GREEN PAPER ON VERTICAL RESTRAINTS IN EN COMPETITION POLICY
Date: 1997-01-22
Institutions: European Commission
Subjects: competition policy, distributive trades, single market, trade restriction

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  22.01.1997 
COM(96)  721  final 

GREEN PAPER  ON VERTICAL  RESTRAINTS 
IN EC COMPETITION  POLICY 

(presented  by the Commission) 

GREEN  PAPER  ON VERTICAL  RESTRAINTS 
IN EC COMPETITION  POLICY 

CONTENTS 

Executive  Summary 

Introduction  to  Green  Paper  and  invitation  to  third  parties  to  comment 

CH  I  - 

Structure  of  distribution 

CH  II  - 

Economic  analysis  of  vertical  restraints  and  the  internal  market 

CH  III  -  Current  procedures  and  institutional  framework 

CH  IV  -  Current  rules  for  vertical  restraints 

CH  V  -  Advantages  of  the  present  system 

CH  VI  -  Comparison  of  Community  law with  Member  State 

and  third  country  laws  applicable  to  vertical  restraints 

CH  VII  -  Results  of  fact  finding 

CH  VIII  -  Options 

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GREEN  PAPER  ON  VERTICAL  RESTRAINTS  IN  EU  COMPETITION  POLICY 

EXECUTIVE  SUMMARY 

Background  and  reasons  for  Green  Paper(1) 

1.  The  creation  of  a  single  market  is  one  of  the  main  objectives  of  the  European  Union's 
competition  policy.  Whilst  great progress has been made  further  efforts  are  still necessary  if 
the  full  economic  advantages  of  integration  are to  be  realised. 

2.  The  single  market  represents  an opportunity  for  EU firms to enter  new markets that  may 
have been previously closed to them because of government barriers. This penetration  of new 
markets takes time and investment and is risky.  The process is often  facilitated  by agreements 
between  producers  who  want  to  break  into  a new  market  and  local  distributors.  Efficient 
distribution with appropriate pre- and after-sales support is part of the competitive process that 
brings  benefits  to  consumers. 

However,  arrangements  between  producers  and  distributors  can  also  be  used  to  continue  the 
partitioning of the market and exclude new entrants who would intensify  competition and lead 
to  downward  pressure  on  prices.  Agreements  between  producers  and  distributors  (vertical 
restraints) can therefore  be used pro-competitively to promote market integration and  efficient 
distribution  or anti-competitively to block integration  and competition.  The price  differences 
between  Member  States that  are still  found  provide the incentive  for  companies to enter  new 
markets  as well  as  to  erect  barriers  against  new  competition. 

3.  Because of their  strong links to market  integration  that  can be either positive  or negative, 
vertical  restraints  have  been  of  particular  importance  to  the  Union's  competition  policy. 
Whilst  this  policy  has  been  successful  in  over  30  years  of  application  a  review  is  now 
necessary  because 

the  single  market  legislation  for  the  free  movement  of  products  is  now  largely  in  place 
the  Regulations  governing  vertical  restraints  expire,  and 
there  have been  major  changes  in methods of distribution  that may  have  implications  for 
policy. 

4.  In  addition,  as  the  world's  largest  trading  block,  the  Union  is  committed  to  the 
development of open and fair  international trade.  Just as vertical restraints can either  promote 
or  hinder  the  creation  of  a real  single  market,  they  can  be either  beneficial  or  detrimental  to 
international  trade.  The  Union's  policy  in  this  area  is  therefore  of  wider  international 
importance.  Our  experience  may  be useful  for  analysing  market  access  impediments  in  third 
countries. 

(l)Each  heading  in  this  executive  summary  corresponds  to  a chapter  in  this  Green  Paper. 

Exec,  summary  p. i 

5.  The  review  of policy  takes the  form  of a Green  Paper,  which  sets out the  relevant  issues 
as  understood  by  the  Commission(2).  Several  policy  options  (point  VIII  below)  are  set  out 
which  will  form  the  basis  for  a  wide  reaching  public  consultation  involving  Parliament, 
Member  States, the  Economic  and  Social  Committee  and  Committee  of  Regions  as  well  as 
all  interested  parties  (producers,  distributors,  workers  representatives  and  consumers).  This 
consultation  will  allow the  Commission  to  decide  on the  direction  and  form  of  future  policy 
in  the  full  light  of  all  the  facts.  This  review  and  consultation  also  constitute  the 
Commission's  response  to  the  exciting  challenge  of  taking  forward  this  key  area  of 
competition  policy  into  the  next  millennium. 

I.  Structure  of  distribution 

6.  Making  general  statements  about  distribution  or identifying  trends  is difficult  because  of 
its  size,  diversity  and  dynamism. 

-  Size.  Distribution  employs 22 m (15.6% of total employment), represents  12.9% of value 

added  and  accounts  for  4,5  m  enterprises  (29.4%  of  total)(1994  figures  EU  15). 

-  Diversity.  The structure of distribution varies considerably  from  sector to sector, not only 
in  the  degree  of  concentration  or  lack  of  it  at  the  distribution  level  but  also  in  the 
organisation  upstream to the manufacturer  (sometimes via specialised intermediaries  such 
as  wholesalers  or  importers).  In  addition  there  are  considerable  differences  in  size  and 
structure  between  Member  States  even  in  the  same  sector.  Finally  there  are  many 
different  types of distribution  systems (eg exclusive distributors dealing in one product  or 
supermarkets  stocking  30.000  lines). 

-  Dynamism.  Distribution  is  a  dynamic  sector  with  a  relatively  high  birth  and  death  rate 
of  small  companies. New  forms  of distribution  are constantly  being  tried  out.  In  certain 
sectors there has been a trend towards concentration with the development of oligopolistic 
structures. 

7.  All  industries  need  distribution  and  the  level  of  service  provided  by,  and  efficiency  of, 
distribution  are important  elements  of the competitive  process to reach customers.  Very  few 
producers distribute themselves to final customers; rather, they rely on specialised distributors. 
In  some  industries  there  are  considerable  economies  to  be  gained  from  cooperation  in  the 
supply  chain,  which  have been  facilitated  and  accelerated  by the introduction  of  Information 
Technology  and  modern  Just-in-Time  techniques.  This has  led  to  goods  being  pulled  down 
the  supply  chain  by  final  demand  rather  than  pushed  down  from  above  according  to  the 
dictates  of  production  needs.  The  result  has  been  considerable  savings  in  inventories  and 
large  reductions  in  volumes  of  unwanted  goods.  Competition  between  supply  chains  is 
growing  in  importance. 

8.  Whilst  distribution  is  a  dynamic  sector,  it  is  also  characterised  in  the  EU  by  barriers  to 
entry  particularly  when  compared  to certain  third  countries  (eg restrictions  on  opening  hours 

(2)This  Green  Paper does not cover motor vehicles, commercial  agents or licensing of intellectual  property  which 
have been  or are the object  of separate exercises.  The focus  is primarily  on vertical  restraints  in the  distribution 
chain.  However,  comments  are  also  invited  in  relation  to  upstream  linkages  in  the  supply  chain  between 
producers  and  suppliers  of  intermediary  inputs. 

Exec,  summary  p.  ii 

and  zoning  laws).  This  may  have  enhanced  the  market  power  of  certain  distributors  in 
oligopolistic  markets  and  have  implications  for  competition  policy. 

9.  Whilst  there  are  examples  of  distributors  moving  outside  their  "home" market  and  there 
are  some  European  wide  chains  emerging,  distribution,  particularly  at the retail  level,  is  still 
largely national. The Commission  asks whether this national character of distribution  coupled 
with  the  need  for  economic  integration  of  supply  chains  driven  by  economies  from 
Information  Technology  have  implications  for  policy.  The  Commission  has  always  insisted 
on the freedom  for  intermediaries to respond to price differences  between Member  States and 
engage in parallel trade as central to its policy of ensuring that distribution arrangements  have 
a  market  integration  and  not  a  market  partitioning  effect. 
In  view  of  structural  and 
organisational changes in distribution, this freedom  for intermediaries to conduct parallel trade 
may  no  longer  be  sufficient  on its own to ensure a positive outcome  for  vertical restraints on 
competition  and  market  integration  in  all  cases.  Similar  conclusions  were  drawn  from  the 
fact-finding  exercise  for  this Green  Paper  (see point  VII).  The  Commission  would  welcome 
comments  and  evidence  on  this  point  and  on the  implications  for  the  options  (point  VIII). 

II.  Economic  analysis  of vertical  restraints  and  the  single  market 

The  heated  debate  among  economists  concerning  vertical  restraints  has  calmed 
10. 
somewhat  and  a consensus  is emerging.  Vertical  restraints  are  no  longer  regarded  as per  se 
suspicious  or  per  se  pro-competitive.  Economists  are  less  willing  to  make  sweeping 
statements.  Rather,  they  rely  more  on  the  analysis  of  the  facts  of  a  case  in  question. 
However,  one  element  stands  out  : the  importance  of  market  structure  in  determining  the 
impact  of  vertical  restraints.  The  fiercer  is  interbrand  competition,  the  more  likely  are  the 
pro-competitive  and  efficiency  effects  to  outweigh  any  anti-competitive  effects  of  vertical 
restraints.  Anti-competitive  effects  are only likely  where interbrand  competition  is weak and 
there  are  barriers  to  entry  at  either  producer  or  distributor  level.  In  addition  it is  recognised 
that  contracts  in  the  distribution  chain  reduce  transaction  costs,  and  can  allow  the  potential 
efficiencies  in distribution  to be realised.  In contrast, there are cases where vertical  restraints 
raise  barriers  to  entry  or  further  dampen  horizontal  competition  in  oligopolistic  markets. 

11. 
The  questions  posed  by  vertical  restrains  are  still  highly  significant  in  terms  of 
potential  economic  gains.  Figures  showing  price  differences  between  Member  States 
demonstrate  that,  although  there  has  been  some  price  convergence,  the  potential  economic 
gains  from  further  integration  are  by  no  means  exhausted. 

12. 

Other  conclusions  that  can  be  drawn  from  recent  economic  analysis  are  that  : 

Individual  clauses  in  an  agreement  or  different  types  of  vertical  restraints  cannot  be 

considered per  se  as  having  a negative  or  positive  effect  on  competition  or  integration. 

The combination  of several vertical restraints does not necessarily  increase the probability 
of  any  anti-competitive  outcome  but  in  some  circumstances  may  make  the  outcome  more 
favourable. 

Analysis  should  concentrate  on  the  impact  on  the  market  rather  than  the  form  of  the 
agreement.  For example, whether  entry is foreclosed  by a network of agreements or whether 
the vertical  agreement coupled  with market power permit producers or distributors to practice 

Exec,  summary  p.  iii 

price  discrimination  between  different  Member  States. 

Given  the  risk  associated  with  either  entry  into  new  markets  or  significant  market 
expansion  (ie  creation  of new trade flows  that integrate  the market), consideration  should  be 
given  to  a  more  favourable  treatment  of  vertical  restraints  where  this  is  accompanied  by 
significant  material  or  immaterial  investment.  This  more  favourable  treatment  should  be 
limited  in time. 

The nature of the products, the need for  services and for investment to undertake  efficient 
distribution  and  the  needs  and  knowledge  of  consumers  may  all  be  important  elements  in 
determining  both  the  objective  efficiencies  promoted  by  vertical  restraints  and  any  anti 
competitive effects.  A list of criteria that might be used to identify  efficiencies  in distribution 
and  so  help  guide  policy  is  given  in  the  text  (pt  85).  Comments  on  the  usefulness  or 
otherwise  of  this  table  are  requested. 

It  is  clear  that  economic  theory  can  not  be  the  only  factor  in  the  design  of  policy. 
13. 
Firstly  it  is  only  one  source  of  policy.  Secondly  a  full  evaluation  of  every  individual  case 
would  be  too  costly  in  resource  terms  and  may  lead  to  legal  insecurity.  Its  use  is  therefore 
primarily  to  help  develop  basic  policy  and rules. 

III. 

Current  procedures  and  institutional  framework 

The Treaty  rules on competition  applicable to undertakings  are set out  in Articles 85-
14. 
90.  Article  85 is of particular  relevance  for  which vertical  restraints.  Article  85(1)  provides 
for  a ban  on  agreements  which  may  affect  trade and which  have as their  object  or  effect  the 
prevention,  restriction  or  distortion  of  competition.  Agreements  falling  within  its  scope  are 
void  (Article  85(2))  unless  exempted  under  Article  85(3).  Amongst  other  conditions  for 
exemption,  the  agreement  must  not  eliminate  competition  and  the  efficiency  gains  or  other 
objective  advantages  it  promotes  must  outweigh  the  disadvantages  from  the  loss  of 
competition.  Consumers  must  also  obtain  a fair  share  of  the  gains. 

15. 
The  Council, acting under Article 87 established the implementing rules for the basic 
Treaty  provisions  of  Articles  85 and  86.  These are  set out  in Regulation  17/62  which,  inter 
alia, gave the Commission exclusive competence to grant exemptions under Article  85(3) and 
set up a system  of notification  to the Commission  for  agreements  for  which an exemption  or 
negative  clearance  is  sought.  The  entry  into  force  of  Regulation  17/62 resulted  in  a  "mass" 
of  notifications  in  excess  of  30,000  in  the  early  1960's,  the  majority  of  which  concerned 
vertical  agreements.  In  view  of  the  fact  that,  under  the procedures  laid  down  in  Regulation 
17/62, the Commission is unable to adopt many formal  decisions (currently around 20 a year), 
and  that  its  capacity  to  close  cases  by  informal  comfort  letter  is also  limited  (around  150  a 
year),  in order  to  give  legal  certainty  to companies  with  vertical  agreements,  an approach  of 
"block  exemptions"  was  adopted. 

Under  Council  Regulation  19/65,  the  Commission  is  empowered  to  adopt  "block 
16. 
exemption"  Regulations  which define  certain categories of agreements which generally  fulfil 
the  conditions  of Article  85(3) and  so are exempted.  Council  Regulation  19/65 requires  that 
Commission  block exemption  Regulations contain lists of conditions which must be  fulfilled, 
the  types  of  agreements  covered,  restrictive  clauses  which  are  exempted  and  clauses  which 
must  not  be  included. 

Exec,  summary  p. iv 

17. 
The Commission has identified  different  types of distribution systems and acting under 
the powers granted to it by Council Regulation  19/65, has adopted block exemptions  to cover 
them.  These  currently  are  : 

exclusive  distribution,  where  a  producer  agrees  to  appoint  only  one  distributor  in  a 
territory  (Regulation  1983/83) 

exclusive purchasing including special provisions for beer and petrol, where the distributor 
agrees  to  purchase  the  goods  in  question  only  from  one  producer  (Regulation  1984/83) 
and 

franchising,  where  a franchisee  is allocated  an exclusive  territory  in which  to exploit  the 
know-how and intellectual property rights of the franchiser  and sell the product or  service 
in  a  standardised  format  (Regulation  4087/88). 

Where an exclusive distribution or purchasing agreement or a franchising  agreement  conforms 
to  the  block  exemption,  no  notification  is necessary  for  an  exemption. 

In  addition  the  Commission  identified  a  further  type  of  distribution  :  selective 
18. 
distribution,  whereby  distributors  are  chosen on  the  basis  of  objective  criteria  necessary  for 
the  efficient  distribution  of  the  goods  in  question.  Selected  distributors  normally  provide 
some  pre-  or  after-sales  services  and  may  only  sell  to  final  consumers  or  other  selected 
dealers.  Because  no  "mass"  problem  was perceived  for  selective  distribution,  Commission 
policy  has been  set  out  in  individual  decisions following  the procedure  of  Regulation  17/62. 

Although  the  Commission  has  a monopoly  for  applying  Art  85(3), there  is still  room 

19. 
for  a role  by  national  courts  and  competition  authorities. 

national  courts  may  apply  Articles  85(1)  and  (2)  and  86.  They  may  also  interpret  the 
provisions of the  block exemptions  to see if agreements  are covered.  They  can  therefoie 
resolve many disputes about competition rules and vertical  agreements.  The  Commission 
can  decline  to  deal  with  complaints  when  they  can  be  dealt  with  by  national  courts. 
Finally  national  courts  can  award  damages,  provisional  remedies  and  injunctions,  often 
more  quickly  than  the  Commission 

national  competition  authorities  may  apply  Articles  85(1)  and  (2)  and  86  as  long  as  the 
Commission has not opened its own procedures in respect of the same agreements.  Seven 
of  the  fifteen  Member  States have  adopted  enabling  legislation  permitting  them  to  apply 
these  powers.  Unless  the  Commission  has  granted  an  Article  85(3)  exemption  or  the 
agreements  are  covered  by  a  block  exemption,  Member  States  can  apply  their  own 
national  law  to  an  agreement. 

IV. 

Current  rules  for  vertical  restraints 

20. 
Because  of  concerns  over  threats  they  pose to  market  integration  and  the  ambiguous 
nature  of  their  impact  on  competition,  Commission  policy  has  been  to  apply  Article  85(1) 
relatively  widely  to  vertical  restraints. 
It  considers  that  both  intrabrand  and  interbrand 
competition  are  important. 

Exec,  summary  p. v 

21. 
The rules on de minimis  define  categories  of agreements that are too small to have  an 
appreciable  impact  on trade or competition  and are consequently  outside the scope of  Article 
85(1).  Above  this  level,  Article  85(1)  applies  virtually  automatically  to  certain  vertical 
agreements  which  by  their  very  nature  can  only  distort  competition,  in particular  to 

agreements which limit the freedom  of distributors to set their resale prices (Resale  Price 
Maintenance)  and 

agreements which  establish absolute territorial  protection for  exclusive distributors.  This 
point is central to Commission policy.  Not only is Article 85(1) applied, but an Art  85(3) 
exemption  is unlikely  to  be  granted.  Whilst  a distributor  may  be  allocated  an  exclusive 
territory  in  order  better  to penetrate the market  and make distribution  more efficient  and 
may be forbidden to sell or promote directly in the territory of other exclusive distributors, 
this protection must not be absolute.  The possibility of some alternative sources of supply 
must  always  exist.  Although  exclusive  distributors  may  be  forbidden  from  actively 
promoting  the  product  outside  their  allocated  exclusive  territory,  they  must  be  free  to 
respond  to  orders coming  from  outside that territory  (passive  sales).  Customers  must  be 
free  to purchase  from  any distributor  they wish  in the EU, even  outside  their territory  of 
residence, and make or arrange for personal imports. Intermediaries and other traders must 
be  able  to  buy  from  any  distributor  and  sell  in  any  other  market,  particular  in  response 
to  significant  price  differences  between  Member  States  (parallel  trade). 

If  a vertical  agreement  is neither  de minimis  nor  constitutes  one  of  the two  restraints 
22. 
automatically  triggering  the  application  of  Art  85(1),  a case by  case  analysis  is necessary  to 
see if Art  85(1) applies.  This analysis takes account of the real economic  context  of the case 
to  see if competition  is appreciably  restricted.  Even if the individual  agreement  does not  fall 
within  the  scope  of  Article  85(1), the  cumulative  impact  of  several  similar  agreements  may 
appreciably  restrict  competition.  This  is  particularly  the  case  for  networks  of  exclusive 
purchasing  agreements  where  a  large  share  of  retail  outlets  are  tied  exclusively  to  existing 
producers.  This  can  foreclose  the  market  to  new  producers  or  prevent  producers  in  other 
Member  States  from  entering  the  market. 

23. 
Because  Article  85(1)  has  been  applied  widely  to  vertical  agreements,  the  block 
exemptions  must  provide  legal  certainty  for  firms.  They  do  this by  setting  out  the  types  of 
distribution  arrangements  that  are  automatically  exempted  under  Article  85(3).  Firstly,  the 
Regulations  set  out  the  reasons  why  the  types  of  distribution  agreements  may  restrict 
competition  and  fall  under  Article  85(1),  along  with  the  general  reasons  that  permit  the 
Commission  to  grant  an  exemption  under  Article  85(3)  subject  to  certain  conditions.  A 
common  thread  through  the  three  block  exemptions  (exclusive  distribution  and  purchasing 
(including  special  arrangements  for  beer and petrol) and franchising)  as well as the policy  for 
selective  distribution  has  been  the  overriding  concern  not  to  permit  any  form  of  absolute 
territorial  protection(3). 

(3)Any  impediment  to  passive  or  parallel  trade  is  a serious  infringement  of  the  competition  rules.  When  such 
behaviour  is  detected  it  is  normally  punished  by  fines. 

Exec,  summary  p. vi 

Rules  are  also  set  out  for  what  is and  is not  permitted  with  respect  to 

- 

territorial  restrictions 
purchasing  obligations  including  tie-ins 
selling  obligations 
non-compete  clauses  and  permissable duration  of  the  contract  and 
customer  restrictions. 

Finally  the  block  exemptions  lay  down  the  conditions  that  might  lead  the  Commission  to 
withdraw  the  benefit  of  the  exemption. 

V.  Advantages  of  current  system 

24. 
The  Commission  believes  that  its  competition  policy  towards  vertical  restraints  has 
been  largely  successful.  Its  advantages  can be characterised  in  terms  of  both  substance  and 
procedure.  Its  disadvantages  and  criticisms  are  outlined  below  in  section  VII. 

substantive  advantages 

In  drawing  Article  85(1)  relatively  widely,  the  analysis  of  vertical  restraints  is 
25. 
primarily  focused  on exemptions under Article  85(3) which allow a full  economic  assessment 
of the advantages of the agreements, the impact on the structure of competition and  consumer 
welfare.  This  approach  has  allowed  the  Commission  to  strike  a balance  between  intra-  and 
interbrand  competition.  The  need  for  this  type  of  analysis  is  a reflection  of  the  ambiguous 
nature  of  the  impact  of  vertical  restraints  on  competition. 

26.  Market  integration  has  also  been  promoted  by  current  policy  which  ensures  that 
distribution  systems  can never  establish absolute territorial protection.  Thus, even though  the 
pro-competitive  gains  from  granting  territorial  exclusivity  are permitted,  vertical  agreements 
must still leave open the possibility of alternative sources of supply.  Markets cannot be sealed 
off  to  prevent  intermediaries  exploiting  price  differences. 

The policy allows freedom  to establish new and innovative forms of distribution, since 

27. 
agreements  not  already  covered  by  block  exemptions  can  be  notified  individually. 

procedural  advantages 

28. 
The  notification  system  has  been  successful  in  providing  the  Commission  with 
information  about the many types of vertical arrangements.  It provided the basic material  for 
the  Commission  to  decide  on  the  need  for  and  scope  of  block  exemptions.  These  block 
exemptions  provide  basic  legal  certainty  for  the  vast  bi  <:  of  vertical  agreements  in  the  EU 
as well as the advantages of a one-stop-shop.  Comfort  letters have successfully  dealt with any 
mass problem  for  cases not already covered by block exemptions.  This combination  of block 
exemptions plus comfort  letters has freed  scarce Commission resources to deal with cases that 
require  individual  attention,either  to  show  what  is  permitted  in  new  policy  areas  or  to 
investigate  and bring to an end serious  infringements  of the rules (eg block to parallel trade). 
Finally  the  role  of  national  courts  and  authorities  improves  the  efficiency  and  speed  of 
enforcement  in  this  area. 

Exec,  summary  p.  vii 

VI. 

Comparison  of  Community  law with  Member  State  and  third  country  law  and 
policy  applicable  to vertical  restraints. 

A  comparison  with  other  Member  States  and  third  country  law  and  policy  is  useful. 
It  also  shows  the 

29. 
It  provides  experience  of  policies  from  which  the  Union  can  profit. 
feasibility  or  otherwise  of  certain  alternatives  that  may  be  considered  as possible  options. 

30. 
However, it should always be remembered that the Commission is the only competition 
enforcement  agency in the world that has a market integration objective  in addition to that of 
maintaining  a system of undistorted  competition.  Other models are therefore  not  necessarily 
appropriate  for  the  EU. 

31. 

For  analytical  purposes  countries  were  divided  into two  groups  : 

those  with  laws that resemble  Article  85 with  its two-part  structure,  containing  a  general 
prohibition  and  a  separate  exemption  provision 

those  with  laws  not resembling  Community  law in that  a violation  is generally  based  on 
the  finding  of  some  type  of  abuse. 

