale the importance of the market integration goal. (49) However, on appeal, the European Court of Justice ultimately reverted to the old axioms. (50) It may be concluded that the pharmaceutical cases have brought a number of nuances, rather than a real change, in the attitude towards parallel imports. Clearly, the market integration goal is still prominently present in the case law of the European courts. Moreover, there are no indications that a more hospitable assessment of restrictions on parallel trade will be introduced outside the pharmaceutical sector. As long as the Grundig/Consten prohibition is not overruled, tensions between market integration and economic welfare goals (both allocative and dynamic efficiency) will persist and the impact of consumer welfare of the restrictive case law will remain ambiguous.

V. Perverse Effects of the EU Prohibitions on Member-States' Laws

This section deals with two major perverse effects of EU competition law on the statute law of the member-states. The strict prohibitions of vertical minimum price fixing and absolute territorial protection flow from the aim of achieving market integration. This goal is absent in the competition laws of the member-states and, hence, EU competition law should not affect the contents of the latter. Reality is different: EU competition law imposed a mortgage on member-states' laws. First, a "spontaneous" harmonization of the competition laws of the member-states has occurred, which brought the provisions of the latter in line with Article 101 TFEU. Second, outside the area of competition law, member-states have adopted national statutes to circumvent the prohibition of Article 101 TFEU. Both types of legislation by the member-states have caused perverse effects that are discussed below.

A. Harmonization of Member-States' Laws

It is not easily conceivable why EU competition rules should affect the contents of national competition laws, since the goal of market integration is absent in the member-states. The competition laws of the member-states could be interpreted on the basis of an economic analysis that is free of all the dogmas and precedents of EU competition law. National legislators should be able to elaborate economically justified and legally consistent rules for contract terms that do not fall within the scope of Article 101 TFEU. The aim of market integration, which is the cause of the conspicuous inconsistencies in the treatment of vertical restraints at the EU level, should not also afflict national competition laws. What is there to prevent the national legislators from affording equal legal treatment both to complete vertical integration and to integration by means of clauses in long-term contracts, such as territorial restraints, customer restraints (selective distribution, franchising), and even vertical minimum price fixing? Insofar as these restraints provide gains in efficiency and do not cause any significant restrictions on competition, there is no antitrust problem and detailed legal rules are superfluous. In such circumstances competition law only entails administrative costs without any compensatory welfare advantage.

In the past, competition rules of EU member-states, which were superior from an efficiency perspective, were changed because of the need to conform to EU competition law. A telling example is the abolition of the old Gennan rules on vertical restraints. Historically, German competition law (Gesetz gegen Wettbewerbsbeschrankungen, abbreviated GWB) made a clear distinction between horizontal and vertical restraints. Whereas the former were prohibited (subject to particular exceptions), the latter were subjected to an abuse control. According to the prohibition principle, horizontal restrictions of competition are directly prohibited and can be invalidated with retroactive effect without the need for a previous decision of a competition authority. Under an abuse principle, vertical restraints may be found illegal by a competition authority but with prospective effect only. It must be added, however, that the old German competition law made a distinction between agreements on prices and business terms (Section 14 old GWB) and agreements by which one party limited the freedom of the other party to enter into contracts with third parties (Section 16 old GWB). In agreements between enterprises on goods or commercial services, no restraints could be imposed with respect to prices and business terms in reselling the goods or performing the commercial services. Other vertical restraints (such as exclusive dealing and customer restrictions) were subject to an abuse control only. In 2005, the seventh amendment of the GWB has aligned the German regime on vertical restraints with EU competition law. Consequently, under the new German regime--as per its European counterpart--vertical restraints have to be judged according to the general cartel prohibition. The specific exceptions have also been deleted and replaced by a general clause similar to Article 101(3) TFEU.

