WRITTEN QUESTION E-3916/98

by Viviane Reding (PPE) to the Commission

(4 January 1999)

Subject: Vertical barriers to trade in the beer sector

As part of the planned reform of the application of the rules on competition laid down in the Treaty, it is reported that the Commission is about to propose an overall reduction in the number of vertical barriers to trade.

Does the Commission realise that the proposed threshold of 40 % of market share might result in the closure of all the breweries in Luxembourg? Individual breweries there do have more than 40 per cent of market share, so they will no longer be able to conclude exclusive contracts. However, competing undertakings from the surrounding regions, which have less than a 40 % share of their domestic market but whose production is far greater than the entire production of Luxembourg, will be able to conclude such contracts. The small Luxembourg breweries will surely go under in the competition and survival war fought by the "big names" which have extensive resources. That cannot be the objective of the new rules, and the Commission should realise this.

Is the Commission thinking of adapting its definition of the reference market to the situation in the real world, i.e. to define as a domestic market (of course, then with a lower reference figure for market share) the market in which actual competition ultimately takes place between undertakings? If not, would it not be more sensible for it to consider the supra-regional aspects of the innovations?

Answer given by Mr Van Miert on behalf of the Commission

(10 February 1999)

The Honourable Member raises a number of issues concerning the Commission's proposals for revision of its competition policy rules for vertical agreements which are clarified hereafter.

On 30 September 1998, the Commission adopted a communication(1) that sets out its plan for a revised competition policy towards vertical restraints, proposing a shift to a more economic approach. This is widely supported and is made necessary by a number of structural weaknesses in current block exemption regulations, including that covering beer supply agreements.

The main weakness is that the current block exemption regulations exempt without taking account of the position of the companies involved on the market. It makes no difference whether a company has 5 % or 95 % market share. This is not good competition policy and cannot be maintained. The Commission's experience is that vertical restraints generally have only beneficial effects when the companies involved have no market power. However, in cases where companies do have market power the picture can be different. Vertical restraints can in these circumstances be used for pro-competitive purposes as well as anti-competitive purposes, for example to hinder entry to the market.

The kernel of the Commission's proposal1 is a block exemption regulation that will apply to all sorts of vertical restraints in almost all sectors, for final and intermediate goods as well as services. The economic approach requires limiting the applicability of the block exemption to those that have market power. The only criterion to apply such a limit that is practicable and widely used in competition policy throughout the world is the market share on the relevant anti-trust market or indexes calculated on the basis of market shares. While acknowledging that market share and market power are not the same, the first can be used to define a safe harbour, that is to indicate when lack of significant market power can be assumed.

To take the relevant anti-trust market does not discriminate against companies operating in smaller markets. It treats companies with similar market shares in the same way, whether operating on the same or different markets. It would not be right to pre-decide on the geographical scope of the market as suggested in the question.

In the communication it is proposed that one or two market share thresholds will limit the application of the proposed block exemption. The choice between a one or two threshold system and the actual levels have been left open for the moment. The Commission proposes in the communication 20 % and 40 % in case of a two threshold system and a threshold between 25 % and 35 % in case of one threshold. This will create a safe harbour for companies below the threshold. It will restore their freedom to contract and make it possible for companies to choose distribution formats which are commercially the most interesting. As most markets are competitive and the large majority of companies have modest market shares it will increase legal certainty and reduce enforcement costs for the majority of companies. The object and effect will therefore not be to reduce the number of vertical agreements.

The proposed new block exemption does not mean that the few brewers with market shares above the threshold will necessarily have to fear for the validity of their contracts or are required to notify.

Being outside the block exemption does not carry with it the presumption that a vertical restraint is illegal. The agreement may not be anti-competitive at all, and it may fall outside Article 85(1) of the EC Treaty. It may fall within Article 85(1) but be exemptable under the criteria for Article 85(3) of the EC Treaty. The Commission will issue guidelines on the application of the competition rules above the threshold to clarify its future policy for these companies.

Companies with market power above the threshold may have to adapt certain of their contracts if, upon investigation of their market, this proves necessary to keep the market open and competitive. But this protection of competition will be good for consumers and in the longer run will be good for employment by guaranteeing a viable industry.

(1) COM(98) 544 final.