32. 
Examination  shows the diversity  of arrangements  for  handling  vertical  arrangements. 
However  certain  major  aspects  in  which  these  systems  are  consistent,  and  consistent  in 
differing  from  the  Community  system,  can be  identified. 

First  they  hold  that  economic  analysis  should  be  employed  in  the  first  instance  to 
determine  whether  a  violation  is  present.  This  is  true  of  at  least  some  of  the  Member 
States  with  systems  based  on  the  Community  system  (most  notably  France  and  Italy), 
some of the Member  States with systems which differ  from  the Community  system  (most 
notably  Germany  and  the  UK)  and  third  countries  (both  the  USA  and  Canada) 

Secondly neither the large Member  States nor the USA, nor Canada, employ a  notification 
system  with  respect  to  restrictive  agreements.  This  is  because  they  believe  enforcement 
resources  can  be  put  to  better  use  in  other  ways  such  as  investigating  complaints  which 
involve vertical restraints.  The absence of a notification  system is also consistent with the 
premise  that  vertical  agreements  are a priori  lawful 

Thirdly  only  a  small  number  of  cases  involving  vertical  restraints  are  brought  in  these 
systems, which is again consistent with the notion that these restraints are a-priori  lawful. 

VII.  Results  of  fact  finding 

33. 
As  part  of  the  exercise  to  collect  background  information  for  the  Green  Paper,  the 
Commission conducted a series of interviews with manufacturers,  retailers, industry, trade and 
consumer  associations and  specialist  academics.  These interviews in no way change the need 
for,  or prejudge,  the open consultation that will follow the publication  of the Green Paper,  but 
merely  helped  the  Commission  to  identify  certain  key  issues. 

The results of the fact  finding  confirm  the findings on distribution gathered  from  basic 
34. 
source materials  (section I above).  In particular they emphasised the changes stemming  from 

Exec,  summary  p. viii 

the  introduction  of  Information  Technology  (IT).  Information  is  more  concentrated  in  the 
hands of distributors, who now constitute a more credible countervailing  power to producers. 

35. 
Great emphasis was put on the internal market not yet being completed.  This was due 
not  only  to  natural  barriers  (eg  differences  in taste,  language)  and  the  time  and  risk  it  takes 
to  overcome  them,  but  also  the  incomplete  nature  or  unsatisfactory  working  of  the  single 
market. 

36.  Many interviews  also raised questions concerning private structural  impediments to  a 
single market  and parallel trade.  It became obvious during the interviews that many  retailers 
do not take advantage of the opportunities to exploit price differences  between Member  States 
for  fear  of  spoiling  long-term  relationships  with  manufacturers,  or,  of  being  faced  with 
retaliatory  actions  such  as boycotts  or price discrimination.  Cross-border  purchasing  groups 
do not yet seem to have had a significant  impact on narrowing price differentials.  In addition, 
the  introduction  of  IT  and  the  logistical  savings  from  close  cooperation  in  the  supply  chain 
mean  that  price  differences  have  to  become  even  greater  before  parallel  trade  becomes 
economic, particularly  in view of the necessarily uncertain nature and randomness of  supplies 
obtained  from  that  source. 
IT  made  it  easier  for  producers  to  trace  and  stop  sources  of 
parallel  trade  between  national  markets.  Even  when  distributors  did  try  to  source  in  other 
(cheaper)  Member  States,  they  were  usually  refused  and  referred  back  to  the  national 
subsidiary  of the  producer  or  his exclusive  dealer  in the territory  to  which  the  distributor  in 
question  intended to import the goods.  All these practices increase the uncertainty  of parallel 
imports  and  make  them  less attractive,  with  the  consequence  that  on their  own  their  market 
integration  function  may  be  less  effective. 

37. 
Certain  criticisms  were  made  about  the  structure  and  application  of  current 
Commission  policy  for  vertical  restraints  and  block  exemptions,  as  well  as  several  requests 
for  changes  or  adaptations(4).  The  most  commonly  heard  points  were 

the  current  block  exemptions  lacked  flexibility,  have  a  strait-jacket  effect  and  are  over-
regulatory; 

too  much emphasis  is put on analysis of clauses  and not enough  on the  economic  impact 
of the agreements.  A more rigorous policy could be applied through a more active policy 
of  withdrawal  of  block  exemptions; 

one-stop-shopping  is vital, as is legal certainty which might be lost if the block  exemption 
approach  were  abandoned.  Comfort  letters  did  not  provide  a  satisfactory  solution; 

if  the  block  exemption  approach  is maintained  it  should  be  more  flexible,  less  dirigiste 

(4)In  many  respects  these  remarks  mirror  those  made  by  industry  organisations  :  UNICE  (Modernising  EU 
competition  policy  UNICE  1995), BDI (Standortfaktor  Wettbewerbspolitik  - Reformbedarf  auf deutscher  under 
europaischer Ebene,  BDI  1995) and CBI (Loosening the strait-jacket  CBI proposals for reform  of the scope and 
administration  of  Article  85. CBI  1995)  as  well  as their  legal  advisers  and  academic  lawyers  (for  example  B. 
Hawk  "System  failure:  Vertical  Restraints  and  EC Competition  Law",  Common  Market  Law  Review,  Vol.  32, 
N" 4,  1995.)-  The thrust  of these remarks  is that Article 85(1) has been too widely drawn  for  vertical  restraints, 
that  block  exemption  Regulations  have  an  over-regulatory  straitjacket  effect  and  that  the  current  operation  of 
individual  notifications  and  comfort  letters  is both  costly  and  does  not  provide  adequate  legal  certainty. 

Exec,  summary  p.  ix 

and  wider  in scope.  For  example, one non-exemptible clause  should  not  cause  nullity  of 
the whole exemption, and block exemptions could include intermediate goods and not only 
goods  for  resale  as  at  present; 

-  Commission  policy  should  promote,  not  discriminate  against,  plurality  of  distribution 
systems.  This can arise when buying groups and retail associations (or a group consisting 
of  a mixture  of  integrated  subsidiaries and non-integrated  outlets  such as franchisees)  try 
to  obtain  the  logistical  economies  obtainable  from  the  full  application  of  IT  and  the 
integration  of  the  supply  chain; 

some  interviewees  wondered  whether  it  might  be  useful  to  have  rules  against  price 
discrimination  even  for  non-dominant  companies  to  prevent  integrated  subsidiaries 
charging  different  prices  in  different  Member  States; 

the  views  on  selective  distribution  were  very  varied.  Some  were  satisfied  with  its 
operation  and  it  was  considered  as  necessary  to  distribute  certain  products.  Others  felt 
that  it  lead  to  price  rigidities,  that  price  discounters  were  excluded  even  though  they 
fulfilled  the  criteria  for  admission  to  the  system  and that  selective  distribution  was  used 
for  many  products  when  it was no longer justified.  Complaints  were  made  about  lack of 
transparency  and  objectivity  in  applying  the  criteria  for  admission  to  the  system  and 
arbitrariness  on  the  part  of  producers. 

VIII.  Options 

The Green  Paper asks for  comments on four  options set out below.  These options are 

38. 
not  exhaustive  and  individual  elements  from  the  different  options  may  be  combined. 

39. 

Some  remarks  or  questions  are  common  to  several  or  all  options 

- while the Commission acknowledges that the case law of the Community  Courts and its own 
policy  in respect  of vertical  restraints have evolved  over time and are  likely to continue to do 
so,  it envisages  only  options  which  remain  within the bounds  of Article  85 as  interpreted  by 
the  European  Courts,  and 

- absolute  territorial  protection  and  Resale  Price  Maintenance  (RPM)  which  may  affect  trade 
between  Member  States  will  not  only  continue  to  fall  per  se  within  Article  85(1)  but  are 
unlikely  to  be  exempted, 

-  the  options  apply  only  to  vertical  distribution  agreements  not  agreements  between 
competitors  although  the  latter  may  be permitted  for  certain  SMEs, 

-  the  options  apply  principally  to vertical  arrangements  for  goods for  resale.  Comments  are 
requested  on  whether  the  options  can  be  extended  to  intermediate  goods, 

-  non-opposition  procedures  are  not  an appropriate  solution  for  dealing  with  a large  number 
of  cases, 

- comments  are requested  on the use of market share thresholds either to define  eligibility  for 
exemption  or as a guide to market structures when the Commission may withdraw the  benefit 

Exec,  summary  p. x 

of  this  exemption,  and 

-  a  separate  exercise  is  currently  under  way  to  increase  the  thresholds  below  which  Article 
85(1)  does  not  apply  (Notice  on  Agreements  of  Minor  Importance  -  "de  minimis").  As  a 
working  hypothesis  for  this  exercise,  this may  be taken  to  be  10 %. 

OPTION  I  - MAINTAIN  CURRENT  SYSTEM 

The  advantages  of  the  current  approach  were  set  out  at  point  V  above.  The  special 

40. 
arrangements  for  beer  and  petrol  would  continue. 

OPTION  II  -  WIDER  BLOCK  EXEMPTIONS 

41. 
This option  consists of maintaining  the current  approach  and the  many  advantages  of 
block  exemptions  but  responding  to  criticisms  made  by  making  them  more  flexible,  cover 
more  situations  and be less regulatory.  In addition this option raises the question  of  whether 
it  is  appropriate  to  adopt  a  block  exemption  Regulation  for  selective  distribution  or  an 
independent  arbitration  procedure  for  disputes  concerning  admission  to  such  distribution 
systems.  The  special  arrangements  for  beer  and  petrol  would  also  be  made  more  flexible. 

Suggestions  as  to  the  type  of  changes  that  could  be  made  are  requested. 

OPTION  HI  - MORE  FOCUSED  BLOCK  EXEMPTIONS 

42. 
Because  considerable  price  differences  still  remain  in  the  single  market,  because 
vertical restraints can be anti-competitive  when coupled with market power and because intra 
brand  competition  is  important  especially  when  interbrand  competition  is  not  fierce,  this 
option  proposes to  limit the exemption  given by current block exemptions to companies  with 
market  shares  below  a  certain  threshold  [40%](5).  Suggestions  as to  how  to  limit  any  mass 
problem  or  legal  insecurity  that  might  arise  for  cases  above  the  threshold  include  granting 
exemption  only  on condition  that there  is no price discrimination  between  different  Member 
States.  The  special  arrangements  for  beer  and  petrol  would  also  limit  the  scope  of  the 
exemption  above  the  [40%]  market  share  threshold. 

OPTION  IV  -  REDUCE  SCOPE  OF  ARTICLE  85(1) 

As  a  response  to  the  criticisms  that  block  exemptions  have  had  a  strait-jacket  effect 
43. 
and  that  Article  85(1)  has  been  applied  too widely  to  vertical  restraints  without  reference  to 
their  economic  and  market  context,  this option  proposes  for  parties  with  a market  share  less 
than  [20  %]  to  introduce  a rebuttable  presumption  of  compatibility  with  Article  85(1)  ("the 
negative clearance presumption").  This negative clearance presumption could be implemented 
by  a Notice  and  subsequently  in the  light  of experience  acquired,  within  the  framework  of  a 
negative  clearance  regulation.  This  approach  would  apply  to  beer  and  petrol  supply  sectors 
only  in  so  far  as  the  cumulative  impact  of  parallel  networks  has  no  significant  foreclosure 
effect.  The  presumption  of  negative  clearance  could  be  rebutted  on  the  basis  of  a  market 
analysis  taking  account  of  factors  such  as  market  structure  (eg  oligopoly),  barriers  to  entry, 

(5)Below  this  threshold  it  is  possible  to  introduce  the  suggestions  for  change  in  Option  II. 

Exec,  summary  p. xi 

the degree  of  integration  of the  single market  or the cumulative  impact  of parallel  networks. 

44. 

Above  the  [20  %]  threshold  there  are two  variants  : 

-  Variant  I  : wider  block  exemptions  described  in  Option  II. 
-  Variant  II  : follow  option  III  with  wider  block  exemptions  up  to  40  % market  share  but 

inapplicability  or  limited  scope  of  block  exemptions  above  this  limit. 

The  variants  for  beer  and petrol  above  [20%]  would  be  that  described  in  options  II  and  III 
for  these  sectors. 

Exec,  summary  p.  xii 

GENERAL  REMARKS  ON  OPTIONS 

Although  the  Commission  is  willing  to  enter  into  consultation  and  discuss  possible 
45. 
changes  to policy,  it should  be  understood  that current policy  and  rules  Will be  applied  until 
such  time  as the  Commission  changes  its policy  or rules. 

It  would  be  useful  for  the  Commission  if  comments  on  the  options  addressed  the 

46. 
following  issues,  which  must  be  taken  into  account  in the  choice  of  option. 

-  substantive  concerns  of  competition  policy 

-  how  efficiently  does  the  option  distinguish  between  the  pro-  and  anti-competitive 
effects  of agreements, how far does it facilitate  market integration, how far does it permit new 
and  innovative  forms  of  distribution,  do  consumers  get  a  fair  share  of  the  benefit  and  what 
is the  attitude  to  the  use  of  market  share  thresholds  as  a guide  or  rule  in  applying  policy  ? 

-  procedural  and  legal  concerns 

- how far does the option provide legal certainty and speedy and efficient  enforcement 
without creating a "mass" problem of many individual notifications  and how far does it permit 
one-stop-shopping  and  decentralisation  ? 

-  how  far  can  the  option  be  implemented  by changing  current  Commission  practices 
(eg.  comfort  letters)  or  rules  (eg.  Commission  Regulations),  or  how  far  would  more 
substantive  legal  changes  be  needed  (eg.  Council  Regulations)  ? 

The  address  to  which  comments  should  be sent  is  given  pt 306. 

Exec,  summary  p.  xiii 

INTRODUCTION  TO  GREEN  PAPER  AND  INVITATION  TO  THIRD 
PARTIES  TO  COMMENT 

I. 

Importance  of vertical  restraints  for  Community  competition  policy 

1. 
Integration of the different  economies of the Member  States and the creation of a single 
market  are  fundamental  political  objectives  of  the  European  Union  (Article  2).  One  of  the 
instruments  designed  to  bring  about  the  integration  of  the  single  market  has  been  the 
establishment  of a system of undistorted  competition  (Article  3g).  Such integration  based  on 
undistorted  competition  is now also  widely recognised  as one of keys to European  industrial 
competitiveness  in wider  global  markets  and as a means of  accelerating  growth  and  creating 
jobs.  Community  competition  policy  therefore  unlike  competition  policy  of  Member  States 
or  our  trading  partners  has  not  only  had  to  take  account  of  the  need  for  a  system  of 
undistorted  competition  but  also  the  market  integration  objective. 

2. 
Because of this integration objective,  the relationship between producers and distributors 
and other vertical relationships in the distribution chain has been of particular concern for  EU 
competition  policy.  Producers  have vertical  relationships  with component  or  input  suppliers 
in increasingly complex supply chains.  Most producers also use a specialised distributor  often 
with  specialised  intermediaries  (eg wholesale)  to reach their  final  consumers.  These  vertical 
and  distribution  relationships  are  needed  both 
- 

to  distribute  efficiently  since  producers  do  not  always  have  the  necessary  skills  or 
knowledge  of  distribution  and  specialised  distributors  can  often  gain  economies  of  scale 
and  scope  by  distributing  several/many  products  simultaneously,  and 
to  penetrate  new  markets  since  a  relationship  with  a  local  distributor  with  specialist 
knowledge  of  the  markets  in which  the product  is to be launched  can  increase the  chance 
of  success  and  reduce  risks. 

- 

In addition to  promoting  efficiency  and market  integration,  these vertical restraints  can 

3.. 
also  give  rise  to  concerns  for  competition  policy,  for  example 
- 

the organisation of a distribution system with exclusive distributors appointed on a Member 
State basis can facilitate  the continued partitioning  of the single market on a national basis, 
or 
if  several  competing  manufacturers  tie up  all  the  existing  distributors  in  a given  territory 
by  exclusive  contracts,  this  can  create  barriers  to  entry  for  a  new  producer  to  enter  the 
market  as  he  does  not  have  access  to  a system  of  distribution. 

- 

Therefore  vertical  restraints  have been of  special  concern to  Community  competition  policy. 

II.  Coverage  of  Green  Paper 

4. 
There are very many types of distribution  systems and vertical relationships in a modern 
complex  economy.  In  fact  as  companies  increasingly  both  outsource  and  have  recourse  to 
specialist  services  such  as  distributors,  the  supply  or  logistic  chain  becomes  longer. 
Consequently  vertical  relationships  may  be  growing  in  importance.  However  for  analytical 
purpose,  the  Commission  has  distinguished  four  types  of  distribution  systems 
-  exclusive  selling  whereby  a producer  undertakes  to  sell  only  to  a particular  distributor  in 

1 

a  given  territory 

-  exclusive  buying  whereby  a distributor  undertakes only  to take  supplies of the product  in 

- 

- 

question  from  a  single  producer  (found  particular  for  beer  and  petrol) 
franchising,  whereby a franchisee  is allocated an exclusive territory in which to exploit the 
know-how  and  intellectual  property  rights  of  the  franchiser  and  sell  in  a  standardised 
format 
selective  distribution  whereby  distributors  are  chosen  on  the  basis  of  objective  criteria 
necessary for the efficient  distribution of the product in question and these distributors can 
only  sell  either  to  final  consumers  (to  whom they  normally  provide  a service  in  addition 
to  the  product),  or  to  other  selected  distributors  who  fulfil  the  objective  criteria.  This 
system  is  found  in  particular  for  highly  technical  products  -  eg  certain  consumer 
electronics  -  or  luxury  goods  - eg  perfumes. 

5. 
The  Commission  has  developed  a  specific  policy  for  these  four  types  of  distribution. 
These are set out  in Commission  Regulations  for  the first three(,) and  individual  Commission 
decisions  and  practice  for  the  last. 

6. 
The  present  Green  Paper  covers  all  vertical  relationships  in  the  distribution  chain, 
although the main focus will be the four types of distribution  listed above(2).  Because  (nearly) 
all  modern  economic  activity  involves  vertical  relationships,  Community  competition  policy 
in  this  area  is possibly  of  interest  to  a greater  number  of  companies  than  any  other  area  of 
competition  policy.  This  Green  Paper  will  not  cover  directly  questions  of  buying  power. 
Although  there  is  some  overlap,  the  issues  of  buying  power  are  best  treated  separately. 

III.  Aim  of  Green  Paper 

7. 
The  aim  of  the  Green  Paper  is  to  undertake  a  fundamental  review  of  policy  towards 
vertical  restraints.  Current  policy  has  been  developed  and  evolved  to  meet  successfully 
changing  circumstances  over  the  last  thirty  years.  However  a  review  is  now  considered 
necessary  because 
- 

the  three  Regulations  covering  exclusive  buying  and  selling  (including  the  special 
arrangements  for  beer and service-sfotions) and franchising  will expire and the review will 
help  prepare  their  renewal  with  any  changes  considered  necessary, 
the  single  market  legislation  is  now  largely  in  place.  Therefore  in  the  future  private 
barriers (ie arrangements between undertakings) may gain in importance relative to public 
barriers  as  a  cause  of  the  partitioning  of the  single  market,  and 
there  have  been  major  changes  both  in  the  structure  of  final  distribution  and  in  the 
organisation  of  logistics  (due  largely  to  the  application  of  Information  Technology),  that 
may  have  implications  for  Community  policy  towards  vertical  restraints. 

- 

- 

'''Commission  Regulations (EEC) No  1983/83,  1984/83 (see also Commission  Notice 84/c  101/02) and 4087/88. 
All  Regulations  and  Notices  and  other  basic  legal  texts  can  be  found  in  "Competition  law  in  the  European 
Communities  Vol.  1A  Rules  Applicable  to  undertakings".  European  Commission  1994. 

(2)This  Green  Paper  does  not  cover  motor  vehicles  (which  has  been  the  subject  of  a  recent  Commission 
Regulation  (1475/95) and  any vertical relationship  in the licensing of Intellectual  Property Rights or commercial 
agents (which  are the object  of separate exercises). It should  also be reminded  that  in general  Article  85 applies 
to  the  production  of  and  trade  in  agricultural  products.  However,  Article  85  (1)  does  not  apply  to  those 
arrangements  which  are  an  integral  part  of  a common  market  organisation. 

8. 
The  Green  Paper  sets  out  the  current  economic  and  legal  situation  as  regards  vertical 
restraints  as  well  as  the  results  of  a  fact  finding  exercise.  The  focus  will  be  on  market 
integration as well as more purely competition related  issues.  This exercise has permitted  the 
Commission  to  identify  a number  of  possible  options  for  the  future  thrust  of  policy  towards 
vertical  restraints,  (see  Executive  Summary  and  Chapter  VIII  for  options). 

IV.  Invitation  to  comment 

The  Commission  is  transmitting  this  Green  Paper  to  Parliament,  Member  States,  the 
9. 
Economic and  Social Committee, and the Committee of Regions.  The Commission will  enter 
into  dialogue  with  these  partners and  invites them  to  express  an  opinion  on the  Green  Paper 
and  the  options. 

10.  By publishing the Green Paper the Commission  also invites and welcomes all  interested 
third parties  - producers, distributors, consumer  organisations and worker representatives  - to 
submit comments.  Third parties are particularly  invited to submit  comments  on the  different 
options,  giving  their  reasons  along  with  all  supporting  factual/quantitative  evidence  for  their 
preferred  option.  They  are  also  requested  to  submit  their  view  on  the  means  by  which  this 
option  can  be  most  efficiently  implemented  and  what  legislative  changes  this  would  imply. 
The  Commission  may  decide  to  hold  hearings  once  the  period  for  written  comments  is 
finished  if  there  is  sufficient  interest  and  if  it considers  the  submissions  show  such  hearings 
justified. 

This  consultation  process  with  all  interested  socio-economic  partners  will  then  allow  the 
Commission  to  decide  on the  direction  and form  of policy  in this  area  in the  full  light  of  all 
the  facts  and  views. 

11.  The  address  to  which  comments  should  be  sent  is  given  pt  306. 

12.  Although  the  Commission  is  willing  to  enter  into  consultation  and  discuss  possible 
changes to policy,  it should  be understood  that current policy  and rules will  continue  to 
be  applied  until  such  time  as the  Commission  changes  its  policy  or  rules. 

Chapter  I 

STRUCTURE  OF  DISTRIBUTION 

I.. 

Introduction 

13.  The  purpose  of this chapter  is to  give a brief overview  of the distribution  sector  and to 
point  out  those  changes  and trends in the  structure  of  distribution  which  may  be relevant  for 
European  Union  (EC)  Competition  policy  on  vertical  restraints(3).  It  must  be  acknowledged 
at  the  outset  that  there  are  major  variations  in  the  structure  of  distribution  as  between  the 
Member  States  of the  EC and  that many  of the  changes  and trends  in distribution  identified 
in  this  chapter  are  difficult  to  measure  across  the  whole  of  the  EC  as  they  exist  to  varying 
degrees  in  the  different  Member  States  and  sectors  of  distribution,  nevertheless  they  are 
important  if  one  is  to  understand  the  implications  of  vertical  restrictions  on  competitive 
relationships  between  undertakings  in  the  EC  and  the  establishment  and  maintenance  of  a 
single  market.  In this chapter  the term  "distribution" is used in its widest  sense to  encompass 
all trade activities between producers and consumers, where the consumers may be processors, 
manufacturers  or  final  consumers. 

14.  The  distinction  between  manufacturing,  wholesaling  and  retail  sectors  is  becoming 
In  many  cases  today,  the  function  of  the  wholesale  distribution 
increasingly  blurred. 
sub-sector itself may be partially or fully undertaken by the manufacturer,  while some retailers 
are active in both wholesale distribution  and manufacturing.  This makes it extremely  difficult 
to  analyze  these  sectors  independently  from  each  other  or  to  interpret  statistical  data. 
Increasingly  these  sub-sectors  are  being  viewed  as  activities  which  form  part  of  a  single 
supply  chain  from  raw  material  sourcing  through  manufacturing  and  distribution  to  the  end 
user.  In  this  chapter  the  terms  "manufacturer"  and  "supplier"  are  used  synonymously  to 
describe  undertakings  which  constitute  the  first  link  in  the  supply  chain  for  a  particular 
product(suppliers  further  down  the  supply  chain  are  referred  to  as wholesalers  or  retailers). 

II. 