The harmonization of the German GWB and EU competition law in the field of vertical restraints may be perceived as a missed opportunity for beneficial competition of competition laws. Whereas harmonization may bring benefits when preferences across jurisdictions are homogeneous and there exist important economies of scale, competition seems the preferable option in case of heterogeneous preferences and when learning processes are important. (51) Given the ambiguous welfare effects of vertical restraints, learning effects are very important in this area of competition law. The provisions of the old GWB on vertical restraints were more in line with an economics based approach than current EU competition law. In contrast with the more interventionist EU approach, former German competition law gave preference to an abuse control rather than a prohibition principle for restraints conferring exclusivity rights on firms (territorial and customer restrictions, exclusive purchasing agreements, tying clauses). An abuse principle was deemed to be sufficient to prevent significant competitive distortions. Regulation 330/2010 softened the previous harsh EU treatment of vertical restraints. There is, however, no presumption of illegality for vertical restraints falling outside the block exemption. All in all, an abuse control seems more in line with the important economic insight that vertical restraints can be used to realize efficiencies and only pose a problem if third parties are harmed because of insufficient interbrand competition. It must be added, however, that the economic wisdom of the old German GWB did not extend to vertical price fixing, even though the German competition rules were less strict than EU competition law because of the possibility of legal exceptions.

In essence, it is a mistake to incorporate EU competition rules without first analyzing their relevance to domestic competition concerns. Only political reasons may explain the massive adoption of the inefficiencies and inconsistencies of the EU competition rules on vertical restraints in the memberstates. Several pressure groups that have a clear interest in the adoption of those rules have been active: large firms and specialized competition lawyers urged for this solution emphasizing the need for legal certainty. In contrast with small and medium-sized enterprises, which might profit from certain prohibited restrictions, the former have an interest in harmonized laws, since they lower the costs of interstate trade. Also, competition lawyers profit from European-style rules: the value of human capital built up at a period when national competition laws were nonexistent (or hardly implemented) increases substantially when national competition laws become a copy of the European rules. The rhetoric of legal certainty masked the underlying interests of political pressure groups, but it did so at the cost of substantial inefficiencies.

B. Member-States' Law Trying to Circumvent the EU Prohibitions

This section adds to the above discussion another perverse effect of the EU competition regime: the lobbying of particular industries to enact national laws that legalize minimum resale price maintenance. If prices are legally regulated and not merely the result of agreements between independent economic agents, the restrictions result from state action and Article 101 TFEU no longer applies on its own. Still, member-states may be sued before the European courts for having infringed their duty of loyalty to the treaty provisions. (52) Also, proceedings are possible if the national rules hinder the free movement of goods and services and no justification for them can be provided. (53) However, the latter proceedings are burdensome, and their outcome remains uncertain. Therefore, the effect of regulating prices may be that blacklisted clauses escape the scope of the prohibition of vertical restraints as contained in Article 101 TFEU. As a consequence, particular interest groups may lobby national governments to introduce price regulation, either allowing or requiring fixed prices, to restrict competition.

Fixed book prices may serve as the primary example of this undesirable side effect. In the past, arrangements regarding fixed book prices were laid down in agreements between publishers and booksellers. Nearly all key players on the book market were part of it since rules were laid down by professional associations to which nearly all companies active on the book market were affiliated. These arrangements were discontinued because the European Commission held that they violated EU law to the extent that they also hindered interstate trade, as for instance in German-language books between Germany and Austria or Dutch-language books between Belgium and the Netherlands. (54) The agreements were replaced by national laws in order to protect them from the prohibition of Article 101 TFEU. For example, in Germany an exception for book prices originally was laid down in the national competition law (GWB) but later on moved to a specific statute. (55)

The national laws are justified by the argument that fixed book prices are an instrument to ensure greater diversity and accessibility of books than the market itself would produce. Fixed book prices are thus presented as a means of achieving cultural policy objectives and should stimulate people to read more literary and cultural titles. It is highly questionable whether these laws achieve this objective. To start with, an analysis of effectiveness is difficult to execute since the cultural objectives are defined in a very vague and imprecise way. Next, there are several alternatives that ought to be investigated before any conclusion on the efficiency of fixed book prices can be drawn. These alternatives include allowing but not requiring publishers to fix prices, subsidies to the production of culturally valuable titles, increasing the availability of books in public libraries or, ultimately, no intervention whatsoever and trusting the market outcomes. In the absence of convincing evidence, there is a risk that national laws result in a pure welfare loss as a result of rent-seeking by established interest groups of the book trade.