Importance  of  Distribution 

15.  Almost  all  goods,  and many  services, pass from  producer  to consumer  by a  process  of 
trade  and/or  distribution.  Distribution  needs  to  be  considered  not  only  as  a  sector  but  as  a 
process  or  function  within the economy.  It performs  a value  added  function  in its own  right. 
At  the  beginning  of  the  1990s,  about  4.5  million  enterprises  (29.4%  of  the  total)  in  the 
European  Community  (EC)  were  involved  in  distributive  trades,  of  which  3.4  million  were 
in  retailing  and  1,1  million  in  wholesaling(4).  This  percentage  may  vary  considerably  for 

(3)Directorate  General  XXIII of the Commission  has published  a tender for  an economic  study on  "The  structure 
of and trends  in the distributive  trades  in the European  Community"  which  is scheduled  for  completion  in  1997 
(OJ No  C 228, 2.9.95,  p. 17) This  and  any  other relevant  studies  which  subsequently  become  available,  will  be 
taken  into  consideration  during  the  consultation  process  which  follows  publication  of this  Green  Paper. 

) 

See the statistical  annex of the Commission's  "Green Paper on Commerce",  COM  (96)530  of 20.11.1996 

different  Member  States  ranging  from  about  20%  in  Denmark  and  Belgium  to  40%  in 
Greece(5).  Distributive  trades  employed  approximately  22  million  people  in  the  EC  in  1994 
(15,6%> of total  employment).  In  1991, 12,9% of all value-added  in the EC was generated  in 
the  distributive  trades  sector,  ranging  on  a national  basis  from  10%» in  Germany  to  17%> in 
Portugal. 

16.  The  long-term  viability  of  any  individual  member  of  a  supply  chain  is  becoming 
increasingly  dependent  on the  ability  of the entire chain to  compete with  the chains  of  other 
economic  operators.  For  this  reason,  members  of  a  chain  may  seek  to  influence  its 
functioning.  Complete  control  can  be  achieved  by  acquisition  of  the  other  members  of  the 
chain, i.e. vertical  integration. While many producers lack the financial  resources to sell direct 
to  final  consumers,  wholesalers  and/or  retailers  are  used  primarily  because  of  their  superior 
efficiency  in making  goods widely  available and accessible to targeted  customers.  Where, as 
is  the  case  for  most  distribution  systems,  there  is  no  vertical  integration  for  part  of  or  the 
entire  supply  chain,  relationships  can  be  governed  by vertical  restrictions,  the subject  matter 
of  this  Green  Paper. 

III.  Wholesale  distribution 

Description 

17.  Wholesaling  is a difficult  activity to define  and seems to have different  meanings  within 
different  Member  States.  Its function  has evolved over time and different  types of  wholesale 
organisations  still  coexist  in various  phases of development.  The NACE  rev.  1  classification 
defines  wholesale  distribution  as  "units  exclusively  or  primarily  engaged  in  the  resale  of 
goods  in  their  own  name  to  retailers  or  other  wholesalers,  to  manufacturers  and  others  for 
further  processing,  to  professional  users,  including  craftsmen,  or  to  other  major  users". 

18.  Wholesalers  buy  primarily  from  manufacturers  and  sell  mostly  to  retailers,  industrial 
users,  and  other  wholesalers.  Wholesalers  perform  many  value  added  functions,  including 
selling  and  promoting,  buying  and  assortment  building,  bulk-breaking,  warehousing, 
transporting, financing, risk bearing, supplying market information, and providing management 
services.  Throughout  the distribution  chain the functions  necessary  for  the economic  process 
can either be found  within independent  wholesale businesses or upstream  and downstream  in 
the distribution  chain with sales companies of suppliers or purchasing  departments  of buyers. 
Generally,  wholesalers  are  only  used  by  manufacturers  or  purchasers  where  they  are  more 
efficient  at  performing  one  or  more  of  these  value  added  functions. 

19.  Wholesale  trade  is described  by  some  analysts  as a  function  which  bridges  differences 
in  the  distribution  chain  between  place,  time  period,  quantities  and  price  requirements. 
Generally speaking, wholesaling only requires scrutiny under EC competition rules on vertical 
restraints where these  "bridges" are not open to all  goods (e.g. exclusive  distribution)  or only 
under  restrictive  arrangements  (e.g.  exclusive  purchasing  and  customer  restrictions).  The 
existence of wholesalers would  also appear to be important for market access, particularly  for 
small  and  medium  sized  enterprises.  Wholesalers  who  are  not  acting  on  an  exclusive  basis 

(5)Definitions  and  statistical  methods  for  processing  data  on  distribution  for  the  national  accounts  vary 
considerably.  A  harmonised  classification  system  (NACE  Rev.  1) only  entered  into  force  in  1993. 

may also play an important role in seeking  cheaper prices, particularly  in those sectors where 
retailers  do not  have  sufficient  resources to  engage  in imports  and  exports to  any  significant 
extent. The limited information  on wholesalers tends to indicate that they are undertakings  for 
whom  foreign  markets are more important  for  sourcing than sales, although they do  facilitate 
exports. 

Trends 

20.  The European economy  is going through a process of change which is impacting  on the 
distribution  chain  and  the  position  of  the  wholesaler.  Greater  concentration  and  integration 
in  retailing  has  altered  the  position  of  the  wholesale  trade,  the  traditional  intermediaries 
between  manufacturers  and  retail  outlets.  The  trend  has been  for  the  wholesale  functions  to 
be  absorbed  by  the  retail  chain  and  this  trend  is  likely  to  continue.  Developments  in 
information  technology  and  modern  distribution  systems  have  resulted  in  a  shift  in  control 
over  inventories from  wholesalers to retailers (e.g. access to point of sale information  enables 
the larger retail chains to forecast  demand with a high  level of accuracy,  and thus to  fine-tune 
their  inventory  levels  and  delivery  schedules).  Another  trend  has  been  the  reduction  in  the 
number  of  independent  national  distributors, particularly in  the  food  and drinks  sectors, with 
manufacturers  entrusting  national  distribution  to  wholly  owned  subsidiary  companies. 

21. 
In certain  instances, wholesalers try to offer  additional services to retailers in areas such 
as  financial  and  stock  control,  setting  up  of  new  retail  outlets,  development  of  a  common 
image  etc.  Some  wholesalers  have  set  up  so-called  voluntary  chains  which  involve  central 
purchasing  on  behalf  of  their  members.  These  link  separate  legal  undertakings  (both 
wholesalers  and  retailers)  in a manner  which  permits  them  to  compete  more  efficiently  with 
large  integrated  undertakings  by common  use of a single modern  and  efficient  supply  chain. 

22.  New  entities  have  entered  the  market  for  distribution  services  such  as  specialists  in 
warehousing  and  physical  distribution  to  provide  European  distribution  services  to  large 
manufacturers.  These  logistics  service  providers  do  not  take  part  in  the  commercial  process 
to  the  same  extent  as  wholesalers  do  (i.e.  they  do  not  take  title  to  the  products  concerned). 
These specialists can take over the logistics activities of industry and wholesalers because they 
have their information  systems in place and have locations throughout Europe.  They are  often 
part  of  large  transportation  companies  willing  to  invest  in the  creation  of  these  services  and 
their  margins  are  substantially  lower  than  those  of  the  wholesale  trade. 

23.  Faced  with  falling  rates  of  return  in wholesaling  and  integration  by  other  members  of 
the supply  chain, many wholesalers  have restructured  their  operations  in an effort  to  increase 
purchasing power, economies of scale and value add .d, while reducing operating costs. Three 
strategies  have  been  particularly  significant.  The  first  is  the  voluntary  chain  where  the 
wholesaler  has  sought  to  play  the  leading  role  in  grouping  small  buyers  together  in  central 
purchasing,  the  provision  of  common  services  or  even  a  single  trade  name.  The  second  is 
where  wholesalers  have  diversified  their  operations  into  other  markets, particularly  retailing. 
The  third  significant  strategy  is  where  wholesalers  have  moved  from  the  delivered  trade  to 
"Cash  and  Carry"  warehouses  in  which  the  small  retailer  assembles  and  pays  for  its  goods, 
and  from  which  it  performs  the  transport  function. 

In  some  sectors,  such  as pharmaceuticals,  the  European  wholesale  trade  holds  a  strong 
24. 
position  while  in  others,  its  functions  have  been  integrated  with  suppliers  or  buyers.  Some 

manufacturers  are  concentrating  on  their  core  business  while  leaving  the  other  business 
processes, including  distribution,  to specialists with local, technical  and  logistics knowledge. 
It  would  appear  that  many  wholesalers  have  increased,  or  are  in  the  process  of  increasing, 
their purchasing  power  vis-a-vis producers by developing  or extending  distribution  networks 
of  independent  traders.  The  development  by  the  wholesaler  of  services  which  benefit  their 
retailer  clients  will  also  enable  them  to  "add  value" to  their  business  activities. 

IV.  Retail  distribution 

Description 

25.  Retailing  is  a  dynamic  and  complex  sector  involving  a  range  of  company  types  of 
varying  scale.  Its  structure  reflects  the  cultural  characteristics  of  the  society  it  serves,  and 
regulatory,  sociological,  economic  and technological  developments  have  an  impact  on  retail 
trade.  Prominent among these factors are population patterns and associated social trends (e.g. 
ageing,  mobility,  urban  development  and  car  ownership).  There  is a higher  outlet  density  in 
Mediterranean  countries  (particularly  Greece,  Portugal  and  Italy)  than  in  most  of  Northern 
Europe, due to the large proportion of family  and other small retail enterprises. In  1992, 32% 
of  the  estimated  3.8  million  retail  outlets  in the  EC  were  mainly  engaged  in  food  retailing; 
the remaining 58% in non-food  retailing and  10% in motor trades. In Mediterranean countries, 
which  have  a  high  percentage  of  sole  proprietors,  the  number  of  local  outlets  is  almost  the 
same  as  that  of  retail  enterprises.  In  Northern  Europe,  however,  where  there  is  greater 
concentration,  the  difference  between  the  number  of  enterprises  and  that  of  outlets  is 
increasing  each  year,  as  a  small  number  of  enterprises  gain  control  of  increasingly  large 
networks  of  outlets.  Retail  turnover  at  constant  prices  rose  by  nearly  20%  in  the  EC 
(excluding  Spain, Italy and Portugal) from  1985 to  1991. Retailing is a major  employer  in the 
EC.  In  1990 retail  employment  in the EC was approximately  13.3 million,  representing  10%» 
of  total  employment. 

26.  Household  consumption  is  the  most  significant  determining  factor  for  retail  trade 
activity.  In  1990, tradable  consumption,  which equates to retail  spending, represented  nearly 
53% of total household consumption in the EC. Tradable consumption exceeds the EC average 
in Portugal  (66.1%)  and  Ireland  (64.6%). In these  countries, the share  of  food  products  is as 
high  as 40%, compared  with only  16.6% in Germany,  18.4% in the Netherlands, and  slightly 
over  19% in  Belgium  and  France.  Sectoral  analysis  of household  consumption  indicates  the 
persistence of wide diversity in standards of living, climate, culture and lifestyles.  Markets  for 
certain product  categories  (e.g. cosmetics, cars, luxury  goods)  are evolving  towards a certain 
degree  of homogeneity.  Regional  differences  persist  for  products  such as  food,  clothing,  and 
footwear.  Community-wide  product standardisation  is therefore  a slow process; retailers need 
to  be  very  responsive  to  local  consumer  needs  and  lifestyles. 

27.  Barriers to entry at retail level may in certain circumstances increase the anti-competitive 
aspects  of  vertical  restraints.  A  1994  Report  on Employment  Performance  by  the  McKinsey 
Global  Institute  contains  a case  study  on employment  in retailing.  The  study  identifies  weak 
performance  in job  creation  in Europe  vis-a-vis the  US and  identifies  a number  of  issues  for 
policy  makers.  In  respect  of  the  retailing  sector  the  study  concludes  that  "product  market 
restrictions  represent 
increased 
employment.  Restrictions on opening hours, excessive zoning restrictions, and the veto power 
given  existing  retailers  have  both  limited  the  creation  of  higher  value,  higher  employment 

the  most  obvious  and  easily  correctable  barriers  to 

7 

retailing  formats  and  restricted  the  shopping  opportunities  available  to  consumers.  These 
restrictions  have  not  saved  the  existing  retailers  they  were  designed  to  protect,  as  the  rapid 
decline in individual  stores in France, Germany and Japan indicates ( 
). All they have  done 
is  limit  the  creation  of  new jobs,  leading  to  lower  employment,  lower  national  income  and 
lower  value to the  consumer."  The tendency  observed  over the last few  years in the  Member 
States to relax restrictions without jeopardising objectives with a social, employment or spatial 
planning  character,  should  be  viewed  positively. 

28.  Retailing is the final link in the distribution chain between the customer and the product 
manufacturer  for the majority  of consumer goods. Even so very few manufacturers  have their 
own retail outlets.  They  leave this to  specialist retailers because of either their  economies  of 
scale  and  scope,  or  their  local  knowledge  and  capital.  In  its  simplest  form,  retailing  is  the 
activity  which  makes  goods  and  services  available  for  purchase  and  consumption  by 
consumers.  The  role  of  retailers  in  the  distribution  chain 
varies  according  to  the 
characteristics  of  the  products  and  service  concerned  and  the  type  and  nature  of  business 
relationships with others involved in the chain. Traditionally, retailing does not in itself  create 
goods  and  services,  and  consequently,  the  activities  performed  by  retailers  reflect  this  role. 
Increasingly,  retail  activity  now  "adds value" to products  and  services  and  enhances them  in 
the  eyes  of  consumers.  More  and  more  food  retail  chains  offer  a  wide  range  of  products 
under their own private labels. Some retail chains are also trying to create a brand out of their 
outlets.  In Western  European  countries, one sees more upstream  integration meaning that  an 
increasing  amount  of  fast  moving  products  are delivered  directly  from  suppliers to  the  retail 
outlets.  This trend  is motivated  by  decreased  transport  lead-times  and  improved  information 
technology. 

29.  Although  some manufacturers  offer  products that are available in all European  countries 
under  the  same  label,  and  retail  chains  are  increasingly  undertaking  cross-border  activities, 
retail  activity  is  not  a  single  homogeneous  international  entity.  In  spite  of  its  growing 
importance,  internationalisation  is  still  limited  to  certain  retail  groups  and  countries.  At  the 
beginning  of  the  1990's,  75%  of  the  EC's  international  food  retailing  operations  were 
conducted  by  only  three  countries;  Germany,  France,  and  the  United  Kingdom.  The  saying 
"retailing is a local business" is still correct, not only because of its geographically  determined 
cultural  differences,  but  also because  of  its organisation  and selling  techniques.  Many  cross-
border  retailers have had to fine tune their offers  to meet  local  consumer tastes and  continue 
to  source  on  national  as  opposed  to  pan-European  terms  and  conditions  of  business. 

Trends 

30.  Retailing  is an  extremely  dynamic  and  changing  sector  with  high  birth  and  death  rates 
particularly  amongst  smaller retailers. While independent shops supplied by wholesalers  were 
the norm  in many  countries  in the  1950s, the multiple  chains have come to play  a  significant 
role  in many  countries.  In  most  of Northern  Europe  large retailers  account  for  over  50% of 
retail  sales.  With  the  possible  exception  of  Sweden  and  Finland,  where  traders  groups  have 
ensured  the  survival  of  many  small  operators,  Northern  Europe  generally  has  the  most 
developed  network  of  shops  with  larger  outlets  handling  substantia^  volumes  of  trade.  The 
trend  towards  concentration  is more marked  in the food  than the non-food  sector.  In most  of 
Northern  Europe  the  top  five  food  retailers  in  each  Member  State  account  for  over  50%  of 
food  retailing.  In  Southern  Europe  the  retail  trade  is  less  concentrated  with  smaller  units 
prevailing. Concentration  in distribution reflects  a similar trend in manufacturing.  This is also 

evidenced  by  the  growth  of  retailers'  brands  and  the  decline  of  secondary  brands  in  certain 
Member  States(6). 

31.  The retailer  is the closest of all the institutions in the distribution chain to the  consumer 
and is increasingly  using the knowledge derived from  this position to develop activities  more 
suited  to  consumer  demands.  Companies  in  the  sector  have  recognised  that  consumers' 
perceptions  of  organisations  and  store  formats  are  central  to  the  retailing  business  and  have 
responded  accordingly.  On  the  one  hand,  for  some  retail  segments  there  is  a  trend  from  a 
mass or generalist retail offer  to a specialist retail offer,  which is particularly visible in smaller 
store formats.  The aim is to exploit specialist market segments, identify  target customers, and 
provide  a retail offer  to meet these needs.  On the other  hand,  for  many  customers  a mass or 
generalist retail offer  is still appropriate for certain needs.  The growth and spread of the large 
scale  food  store (whether  hypermarket  or  superstore)  is testament to this.  However,  even  in 
the  large  store  sector,  which  is  commonly  associated  with  mass  retailing,  specialisation  is 
taking place.  Large store specialists are developing in most retail product line areas  (furniture, 
DIY,  garden  centres,  clothing,  shoes,  records  and  toys),  and  many  department  stores  are 
adjusting  their  product  ranges,  effectively  becoming  large  textile  specialists. 

32.  Each  type  of  outlet  (e.g.  department  store, hypermarket  and  large  scale  specialist)  can 
be  compared  to  a  product  with  a  specific  life  cycle.  In  Germany,  France,  and  the  United 
Kingdom, variety stores and conventional self-service outlets (supermarkets and mini-markets) 
are  experiencing  a  decline  in  growth.  Large  scale  specialists  in  the  suburbs  and  discount 
stores,  specialist  chains  and  convenience  stores  in  the  inner  cities  are  in their  growth  stage. 
As  certain  traditional  retail  formats  disappear,  they  are replaced  by  others. The  new  formats 
are  usually  more  modern  and  better  suited  to  local  requirements.  The  stage  reached  by  a 
given  outlet  format  is  not  the  same  in  all  countries.  The  hypermarket  format  is  expanding 
rapidly  in  Southern  Europe  (Spain,  Italy,  Greece  and  Portugal),  but  its  growth  has  slowed 
down  in Northern  Europe. 

33.  Beside  marketing  as  a  main  factor  for  increasing  sales,  retail  management  focuses  on 
managing  cost  structures.  For  that  reason  great  emphasis  is placed  upon  maximising  buying 
power  benefits  through  scale and  efficiency.  Scale is related  to the  volume  of products  sold 
within  a product  range,  sales  growth  via  internal  development,  acquisition  or  collaboration. 
The  breadth  of product  ranges  and  number  of  brands  stocked  also  influences  power  as  sales 
volume is concentrated  or dispersed over the lines or brands. Efficiencies  in decision-making, 
and  centralisation  or  the  coordination  of  purchasing  also  provide  for  greater  buying  power. 
From  a competition policy perspective  it is important to recognise that these efficiencies  may 
be  lost  where  a  retailer  engages  in  parallel  trade  or  other  sources  outside  its  normal  supply 
chain(7). While purchase  prices are  important,  no retailer  looks at purchase prices in  isolation 
from  transport,  storage  and  administrative  costs, and  the  impact  of  sourcing  on supply  chain 
efficiency.  Food  retail  outlets  particularly  optimise  shelf-space  management,  which  is  a 
determining  factor  in  buying  decisions.  Closely  associated  to the cost  of buying,  particularly 
for  retailers  with  a  high  stock  turnover,  is  management  of  the  delivery  and  distribution  of 
products  to  stores  and  customers.  A  clear  trend  in  Europe  is  a  move  towards  the 

(6)On  the  issue  of  decline  in  secondary  brands,  see also  Chapter  VII. 

(7)  See  points  41  and  45  of  this  chapter  for  other  possible  efficiency  losses. 

9 

centralisation  of  physical  distribution,  where  suppliers  deliver  to  a  central  point  for 
redistribution  rather  than  direct  to  the  store.  Often 
involve  the 
this  process  may 
subcontracting  of  this  activity  to  specialist  third  party  distribution  companies. 

34.  Supply chain management  is increasingly  important in order to improve both  marketing 
and  control.  Whilst  buying  terms  and  conditions are  still  the  subject  of  negotiation  between 
suppliers and retailers, the nature  of these discussions  becomes more and more  collaborative. 
Coordination  of  the  supply  chain  has  grown,  enhanced  by  improved  information  on  product 
movement  and  the  increasing  power  of  retailers  who  regard  their  outlets  as  a  brand.  The 
combination of activities, products  and  services offered  by retailers  "adds value" to  the  basic 
product  offering  and  provides  a  means  of  differentiation  from  competitors.  The  growth  in 
retailer  advertising  reflects  this  trend,  as  does  the  development  of  retailer  brand  product 
ranges. The role of the retailer brand has changed, particularly  in the food  sector. The original 
market position of these food brands was a low price/lower quality alternative to  manufacturer 
brands;  but,  as these  brands  carry  the retailer's  name  and  are  unique  to the  store,  they  have 
been  repositioned,  their  quality  improved  and  are  increasingly  associated  with  new  product 
launches.  In  some  food  retail  chains,  private  labels  already  take  30%  of  the  fast  moving 
product  assortment. 

35.  All  of  these  operational  issues  have  been  aided  by  the  introduction  of  technology  in 
retailing  and  the  development  of  management  skills.  Initially,  technology  investment  was 
driven  by  the  desire  for  better  management  of  assets  and  associated  productivity 
improvements.  Increasingly,  a number  of retail  businesses  are  appreciating  the  potential  for 
information  technology to aid marketing and strategic management decisions.  The  acceptance 
of  universal  standards  that  allow  item  identification,  data  transmission  and  electronic 
processing have been central to the adoption of technology  in retailing.  For example, without 
agreements  on  bar-code  standards,  investment  in  item  identification  equipment  such  as 
scanning  could  not  take place.  Investment  in such technologies has provided  the  information 
infrastructure  upon  which  application  technologies  such  as  electronic  funds  transfer  at  the 
point  of sale (EFT-POS)  and  electronic  data interchange  (EDI)  are based.  These  application 
technologies provide the information  basis for improved management of retailers and  facilitate 
direct  contact  between  manufacturer,  si  ^plier,  and  public  sales  information  systems.  They 
have  also  enabled  large-scale  retailers  to  integrate  wholesale  functions  and  to  develop 
alternative  forms  of  distribution. 

36. 
In the face of competition from  large distribution undertakings, many small and medium 
sized  undertakings  have  defended  their  market  shares  by  associating  together  in  a  network 
which  grants  them  access  to  efficient  logistic  structures  and  enables  them  to  acquire  the 
necessary  critical  mass  and  economies  of  scale.  These  network  associations  of  independent 
businesses  are  primarily  structured  in  the  form  of  co-isumer  or  retailer  co-operatives, 
purchasing  groups,  voluntary  chains  between  a  wholes  er  and  many  retailers,  or  even  as 
franchises.  Franchising,  which appeared  more recently  than the other networks,  is  developing 
rapidly,  particularly  in  non-food  sectors  as  manufacturers  endeavour  to  influence  their 
distribution networks. It is most developed in France accounting for approximately  8% of total 
retail turnover  in  1991. The primary  advantage  of franchising  over the other  network  formats 
is its greater emphasis on transfer  of business know-how and the marketing  of a more  unified 
image.  In  grouping  together  under  a  common  trade  name  independent  undertakings  of 
different  sizes,  these  network  formats  offer  small  and  medium  sized  undertakings  the 
possibility  of  competing  more  efficiently  with  large  distribution  undertakings.  In  Germany 

10 

trade through  such networks  is showing  an upward  trend,  accounting  for  almost  50%) of  food 
sales in  1992. In terms  of turnover,  some of these networks  are  comparable  with  large  scale 
distribution  undertakings  (the two principal  networks of  independents  in France  are  amongst 
the  top  10 retail  groups  in  Europe). 

37.  Large  retailers  have  increasingly  developed  strategies  to  maintain  growth  and  service 
within  the  market  place.  Some  of  the  strategies  that  re-occur  in  literature,  include; 
-  Seeking  product  market  dominance.  Growth  is sought  within  the  existing  'core'  product 
market as companies seek to increase their share of sales through new outlet  development, 
or  through  cooperation  with,  or  acquisition  of,  others  operating  in  the  market. 

-  Diversification  beyond  the  original  activities  of  the  business  into  related  or  new  product 

markets. 