Neither economic theory nor empirical evidence provides a clear-cut answer to the question whether fixed book prices enhance economic welfare. The arguments of national governments favoring minimum resale prices relate to a wider availability and greater diversity of books. Wider availability should be achieved by higher profit margins that encourage booksellers to stock a larger range of books on their shelves, cross-subsidizing unprofitable titles and preventing competition by booksellers offering only fast-selling titles. Greater diversity should be achieved by providing browsing facilities to consumers in a larger number of sales outlets, enabling publishers to take more risk and allowing them to finance losses on unprofitable books. These arguments get some support from general economic theories of vertical restraints, including the free-rider rationale, (56) the optimal density of stores reason, (57) and the demand risk argument. (58) The ban on price competition may guarantee the provision of presales services and prevent specialized stores from being driven out of business by discounters. It may also contribute to an optimal density of book stores. If price competition is tough, retailers may wish to locate far away from each other and too few retail outlets may be available to guarantee an efficient distribution in a particular geographical region. Finally, by reducing uncertainty, fixed prices may induce booksellers to carry high-risk books--in particular, literary and cultural titles. Economic theory provides an efficiency justification for resale price maintenance if demand is uncertain, the manufacturer has a need for the product to be on the retailer shelves before the uncertainty is resolved and the economic risk of inventories is higher for ordinary retailers. (59) If these conditions are fulfilled in the book trade, price competition could underline the existence of specialized book stores resulting in fewer outlets to resolve the uncertainty of demand. However, many economists (in particular, those working with competition authorities) are not convinced by the efficiency arguments discussed above. The other side of the coin is that fixed prices may facilitate collusive behavior both at the publishers' and retailers' level. Booksellers may be less able to respond to the demand of consumer groups favoring lower prices and cannot gain market share through price competition. Besides higher prices, also losses in dynamic efficiencies must be considered. Fixed prices may impede the development of alternative sales channels; comparison of EU member-states shows that the share of books sold via the internet is lower in countries with fixed book prices.

Also the empirical evidence on fixed book prices is not conclusive. Both comparative studies (cross-country analyses) and ex ante/ex post studies have been conducted but do not allow strong conclusions. The Scandinavian countries lend themselves to comparative study since they are closely related culturally and have widely different book policies. (60) Research was conducted on the period when Norway and Denmark had fixed prices (61) and there was price competition in Finland and Sweden. A main conclusion about Sweden was that the supply of books can compete both in quality and variety with Nordic countries that introduced fixed book prices. (62) Since Sweden introduced free pricing in 1970, also an ex ante/ex post appraisal was possible. In spite of its more commercial publishing policy, this research did not indicate a correlation between price competition and a crowding-out effect of less popular books or a lower density of book stores. (63) Studies of the abolition of fixed book prices in the United Kingdom (Net Book Agreement) show increased sales of discounted popular books, increased prices for cultural titles, some losses for smaller publishers and independent book stores but no decrease in the number of titles. (64) The problem with the above studies remains that, even though similar in many respects, the Scandinavian countries also differ in other potentially important respects so that one cannot be certain that differences in cultural and economic performance are due to different pricing systems. Also the Scandinavian and British ex ante/ ex post studies must be assessed with caution since other factors besides the legislative change may have had an effect on the ultimate outcomes. Only substantive differences in performance between fixed and free prices revealed by both economic theory and supporting empirical evidence could allow policy conclusions. In sum, the main conclusion seems that rhetoric rather that hard empirical evidence dominates the discussion between supporters and opponents of fixed book prices.

The above conclusion also may hold for a comparison of the strict ban on resale price maintenance in EU competition law and member-states' laws that require fixed book prices. Whereas the former overstresses the potential anticompetitive impact of resale price maintenance, the latter are too optimistic about the potential of fixed book prices to achieve better economic performance and cultural diversity. Given this state of things, one could argue in favor of a third system that allows but does not require fixed book prices. This change would imply the end of the quasi-per se prohibition of vertical minimum price-fixing in EU competition law and allow competition between member-states' laws. If this hybrid regime is adopted, publishers will have the possibility to impose fixed prices for more culturally valuable books, thus reducing uncertainty and improving the availability of such books. At the same time, there can be competition at the retail level for popular books. Under the third system, member-states will also have the freedom to slim down the prohibition of resale price maintenance in different degrees and for different goods and services. At the same time, they can experiment with other devices (subsidies to publishers and libraries) to achieve the cultural objectives. Ultimately, the different approaches in the twenty-eight EU member-states will create a unique laboratory of learning and a high potential to improve the quality of competition law.