-  Vertical  integration,  which  may  include  activities  such  as  wholesale  functions,  the 

development  of  private  label  products,  and  brand  advertising. 

-  Geographical  diversification  outside  the  domestic  market.  More  retailers  are  trading 
internationally  and  are  using  a  wide  range  of  market  entry  strategies.  Large  retailers 
generate  a  significant  proportion  of  sales  from  overseas  activities.  The  management 
involvement  in  international  operations  will  range  from  a  financial  stake  in  existing 
companies,  to  franchising  and  everyday  management  control. 

In addition, food  retailers are entering into cross-border alliances. While these alliances do not 
appear  to  have engaged  in collective  purchasing  to any  great extent, they  often  facilitate  the 
exchange  of  information  on producers  and their  prices, which  puts  pressure  on producers  to 
justify  price differences  between Member  States. All of these strategies have enabled  retailers 
to obtain some influence  over the supply chain, to become more balanced negotiating  partners 
for  suppliers  and  in  some  cases  to  act  as  competitors  to  suppliers. 

38. 
Trends  in retailing  are not uniform  throughout  the EC and are influenced  not  only  by 
competitive  forces  within  the  industry  in  each  Member  State  but  also  by  differing  national 
customs  and  differing  national  measures  regulating  the  size,  location,  labour  costs,  opening 
hours  and  trading  practices  of  retail  formats.  There  are  major  variations  in  the  structure  of 
distribution  as between  the  Member  States of the  EC.  These  variations  arrive  not  only  from 
the  fact  that the  industry  is at  different  stages of development  in the Member  States but  also 
from  cultural  and  regulatory  differences.  While regulatory  differences  can  be  removed  over 
time,  cultural  differences  are  likely  to  persist  and  will  continue  to  restrict  the  organic 
expansion  of  retail  distributors  outside  their  national  territories.  Nevertheless,  as  retail 
internationalisation  in  its  various  forms  increases  from  its  low  base  over  the  next  decade, 
similarities  in  the  retail  formats  and  management  techniques  seen  in  different  countries  may 
grow.  Despite  these  trends,  retailing  will  however  retain  distinct  national  characteristics.  In 
most  countries  and  retail  product  markets,  the  purchasing  power  of  large  organisations  is 
growing. 

39.  While  it may  be too early  to judge  the full  impact of these trends and changes  for  EC 
Competition  policy  on vertical  restraints, it would  appear  that parallel  trade and  arbitrage  are 
still  important  issues  given  that  distribution  in  retailing  is  still  primarily  operated  along 
national  lines,  with  goods  being  sourced  on  national  terms  and  conditions. 

11 

V. 

Changes  in  distribution 

Management  and  technology 

Traditional distribution channels consisting of independent manufacturers,  wholesalers 
40. 
and retailers are in decline. These traditional  channels consist of independent  operators  acting 
at  arms'  length  and  seeking to maximize their  own profit  rather than those  of the channel  as 
a  whole. 

The  whole  nature  of  distribution  has  been  changed  by  the  information  technology 
41. 
revolution. 
Information  systems  have  forced  companies  to  re-evaluate  and  adapt  their 
commercial  relationships  with  both customers  and suppliers  and have  enabled  them  to  adopt 
more  tightly  managed  and  efficient  business  practices.  The  adoption  of  Just-in-time  (JIT) 
principles by manufacturing  industry and their extension to traditional distribution systems has 
had  a profound  effect  on  the whole  distribution  chain.  JIT  is based  upon the principle  that 
no  products  should  be  made,  no  components  ordered,  until  there  is  downstream  demand. 
Combined  with modern  technology  (i.e. computers, automation,  laser  scanning, etc.)  JIT  has 
facilitated  a shift  from  "push" (i.e. where products are manufactured  and stored in anticipation 
of  demand)  to  "pull"  (i.e.  where  consumer  demand  pulls  products  towards  the  market  and 
behind those products the flow of components is also determined by that same demand) in the 
supply  chain.  The  disadvantage  of  the  "push"  system  is  that  it  frequently  results  in  stock 
levels  being  higher  or  lower  than  necessary.  The  adoption  of  JIT  techniques  reduces  stock 
holdings and forces companies to address inefficiencies  or bottlenecks in the supply chain. JIT 
also  involves  a  shift  from  large  shipments  towards  smaller  and  more  frequent  shipments,  a 
factor  which  forces  both  suppliers  and  customers  to  search  for  consolidation  (i.e.  JIT 
deliveries  from  a number of supplies are consolidated  into one delivery, thus cutting down on 
transport  and  other  costs  arising  from  smaller  and  more  frequent  nature  of  batches). 

42. 
Quick response logistics (QR) a further  refinement of JIT, is a concept used to describe 
the capturing  of demand in as close to real time as possible and as close to the final  consumer 
as  possible.  The  implementation  of  QR  has  been  facilitated  by  electronic  data  interchange 
(EDI), efficient  replenishment (ER), bar coding, laser scanners, etc. The most recent evolution 
of  these  concepts  in retailing  is called efficient  consumer  response  (ECR), the  aim  of  which 
is to provide  consumers  with the best possible value, service and variety  of products  through 
a  collaborative  approach  to  improving  the  supply  chain. 

The  adoption  of  JIT,  QR  and  ECR  systems  in  distribution  involve  a  shift  from  the 
43. 
traditional arms'  length relationship between manufacturers,  wholesalers and retailers towards 
a relationship  of co-operation, particularly  in the area of logistics(8).  Although well  advanced 
in  the  U.S.  it  has  been  suggested  that  co-operation  between  product  manufacturers  and 
retailers  in  the  supply  chain  is  still  in  its  infancy  in  the  EC  due  to  a  number  of  obstacles, 
including  the  traditional  conflict  between  branded  manufacturers  and  large  multiples  who 

(8)  It  is also  important  to recognise  the  importance  of  logistical  integration  as a competitive  tool, particularly  in 
global  markets.  This  is  clearly  illustrated  by  the  1993  study  commissioned  by  the  European  Commission  on 
"The  Evolving  Competitive  Challenge for the European  Automotive  Components  Industry".  This  study reveals 
that  in  both  productivity  and  stock  turns  the  EC  components  industry  only  achieves  one  third  of  the  Japanese 
level.  One  of  the  principal  reasons  advanced  for  this  competitive  disadvantage  is  the  lack  of  "true  partnership 
relationships  along  the  value  chain". 

12 

would  rather  sell  their  own  branded  goods,  and  differing  national  terms  and  conditions  of 
business.  One of  the  most  commonly  quoted  examples  of co-operation  involving  a  branded 
manufacturer  and  a retailer  is the  "partnership" in the US between  Procter  &  Gamble  (P&G) 
and  Wal-Mart,  one  of  North  America's  largest  retailers,  whereby  the  former  receives  sales 
data directly  from  the  check-out counters of the latter.  P &G  uses this information  to  match 
its production  to Wal-Mart's  demand.  The benefits  of such a system  for  both  manufacturers 
and  retailers  is  that  they  can  reduce  the  levels  of  stocks  while  improving  consumer 
availability.  While the fully  integrated  "partnership" concept as between P &G  and  Wal-Mart 
may  still be  in its  infancy  in  Europe, we are now  starting to see the emergence  of  integrated 
logistics  systems  that  link  the  operations  of  the  entire  supply  chain. 

Structure 

44. 
Distribution  in  the  EC  is  undergoing  considerable  restructuring.  Changes  include 
concentration,  reduction in the number of traditional wholesalers, transformations  in the retail 
sector  and  a tendency  towards  diversification  and  internationalisation. 

This  change  can  be  summarised  as : 

-  concentration,  expressed  in  terms  of  a  reduced  number  of  larger  operators,  and  closer 

vertical  links  between  manufacturers,  wholesalers  and  retailers; 

-  development  of  networks  of  independent  traders,  primarily  in reaction  to  trends  towards 
concentration and the growth of large integrated groups. In general terms, retailers without 
dedicated  distribution  facilities  and  the  capacity  to  bypass  the  wholesaler  are  unable  to 
compete  with  the  major  retail  groups  in terms  of  price  and  service. 

-  a  general  reduction  in  the  number  of  independent  national  distributors/traditional 
wholesalers,  bearing  in  mind  the  fact  that  the  concept  of  wholesaling  seems  to  have 
different  meanings  within  different  Member  States; 

-  a series of transformations  in the retail sector, with significant  differences  between Member 
States.  Overall  a  slower  increase  than  before  in hypermarkets,  a rise  in  franchising  and  a 
proliferation  of  forms  of  distance  selling  are  prominent  features; 

-  a tendency  towards  diversification  of activities  into other  service  areas.  In addition  some 
specific  moves  towards  internationalisation,  although  from  a low base,  such that  retailing 
is  still  essentially  national. 

45. 
The changes in management  and technology described  above have major  implications 
for  EC  competition  policy  on  vertical  restraints.  Vertical  restraints  can  be  used  to  isolate 
national  markets,  particularly  where  there  are  price  differences  between  Member  States.  To 
counteract  this isolation  the Commission  has relied upon the operation  of  "parallel  trade" and 
arbitrage.  It has long been recognised  that operation of  "parallel  trade" has been  hindered  by 
public measures (e.g. different  currencies, tax systems, technical regulations and administrative 
formalities), private measures (e.g. agreements not to supply across frontiers)  and social issues 
(e.g. differing  cultural,  linguistic and consumer  preferences(9)).  However,  it now appears that 
even where "parallel trade" is theoretically possible, the inherent nature of modern  distribution 
systems may  have reduced  the  scope for the operation  of this mechanism.  While price is still 
important,  the relative  importance  of certainty  and efficiency  of  supply  has increased.  When 

<9)See  also  Chapter  II  on  the  Single  Market. 

13 

considering  whether  to engage  in parallel trade, a wholesaler  or retailer  who forms  part  of an 
efficient  supply chain must not only take into account immediate financial  considerations such 
as transport,  storage, capital  and administrative  costs, but also short to medium term  financial 
considerations arising from  the disruptive impact of such a transaction on its supply chain. For 
example  the  immediate  financial  gain  on a parallel  trade transaction  or  series of  transactions 
could  be wiped  out  where the wholesaler  or retailer  subsequently  has to ré vert to  its  original 
channel  of  supply  (e.g.  national  importer  or  manufacturer)  and  experiences  delays  in 
replenishing  stocks.  Such  delays  could  occur  simply  from  the  reduction  of  its  stocks  in 
accordance  with  JIT  principles  (i.e.  stocks  are  no  longer  manufactured  and  stored  in 
anticipation  of  demand).  The  adoption  of  such  principles  and  the  decline  in  the  number  of 
independent wholesalers are also likely to reduce the level of stocks entering the parallel  trade 
market  in  the  first  place. 

VI. 

Petrol  and  beer 

There  have  been  major  changes  in  the  distribution  of  petrol  and  beer  although 
46. 
generalisations are difficult.  These are not discussed here in detail because the situation varies 
between  Member  States.  In some Member  States the impact of liberalising  State  monopolies 
is being worked  out (Spain and Portugal  for petrol) and in some new Member  States there are 
still monopolies  (Sweden,  Finland and Austria for  alcohol). The Commission would  welcome 
evidence  in  these  sectors,  and  particularly  for  beer,  on  the  ease  or  otherwise  in  which 
producers  in one  Member  State can penetrate  a new market.  In particular  it would  be  useful 
to  analyze  whether  the  widespread  system  of  exclusive  purchasing  contracts  facilitated  or 
hindered  this  process.  Despite  these  caveats  some  general  remarks  can  be  made. 

Petrol 

47. 
The number  of petrol  stations is in decline with an increase in the average size of each 
outlet.  Super/hyper  markets  have  also  entered  with  aggressive  pricing.  They  now  represent 
a  relatively  large  share  in  some  markets  (up  to  33%).  There  has  been  the  emergence  of  no 
brand  or  own  brand  petrol.  In  addition  other  branded  entrants  have  managed  to  break  into 
national  markets.  The  investment  needed  for  a  petrol  station  has  increased  considerably 
(increased  size,  environmental  protection  and  increased  facilities).  The  relative  importance 
of the  non-petrol  aspect  of  outlets  has  increased  with  the  development  of  convenience  shops 
selling a range  of  consumer  goods in addition to car related  accessories  and  lubricants00).  In 
fact  a  much  smaller  percentage  of  off-sale  lubricants  is  sold  via  petrol  stations  due  to  the 
growth  of  special  car  accessory  store/chains.  With  the exception  of  supermarkets,  the  petrol 
stations themselves continue to be owned/leased/managed  by small (often  one-man) businesses 
linked  to the major  petrol  producers  by exclusive  p .rchase contracts.  In addition, the  station 
and  equipment  are  often  financed  by  loans  from  the  producers. 

Beer 

The  structure  of  brewing  varies  greatly  between  Member  States,  going  from  highly 
48. 
atomistic,  to  tight  oligopoly  and  even  dominance.  Local  producers  tend  to  account  for  the 
bulk  of  sales  in  each  Member  State  although  there  is an  increase  in  intermarket  penetration. 

(10^Each  petrol  company  is  developing  a  separate  standardised  format  for  its  chain  of  convenience  stores. 

14 

This  is being  accomplished  in various  ways - direct  import, though  own  subsidiary,  brewing 
under  licence,  purchase  of  or joint  venture  with  local  brewers, purchase  of  retail  outlets,  via 
wholesalers,  construct  new  brewery  or  distribution  arrangement  with  local  brewers. 

Sending  standard  beers  long  distance  to  keep  supplies  available  and  fresh  is  not 
49. 
economic.  There  is  a  tendency,  quite  strong  in  some  Member  States,  for  the proportion  of 
off-sales  (eg. via supermarkets for  consumption  off the premises) to grow relative to on-sales 
(ie for  consumption  on premises).  The outlets for  on-sales tend to be owned/leased/managed 
by  small  often  one-man  businesses.  They  are  often  but  not  always  linked  to  brewers  by 
exclusive  purchasing  contracts.  In  addition  these  on-sale  retail  outlets  can  be  financed  by 
loans  from  brewers.  This  finance  is  increasingly  important  as  the  level  of  amenity  (value 
added)  in the  outlet  has tended  to  increase  with the  subsequent  increase  in investment  costs. 
Recently  there  has been the emergence  of specialist  retail outlet management  companies  that 
own  many  outlets.  These  management  companies  negotiate  with  brewers  for  supplies. 

VII.  Conclusions  and  Questions 

50.  With  information  technology  acting  as the  catalyst,  there  is a movement  towards  the 
replacement  of  conventional  supply-driven  distribution  channels  by  planned,  professionally 
managed,  demand-driven  supply  chains  in  which  suppliers,  manufacturers,  wholesalers  and 
retailers act as an integrated  system and compete against other integrated  systems to maximize 
efficiencies  and  consumer  response.  However,  it  should  be  noted  that  "partnership"  between 
manufacturers  and  retailers  in  the  management  of  the  supply  chain  has  so  far  been  limited 
by  a number  of  obstacles,  including  differing  national  terms  and  conditions  of  business  and 
business  practices. 

51. 
From  a  competition  perspective  it  is important  to  note  that  the  shift  from  traditional 
arms'  length  relationships  towards  relationships  based  on  cooperation  may  weaken  positive 
competitive  forces  within the supply chain, such as intra-brand competition.  In addition, there 
is  a greater  potential  for  the  domination  of  such a  supply  chain  by  one  of  its  members  than 
a  traditional  distribution  channel,  resulting  in  the  imposition  of  functions  and  costs  on  the 
other operators in the chain (as opposed to the situation where all independent operators  freely 
assign  and  integrate  their  functions  on  the  basis  of  arms'  length  negotiation).  This  is  an 
important  factor  for  EC  Competition  policy, particularly  where  the party  responsible  for  the 
management  of  the  supply  chain  is  a  large  undertaking  and  the  other  parties  are  small  and 
medium  sized  enterprises  who  are  economically  dependent  on  that  supply  chain,  given  that 
it  may  result  in  a  substantial  weakening  of intra-brand  competition  and/or  foreclosure  of the 
supply  chain  to  other  producers  in the  same  or  related  markets. 

52. 
The unified  systems have together with information  technology facilitated  a shift  from 
"push"  to  "pull"  in  the  supply  chain  for  many  sectors  of  distribution.  Moreover,  in  many 
sectors there  is now  a concentration  at either  end of the supply  chain, with the  disappearance 
of  independent  intermediaries.  Both of these  factors  appear to have considerably  reduced  the 
scope for parallel trade or arbitrage even where there are substantial price differences  between 
Member  States.  The  principal 
implication  of  these  changes  for  EC  Competition  policy  on 
vertical  restraints  is  that  modern  distribution  systems  could  "copperfasten"  the  isolation  of 
national  markets,  given  that  distribution  in  retailing  is  still  nationally  orientated.  This  could 
have  major  implications  for  the  market  integration  goals  of  the  EC. 

15 

53.  We  have  been  unable  to  find  any useful  statistics  on the relative  size and  importance 
of  the  various  distribution  channels  used  by  manufacturers,  namely  exclusive  distribution, 
exclusive  purchasing,  selective  distribution,  open  distribution  and  franchising.  Nor  have  we 
been  able  to  get  useful  information  on  the  decline  in  independent  wholesalers/distributors 
across  Europe.  The  Commission  would  particularly  welcome  the  views  (backed  up  by 
statistics)  of  interested  parties  on  the  relative  size  and  importance  and  accessibility  of 
distribution channels  in Europe, and the decline in independent  wholesalers/ distributors.  We 
would  also  welcome  views  on the extent to which  new distribution  formats/systems  and  any 
of the  other  factors  identified  in this chapter  may reinforce  the isolation  of  national  markets 
by  vertical  restraints. 

16 

ECONOMIC ANALYSIS OF VERTICAL RESTRAINTS AND THE SINGLE MARKET 

Chapter  II 

I. 

Background 

54. 
The economic  analysis of vertical  restraints has in the past been the  subject  of  heated 
debate between economists.  By the early  1980's the position had swung from  regarding them 
as  suspect  for  competition,  to  a  generalised  perception  that  they  were  innocuous  for 
competition  (the  Chicago  school).  Nowadays  there  is  a  new  emerging  consensus  and 
economists are becoming more cautious in their assessment of vertical restraints with  respect 
to competition policy and less willing to make sweeping generalisations, and vertical restraints 
cannot  all  be  regarded  as  per  se  beneficial  for  competition0 ]).  However  one  element  does 
stand  out.  Current  economic  thinking  stresses  the  importance  of  market  structure  in 
determining  the  impact  of  vertical  restraints  on  competition.  The  fiercer  is  interbrand 
competition  the  more  likely  are  the  pro-competitive  and  efficiency  effects  to  outweigh  any 
anti-competitive effects  of vertical restraints.  The inverse is true when interbrand  competition 
is weak  and  there  are  significant  barriers  to  entry. 

To  further  the  interest  of  the  consumer  is  at  the  heart  of  competition  policy.  Effective 
competition is the best guarantee for  consumers to be able to buy good quality products at the 
lowest possible prices. Whenever in this green paper the introduction or protection of  effective 
competition  is mentioned,  the protection  of the consumer's  interest by ensuring  low prices is 
implied. 

55. 
This  chapter  will  give  some  of  the  conclusions  from  recent  economic  thinking  on 
vertical  restraints  that  may  be  useful  in  policy  formulation(12). 
It  will  also  examine  the 
relationship between the state of play of integration in the single market and vertical restraints. 
Even though many of the administrative and other public barriers to trade have been removed, 
we  do  not  yet  have  a  real  single  market  in  some  sectors  and  there  remain  significant  price 
differences  between  Member  States.  This  suggests  there  are  still  significant  unexploited 
economic  advantages  to  be  had  from  further  integration  and  that  the  importance  of  private 
agreements  (eg.  vertical  restraints)  to  promote  or  hinder  economic  integration  has  increased 
relative  to  that  of  public  barriers. 

II. 

The  economic  interpretation  of vertical  restraints 

56. 
As  the  relationship  between  a  producer  and  a  distributor  progresses  beyond  a  mere 
arm's  length one-off  sale, and regular and closer contacts are necessary, contracts and vertical 
restraints  can,  for  instance,  reduce  transaction  costs  between  them.  This  is  particularly  so 

(ll)In  particular  a key assumption  for  the Chicago  school  conclusions  was perfect  competition  at the  distribution 
level.  The  McKinsey  study  (op  cit)  suggests  this  not  to  be so  for  Europe  and  identified  significant  barriers  to 
entry. 

(12)This  is based on  P. Rey and F. Caballero  "The implications  of the Economic  Analysis  of Vertical  Restraints" 
forthcoming  as an  Economic  paper of the European  Commission,  DG  II, Brussels.  The reader  is also  referred 
to  Dobson  and  Waterson  "Vertical  Restraints  and  Competition  Policy",  London  1996  and  "Competition  Policy 
and  Vertical  Restraints",  OECD,  Paris  1994. 

17 

when distribution  requires  longer term relationships involving division of tasks in selling and 
promotion activities and the transfer  of intangibles such as good will and know-how.  Neither 
party has complete knowledge of the other parties'  activities.  Each has different  interests, the 
pursuit of which on an independent basis does not regularly take account of the impact on the 
interests  of  the  other  party.  Furthermore  producers  and  distributors  have  independent  and 
individual  powers  of  decision  over  the  different  elements  in the production  and  distribution 
chain.  Given  such  a  general  background  there  is scope  for  vertical  restraints  to  help  obtain 
more  efficient  outcomes  not  only  for  producers  and  distributors  but  also  for  consumers  and 
efficiency.  Co-ordination  between  producers  and  distributors  formalised  through  vertical 
restraints  can  help  firms  to  increase  their  profits  and  under  certain  circumstances,  those 
efficiency  gains  may  be  passed  on  to  consumers.  Some  examples  are  given  below. 

Vertical  restraints  as  a  means  to  improve  economic  efficiency  through  a  better  co 

ordination  between  producers  and  distributors(13) 

57. 
From  the  point  of view of  competition  policy,  it is best to  distinguish  cases  in which 
vertical restraints have an overall positive effect  from  those where they bring about a negative 
effect.  Vertical  restraints  normally  have  an  unambiguous  positive  effect  when  they  are 
properly  introduced  to  solve  co-ordination  problems,  while  their  negative  effects  tend  to 
prevail  in  the  presence  of  weak  upstream  and/or  downstream  competition. 

a) 

Vertical  co-ordination  in  pricing. 

In  the  absence  of  co-ordination,  vertical  structures  may  produce  prices  that  are  too 
58. 
high,  not  just  from  the  point  of  view  of  consumers,  but  also  from  the  point  of  view  of 
producers and distributors.  When there is some market power, producers and distributors will 
charge  "mark  ups"  to  their  respective  costs(I4).  This  "double"  mark  up,  known  as  double 
marginalisation,  results  from  the fact  that  each firm  takes  its pricing  decision  independently, 
without  taking  into  consideration  the  impact  of  its  decision  on  its  partner  in  the  vertical 
structure.  As  a  result,  the  price  is  likely  to  be  too  high,  that  is  higher  than  the  price  that 
would  maximise  the  joint  profits  of  producer  and  distributor(s).  Setting  maximum  retail 
prices  by  producers  can  help  overcome  this  situation.  Other  types  of  vertical  restraints  can 
help  solve  the  double  marginalisation  problem.  For  instance,  a two-part  tariff  with  a  fixed 
fee  and  a  wholesale  price  are  usually  lound  in  franchise  agreements.  Minimum  purchase 
obligations  can  also  solve  the  double  marginalisation  problem.  However,  these  alternative 
solutions  may  not  have  the  same  effect  from  a competition  viewpoint. 

b) 

Co-ordination  for  the  provision  of  services 

59. 
The  distribution  of  goods  and  services  usually  requires  the  provision  of  additional 
services  by  distributors.  These  may  take  the form  of  after-sales  services  such  as  guarantees 
or  maintenance  or  pre-sales  services  such  as informatio-  or  technical  assistance  to  potential 

(l3)There  are other  efficiency  gains that can be obtained  by vertical  restraints that  are also taken  into account  for 
Commission  policy  in  this  field.  They  are  listed  in  Chapter  IV  and  not  repeated  here. 

(14)  Market  power  means  that  producer  and  distributor  face  downward  sloping  demand  curves  i.e.  not  the 
horizontal  demand  curve  they  would  face  in  perfect  competition. 