VI. Conclusions

For several reasons, EU competition policy on vertical restraints has been a failure. First, the competition rules contained in the relevant regulation and explained in the accompanying guidelines are inconsistent. Second, the rules create a number of inefficiencies that cause a negative impact on social welfare. Third, it is doubtful that these inefficiencies can be justified by the market integration goal since the rules may turn out to be ineffective in reaching this objective. Fourth, EU competition law on vertical restraints has created negative side effects: it has put an end to experimentation and innovation of competition rules at the member-states level and induced private interests groups to spend a lot of effort in lobbying national regulators. Several of these pitfalls have been indicated by Richard Markovits in his treatise on U.S. antitrust law and EU competition law. Markovits has argued that competition rules prohibiting intrabrand restraints do not generally increase consumer welfare. The prohibitions can also be easily circumvented, and they are not effective to reach the market integration goal of EU competition law. These criticisms have been supported in this article and further expanded by a discussion of additional errors that have made the EU competition rules on vertical restraints a policy failure.

The main lessons for competition policy in the EU seem to be the following. The insights of economic analysis apply word by word to both nonprice and price restraints. The cost of the persisting unwillingness to revise the strict prohibition of vertical minimum price fixing is high since it excludes the design of a legal regime for vertical restraints that is consistent with economic wisdom. EU competition law should also move away from a strict market integration perspective and recognize a potential trade-off with efficiency savings. This lesson applies with even greater force to the competition laws of the member-states. This article has warned against spontaneous harmonization, which neglects different preferences regarding competition policy, inhibits learning effects, and creates scope for lobbying by interest groups to circumvent the prohibition of blacklisted clauses. The peculiarities of the situation in the member-states do not call for copying the EU competition rules, for the central aim of market integration is absent from the national statutes.

DOI: 10.1177/0003603X15625122

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

(1.) Richard Markovits, Economic Analysis and the Interpretation and Application of U.S. and E.U. Antitrust Law 84-85 (2014).

(2.) Richard Markovits, supra note 1, at 111.

(3.) Roger Van den Bergh & Peter D. Camesasca, European Competition Law and Economics: A Comparative Perspective (2006); Pierre Larouche & Maarten Pieter Schinkel, Continental Drift in the Treatment of Dominant Firms: Article 102 TFEU in Contrast to [section]2 Sherman Act (TILEC Discussion Paper, 2013-020).

(4.) Cases 56 and 58/64 Consten and Grundig v. Commission, E.C.R., at 299 (1966).

(5.) The early case-law of the European Court of Justice made clear that the application of the competition rules requires a lull analysis of the factual, legal, and economic context. See Case 56/65 Societe Technique Miniere v. Maschinenbau Ulm GmbH, E.C.R. 235, at 249 (1966); Case 23/67 Brasserie de Haecht SA v. Wilkin-Janssens E.C.R. 407, at 415 (1967); Case C-234/89 Delimitis v. Henninger Brau E.C.R. 1-935 at 984 (1991).

(6.) Agreements of minor importance generally have remained outside the scope of Article 85(1), now Article 101 TFEU. The relevant threshold is the parties' market share; it is set at 15% in a vertical case, while being only 10% for horizontal agreements; see Notice on agreements of minor importance which do not appreciably restrict competition [2014] O.J C 291/1.

(7.) Commission Regulation (EEC) No 1983/83 of 22 June 1983 on the application of Article 85(3) of the Treaty to categories of exclusive distribution agreements [1983] O.J. L 173/1; corrigendum [1983] O.J. L 281/24.

(8.) Id.

(9.) Commission Regulation (EEC) No. 4087/88 of 30 November 1988 on the application of Article 85 (3) of the Treaty to categories of franchise agreements [1988] O.J. L 359/46.

(10.) Commission Regulation (EC) No. 1475/95 of 28 June 1995 on the application of Article 81 (3) of the Treaty to certain categories of motor vehicle distribution and servicing agreements [1995] O.J. L 145/25.

(11.) Commission Regulation (EC) No. 2790/1999 of 22 December 1999 on the application of Article 81 (3) of the Treaty to categories of vertical agreements and concerted practices [1999] O.J. L 336/21.

(12.) The block exemption for car distribution agreements expired on May 31, 2013.

(13.) Commission Regulation 330/2010 on the application of Article 101 (3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, O.J. 23.4.2010, L 102/1. The Regulation is clarified by the EU Commission's Guidelines on Vertical Restraints, O.J. 19.5.2010, C 130/1 (hereinafter, Guidelines).

(14.) For technical legal comments on the precise meaning of the words used in the block exemption, see R. Whish, Regulation 2790/99: The Commission's "New Style " Block Exemption for Vertical Agreements, 37 C.M.L. Rev. 896 (2000).