18 

buyers.  This  raises  two  different  types  of problems  for  economic  efficiency05). 

Appropriation problems.  If a distributor  spends on pre-sales information  to customers 
i) 
or improves his facilities, the demand  for his product will grow and he will benefit  from  this. 
But the manufacturer  supplying the products he sells will benefit  too, as he will  sell  more  to 
the  distributor.  In these  situations, the distributors'  sales efforts  will  be below the  level  that 
they  might  reach  if  he  could  get  all  the  benefits  resulting  from  his  extra-efforts.  Vertical 
restraints can help achieve the optimal outcome for the vertical structure.  Consumers will also 
benefit  from  this  outcome  if there  is active  interbrand  competition.  Once  again,  a  franchise 
system  with  a  franchise  fee  and  a  lower  wholesale  price  can  ensure  that  the  level  of  sales 
effort  is  improved. 

Free-rider  problems.  When  several retailers sell the same brand of a given product  in 
ii) 
a  given  area,  all  retailers will  benefit  from  the  sales efforts  of one  of them.  For  example,  if 
one retailer  invests  in information  to customers in that area, or advertises that brand, all  other 
retailers  can  save  in  advertising  and  "free  ride" on the  services provided  by the  first  one.  In 
such  a  situation,  all  retailers  will  tend  to  under-invest  in those  activities.  Free-riding  can  be 
solved by the imposition of exclusive territories by the producer.  If the distributor is allocated 
an exclusive  territory  where he will  be the only  supplier  of a given  brand,  transportation  and 
transaction  costs  will  minimise  the  effects  of  "free-riding". 

Vertical  restraints  to  harm  competition. 

To  examine  the  impact  of  vertical  restraints  on  competition  we  have  to  take  into 
60. 
account  competition  not just  at the  level of distribution,  i. e. intrabrand  competition,  but  also 
at  the  level  of  competition  between  manufacturers  or  interbrand  competition.  Introducing 
vertical  restraints  can  be a means to dilute  competition  upstream  between  manufacturers  that 
do not compete  directly  face  to face  but through their retailers. In that case we can talk  about 
competition  between  "vertical  structures".  There  are  at  least  three  different  ways  in  whic; 
vertical  restraints  can  restrict  competition. 

a)  Distribution  or  manufacturing  cartels. 

61. 
Vertical  restraints  such  as  resale  price  maintenance  or  territorial  exclusivity  have  the 
intrabrand  competition  under  certain 
direct  effect  of  restricting  or  even  eliminating 
circumstances.  For  that  reason,  distributors  may  be  interested  in  the  enforcement  of 
agreements with their suppliers to restrict competition at the retailers'  level. When  distributors 
have  market  power,  this  interest  is  particularly  likely  to  emerge  if  entry  in  distribution  is 
difficult.  Vertical  restraints  can  also  be  used  to  help  enforce  collusive  price  agreements 
between manufacturers.  For instance, resale price maintenance can facilitate  collusion as price 
cuts  at  the  retail  level  are  easier  to  detect.  If  all  multibrand  retailers  maintain  the  prices 
established  by  the  producers,  cartel-breaking  cuts  in  wholesale  prices  could  not  be  reflected 
at  the  retail  level  without  a  risk  of  being  rapidly  detected.  The  impossibility  of  passing  on 
those  cuts  and  the  risk  of  retaliation  by  other  cartel  members  make  cartel  agreements  more 
stable  in  the  presence  of  resale  price  maintenance. 

°5}In  fact  economists  would  consider  other  problems  such  as  risk  shifting  or  moral  hazard  problems.  For 
simplicity,  these  issues  will  not  be  considered  here.  See  Rey  and  Caballero  op.  cit.  for  a  discussion  of  these 
issues. 

19 

b)  Vertical  restraints  as  instruments  of  foreclosure 

Vertical  restraints  can  be  introduced  with  the  effect  of  hindering  entry  by  other 
62. 
potentially  more  efficient  competing  manufacturers.  This may  clearly  be  the  case  if  existing 
producers  reach  exclusive  agreements  with  the  distributors  of  a  certain  product  available  in 
a  given  area.  The  existence  of  some  sort  of  barrier  to  entry  or  any  other  factor  limiting  the 
number of retailers is a necessary condition for this foreclosure to occur. However, this is also 
possible  if economies  of  scale  or of  scope are important  in retailing, when  signing  exclusive 
agreements  with  existing  retailers  would  make  entry  harder  for  entrants  at  the  level  of 
production, because they would have to face higher distribution costs than incumbent firms0 6). 

63. 
Nevertheless,  vertical  restraints  can also  stimulate  entry  in the  long run  under  certain 
circumstances. In so far as vertical restraints such as territorial exclusivity tend to increase the 
profits  obtained  by  vertical  structures,  they  will  also  stimulate  entry  by  other  potential 
distributors  and  producers  and  this will  promote  efficiency  in  the  long  run. 

c)  Vertical  restraints  as a means to  dilute  competition  among  producers. 

64. 
In oligopolistic markets the introduction of vertical restraints within vertical  structures 
can reduce  the degree of interbrand  competition  even further.  For  instance, exclusive  dealing 
sometimes allows manufacturers  to raise their margins by increasing wholesale prices. In that 
case, if retailing takes place under non-competitive  conditions  and there are barriers to entry, 
retailers  will  tend  to  respond  to  those  higher  wholesale  prices  by  increasing  final  prices  to 
consumers too. Alternatively, apart from  reducing intrabrand competition, exclusive territories 
implemented  by more  than  one  producer  can  also  dilute  interbrand  competition  by  reducing 
the incentives that manufacturers  have to undercut each other's prices. Thus, besides reducing 
intrabrand  competition  in  oligopoly  markets,  vertical  restraints  can  dampen  interbrand 
competition  too.(17) 

III. 

Developing  workable  rules:  Intrabrand  and  interbrand  competition 

65. 
For policy purposes, it is necessary to translate the conclusions from economic analysis 
into  workable tools  that  are both  consistent  with  EC competition  rules and  relatively  easy to 
implement  with the  necessary  legal  certainty  for  undertakings.  One element  has emerged  as 
crucial  in  analysing  the  impact  of  vertical  restraints  : the  degree  of  interbrand  competition. 
The existence of a market structure permitting a sufficient  level of competition in distribution 
and/or  production  will  be  determinant  of the  net  effect  of  vertical  restraints  on  competition. 
This  element  can  assist  in the  development  of  policy  consistent  with  economic  analysis  and 
taking  into  account  the trade  off  between  full  market  analysis  of every  case  and  the  costs  of 
such  a mechanism  of  enforcement. 

If vertical restraints such as exclusive territories or franchising  are introduced  to avoid 
66. 
the consequences  of free-riding,  competition between  retailers of the same brand may  also be 

(16) A similar  argument  can be made about the foreclosure  of producers by distributors when  the latter are strong 
enough. 

(l7)See for  instance,  Bèsanko and Perry  "Exclusive dealing  in a spatial model  of retail  competition",  International 
Journal  of  Industrial  Organisation,  vol.  12,  1994  pp.  297-329  and  Rey  and  Stiglitz  "The  role  of  exclusive 
territories  in  Producers'  competition",  Rand  Journal  of  Economics,  vol.  26,  n°  3, Autumn  1995, pp.  431-51. 

20 

restricted.  The  efficiencies  that  result  from  the  introduction  of  those  restraints  will  increase 
profits  for  the  vertical  structure.  Consumers  are  much  more  likely  to  benefit  from  the 
efficiency  gains if the vertical structure faces strong competition from  other suppliers of goods 
that can be considered  close substitutes of the product in question. If the vertical  structure has 
sufficient  market  power,  it  will  have  less  incentive  to  reduce  prices  and  will  tend  to  absorb 
any  efficiency  gains  in  the  form  of  extra  profits.  However,  a  relatively  competitive  market 
structure  can dampen  the potentially  negative effects  of the vertical  restraint  on  competition. 

67. 
The  question  of  agreements  with  multiple  vertical  restraints  also  arises.  The 
combination  of  different  clauses  in  the  same  contract  can  significantly  complicate  the 
economic assessment  of the competitive  impact of vertical  restraints. The addition of vertical 
restraints does not necessarily  imply a proportional worsening of their impact on competition. 
For  instance,  the  introduction  of  exclusive  territories  -  to  avoid free  rider  problems  for 
instance-  would  tend  to  reduce  intrabrand  competition  and  retailers  may  be  inclined  to  raise 
prices.  Moreover,  double  marginalisation  problems  are  aggravated  by  territorial  exclusivity 
as  it  gives  more  market  power  to  distributors.  To  avoid  this reaction,  which  would  result  in 
smaller output levels sold, manufacturers may combine the introduction of exclusive territories 
with  an  additional  vertical  restraint  such  as price  ceilings  or two-part  tariffs  to  avoid  double 
mark-up  problems.  In this  case, the  combination  of two  vertical  restraints  could  be  positive 
for  competition. 

68. 
However,  the  bundling  of  vertical  restraints  might  also  be  the  reflection  of  a 
combination  of motives which  might have adverse effects  for  competition.  If a given vertical 
restraint  is  introduced  to  solve  problems  of  co-ordination,  along  with  another  one  aiming 
deliberately  to  restrict  competition,  for  example  the  creation  of  a cartel,  there  might  not  be 
any  compensatory  effect  and  one  would  not  see  any  improvement  in  the  outcome  from  a 
competitive  point  of  view. 

69. 
For these reasons, the assessment of the effects  of agreements presenting a combination 
of vertical restraints has to be carried out taking into account the joint effect  of all the vertical 
restraints  included  in  the  agreement  in their  market  context.  A  one-by-one  consideration  of 
the  different  vertical  restraints  may  be  insufficient  to  reach  a  correct  evaluation  of  the 
agreement. 

IV. 

Vertical  restraints  and  the  Single  Market 

70. 
The ongoing  integration  process  of the  Single Market  adds an  extra  dimension  to the 
analysis of vertical restraints. The  1992 programme was the result of a widely held  conviction 
that  the  failure  to  achieve  a  single  market  has  been  costing  European  industry  millions  in 
unnecessary  costs and  lost opportunities. The exact title of the  Cecchini  Report,  "The cost  of 
Non-Europe"(18) is a clear reflection  of this. The efforts  made since the entry  into force  of the 
EEC  Treaty  in  1958  had  not  exhausted  by  the  mid-1980's  all  the  potential  gains  to  be 
expected  from  the full  economic integration of the economies of the Member  States. Now that 
more  steps  have  been  taken  to  eliminate  the  remaining  obstacles  to  the  free  movement  of 
goods, services and  factors  of production,  it is still apparent that further  efforts  are  necessary 
to  achieve  the  maximum  possible  level  of  integration.  This  integration  has  taken  on  wider 

(18)See  summary  in  "The  European  Challenge  -  1992.  The  Benefits  of  a  single  market".  Paolo  Cecchini 
Wildwood  House  1988, 

21 

significance,  since  a  successful  single  market  giving  European  companies  the  possibility  of 
economies of scale and scope whilst still being subject  to effective  competition,  is seen as the 
springboard  for  competitiveness  in  increasingly  global  and  competitive  world  markets. 

71. 
Competition is vital to obtain the economic gains from  the single market.  These gains 
will  only  come  if  firms  compete  more  with  each  other  and  enter  each  other's  market.  The 
gains  come  from: 
- 

static  efficiencies,  where  competitive  pressures  reduce  the  price  in  high  price  Member 
States to levels nearer those in lower priced Member  States.  Prices may be lower  because 
of  "natural"  cost  advantages  or  greater  competitive  pressures. 

-  dynamic efficiencies  where the process of increasing competitive pressures will spur  firms 
to greater  efficiencies.  The simplest to explain is perhaps economies of scale from  having 
a  larger  market,  but  many  gains  are  likely  from  the  simple  increase  in  competition 
especially  in  markets previously  sheltered  by barriers  or  not  subject  to effective  pressure 
from  competitors. 

Of  course  not  all  markets  will  become  European.  Some  will  stay  local  (e.g. 
72. 
hairdressers)  and  some  are  already  global  (e.g.  civil  aero-engines).  But  for  many  products, 
Europe will increasingly  become the relevant geographic jnarket.  Even though there  is some 
evidence of convergence  of prices of certain traded goods, there is still room for  further  gains 
from  increased  competition  and  integration. 

73. 
The  Single Market  Programme  was based on the assumption  that the removal  of non-
tariff  barriers should lead to increased competition which would in turn put pressure on prices. 
Competitive  pressures  were  expected  to  take  price  reductions  beyond  the  limits  allowed  by 
economies  of  scale,  which  would  imply  a  reduction  in  price-cost  margins  throughout  the 
economy  and  in particular,  in those  sectors more directly  affected  by the  Single  Market.  The 
final  result  from  these  competitive  pressures  on prices was expected  to be  a process  of  price 
convergence for  goods across different  Member  States, to the advantage  of consumers.  These 
predictions  were  supported  by  empirical  evidence  showing  the  existence  of  important  price 
dispersion for  a selected group of goods and services throughout the Community.  Final  prices 
to  consumers  diverged  substantially  from  country  to  country  in  1985. 

74. 
Price  differentials  remain  at present  substantial,  in particular  for  certain  goods.  More 
importantly,  there  seems  to  be  significant  price  differences  across  Member  States  in  the  net 
purchasing prices of distributors. For consumer electronics for  instance, differences  can attain 
up  to  35%  for  the  same  product/model  bought  from  the  same  manufacturer.  Despite  the 
persistence of important price differentials  between Member  States, a recent study carried  out 
in  the  framework  of  the  evaluation  of  the  Single  Market  shows  the  existence  of  a  tendency 
towards  price  convergence.  Table  1 shows  disperse  i  indexes  for  prices  of  different  groups 
of products(19). Indices have been calculated including and excluding taxes to isolate the  effects 
of indirect  taxation.  The results show that for  traded  goods and services  for  which the  single 
market  has  had  a  real  impact,  price  dispersion  has  been  reduced.  However,  for  construction 
and  energy,  where  the  impact  of  the  Single  Market  is  very  limited,  there  has  been  no  price 
the 
convergence.  Indeed, 

in  some  cases  price  dispersion  has 

increased.  With  all 

(19) The prices  in the table are retail.  Wholesale prices would be a better  indicator  for  the purposes of this  report 
but were not  available.  However the retail  prices are probably  sufficient  to show  both  any trends towards  price 
convergence  and  serve  as  an  indicator  albeit  imperfect  of  differences  in  price  still  existing  at  wholesale  level. 

22 

methodological  caveats  that  comparisons  of  this  type  require,  this  seems  to  support  the 
evidence  of  a  real  impact  of  the  Single  Market  programme  in  terms  of  price  convergence. 
Nonetheless,  substantial  price  differences  were  still  present  in  1993. 

Coefficients  of price  variation  between countries  for  selected  groupings 

Table  1 

1980 

1985 

1990 

1993 

Incl. 
taxes 

Excl 
taxes 

Incl. 
taxes 

Excl. 
t a x es 

Incl 
taxes 

Excl 
taxes 

Incl 
t a x es 

Excl. 
t a x es 

2 5 .5 
22.7 
18.4 
10.5 

15.7 
23.1 
17.2 
10.5 

14.2 
23.9 
12.5 
9.7 

15.7 

15.  7 

11.0 

19.9 
25.2 
22.1 
13.1 

20.1 

26.0 
33.0 
30.8 
18.0 

24.4 

18.8 
25.7 
20.5 
13.1 

20.1 

24.2 
31.9 
28.0 
18.0 

24.4 

19.1 
25.6 
16.1 
12.5 

14.4 

22.5 
33.7 
21.1 
14.0 

22.1 

14.2 
24.6 
10.4 
9.7 

11.0 

17.  7 
25.2 
13.3 
12.5 

14.4 

21.4 
31.5 
16.9 
14.0 

22.1 

13.5 
20.0 
19.4 
11.6 

14.0 

20.3 
24.6 
24.7 
12.2 

16.5 

22.8 
31.8 
28.0 
13.1 

23.5 

13.4 
20.2 
18.8 
11.6 

14.0 

18.5 
23.7 
22.6 
12.2 

16.5 

21.5 
30.4 
26.0 
13.1 

23.5 

12.4 
21.3 
24.3 
12.5 

19.1 

18.0 
23.4 
30.6 
12.9 

22.4 

19.6 
28.6 
31.7 
14.5 

27.4 

12.6 
21.7 
23.4 
12.5 

19.1 

16.6 
23.3 
27.4 
12.9 

22.4 

18.4 
28.3 
29.7 
14.5 

27.4 

goods 

goods 

goods 

EC-6 

Consumer 
Services 
Energy 
Capital 
goods 
Construction 

EC-9 

Consumer 
Services 
Energy 
Capital 
goods 
Construction 

EC-12 

Consumer 
Services 
Energy 
Capital 
goods 
Construction 

1 

Source  DRI,  E  de  Ghellinck  and  Horack,  Adler  and  Associates,  "Study  on  the  Emergence  of  Pan  European 
Markets".  Draft  Final  Report  february  1996. 

75.  However  the  full  possibilities  for  increased  competition  offered  by  remaining  price 
differences  will  not  be  eroded  overnight  even  for  goods  or  services  where  the  relevant 
geographic  market  might  eventually  be  expected  to  be  wider  than  a Member  State.  This  is 
because  : 

there  are  still  some  regulatory  or  administrative  obstacles  to  eliminate,  and 
there are other  "natural" frictions  (language, tastes, local customs)  which  will  continue to 
create  costs  (and  therefore  barriers)  to market  integration  as well  as  less natural  frictions 
(eg.  different  and  fluctuating  currencies). 

76. 
Even  in  the  absence  of  natural  or  other  friction  costs,  bringing  about  effective 
competition  at the  European  level  often  requires penetrating  new markets  or  increasing  sales 
efforts  even where a producer  is present in the market of another  Member  State.  This process 
often  requires considerable  investment  to build  tip distribution  networks  and  break  down  the 
entrenched  position  of  incumbents. 

23 

77.  Moreover, the success of the Single Market requires substantial changes in distribution 
in  Europe.  Two  issues  have  to  be  mentioned  in this  regard. 
-  The  fact  finding  carried  out  for  this  Green  Paper  suggests  that  modern  distribution 
influence 

techniques  may  reduce  the  possibilities  for  independent  arbitrageurs  to 
significantly  markets.  The  Commission  would  welcome  any  evidence  on  this  point. 
-  The  Commission  also  has no  evidence  on how the  integration  process  is hindered  by  the 
fact that very few European-wide distributors have expanded outside their "home" territory 
compared  with the number  of producers who sell regularly  and  significantly  outside  their 
"home"  markets.  Even  where  distributors  have  expanded  into  other  markets,  they  have 
often  taken  over  existing  local  distributors  (and  kept  the  original  names,  style,  etc.).  In 
addition,  such  distributors  seem  on  the  whole  to  source  locally  either  because  of  the 
inherent  efficiencies  of  local  logistic  supply  chains  or  of  the  insistence  of  manufacturers 
on  supplying  only  through  their  local  subsidiary  or  dealer  in  that  Member  State.  Prima 
facie,  price  discrimination  by  producers  between  Member  States would  be more  difficult 
if  they  were  confronted  with  some  European  wide  distributors.  The  Commission  would 
welcome  any  evidence  on  this  point. 

78. 
The  EC  experience  shows  that  the removal  of  non-tariff  barriers  is not  sufficient  for 
the  full  development  of  parallel  trade,  arbitrage  and  changes  in  distribution  across  Europe. 
For the complete  success  of economic  integration  it is necessary  that producers,  distributors 
and  consumers,  find  it  profitable  to  move towards the new  market  situation  and  do  not  take 
actions to  avoid  or  counteract  the  effects  of the  Single  Market  measures.  The  elimination  of 
barriers  to  trade  may  not  achieve  its  objectives  if  producers  and/or  distributors  introduce 
practices contrary to integration. Unfortunately  in many cases it is likely that they have  strong 
incentives  to  do  so. 

Producers  of  goods  and services with market power  can take advantage  of the  market 
79. 
segmentation  resulting  from  the  pre-1992  scenario  and  use  language  or  other  differences  to 
price  discriminate  across  countries.  This  will  let  them  maximise  their  profits.  On  the  other 
hand,  distributors  with  market  power  in  their  "home"  country  may  take  measures  to  avoid 
market  integration  as  this  could  weaken  their  market  position.  Moreover,  under  certain 
circumstances,  price  discrimination  can  be  maintained  after  the  elimination  of  non-tariff 
barriers  to  trade,  even  if  either  manufacturers  or  distributors  make  less  profit  after  the 
elimination  of  those  barriers.  This  may  occur  if  the  sum  of  manufacturers'  and  distributors' 
profits  is  higher  under  the  price  discriminating  scenario  than  under  arbitrage  and  market 
integration.  For  instance,  the  extra  profits  obtained  through  price  discrimination  by  the 
manufacturer  can be so high that he may find ways to reach an agreement with his distributors 
to  pass  on  to  them  part  of  those  extra  profits,  on  the  condition  that  no  parallel  trade  take 
place.  In those  cases,  both  will  have  incentives  to  maintain  the pre-integration  outcome  and 
not  become  involved  in  parallel  trade.  Thus, there  are  reasons  to  believe  that  firms  may  try 
to  introduce  practices  whenever  they  can  to  block  or  hinder  parallel  trade  and  arbitrage. 

Vertical  restraints  to  facilitate  integration. 

After  the removal of administrative and other barriers to integration, market entry does 
80. 
not  occur  automatically.  The  creation  of  new  distribution  channels  or  the  modification  of 
existing  networks  is  costly  in  terms  of  investment.  Moreover,  the  introduction  of  new 
products  or  brands  in  foreign  markets  requires  investments  in  marketing  research  efforts, 
advertising  and  infrastructure,  both  by  the  producers  and  local  retailers,  which  are  often 
subject  to  uncertainties.  In  the  context  of  economic  integration,  the  existence  of  different 

24 

currencies  and  possibilities  of  fluctuations  will  add  more  uncertainty  to  the  outcome  of  the 
investment.  These  factors  have  one  element  in  common:  the  investment  required  for  the 
introduction  of new goods and services  in a "foreign"  market  are product  and brand  specific. 
In  that  sense,  the  investor  will  not  be  able  to  recover  the  amounts  invested  if  he  does  not 
succeed  in  developing  a new market.  In economic terms, the necessary  investments to  open 
new  distribution  channels  are  considered  "sunk"  costs  ie.  costs  that  firms  cannot  recover  if 
they  fail  and  want  to  withdraw. 

81. 
This  irreversibility  coupled  with  the  highly  uncertain  nature  of  investment  decisions 
for  both producers  and  distributors  will  mean that  some decisions to  enter  new  markets  will 
be  postponed  or  even  that  entry  may  not  occur.  Firms  will  effectively  enter  and  thereby 
realise  market  integration  only  if their  expected  profits  are  well  above  the  irreversible  costs 
of entry.  However, the introduction  of vertical restraints can effectively  increase the  number 
of circumstances  under  which  entry  can occur.  For  example exclusivity  can reduce risks  for 
distributors  or facilitate  information  flows.  Therefore  in the circumstances  identified  here of 
high investment and risk, there may be a case at least temporarily for treating more  favourably 
vertical  restraints  designed  to  facilitate  new  entry  or  expand  existing  market  positions 
significantly. 

Vertical  restraints  to  hinder  integration. 

82. 
As well  as facilitating  and  speeding  up market  integration,  vertical  restraints  can  also 
hinder  the  process.  It  must  be  stressed  that  such  a  negative  outcome  is  likely  only  when 
market power is high and there are barriers to entry - in competitive markets vertical  restraints 
are  unlikely  to  hinder  integration(20). 

There  are  nevertheless  circumstances  where  vertical  restraints  can  hinder  market 

83. 
integration,  in  particular 
-  where  market  access  is  foreclosed  by  a wide-ranging  system  of  exclusive  purchasing  or 
distribution agreements restricting the distributor's freedom  to market competing products. 
-  where  interbrand  competition  is already  weak,  some vertical restraints can have the  effect 
of diminishing both intra- and interbrand competition and so hinder the integration process. 
. ' This is particularly  the case where there are significant  price differences,  giving  producers 
the  incentive  to  continue  to  price  discriminate  and  keep  markets  separate.  Vertical 
restraints  in coordination  with  some market power  facilitate  producers  ability to  maintain 
price  discrimination. 