(15.) Guidelines, supra note 13, at 11.

(16.) Id. at 47.

(17.) Id. at 226.

(18.) Id. at 48.

(19.) Id. at 225.

(20.) Id. at 51.

(21.) Id. at 52-54.

(22.) Richard Whish, supra note 14 at 89S.

(23.) Id. at 970.

(24.) This section is largely based on Van den Bergh & Camesasca, European Competition Law and Economics, supra note 3 at 229-240.

(25.) Seminal publications by Nobel Prize laureates include, inter alia, Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (1975); Patrick Rey & Jean Tirole, The Logic of Vertical Restraints, 76 Amer. Econ. Rev. 921 (1986).

(26.) See, recently, Patrick Rey & T. Verge, Resale Price Maintenance and Interlocking Relationships, 58 J. Ind. Econ. 828 (2010).

(27.) Studies showing price increases and potential losses of consumer welfare include Thomas Overstreet, Resale Price Maintenance: Economic Theories and Empirical Evidence (Bureau of Economics Staff Report to the Federal Trade Commission, 1983), http://www.ftc.gov/be/econrpt/233105.pdf. Other studies found less evidence of anticompetitive effects and major efficiency gains: Stanley I. Ornstein, Resale Price Maintenance and Cartels, 30 Antitrust Bull. 401 (1985) and Pauline M. Ippolito, Resale Price Maintenance: Empirical Evidence from Litigation, 34 J. Law & Econ. 263 (1991).

(28.) Green Paper on vertical restraints in EC competition policy, COM/96/0721 Final, at [paragraph] 86.

(29.) See, e.g., Barry Hawk, System Failure: Vertical Restraints and EC Competition Law, 32 C.M.L. Rev. 973 (1995) and Roger Van den Bergh, Modern Industrial Organisation versus Old-Fashioned EC Competition Law, 2 E.C.L.R. 75 (1996).

(30.) See Arndt Christiansen & Wolfgang Kerber, Competition Policy with Optimally Differentiated Rules Instead of "Per Se Rules vs Rule of Reason", 2 J. Comp. L. & Econ. 215 (2006).

(31.) See Louis Kaplow, Why (Ever) Define Markets?, 124 Harv. L. Rev. 437 (2010).

(32.) The problems resulting from the definition of the relevant market exceed the scope of this paper. See, for further discussion, Louis Kaplow, supra note 31.

(33.) On the analysis of buying power in antitrust law, see Roger Blair & Jeffrey Harrison, Monopsony in Law and Economics (2010); Zhiqi Chen, Buyer Power: Economic Theory and Antitrust Policy, Res. Law & Econ. 17 (2007).

(34.) Guidelines, supra note 13, at 225.

(35.) Id. at 14.

(36.) United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967).

(37.) However, if the agent bears risks relating to supply, product liability, nonperformance by customers, it will treated as an independent dealer. Also, provisions concerning the relationship with the principal (single branding, noncompete obligations after expiry of the contract) may infringe Article 101 TFEU. See Guidelines, supra note 13, at 18-21.

(38.) Continental T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

(39.) Leegin Creative Leather Products, Inc. v. PSK.S, Inc., 551 U.S. 877 (2007). The case was decided with a five to four majority; see the powerful dissenting opinion of Justice Breyer.

(40.) This section builds upon and is an update of Van den Bergh & Peter Camesasca, European Competition Law and Economics, supra note 3, at 45-49.

(41.) The German purity law reserved the denomination "beer" to beer brewed from specific approved ingredients--see Case 178/84 Commission v. Germany E.C.R. 1227 (1987) ("Reinheitsgebot"). In spite of German (unconvincing) attempts to justify this restriction on grounds of public health, the purity law was considered an infringement of the "free movement of goods" principle.

(42.) For an analysis of this evolution within the broader framework of the TFEU, see Ioannis Lianos, Some Reflections on the Question of the Goats of EU Competition Law, in Handbook on European Competition Law: Substantive Aspects 1 (2013).

(43.) Protocol No. 27 provides that the internal market as set out in Article 3 TFEU includes a system ensuring that competition is not distorted. This Protocol may neutralize the repeal of the former Article 3(1)g, which in any case loses the salience it had before. It is remarkable that the Protocol does not link competitive markets with the "social market economy." The meaning of the latter concept remains obscure; it might be understood as a market economy with social corrections to undo undesirable redistributive consequences of economic liberalism.