84.  Market  integration  can also be hindered  by distributors with significant  market  power. 
If  such distributors  can  either create their own production  facilities  or constitute  a  significant 
share  of  the  sales  of  a  producer,  they  can  insist  on  vertical  restraints  with  the  effect  of 
obliging  producers  not  to  supply  newcomers.  This  power  to  oblige  producers  to  refuse  to 
supply  is  particularly  pernicious  when  it  is  practised  against  newcomers  who  might  use  a 
discount  format.  In these  circumstances  such  practices  serve  to  keep  prices  high. 

(20)The  threat  of entry  can have a beneficial  effect  even  if actual entry  does not take place.  If this threat  of entry 
is credible and potentially quick, it will suffice  to attenuate the potentially negative effects  of exclusive territories 
on  consumers.  Producers  and  distributors  with  territorial  exclusivity  will  refrain  from  exercising  any  market 
power  in  full  to  avoid  entry. 

25 

V. 

Conclusions 

This  chapter  presented  a sketch  of the findings of  the recent  economic  analysis  about 

85. 
vertical  restraints.  There  are  a number  of  conclusions  that  may  be  made: 

i.  Anti-competitive  effects  of vertical  restraints are  likely to be  insignificant  in  competitive 
markets.  Rather  their  efficiency  enhancing  effect  and  benefit  to  consumers  is  likely  to 
dominate.  Anti-competitive  effects  are only likely where interbrand  competition  is weak 
and there  are  barriers  to  entry. 

ii.  Individual  clauses  or  different  types of  vertical  restraints  cannot  be  considered  per  se  as 

having  a negative  or  positive  effect  on competition  or  integration. 

iii.  The  combination  of  several  vertical  restraints  does  not  necessarily  increase  any  anti 

competitive  effects  but  may  in  fact  make the  outcome  more  favourable. 

iv.  Analysis  should  concentrate  on  the  impact  on  the  market,  rather  than  the  form  of  the 
agreements,  for  example  whether  entry  is  foreclosed  by  a  network  of  agreements  or 
whether  the  vertical  agreement  coupled  with  market  power  permits  producers  or 
distributors  to  practise  price  discrimination  between  different  Member  States. 

v.  Given  the  risks  associated  with  either  entry  into  new  markets  or  significant  market 
expansions (ie. creation of new trade flows that integrate the market) consideration  should 
be  given  to  a  more  favourable  treatment  towards  vertical  restraints  where  this  is 
accompanied  by  significant  material  or  immaterial  investment.  This  more  favourable 
treatment  should  be  limited  in time. 

vi.  The  nature  of  the  products,  the  need  for  services  and  investment  to  undertake  efficient 
distribution  and the needs and knowledge of consumers may be all  important  elements  in 
determining  both  the  objective  efficiencies  promoted  by  vertical  restraints  and  any  anti 
competitive  effects.  The  following  Table  2  taken  from  Dobson  and  Waterson  (op  cit) 
provides  a  guide  to  the  likely  effect  of vertical  restraints  and  whether  they  are  justified. 
Comments  on this table  would  be welcome  as to how useful  it would  be  if  incorporated 
into  Guidelines  by  the  Commission. 

Although  the  policy  options  presented  in  Chapter  VIII  take  account  of  these 
86. 
conclusions,  it  should  be  made  clear  that  economic  theory  can  not  be  the  only  factor  in  the 
design of policy  for  several reasons. Firstly,  strict  economic theory  is just  one of the  sources 
of  policy.  In  practice,  the  application  ot  economic  theory  must  take  place  in  the  context  of 
the existing  legal  texts  and jurisprudence.  Secondly,  economic theories  are necessarily  based 
on  simplifying  assumptions  often  obtained  in the  context  of  stylised  theoretical  models  that 
cannot take  into  account  all  the  complexities  of  real  life  cases.  Only  an  individual  analysis 
of  each case  would  allow  the  impact  of  vertical  restraints  to be  assessed  with  any  degree  of 
certainty.  Finally,  a full  economic analysis of every  case would  be very  costly  and  might  not 
be  justified  by  gains  in  identifying  market  situations  and  vertical  restraints  that  were 
detrimental  to competition.  In those circumstances, competition policy  may  have to resort to 
relatively  simple  rules  of  thumb  and  do without  a full  er  nomic  analysis  of  every  case.  The 
costs  in  terms  of  uncertainty  for  enterprises  and  resource  needed  to  do  this  analysis  would 
not  be justified  by  the  expected  economic  gains of  this  approach. 

26 

Table 2 

The  Strength  of  the  Efficiencv  Argument  for  Vertical  Restraints  Across  Different 
Product/Distribution  Conditions 

Product/  Distribution 
Nature 

Product  complexity 

Cost  for  consumer 

Consumer  buying  habits 
Shopping  format 
Consumers'  product 
information 
Price/quality  comparability 

Perceived  product 
differentiation 
Position  in  product  life 
cycle 
Entry  barriers  in  retailing 
Economies  of  scope  in 
retailing 

More  likelihood  of 
restraints having 
efficiency gains 

Highly  complex  or 
technical 
Expensive  - large  part  of 
budget 
One-off  purchases 
Non-convenience  outlet 
Limited  knowledge 

Experience  or  credence 
goods 
Unclear  - weak  branding 

Less  likelihood  of 
restraints  having 
efficiency  gains 

Simple  or  non-technical 

Inexpensive 

Repeat  purchases 
Convenience  outlet 
Details/features  widely 
known 
Search  goods 

Clear  -  strong  branding 

New 

Established  or  mature 

Low 
Insignificant 

High 
Substantial 

' 
i 

27 

Chapter  III 

PROCEDURES  AND  INSTITUTIONAL  FRAMEWORK 

I. 

Article  85  and  the  system  instituted  by  Regulation  17/62 

Article  85 has  two-part  structure,  containing  a general  prohibition  and  an  exemption 

87. 
provision. 

Article  85(1)  imposes  a  general  prohibition  against  agreements  between  undertakings, 
decisions  by  associations  of  undertakings  and  concerted  practices  which  may  affect  trade 
between  Member  States, and which  have  "as their  object  or effect  the prevention,  restriction 
or distortion  of competition  within the common market".  It applies at and  between  all  levels 
in  the  production  and  distribution  chain,  from  research  and  development  to  retailing. 

In order to hold an agreement, decision or concerted practice in violation of Article 85(1), the 
Commission  must  establish  that  (1)  a restriction  of  competition  exists,  (2)  it  is  appreciable, 
and  (3)  it  affects  trade  between  the  Member  States. 

The  far-reaching  ban  on  restrictive  agreements  is  softened  by  the  exemption  rule  of  Article 
85(3),  which  allows  the  Commission  to  exempt  agreements  which  violate  Article  85(1)  but 
which  meet  requirements  specified  therein.  Article  85(3)  provides  the  grounds  upon  which 
an exemption  can  be granted.  To qualify,  an agreement,  decision  or concerted  practice  must 
contribute  to  improving  the production  or distribution  of  goods or  to promoting  technical  or 
economic  progress  while  allowing  consumers  a fair  share  of the  benefit;  at the  same time  it 
must not impose restrictions on the undertakings concerned which are not indispensable to the 
attainment  of  these  objectives,  nor  afford  such  undertakings  the  possibility  of  eliminating 
competition  in  respect  of  a  substantial  part  of  the  products  in  question. 

88. 
Pursuant  to  the  requirements  of  Article  87, the  Commission  submitted  a  proposal  to 
the  Council  consisting  of the procedural  rules to implement  Articles  85 and  86.  These  rules 
were  adopted  as  Regulation  17/62  by  the  Council  by  qualified  majority.  Regulation  17/62 
provides  that  a  party  may  apply  for  a  certification  by  the  Commission  that  the  transaction 
described  in  the  application  does  not  constitute  a  violation  of  Article  85(1),  known  as  a 
"negative clearance".  (Art. 2).  Moreover, it requires notification  of agreements, decisions and 
concerted  practices  prohibited  by  Article  85(1) of  the  Treaty,  and  for  which  the party  seeks 
an exemption  pursuant  to  Article  85(3).  Applications  for  negative  clearance  or  notifications 
for  exemption  must  be  made  in  accordance  with  the  rules  laid  down  in  Commission 
Regulation  3385/94. 

89. 
Under  Regulation  17/62,  the  Commission  has  sole  power  to  declare  Article  85(1) 
inapplicable by granting an exemption pursuant to Article 85(3), subject only to review by the 
Community  Courts  (Art.  9(1)). 

Regulation  17/62  attempted  to  limit  the  number  of  agreements  subject  to  the 
90. 
notification  requirement.  Art.  4(2)  provides that the notification  requirement  shall  not  apply 
to  transactions  where 

28 

(1)  the only parties  are from  a single Member  State and no imports or exports are  involved; 
(2)  not more than two undertakings are involved and the terms of the agreement meet  certain 

requirements  specified  in the  article; or 

(3)  the agreement  is limited to certain specified  objectives(21).  This provision  is designed  to 
relieve  the parties  concerned  of the  obligation to notify,  the  Commission  remaining  free 
to apply Article  85(1) to these agreements.  The practical  advantage  for  these  enterprises 
is that the Commission may examine these agreements ex officio to determine whether the 
requirements  of  Article  85(3)  are  satisfied.  If  so,  it  can  issue  a  decision  to  that  effect 
retroactive to the date the agreement was entered.  Moreover, Art. 4(2) provides that these 
agreements  may  be  notified.  The  advantage  of  making  such  a  notification  is  that,  in 
conformance  with Art.  15(5) of Regulation  17/62, it provides immunity  from  fines.  Art. 
4(2)  does not  stop the  Commission,  in the absence  of notification,  from  imposing  a  fine 
for  agreements  falling  within  this  provision. 

91.  With  respect  to  applications  for  negative  clearance  or  individual  exemption,  the 
Commission  conducts  a  case  by  case  examination.  Regulation  17/62  identifies  the 
circumstances  giving  rise to the opening  of an investigation  by the  Commission,  which  may 
follow  from  an  application  for  negative  clearance  (Art.  2),  a  notification  for  individual 
exemption  (Art.  4),  a  complaint  or  an  ex  officio  initiative  (Art.  3),  as  well  as  a  sectoral 
investigation  (Art.  12).  It also specifies  the Commission's powers of investigation,  including 
information  requests  (Art.  11), and on-site  inspections  (Art.  14) or to obtain  the assistance  of 
Member  States in conducting  investigations (Art.  13).  Art.  19 sets forth  the rights of  defence 
of  the  enterprise  during  the  course  of  these  proceedings  (including  protection  of  business 
secrets),  as  well  as  the  rights  of  third  parties  to  be  heard;  Art.  20  provides  for  the  non 
disclosure  of  professional  secrets. 

92. 
Following  an investigation, the Commission  may decide to grant  a negative  clearance 
or exemption if it finds the activities in question qualify.  On the other hand,  it may  conclude 
that  the  activities  constitute  a violation  of Article  85(1), and  issue  a statement  of  objections. 
The  statement  of  objections  consists  of  a  letter  addressed  to  the  enterprises  engaged  in  the 
activities  which  the  Commission  believes  to  violate  Article  85(1)  and  not  to  qualify  for  an 
exemption.  In the  letter,  the  Commission  must  clearly  set forth  the  essential  facts  on  which 

(21)Specificalfy,  Art.  4(2)  states  that  notification  is optional  where: 
(1) the only  parties  thereto  are undertakings  from  one Member  State and  the agreements,  decisions  or  practices 
do  not  relate  either  to  imports  or  exports  between  Member  States; 
(2)  not  more  than  two  undertakings  are  party  thereto,  and  the  agreements  only: 

(a)restrict  the freedom  of one party to the contract  in determining  the prices or conditions  of business  upon 

which  the  goods  which  he  has  obtained  from  the  other  party  to  the  contract  may  be  resold;  or 

(b)impose  restrictions  on the  exercise  of the rights  of the  assignee or user  of  industrial  property  rights  - in 
particular  patents,  utility  models,  designs  or  trade  marks  -  or  of  the  person  entitled  under  a  contract  to  the 
assignment,  or  grant,  of  the  right  to  use  a method  of  manufacture  or  knowledge  relating  to  the  use  and  to  the 
application  of  industrial  processes; 
(3)  they  have  as their  sole  object: 

(a)the  development  or  uniform  application  of  standards  or  types;  or 
(b)joint  research  and  development; 
(c)specialization  in  the  manufacture  of  products,  including  agreements  necessary  for  achieving  this, 
- where the products  which  are the subject  of specialization  do not, in a substantial  part of the single market, 
represent  more than  15% of the volume of business done in identical products or those considered  by consumers 
to  be  similar  by  reason  of  their  characteristics,  price  and  use,  and 

-  where  the  total  annual  turnover  of  the  participating  undertakings  does  not  exceed  200  million  units  of 

account. 

29 

the  objection  is  based.  Moreover,  it  must  indicate  the  documents  in  the  Commission's 
possession which constitute the proof of the alleged infraction.  The Commission must supply 
its  assessment  of  the  facts  and  specify  the  measures  it  envisages  to  adopt  as  remedies, 
including  fines.  The  Commission  allows the undertakings  to  inspect  all documents  with  the 
exception  of  internal  documents,  documents  containing  business  secrets  of  other  companies 
and  other  confidential  documents.  Regulation  99/63  requires  the  Commission  to  specify  in 
the statement of objections a deadline within which the concerned undertakings or association 
of  undertakings  may  submit  a  reply.  The  reply  may  consist  of  written  comments  with 
relevant  documents  attached.  Interested  third  parties  must  also  be  afforded  the  opportunity 
to make known their views within a given time limit.  Regulation  17/62 and Regulation  99/63 
require the Commission to afford  to all persons who have requested in their written  comments 
the opportunity to put forward  their views in an oral hearing, and the persons to be heard  shall 
be  sent  a  written  summary.  Regulation  17/62  requires  that  an  Advisory  Committee  of  the 
Member  States  shall  be  consulted  prior  to  the  taking  of  any  decision  on  an  application  or 
notification.  The  Commission  may  then  issue  its  final  decision,  which  is  published  in  all 
official  Community  languages,  specifying  the  date  from  which  it will  take  effect. 

93. 
Prior  to  issuing  a  negative  clearance  or  exemption,  the  Commission  is  required  to 
publish  a summary  of the relevant  application  or notice in  all official  Community  languages 
and  to  invite  interested  third  parties  to  submit  their  observations.  (Art.  19(3)).  Regulation 
17/62 requires that prior to issuing any decision on an application or notification,  an Advisory 
Committee of the Member  States shall be consulted.  The Commission  must publish  its final 
decision granting a negative clearance or exemption in all official  Community  languages (Art. 
21(1)). 

94.  When  the  Commission  takes  a  decision  to  grant  an  exemption,  Regulation  17/62 
requires  it  to  specify  the  effective  date  (Art  6(1)),  the  duration  of  the  exemption  and  any 
specific  conditions  or  obligations  (Art.  8(1).  Fines may  not  be  imposed  with  respect  to  acts 
falling  within  the  limits  of the  activity  in the  notification  and taking  place  after  the  date  the 
notification  was  filed  but  before  the  Commission  renders  its  decision  with  regard  to  Article 
85(3).  (Art.  15.(5)(a)). 

95. 
Only a limited  number  of  formal  decisions can be rendered  each year  for  cases  under 
Articles  85  and  86.  Formal  decisions  allow  the  Commission  to  set  forth  its  position  with 
respect  to  certain  questions  and/or  certain  sectors,  and  to  clarify  the  criteria  that  may  be 
applied  thereafter  with  respect  to  similar  agreements.  Negative  decisions  are  also  taken  in 
order  to  compel  companies  to  comply  with  Community  competition  rules  and,  in  particular 
to  impose  fines. 

In  most  cases  of  application  for  negative  csarances  or 

96. 
individual  exemption,  the 
Commission  declares by simple  letter, known as a "comfort  letter,"  (i) that it sees no  grounds 
for  action  against  an  agreement  under  Article  85  (l)(negative  clearance),  or  (ii)  that  the 
agreement  appears to fulfil  the conditions  for  granting an exemption  under Article  85(3). For 
vertical  cases  this  is on  average  accomplished  within  18 months  of  receiving  a  notification. 
Comfort  letters  carry  considerable  authority  although  they  do  not  provide  complete  legal 
certainty.  They  confine  themselves  to  indicating  the  Commission's  prima  facie  favourable 
approach  in  respect  of  the  case  under  examination. 

30 

97. 
An  exemption,  once  granted,  may  be  renewed  (Art.  8.2).  It  also  may  be  revoked  or 
amended  with  retroactive  effect,  if  the  facts  upon  which  it  was  based  have  changed,  the 
parties have committed  a breach of their obligations, it is based on incorrect  information,  was 
induced  by  deceit  or  where  it has been  abused  by the  parties.  (Art.  8.3) 

II. 

Block  exemptions  relating  to vertical  restraints 

Regulation  19/65  and  the  adoption  of  block  exemptions 

Article  87 of the Treaty  of Rome provides that the Council, acting on a proposal  from 
98. 
the  Commission,  shall  adopt  regulations  to  give  effect  to  Articles  85  and  86,  including 
regulations "to lay down detailed rules for the application of Article 85(3), taking into account 
the need to ensure effective  supervision on the one hand, and to simplify  administration to the 
greatest  possible  extent  on  the  other,"  and  "to  define,  if  need  be,  in  the  various  branches  of 
the  economy,  the  scope  of  the  provisions  of  Articles  85  and  86." 

Following  entry  into  force  of  Regulation  17/62,  the  Commission  was  faced  with  a 
99. 
"mass"  problem  of  a  large  number  of  notifications,  many  of  which  concerned  vertical 
restraints  (nearly  30,000  notified  agreements).  Accordingly,  to  facilitate  the  task  of  the 
Commission  in handling  the  large  number  of notifications  submitted,  the  Council  passed  by 
qualified  majority  Regulation  19/65 based on a proposal from  the Commission, which it made 
based  on  its  powers  under  Article  87  of  the  Treaty.  Council  Regulation  19/65  enabled  the 
Commission  "to declare by way of regulation that the provisions of Article  85(1) do not apply 
to certain categories  of agreements and concerted practices."  Regulation  19/65 specified  that 
such  regulations  shall  apply  only  to  categories  of  agreements  to which two  undertakings  are 
party,  and  involve  exclusive  distribution  agreements  and  exclusive  purchase  agreements 
involving  goods for  resale, and restrictions imposed  in relation to the assignment of  industrial 
property  rights.  (Art.  1.(1)).  The  regulation  must  specify  the  restrictions  or  clauses  which 
must  not  be  contained  in the  agreements,  and the  clauses  which  must  be  contained,  or  other 
conditions  which  must  be  satisfied.  (Art.  1(2))  Block  exemption  regulations  are  made  for 
a  specified  period  (Art.  2), and  may  be repealed  or modified  if circumstances  on which  they 
are  based  have  changed.  They  may  also  be revoked  with respect  to  a particular  case  where 
effects  incompatible with Article 85(3)'s conditions are present (Art. 7).  In order to  withdraw 
the  benefit  of  a block  exemption,  the Commission  must  follow  the  full  procedure  leading  to 
adoption  of a decision under  Article  85(1).  No mechanism  is currently  in place with  respect 
to  withdrawal  of  the  benefits  of  a  block  exemption  which  would  eliminate  the  benefit  of 
suspension  of  fines,  similar  to  the  procedure  set  forth  in Art.  15(6)  of  Regulation  17/62. 

the 

instrument  of  the  "block  exemption"  regulation  allows 

the 
100.  Accordingly, 
Commission  to  exempt  a  class  of  similar  agreements  whose  procompetitive  benefits  are 
considered to outweigh their anticompetitive effects.  An agreement of the relevant type which 
complies  with  the  terms  established  in  such  a  regulation  is  automatically  exempt  from  the 
application of Article  85(1), and need not be notified.  Agreements that meet the  requirements 
of  a block  exemption  enjoy  the  same  legal  status  and  advantages  as  those  which  have  been 
granted  an  individual  exemption. 

31 

Specific  Commission  block  exemptions  related  to vertical  restraints 

101.  Commission  Block  exemptions  cover  most  vertical  agreements,  i.e.  exclusive 
distribution (Regulation  1983/83), exclusive purchasing, with specific provisions for beer and 
petrol  (Regulation  1984/83),  franchising  (Regulation  4087/88)(22). 

102.  All  of  the  block  exemptions  for  vertical  restraints  apply  without  regard  to  market 
shares or sales.(23)  The exclusive distribution and exclusive purchasing regulations contain the 
following  provisions: an exhaustive  list of the restrictive clauses that are exempted under  the 
regulation  (the  so-called  'white  list');  a  non-exhaustive  list  of  other  provisions  that  are 
normally  not restrictive  of competition  and may appear in exempted agreements; a list of the 
restrictive  clauses  that  are  deemed  anticompetitive  and  disqualify  the  agreements  concerned 
from  qualifying  under  the  block  exemption  (the  so-called  'black  list'). 

103.  Non-opposition  procedure 

Certain block exemptions (including, with respect to vertical agreements, the franchising  block 
exemption)  contain  a  non-opposition  procedure,  which  may  be  employed  with  respect  to 
restrictions  not  clearly  exempted  and  not  black-listed,  and  is  designed  to  improve  the 
efficiency  with  which  notifications  are  handled.  Under  this  procedure,  if  the  Commission 
does  not  oppose  an  agreement  within  six  months  of  receiving  a  complete  notification,  the 
agreement  is deemed  exempted.(24)  If the  Commission  opposes  an agreement,  the  effects  of 
notification  are governed by the provisions of Regulation  17/62.  Delays may, however,  result 
from  an incomplete  notification.  In  1995, the non-opposition procedure  was used only  twice 
with  regard  to  the  franchising  block  exemption.  The  Commission  welcomes  comments  on 
why  the  non-opposition  procedures  have  not  been  used  more  extensively. 

III. 

Treatment  of  cases  concerning  selective  distribution  agreements 

104.  Selective  distribution occurs when a supplier limits sale of his products to dealers that 
he has chosen according  to specified  criteria.  This distribution  method  is generally  employed 
only  in  certain  sectors  primarily  involving  luxury  or  high-technology  products. 

105.  No block exemption applies to selective distribution agreements.  Instead,  Commission 
practice  is reflected  in approximately  20 formal  decisions taken  over the  course  of a number 
of  years,  statements  published  in  the  Commission's  annual  competition  reports  of  the 
Commission,  and judgments  of  the  Community  Courts. 

IV. 

Role  of  national  courts 

106.  Member  State  courts  hold  concurrent  power  with  the  Commission  to  apply  Articles 
85(1),  85(2)  and  86  through  the  doctrine  of  direct  effect.  The  Courts  themselves  may  not 

(22)Others  include  motor  vehicle  distribution  and  servicing  (Regulation  1475/95)  and  transfer  of  technology 
(Regulation  240/96). 

(23)The applicability of some block exemptions, including those governing specialization  agreements  and research 
and  development,  is  limited  by  market  share  thresholds. 

(24)See,  e.g.,  Regulation  4087/88  of  30 November  1988, Art.  6(1). 

32 

grant exemptions for  restrictive practices that meet the requirement  set forth  in Article  85(3). 
Only  the  Commission  can  grant  Article  85(3)  exemptions  (Regulation  17/62, Art.  9(1)). 

107.  Parties  who  bring  actions  in  national  courts  for  breaches  of  Community  competition 
law  have  access  to  all  procedural  rules  and  remedies  provided  for  by  national  law.  The 
remedies and procedural  rules applied  by national  courts for  breaches of Community  law can 
be  no  less  favourable  than  those  for  a  comparable  breach  of  national  law,  including 
provisional  remedies,  injunctions,  and,  in many  Member  States,  damages. 

In  1992,  the  Court  of  First  Instance  affirmed  the  right  of  the  Commission  to  reject 
108. 
complaints  that  raise  no  significant  Community  interest  and  where  adequate  redress  is 
available through national courts.  Pursuant to this judgment, the Commission will reject  such 
complaints,  which  it  expects  will  lead  to  significant  increase  in  the  number  of  Community 
competition  law  actions  filed  in  national  courts. 

109. 
In  1993, the Commission  issued  its "Notice on Cooperation  Between  National  Courts 
and  the  Commission  in  Applying  Articles  85  and  86  of  the  EEC  Treaty,"(25)  to  aid  national 
courts  in  dealing  with  such  cases. 
It  sets  forth  a  procedure  to  guide  national  courts  in 
applying  Community competition law.  It provides that national courts are required to respect 
the exemption  decision taken by the Commission  (para. 25) and suggests that national  courts 
may  determine  whether  agreements, decisions  or concerted  practices  fall  within  the  scope  of 
block  exemptions  (para.  26). 

V. 

Role  of  national  competition  authorities 

Enforcement  of  Community  competition  rules  by  national  authorities 

110.  Each  of  the  Member  States  has  established  a  national  authority.  Article  88  of  the 
Treaty  empowers  national  authorities  to  apply  Community  competition  law.  As  long  as the 
Commission  has  not  initiated  a procedure  under  Article  85(26),  Member  State  authorities  are 
competent  to  apply  Article  85(1)  in  accordance  with  Article  88  of  the  Treaty  of  Rome. 
(Regulation  17/62, Art. 9(3)).  However, they may not grant an exemption pursuant to Article 
85(3)  nor  withdraw  the  benefits  of  a  block  exemption.  As  discussed  above,  only  the 
Commission  has  power  to  grant  such  an exemption.  Block  exemptions  are, as noted  above, 
directly  applicable  and  thus  may  be  applied  by  national  authorities. 

111.  National enabling  legislation is required to allow national  authorities to apply  Articles 
85 and  86, and to  establish  that national  remedies apply.  Eight  Member  States have  adopted 
such  enabling  legislation;(27)  seven  have  not.(28)  Remedies  vary  considerably  among  the 
Member  States, based  on differences  in law and traditions.  Thus, the position of parties  vary 

(25)O.J.  C39/05  (Feb.  13,  1993). 

(26)Regulation  17/62, Article 9(3)provides that the Member States remain competent to apply Article 85(1) so long 
as the Commission  has not initiated any procedure under Articles 2 (issuance of negative clearant), 3 (termination 
of  infringements)  or  6  (issuance  of  decision  pursuant  to  Article  85(3)). 

(27)Germany,  France,  Italy,  Spain,  Belgium,  Greece,  Portugal  and  Austria. 

(28)Denmark,  Finland,  Ireland,  Luxembourg,  the Netherlands,  Sweden  and  the  United  Kingdom. 

33 

depending  on  the  remedies  offered  by  the  Member  State  in  which  the  action  is  brought. 

112.  The  Commission  has  recently  published  a  draft  Notice  regarding  the  application  of 
Articles  85(1)  (and  86)  by  national  authorities(29).  Like  the  notice  with  respect  to  national 
courts, this notice will provide for  information  and consultation  between the Commission  and 
the  national  authorities  when  the  latter  apply  these  articles  or  national  competition  law  in 
cross-border  cases. 

Concurrent  application  of  national  competition  laws  by  national  authorities 

In the years  between entry  into  force  of the  Treaty  of  Rome  in  1958 and  the  present, 
113. 
each Member  State enacted some form of competition law, or modified  already existing  laws, 
with  respect  to  restrictions  of  competition  and  abuses  of  dominant  position.  Chapter  VI 
discusses  the  Member  States'  laws  on  vertical  restraints. 

114.  National  competition  rules  usually  apply  in  situations  where  tne  primary  effects  of  a 
vertical  practice  are  felt  in  markets within  the  boundaries  of  a  single  Member  State. 

115.  National  competition  authorities are empowered  to enforce  their  national  competition 
laws.  In  general,  they  have  powers  to  investigate,  make  decisions,  and  impose  sanctions. 
Administrative  decisions  of the  competition  authorities  are  subject  in  some  circumstances  to 
review  by  a national  court.  The  investigatory  powers  in  some  Member  States  are  generally 
more  extensive  than  those  of  the Commission  in two  important  respects: many  of them  may 
direct their investigatory efforts  against individuals and sanction them for  failure to cooperate, 
including  imprisonment  for  failure  to  obey  a  court  order;  and  they  have  police  powers, 
including  the  possibility  to  obtain  search  warrants,  which  they  may  use  to  support  their 
efforts  to  make  on-site  inspections. 

116.  Member  State  laws  may  not  be  applied  in  conflict  with  Community  law.  If  the 
Commission  has  made  a decision  that Article  85(1)  does not  apply,  the  national  authority  is 
free  to  decide that  national  competition  law has been violated.  However,  if the  Commission 
grants  an exemption  pursuant  to Article  85(3), the national  authority  cannot  reach  a  contrary 
result,  under  Community  law  or  national  law. 

(29) 

O JC  262  of  10.9.1996 

34 

Chapter  IV 

CURRENT  RULES  GOVERNING  VERTICAL  RESTRAINTS 

I. 

The  scope  of  Article  85 

117.  As we have already seen, distribution agreements raise special difficulties  because they 
are usually something of a two-edged  sword. They can be a useful  way for  a firm to penetrate 
a  new  market  and  to  sell  its  products  effectively.  But  they  can  also  be  used  to  prevent 
outsiders  from  entering  a  market,  and  so  perpetuate  the  compartmentalization  of  the 
Community.  This  equivocal  character  has  given  rise  to  considerable  discussion,  particularly 
regarding  the  extent  to  which  vertical  restrictions  are  caught  by  Article  85. 

In  Consten  and  Grundig,  one  of  its  earliest  judgments  on  the  subject, 

the 
118. 
Court  of  Justice  found  that  Article  85  applied  both to  horizontal  and  to  vertical  agreements; 
regarding  vertical  agreements  the  Court  had  this to  say: 

Although  competition  between  producers  is  generally  more  noticeable  than  that 
between  distributors  of  the  same make,  it does  not thereby  follow  that  an  agreement 
tending  to  restrict  the  latter  kind  of  competition  should  escape  the  prohibition  of 
Article  85(1)  merely  because  it  might  increase  the  former.(30) 

For  a proper  understanding  of  this  approach  the  competition  rules  of the  EC  Treaty  have  to 
be seen in context. Interpreting their purpose in the light of the general principles in Articles  2 
and  3(g) of the Treaty,  we can say that they are intended  not only  to safeguard  the  efficiency 
of  the  economic  system  but  also  to  promote  the  integration  of  the  national  economies  so  as 
to  establish  a  single  market.  This  means,  on the  one  hand,  that  competition  in  goods  traded 
under  the  same  brand  has  to  be  looked  at  on  its  own  merits.  On  the  other  hand,  however, 
given  the  market  integration  objective,  any  system  of  absolute  territorial  protection  will 
normally  be  judged  contrary  to  what  is  a  fundamental  objective  of  the  Treaty,  and  will 
consequently  be  held  incompatible  with  the  competition  rules.  We  will  see  in  more  detail 
below  that  this  aspect  is  of  particular  importance  in  the  competition  policy  pursued  by  the 
Commission,  which  has  consistently  sought  to  prevent  agreements  which  might  impede 
parallel  trade  inside  a  dealer's  authorized  territory  and  passive  sales  outside  it. 

119.  This  chapter  looks  at  the  rules  laid  down  in  the  distribution  block  exemption 
regulations  and  at  the  principles  applied  to  selective  distribution  agreements.  Given  the 
complexity  of  the  subject-matter  it  has  not  been  possible  to  carry  out  a detailed  analysis  of 
cases  in  which  Article  85(3)  has  been  applied  to  individual  agreements  outside  the  block 
exemption  regulations.  Nor  has any  attempt  been  made  to  provide  an  exhaustive  description 
of  the  Commission's  practice  with  regard  to  the  general  applicability  of  the  ban  in 
Article  85(1); the  following  observations  are  intended  as  a rough  outline. 

(30)Joined  Cases  56  and  58/64  [1966]  ECR  299. 

35 

II. 

Types  of  distribution  agreement 

120.  Commission  practice  distinguishes  four  main  types  of  vertical  agreement:  exclusive 
distribution,  exclusive  purchasing,  selective  distribution  and  franchising. 

Exclusive  distribution  agreements 

121.  Regulation  1983/83  is  concerned  with  a  specific  type  of  exclusive  distribution 
agreement which is very common in practice. Article  1  defines the type of agreement  covered 
as  "agreements  to which  only two undertakings  are party and whereby  one party  agrees  with 
the other to supply  certain goods for resale within the whole or a defined  area of the  common 
market  only  to  that  other."  Regulation  1983/83  can  be  said  to  cover  all  bilateral  exclusive 
distribution  agreements  which  relate  to  finished  goods  and  which  have  cross-border 
implications.  It  does  not  cover  agreements  by  which  the  supplier  appoints  more  than  one 
approved  dealer  in  the  contract  territory;  agreements  of  that  kind  have  to  be  vetted 
individually.  Agreements  for  the  supply  of  services  also  fall  outside  the  scope  of  the 
Regulation. And the Regulation applies only to agreements concluded with a view to resale/31} 
The practice  the  Commission  has  followed  with regard  to agreements which  are not  covered 
by  the  Regulation  has  been  based  on  a fairly  generous  interpretation  of  Article  85(3). 

122.  According to recitals  5 to  7 to the Regulation, these exclusive distribution  agreements 
"lead  in  general  to  an  improvement  in  distribution  because  the  undertaking...  does  not  need 
to  maintain  numerous  business  relations  with  a  larger  number  of  dealers  and  is  able,  by 
dealing with only one dealer, to overcome more easily distribution difficulties  in international 
trade resulting  from  linguistic, legal  and other differences".  They  "facilitate  the promotion  of 
sales  of  a product  and  lead  to  intensive  marketing  and  to  continuity  of  supplies  while  at  the 
same  time  rationalizing  distribution...  they  stimulate  competition  between  the  products  of 
different  manufacturers";  such an agreement  is "often  the most effective  way, and  sometimes 
indeed  the  only  way,  for  the  manufacturer  to  enter  a  market...  this  is  particularly  so  in  the 
case  of  small  and  medium-sized  undertakings".  As  a  result  consumers  "can  obtain  products 
manufactured  in particular  in  other  countries  more  quickly  and  more  easily". 

123.  The  same  advantages  do  not  automatically  arise  where  an  exclusive  distribution 
agreement  is  concluded  between  competitors,  whether  reciprocally  or  non-reciprocally.  The 
Regulation  does  not  apply  to  such  agreements,  which  have  to  be  notified  individually.  The 
only  exception  is  for  non-reciprocal  agreements  where  either  party  has  a  turnover  not 
exceeding ECU  100 million. Otherwise exclusive distribution agreements between competitors 
have  to  be  vetted  on  a  case-by-case  basis;  individual  exemption  can  be  granted  on  certain 
conditions.(32) 

(31)In  Commission  practice  "resale"  is  taken  to  include  cases  where  the  dealer  breaks  bulk  or  packages  or 
repackages the article supplied. If he performs additional operations to improve the quality, durability, appearance 
or taste  of the goods, the question  whether the agreement  is concerned with  goods for  resale will  be determined 
by  the  value  the  operation  adds  to  the  goods. . 

(32)For an example see the Moosehead/Whitbread decision, O J No  L  100,20.4.1990, p.  15. In Carlsberg/Interbrew 
the Commission  allowed the agreement on condition that price determination, advertising and strategic marketing 
were not to be left  to the discretion  of the concessionaire: Twenty-fourth  Report on Competition  Policy, p. 351. 

36 

Exclusive  purchasing  agreements 

124.  Regulation  1984/83 applies only to agreements providing for exclusive purchasing with 
a view to resale. The dealer agrees not to buy the goods in question from  suppliers other than 
the  other  party  to  the  agreement  or  a person  designated  by him.  The  supplier  may  supply  to 
other  dealers  in  the  same  area  at  the  same  level  of  distribution,  and  there  is  no  territorial 
restriction  on  the  dealer's  efforts  to  market  the  goods.  But  the  main  exclusive  purchasing 
obligation  is often  accompanied  by  a no-competition  clause  by  which  the  dealer  undertakes 
not  to  manufacture  or  distribute  goods  which  compete  with  the  contract  goods.  Recital  3 to 
the  Regulation  states that  "exclusive  purchasing  agreements  of the categories  defined  in this 
Regulation may fall  within the prohibition contained in Article  85(1)... this is in particular the 
case  where  [the  agreement]  is  one  of  a  number  of  similar  agreements  which  together  may 
affect  trade  between  Member  States".  Agreements  of  this  kind  have  the  effect  of  tying  the 
dealer  to  a  single  supplier,  and  in  some  cases  may  form  a  substantial  barrier  to  entry  to  the 
market by outsiders. The restrictions involved are consequently  of great  importance  from  the 
point  of  view  of  competition  law,  particularly  because  of  their  implications  for  interbrand 
competition. 

125.  But  exclusive  purchasing  agreements  which  meet  the  conditions  set  out 
in 
Regulation  1984/83  produce  economic  benefits  that  justify  a  positive  assessment  under 
Article  85(3). Recitals  5 to 7 to the Regulation point out that they can improve the production 
and  distribution  of  goods  because  they  enable  the  parties  to  plan  production  and  sale  with 
greater  precision  and  for  a  longer  period,  to  limit  the  risk  to  them  of  variations  in  market 
conditions,  and  to  lower  the  costs  of  production,  stocks  and  marketing.  For  small  and 
medium-sized  enterprises  such agreements are often  the only way  of entering  the market  and 
thus stimulating competition. They facilitate  sales promotion and intensive marketing, because 
the  supplier  will  generally  help  to  improve  the  distribution  network.  Consumers  benefit, 
because  they  can  obtain  the  goods regularly  and  more easily.  But  this positive  assessment  is 
subject to the condition that the agreements must not significantly  impede entry to the market 
by  outsiders.  In  the  Langnese-Iglo  case,  for  example,  the  Commission  had  to  withdraw  the 
benefit  of  the  block  exemption;  it did  so especially  because  of the exclusionary  effect  of  the 
agreements  at  issue.(33) 

Exclusive purchasing agreements, like exclusive distribution agreements, do not automatically 
produce  the  anticipated  benefits  if  the  agreement,  whether  reciprocal  or  non-reciprocal,  is 
between  competitors.  The  Regulation  covers  only  non-reciprocal  agreements  where  either 
party  has  a  turnover  not  exceeding  ECU  100 million.  All  other  agreements  between 
competitors  have  to  be  vetted  on  a case-by-case  basis. 

Beer  supply  and  service-station  agreements 

In  addition  to  the  general  rules  on  exclusive  purchasing  the  Regulation  also  makes 
126. 
specific  provision  for  what  it  calls  beer  supply  agreements  and  service-station  agreements. 
Here,  as  a general  rule,  "the  supplier  confers  on the  reseller  special  commercial  or  financial 
advantages  by  contributing  to  his  financing,  granting  him  or  obtaining  for  him  a  loan  on 
favourable terms, equipping him with a site or premises for conducting his business, providing 
him with equipment  or fittings,  or undertaking  other  investments for  his benefit"  (recital  13); 

(33)OJ  No  L  183, 26.7.1993,  p.19. 

37 

"the  commercial  and  financial  advantages  conferred  by  the  supplier  on  the  reseller  make  it 
significantly  easier  to  establish,  maintain  and  operate  premises  used  for  the  sale  and 
consumption  of drinks and service  stations... the exclusive purchasing  obligation  and the  ban 
on dealing  in competing  products  imposed  on the reseller  incite  the reseller  to  devote  all  the 
resources  at  his disposal  to the  sale of  the contract  goods...  such  agreements  lead  to  durable 
cooperation  between  the  parties  allowing  them  to  improve  or  maintain  the  quality  of  the 
contract goods and of the services to the customer and sales efforts  of the reseller... they allow 
long-term  planning  of  sales and consequently  a cost effective  organization  of production  and 
distribution...  the  pressure  of  competition  between  products  of  different  makes  obliges  the 
undertakings  involved  to  determine  the  number  and  character  of  premises  used  for  the  sale 
and  consumption  of drinks and  service  stations, in accordance with the wishes  of  customers" 
(recital  15).  To  obtain  these  objective  advantages  the  exclusive  distribution  of  beer  and 
petroleum  products  must  be  confined  to  designated  premises.  This distinguishes  beer  supply 
and service-station  agreements from  other exclusive purchasing agreements, where there is no 
limitation  to  designated  premises.  In order  to preserve  the  dealer's  commercial  freedom  and 
to  ensure  access  to  the  retail  trade  for  other  suppliers,  therefore,  the  Regulation  limits  the 
duration  of  the  agreement,  and  strictly  defines  the  range  of  products  that  may  be  covered. 
Beer  supply  agreements  concluded  by  small  brewers  fall  outside  the  prohibition  in 
Article  85(1).(34) 

Selective  distribution  agreements 

127. 
In  selective  distribution  a  manufacturer  usually  agrees  to  supply  only  to  dealers 
satisfying  certain professional  or technical requirements, while the approved dealers undertake 
not  to  purchase  or  sell  the  contract  goods  from  wholesalers  or  retailers  outside  the  official 
network.  As  a  general  rule  the  establishment  of  a  selective  distribution  system  is  motivated 
by  the  nature  of  the  product. 

128.  On the basis of the Commission's administrative practice and the case-law of the Court 
of  Justice  we  can  distinguish  three  types  of  selective  distribution  characterized  by  the 
stringency  of  the  approval  requirements  applied.(35) 

^Commission  Notice  concerntng  Commission  Regulations  (EEC) No  1983/83  and  (EEC)  No  1984/83, 
paragraph  40:  OJ  No  C  121,  13.5.1992. 

[1980]  ECR  3775;  Case  99/79  Lancôme 

(35)Selective  distribution  is not  covered  by  a block  exemption,  and  this  account  is  based  on  the  case-law  of  the 
Court  of  Justice  and  the  Court  of  First  Instance  and the  practice  followed  by  the  Commission  in  its decisions. 
The  most  significant  cases  decided  by  the  Community  lawcourts  are:  Case  26/76  Metro  I  [1977]  ECR  1875; 
Case  31/80  L'Oréal 
[1980]  ECR  2511;  Case  126/80  Salonia 
[1981]  ECR  1574;  Case  210/81  Demo-Studio  Schmidt 
[1983]  ECR  3045;  Case  107/82  AEG/Telefunken 
[1983]  ECR  3151;  Case  243/83  Binon 
[1985]  ECR  2034;  Joined  Cases  25  and  26/84  Ford  Werke II 
[1985]  ECR  2725;Case  3\/85ETA  v DK  Investment[1985]  ECR  3933;Case  75/84Metro  //[1986]  ECR  3076; 
and  CaseT-19/91  Vichy  [1992]  ECR  11-415.  The  main  Commission  decisions  are:  Kodak,  OJ  No  L  147, 
7.7.1970, p.  24;Omega,Oi  No  L  242,5.11.1970,p.  22;BayerischeMotoren  Werke,OJ  No  L  29, 3.2.1975, p.  1; 
SABA  1,0}  No  L 28,3.2.1976,  p.  19; Junghans,  OJ No  L  30,2.2.1977, p.  \Q;Krups,  OJ  No  L  120,13.5.1980, 
p.26; Hasselblad,  OJ  No  L  161, 12.6.1982, p.  \%; AEG/Telefunken,  OJ No  L  117, 30.4.1982, p.  15; Ford Werke, 
OJNo  L  327, 24.11.1983, p.  31; Murat, OJ  No  L  348, 10.12.1983, p.  15; SABA  II, OJ  No  L  376,31.12.1983, 
p.  41;  IBM  Personal  Computer,  OJ No  L  118,  5.4.1984,  p.  24;  Grohe,  OJ  No  L  19,  23.1.1985,  p.  17;  Ideal 
Standard,  OJ  No  L  20,  24.1.1985,  p.  38;  Grundig,  OJ No  L  233,  30.8.1985,  p.  1;  Ivoclar,  OJ No  L  369, 
31.12.1985,  p.  1; Villeroy  & Boch, OJ No  L  376, 31.12.1985, p.  15; Vichy, OJ  No  L  75, 21.3.1991, p.  57; Yves 
Saint  Laurent  Parfums,  OJ  No  L  12,  18.1.1992,  p. 24;  and  Givenchy,  OJ No  L  236,  19.8.1992,  p.  11. 

38 

(i) 

(ii) 

The  approval  requirements  may  be  purely  qualitative.  Here  selection  is  by  objective 
criteria which define the professional qualifications to be held by the dealer or his  staff 
and the technical and operational requirements that must be met by sales outlets. From 
its' earliest  decisions  on  the  subject  the  Commission  has  followed  a  "rule  of  reason" 
approach under which it considers that such distribution systems generally  fall  outside 
the  ban  in  Article  85(1)  provided  the  approval  of  dealers  complies  with  three 
conditions.(36)  First,  the  requirements  must  be  related  to  the  nature  of  the  goods  (the 
"principle  of  necessity").(37)  Second,  the requirements  must  not  be  excessive,  bearing 
in  mind  the  objective,  which  is  to  maintain  a  specialized  trade  offering  the  best 
possible  conditions  for  the  sale  of the goods (the  "principle  of proportionality").  And 
third, the requirements must be the same for  all potential dealers, and must be applied 
without  discrimination  (the  "principle  of  non-discrimination"). 

Entry  to  the  network  may  be  confined  to  dealers  who  as  well  as meeting  qualitative 
conditions  are  also  prepared  to  enter  into  additional  commitments  of  a  promotional 
nature;  such  systems  are  not  covered  by  the  rule  of  reason,  and  are  caught  by  the 
prohibition  in  Article  85(1).  But  as these  additional  obligations  allow  distribution  to 
be  concentrated  on the  most  effective  sales  outlets,  with  the  costs  of  distributing  the 
goods  and  providing  assistance  to the  sales  outlets  being  rationalized,  such  networks 
will  in  general  qualify  for  exemption  under  Article  85(3). 

(iii)  Networks  in  which  the  manufacturer 

limits  the  number  of  dealers  on  purely 
quantitative  grounds  (on  the  basis  of  the  purchasing  potential  of  the  region,  for 
example)  are in principle caught by Article  85(1). At present the Commission  accepts 
the  possibility  of  exemption  only  in quite  exceptional  cases.(38) 

Franchising  agreements 

129.  Commission  Regulation  (EEC)  No  4087/88  exempts  agreements  "whereby  one 
undertaking,  the franchiser,  grants the other, the franchisee,  in exchange  for  direct or  indirect 
financial  consideration, the right to exploit a franchise  for the purposes of marketing  specified 
types  of  goods  and/or  services".  A  "franchise"  is  "a  package  of  industrial  or  intellectual 
property  rights  relating  to  trade  marks,  trade  names,  shop  signs,  utility  models,  designs, 
copyrights,  know-how  or  patents,  to  be exploited  for  the resale  of  goods  or the  provision  of 
services  to  end  users".  There  are  three  features  which  distinguish  a  franchising  network: 
(i)  "the use of a common name or shop sign and a uniform  presentation of contract premises", 
(ii)  "the  communication  by  the  franchiser  to  the  franchisee  of  know-how",  and  (iii)  "the 
continuing provision by the franchiser  to the franchisee  of commercial or technical assistance". 

(36)This  general  rule needs to be qualified  in certain particular cases where the market  is considered to be so rigid 
and  structured,  especially  because of the cumulative  effect  of a plurality  of selective  distribution  networks,  that 
the  element  of  competition  which  is  inherent  in  such  systems  is not  enough  to  maintain  effective  competition. 
In  such  cases  the  system  may  be  caught  by  Article  85(1),  and  would  then  have  to  be  looked  at  under 
Article  85(3). 

(37)So  far the Commission  has generally been sympathetic to networks for the distribution  of technically  complex 
items,  certain  specialized  goods  (such  as  newspapers),  and  certain  luxury  articles. 

(38)See  for  example  Regulation  1475/95  on  motor  vehicle  distribution  and  servicing  agreements. 