(44.) See, e.g., Denis Carlton, Does Antitrust Need to Be Modernized?, 21 J. Econ. Per. 155 (2007).

(45.) Claudia Desogus, Competition and Innovation in the EU Regulation of Pharmaceuticals (2010).

(46.) Guidelines on the application of Article 81(3) of the Treaty, O.J. 27.4.2004, C 101/97, at 13.

(47.) David Malueg and Marius Schwartz, Parallel Imports, Demand Dispersion and International Price Discrimination, 37 J. Int. Econ. 167 (1994). See also Han Varian, Price Discrimination and Social Welfare, 75 Amer. Econ. Rev. 870 (1985).

(48.) Patrick Rey, The Impact of Parallel Imports on Prescription Medicines (Mimeo, 2013), citeseerx.ist.psu.edu/viewdoc/ download?doi=10.1.1.493.1937.

(49.) See, e.g., Case T-168/01, GlaxoSmithKline v. Commission, E.C.R. 11-02969 (2006).

(50.) Cases C-468/06- C-478/06, Sot. Lelos v. Glaxo Smith AEVE, E.C.R. 1-7139 (2008).

(51.) Other arguments in favor of centralization and harmonization include the need to internalize interstate externalities and the risk of a race to the bottom. However, extraterritorial application of competition laws may solve the prior issue, and the latter argument is not supported by empirical evidence of destructive competition of competition laws. For further discussion, see Roger Van den Bergh, Economic Criteria for Applying the Subsidiarity Principle in the European Community: The Case of Competition Policy, 16 int. Rev. L. Econ. 363 (1996).

(52.) Joint application of Articles 5 and 101 TFEU.

(53.) According to EU law, restrictions on free movement may be justified if two requirements (necessity and proportionality) are met. First, the restriction must be needed to achieve a goal of public interest (health, consumer protection). Second, the restriction should not go further than needed to reach this goal.

(54.) Commission Decision 25.11.1981, Case VBBB/VBVB, O.J. 25.02.82, L 54/36.

(55.) As mentioned in Section IVA, exceptions to the ban on resale price maintenance could flow from the German competition law itself. Section 15(1) old GWB exempted published materials (Verlagserzeugnisse) from the prohibition for reasons of cultural policy. The German rule was not effective, however. Since parallel importers could not be forced to respect prices imposed by German manufacturers, the system could not be kept watertight.

(56.) Lester Telser, Why Should Manufacturers Want Fair Trade?, 3 J. L. & Econ. 86 (1960).

(57.) J. Gould & L. Preston, Resale Price Maintenance and Retail Outlets, 32 Economica 302 (1965).

(58.) Patrick Rey & Jean Tirole, supra note 25.

(59.) Raymond Deneckere, Howard Marvel, & James Peck, Demand Uncertainty, Inventories and Resale Price Maintenance, 3 quart. J. Econ. 885 (1996).

(60.) For comparative studies including the United Kingdom and non-EU member-states, see Francis Fishwick, Book Prices in Australia and North America (1985) and Francis Fishwick, The Economic Implications of the Net Book Agreement (1989).

(61.) In Denmark, meanwhile, fixed price have been replaced by a hybrid system.

(62.) Vidar Ringstad, On the Cultural Blessings of Fixed Book Prices. Facts or Fiction?, 10 Int. J. Cult. Pol. 351, 359. In support of this conclusion, Ringstad cites a Swedish language contribution by Fjeldstad.

(63.) Vidar Ringstad, supra note 62, at 361.

(64.) Francis Fishwick & Sean Fitzsimons, Report into the Effects of the Abandonment of the Net Book Agreement (1998); see also James Dearnley & John Feather, The UK Bookselling Trade Without Resale Price Maintenance: An Overview of Change 1995-2001, 17 Publishing Res. Quart. 16 (2002).

Roger Van den Bergh *

* Erasmus School of Law, Erasmus University

Corresponding Author: Roger Van den Bergh, Erasmus School of Law, Erasmus University Rotterdam, Rotterdam, 3062 PA, Netherlands. Email: r.vandenbergh@law.eur.nl
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Title Annotation:Symposium: Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law
Author:Van den Bergh, Roger
Publication:Antitrust Bulletin
Date:Mar 1, 2016
Words:12169
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