39 

130.  The  Regulation  starts  from  the  principle  that  "clauses  which  are  essential  either  to 
preserve the common identity and reputation of the network or to prevent the know-how made 
available  and the assistance given by the franchiser  from  benefiting  competitors" fall  outside 
Article  85(1)  (recital  11): Article  3(2)  of the Regulation  lists a number  of  obligations  which 
are  not  caught  by  Article  85(1).  These  include  the  obligation  (i) to  attend  training  courses 
arranged  by  the  franchiser;  (ii)  to  apply  the  commercial  methods  devised  by  the  franchiser; 
(iii)  to comply with the franchiser  standards for the equipment and presentation of the contract 
premises  and/or  means  of  transport;  (iv)  to  allow  the  franchiser  to  carry  out  checks  of  the 
contract premises and/or means of transport to ensure that these standards are in fact  complied 
with;  (v)  not  to  change  the  location  of  the contract  premises without  the  franchiser  consent; 
(vi)  not  to  assign  the  rights  and  obligations  covered  by the  franchise  agreement  without  the 
franchiser  consent;  (vii)  not to disclose the know-how to third parties, even after  termination 
of  the  agreement,  unless  it  has  entered  the  public  domain;  (viii)  to  communicate  to  the 
franchiser  any  experience  gained  in  exploiting  the  franchise  and  to  grant  the  franchiser  a 
non-exclusive  licence  for  improvements  resulting  from  the  exploitation  of  the  know-how; 
(ix)  not  to  use  the  know-how  licensed  by  the  franchiser  for  purposes  other  than  the 
exploitation  of  the  franchise;  and  (x)  to  inform  the  franchiser  of  infringements  of  licensed 
industrial  or  intellectual  property  rights  and  to  take  any  legal  actions  necessary. 

131.  But  agreements  of this  kind  may  contain  clauses  which  do  restrict  competition,  such 
as the  grant  of  an  exclusive  territory  to the  franchisee  or  an obligation  on the  franchisee  not 
to  sell  competing  goods  or  to  use  them  in  the  course  of  the  provision  of  services.  These 
restrictions  would  as  a rule  be  caught  by  the  ban  in  Article  85(1),  but  they  may  qualify  for 
exemption on certain conditions. The Regulation weighs the disadvantages of these restrictions 
against the positive  effects  they can produce. It accepts that they can improve distribution  "as 
they  give  franchisers 
the  possibility  of  establishing  a  uniform  network  with  limited 
investments, which may  assist the entry  of new competitors on the market, particularly  in the 
case  of  small  and  medium-sized  undertakings,  thus  increasing  interbrand  competition.  They 
also  allow  independent  traders  to  set  up  outlets  more  rapidly  and  with  higher  chance  of 
success than if they had to  do so without the franchiser  experience and assistance. They  have 
therefore  the  possibility  of  competing  more  efficiently  with  large  distribution  undertakings" 
(recital  7). From the point of view of consumers franchise  agreements combine the advantage 
of a uniform  and homogeneous network, which ensures a constant quality of the products and 
services,  with  the existence  of traders  personally  interested  in the  efficient  operation  of their 
business  (recital  8). 

132.  The  Regulation  does  not  cover  agreements  to  which there  are more  than two  parties, 
franchising  agreements at industrial or wholesale level, or agreements-between competitors.(39) 

III. 

Assessment  of  the  main  vertical  restrictions 

133.  The  main  types  of  vertical  restriction  will  now  be  examined  systematically  for  each 
class  of  agreement,  in  the  following  order:  (a)  clauses  conferring  territorial  protection  on  a 
party;  (b)  purchasing  obligations entered  into by the dealer,  including tie-in clauses; (c)  sales 
obligations  entered  into  by  the  dealer,  including  clauses  affecting  his  pricing  policy; 

(39)It  does  cover  "master  franchising  agreements",  whereby  the  franchiser  gives  a "master  franchisee"  the  right, 
for  consideration,  to  exploit  a franchise  for  the purposes  of  concluding  franchise  agreements  with  third  parties, 
the  "franchisees". 

40 

(d)  no-competition  clauses  entered  into  by  the  dealer;  and  (e)  obligations  restricting  the 
dealer's  choice  of  customers. 

Territorial  restrictions 

Exclusive  distribution  agreements 

134.  The territorial protection conferred  on an exclusive dealer varies from  case to case with 
the  stringency  of  the  clauses  intended  to protect  his exclusive  rights. In order  to  arrive  at an 
assessment  of  the  territorial  protection  which  is  the  object  or  effect  of  such  clauses,  the 
Commission  and  the  courts  have  consistently  sought  to  determine  whether  the  protection 
conferred  is  absolute  or  merely  relative. 

135.  Regulation  1983/83 identifies two situations in which territorial protection is absolute. 
One arises where  "users can  obtain the contract  goods in the contract territory  only  from  the 
exclusive  distributor  and  have  no  alternative  source  of  supply  outside  the  contract  territory" 
(Article  3(c)).  The  other  arises  where  one  of  the  parties  impedes  parallel  imports  into  the 
contract territory  (Article  3(d)). A classic example is the exercise of industrial property  rights 
to  obstruct  imports  of  "properly  marked  or  otherwise  properly  marketed  contract  goods" 
(Article  3(d)(1)). In its decisions the Commission has identified  other restrictions which have 
the  effect  of  obstructing  parallel  trading,  such  as  those  which  affect  the  validity  of  the 
manufacturer's  guarantee(40)  or  the  "essential  services"  associated  with  the  supply  of  the 
product.(41) 

There  are  some  forms  of differentiation  of products  or prices on the basis  of the  geographic 
market  of  destination  which  can  have  the  same  effect.(42)  Territorial  restrictions  of  this  kind 
will  usually  be  caught  by  Article  85(1),  and  will  not  qualify  for  exemption  under 
Article  85(3).  In  the  same  way,  the  Commission  systematically  acts  against  exclusive 
distribution  agreements which contain bans on reexport to EU Member  States.(43) It has taken 
the  view,  for  example,  that  Article  85 prevents  the  grant  of  a rebate  which  is  subject  to  the 
condition  that the  goods  are not reexported  to  other  Member  States.(44) The  Commission  has 

(40)See  in particular the Zanussi decision (OJ No  L  322,  16.11.1978), and the positions taken by the Commission 
in  Matsushita  Electrical  Trading  Company  (Twelfth  Report  on  Competition  Policy  (1982),  point  77),  Ford 
Garantie  Deutschland  (Thirteenth  Report  on  Competition  Policy  (1983),  points  104 to  106),  Fiat  (Fourteenth 
Report  on  Competition  Policy(1984), point  70), and more  generally  the considerations  set  out  in the  Sixteenth 
Report  on  Competition  Policy  (1986),  point  56. 

(4,)See  Nineteenth  Report  on  Competition  Policy,  point  45, on  the AKZO  Coatings  case. 

(42)A practice  of this kind  was considered  in the decision  in Zero/Montedison (OJ  No  L 272, 4.11.1993,  p. 28). 

(43)There  is a large body  of precedent  here. Among recent cases, see in particular the banning decision  in  Sandoz 
(OJ  No  L  222,  10.8.1987,  p. 28),  subsequently  upheld  in  full  by  the  Court  of  Justice  (Case  C-277/87 
[1990]  ECR  45);  the  fining  decision  in  Tipp-Ex  (OJ No  L 222,  10.8.1987,  p.  1),  also  upheld  by  the  Court 
(Case  C-279/87  [1990]  ECR  261); and the fining  decisions in  Viho/Toshiba (OJ  No  L 287,  17.10.1994,  p.  39), 
Gosme/Martel (OJ No  L  185,  11.7.1991,  p. 23), Newitt/Dunlop Slazenger International (OJ No  L  131,  16.5.1992, 
p.  32),  Viho/Parker Pen(05  No  L  233, 15.8.1992, p. 27), and Ford Agricultural  (OJ  No  L  20,28.1.1993, p.  1). 

(44)See  Pittsburgh  Corning  Europe/Formica  Belgium/Hertel  (OJ No  L  72,  5.12.1972,  p.  35)  and  Sperry  New 
Holland  (OJ  No  L  376,  31.12.1985,  p. 26). 

41 

likewise  held that certain  measures aimed  at providing  additional  protection  for  an  exclusive 
dealer by means of a price differentiation  policy which operates to the disadvantage of parallel 
exporters  do  not  satisfy  the  tests  of  Article  85(3).(45)  In  the  same  way  the  Commission 
considers  that  terms  of  sale  under  which  buyers  must  pay  the  price  of  the  country  of 
destination of the goods rather than that which applies in the country of the seller can  infringe 
Article  85.(46) 

136.  Where  the  territorial  protection  conferred  is  only  relative,  whatever  the  degree  of 
intensity  of  protection  conferred,  consumers  are  still  able  to  obtain  the  contract  goods  from 
sources other than the exclusive dealer, and middlemen can import the goods into the contract 
territory  on  a  parallel  basis.  More  precisely,  an  exclusive  dealer  is  said  to  enjoy  relative 
territorial  protection  if the  agreement  confines  itself  to 

an  obligation  on  the  supplier  to  supply  certain  products  to  the  exclusive  dealer 
distributor  only (Regulation  1983/83, Article  1) and  "not to supply the contract  goods 
to  users  in  the  contract  territory"  (Article  2(1)); and 
an obligation  on the dealer  "to refrain,  outside the contract  territory  and  in relation  to 
the  contract  goods,  from  seeking  customers,  from  establishing  any  branch  and  from 
maintaining  any  distribution  depot"  (Article  2(2)(c)). 

In  this  case  the  supplier  is  entitled  only  to  prevent  his  dealers  from  carrying  on  an 
137. 
active  sales  policy  outside  their  territories.  They  are  consequently  subject  to  indirect 
competitive  pressure  from  the  other  exclusive  dealers,  who  remain  free  to  supply  users  or 
intermediaries  outside  their  own  territories  provided  they  do  not  solicit  orders  ("passive 
sales").  Such  a system  of  relative territorial  protection  does  qualify  for  the  block  exemption 
declared  by  Regulation  1983/83. 

Exclusive purchasing  agreements 

138.  Regulation  1984/83  grants  exemption,  for  a  limited  time,  only  for  an  exclusive 
purchasing  obligation  (and that for  a limited time), and not  for  the allocation  of an  exclusive 
sales territory. Article  2(1) specifies that "No other restriction of competition shall be imposed 
on  the  supplier  than  the  obligation  not  to  distribute  the  contract  goods  or  goods  which 
compete with the contract goods in the reseller's principal  sales area and at the reseller's  level 
of distribution." This means that if the agreement is caught by Article  85(1) the supplier must 
remain  free  to  supply  to  other  dealers  in the  exclusive  purchaser's  principal  sales  area,  and 
himself  to  operate  at  another  level  of  distribution  in the  same  area.  And  in  order  to  qualify 
for  the  block  exemption  an  exclusive  purchasing  agreement  must  not  place  any  territorial 
restriction  on  the  exclusive  purchaser's  sales  efforts.  The  dealer  thus  retains  his  freedom 
actively  to  seek  custom  outside  his  principal  sales  area. 

139.  Article  16  of  the  Regulation  states  that  if  the  supplier  allocates  an  exclusive  sales 
territory  to the dealer  the  Regulation  ceases to be  applicable,  so that the  agreement  has to be 

(45)See  in  particular  the  Distillers  decision  (OJ  No  L  50,  22.2.1978,  p.  16),  subsequently  upheld  by  the  Court 
(Case  30/78  [1980]  ECR  2229); though  that  decision  ruled  out the applicability  of Article  85(3) on the  ground 
that  the  agreement  had  not  been  notified  as required  by  Regulation  17. See  also the Johnny  Walker Red  Label 
case  (Seventeenth  Report  on  Competition  Policy  (1987),  point  65). 

(46)See  the  decision  in  Kodak  (OJ No  L  147,  7.7.1970,  p. 24). 

42 

considered  under  Regulation  1983/83. 

Beer  supply  and  service-station  agreements 

Whilst  no territorial  restrictions can be imposed  on the reseller's  sales efforts,  the  agreement 
must  clearly  indicate  the premises  in respect of which the agreement  is to apply.  The reseller 
is  free  to  conduct  competing  businesses  from  other  premises. 

Selective  distribution  agreements 

140. 
If  admission  to  a  selective  distribution  network  is  dependent  on  quantitative  criteria, 
the  system  has the  effect  of  giving  each  dealer  a form  of territorial  protection  similar  to  that 
provided by an exclusive sales territory. As we have already seen, such a system will certainly 
be  caught  by  the  ban  in  Article  85(1),  and  will  not  as  a  rule  satisfy  the  tests  for  exemption 
set  out  in  Article  85(3). 

In  addition,  a  supplier  cannot  prevent  his  approved  dealers  from  supplying  contract 
141. 
goods to final users inside the common market by reason of the users' place of residence. Nor 
may he impose on his approved dealers obligations which might have the effect  of partitioning 
markets.  In  particular,  the  manufacturer  must  allow  his  approved  dealers  to  obtain  supplies 
from  any  member  of  his  distribution  network  in  the  common  market  (exclusive  agents  or 
approved wholesalers or retailers). He must leave his approved dealers free to sell the contract 
goods  to  any  other  member  of  the  distribution  network  in  any  Community  country.  To  put 
it another  way,  if  negative  clearance  or exemption  is to  be  granted  the  Commission  requires 
that  the  selective  distribution  contracts  must  not  obstruct  cross-deliveries  between  approved 
dealers,  who  may  be  established  on  the  territory  of  the  same  Member  State  or  in  other 
Community  countries.(47) 

Franchising  agreements 

142.  A  franchising  network  involving  territorial  restrictions  will  usually  be  caught  by 
Article  85(1), and will  qualify  for  the block exemption  declared by Regulation  4087/88  only 
on  condition  that  these  restrictions  do  not  have  the  effect  of  conferring  absolute  territorial 
protection. 

143.  The Regulation does provide that the franchiser  may grant an exclusive  sales territory, 
and  to  this  end  it  exempts  a  series  of  obligations  aimed  at  limiting  the  activities  of  the 
franchiser  inside  the  contract  territory  and  the  activities  of  the  franchisee  outside  that 
territory.(48) 

(47)The  Commission  also requires that cross-deliveries be possible between approved members  of networks in the 
EU  and  members  established  in  countries  in  a free  trade area,  or other  non-Community  countries,  if there  may 
be  an  effect  on  trade  between  Member  States. 

(48)Most  notably  "an obligation  on the franchiser,  in a defined  area of the common  market,  the contract  territory, 
not  to: 

grant  the  right  to  exploit  all  or  part  of the  franchise  to  third  parties, 
itself  exploit  the  franchise,  or  itself  market  the  goods  or  services  which  are  the  subject-matter  of  the 
franchise  under  a similar  formula; 
itself  supply  the  franchiser  goods  to  third  parties"  (Article  2(a)). 

43 

144.  But  if  the  parties  either  directly  or  indirectly  prevent  end  users  from  obtaining  the 
contract  goods  or  services  by  reason  of  their  place  of  residence,(49)  or  take  advantage  of 
differences  in  the  specifications  for  the  goods  or  services  between  Member  States  so  as  to 
partition  the  market,  the  Regulation  no  longer  applies.  Likewise  in  order  to  prevent  the 
partitioning  of  the  market,  the  Regulation  stipulates  that  the  agreements  must  not  restrict 
cross-deliveries  among  the  members  of  the  network  and  between  them  and  the  members  of 
any  parallel  networks  the  franchiser  may  have  established.(50) 

Purchasing  obligations 

Exclusive  distribution  agreements 

145.  Regulation  1983/83  exempts  an  exclusive  purchasing  obligation,  that  is  to  say  "the 
obligation to obtain the contract goods for resale only from  the other party" (Article  2(2)(b)), 
provided  it  is  "agreed  only  for  the  duration  of  the  agreement"  (recital  8). 

146.  Tie-in  clauses  are  not  considered  incompatible  with  Article  85(3). 

147.  Article  2(3)(a)  of  the  Regulation  gives  an  indication  of  other  purchasing  obligations 
which  may  be  imposed  on  an  exclusive  dealer.  It  refers  to  clauses  requiring  the  dealer  to 
purchase complete ranges of goods or minimum quantities. As a general rule such obligations 
are  not  considered  restrictions  within  the  scope  of  Article  85(1).  But  they  must  not  be 
"formulated  or applied  in such a way as to take on the character of restrictions of  competition 
that  are not permitted. "(51) An  obligation  to purchase minimum  quantities  might  for  example 
have  the  same  effect  in  practice  as  a  no-competition  clause,  and  it  would  then  have  to  be 
considered  whether,  given  the  economic  context  in  which  it  was  to  operate,  the  agreement 
might  form  a  substantial  obstacle  in  the  way  of  competing  suppliers  seeking  to  enter  the 
market.  If  there  is  such  an  obstacle  the  agreement  no  longer  meets  the  requirements  for 
exemption,  even  on  an  individual  basis. 

Exclusive purchasing  agreements 

148.  An exclusive  purchasing  obligation  is the vital  component  in the  agreements  covered 
by  the  block  exemption  declared  by  Regulation  1984/83.  Article  1 makes  it  clear  that  "The 
Regulation  only  covers  agreements  whereby  the  reseller  agrees  to  purchase  all  his 

The  franchisee  may be obliged  "to exploit the franchise  only from  the contract premises" (Article  2(c)). He may 
also  be obliged  "to  refrain,  outside the  contract  territory,  from  seeking  customers  for  the goods  or  the  services 
which  are  the  subject-matter  of  the  franchise"  (Article  2(d)).  A  master  franchisee  may  be  obliged  "not  to 
conclude  franchise  agreements  with  third  parties  outside  its  contract  territory"  (Article  2(b)). 

(49)As  far  as  indirect  restrictions  are  concerned  it  is worth  drawing  attention  to Article 4(b)  of  the  Regulation, 
which  states that  an  obligation  on  the  franchisee  to honour guarantees  for  the franchiser  goods  may  qualify  for 
the  block  exemption  on  condition  that  it  includes  goods  sold  in the  common  market  by  other  members  of  the 
franchised  network  or  other  distributors  which  give  a similar  guarantee. 

(50)Article  4(a).  An  example  of  parallel  networks  would  be  the  existence  of  a  franchised  network  alongside  a 
network  of  approved  dealers.  See the  Charles Jourdan  decision:  OJ No  L  35, 7.2.1989.  p.  11. 

(51)See the Commission  Notice  concerning  Commission Regulations  (EEC) No  1983/83 and (EEC) No  1984/83, 
paragraph  19 (OJ  No  C  101,  13.4.1984,  p. 2). 

44 

requirements  for  the contract  goods from  the other party. "(52) It can happen that an  agreement 
to purchase part of the purchaser's requirements needs to be exempted  on an individual basis; 
if  there  are  no  other  restrictions  incompatible, with  Article  85(1)  exemption  is  not  usually 
refused.  The Regulation does cover agreements containing  an "English clause", which  allows 
the  purchaser  to  buy  from  other  suppliers  if they  are  offering  the  goods  on more  favourable 
terms than the other  party.(53) The dealer may also be released  from  his exclusive  purchasing 
obligation  if the  other  party  is unable  to  supply. 

149.  The block exemption does not apply where there is a tie-in clause, that is to say where 
"the  exclusive  purchasing  obligation  is agreed  for  more  than  one type  of  goods where  these 
are  neither  by  their  nature  nor  according  to  commercial  usage  connected  to  each  other" 
(Article  3(c)). This means that in order to qualify  for the block exemption the agreement must 
be concluded  "for  a specified  product  or assortment  of products"  (recital  11), which  must  be 
specified  "by brand or denomination".(54) For the goods to belong to the same range there must 
be a link between them,  which may be of a technical nature (as in the case of accessories and 
spare  parts),  of  a  commercial  nature  (as  with  goods  used  for  the  same  purpose),  or just  a 
matter  of  commercial  usage  (as  with  goods  customarily  offered  for  sale  on  the  same 
premises).  In  its  decisions  the  Commission  has  taken  the  view  that  if  an  agreement 
appreciably affects  competition in trade between Member  States tie-in clauses will not usually 
qualify  for  individual  exemption. 

150.  As regards the duration  of the obligation, the Regulation provides that the  exemption 
does  not  apply  if  the  agreement  is  "concluded  for  an  indefinite  duration  or  for  a  period  of 
more  than  five  years"  (Article  3(d)).  The  Commission  has  been  strict  in  dealing  with  such 
agreements. 

151.  The  Regulation  gives  an  indication  of  other  purchasing  obligations  which  will 
generally be compatible with Article  85(1). It refers to clauses requiring the dealer to purchase 
complete ranges of goods or minimum quantities. The assessment of such clauses in exclusive 
purchasing  agreements  is not  substantially  different  from  that  of  similar  clauses  in  exclusive 
distribution  agreements. 

Beer  supply  and  service-station  agreements 

The  exclusive purchasing  obligation  imposed by a beer  supply  agreement has to be  confined 
to  "certain  beers,  or  certain  beers  and  certain  other  drinks,  specified  in the  agreement".  The 
publican must be free  to sell other beers in bottles, cans or other small packages. The publican 
must  also  be  free  in  his  choice  of  goods  and  services  other  than  the  drinks  specified  in  the 
agreement.  In the case of a service-station  agreement  the exclusive purchasing  obligation  has 

{i2)Notice concerning Commission Regulations (EEC) No  1983/83 and (EEC) No  1984/83, paragraph  35. In other 
words,  "If  the  purchasing  obligation  relates  to  only  part  of  such  requirements,  the  block  exemption  does  not 
apply",  and  the  agreement  would  have  to  be  vetted  individually. 

{"]Notice  concerning  Commission  Regulations  (EEC) No  1983/83 and  (EEC)  No  1984/83,  paragraph  35. The 
Commission's decision  in BP  Kemi/DDSF(Oi  No  L 286, 14.11.1979, p.  32), in which the Commission  held that 
an  English  clause did  restrict  competition,  has to be looked  at  in the  light of the circumstances  of the case, and 
does  not  appear  to  contradict  the  general  rule  in the  Notice. 

(i4)Notice,  paragraph  36. 

45 

to  be  confined  to  "certain  petroleum-based  motor-vehicle  fuels  or  certain  petroleum-based 
motor-vehicle and  other  fuels  specified  in the  agreement".  The  service-station  operator  may 
also  be  obliged  to  use  the  supplier's  lubricants  where  the  supplier  has  helped  finance  a 
lubrication  bay  or  other  lubrication  equipment.  No  other  tie-ins  are  covered. 

Selective  distribution  agreements 

152. 
If  it  is  to  be  compatible  with  Article  85(1)  or  to  qualify  for  exemption  under 
Article  85(3)  an agreement  establishing a selective distribution  network  may  not contain  any 
exclusive purchasing clause. An exclusive purchasing obligation would prevent cross-deliveries 
between  members  of  the  network,  and  would  consequently  partition  the  market.. 

153.  The  Commission  accepts  that  the  supplier  may  require  approved  dealers  to  buy 
minimum  quantities  of  contract  goods  from  him  directly,  provided  the  volume  stays  below 
a  reasonable  threshold;  the  supplier  could  otherwise  use  an  obligation  of  this kind  to  secure 
the  same  result  as  an  exclusive  purchasing  obligation  would.  With  that  proviso  selective 
distribution  agreements  including  such  an obligation,  while  they  do  fall  within  the  scope  of 
Article  85(1),  can  qualify  for  exemption  under  Article  85(3). 

154.  An  approved  dealer  may  be  required  to  buy  and  to maintain  representative  stocks  of 
the range of products covered by the contract: depending  on the circumstances this  obligation 
may  fall  outside  the  ban  in  Article  85(1)  (for  example  where  it  is  not  combined  with  other 
obligations  of  a promotional  nature),  or  may  qualify  for  exemption. 

Franchise  agreements 

155.  Franchise  agreements  must  not  impose  exclusive  purchasing  obligations  on  the 
franchisee.  Regulation  4087/88  stipulates that the block  exemption  applies  on  condition  that 
"the franchisee  is free  to obtain the goods that are the subject-matter  of the franchise  from  the 
other franchisees;  where such goods are also distributed through another network of authorized 
distributors,  the  franchisee  must  be  free  to  obtain  the  goods  from  the  latter"  (Article  4(a)). 

156.  But obligations on the franchisee  to buy minimum volumes, to plan orders in advance, 
and  to  keep  a  minimum  stock  of  a minimum  range  of  goods  are  not  regarded  as  restrictions 
of  competition,  provided  they  do  not  go  beyond  what  is necessary  to  maintain  the  common 
identity  and  reputation  of  the  network  (Article  3(l)(f)). 

Sales  obligations 

Exclusive  distribution  and  exclusive purchasing  agreements 

157.  To  impose  a  resale  price  on  a  dealer  is an  infringement  of  Article  85(1),  and  as  the 
case-law  stands  at  present  it  will  not  as  a  rule  qualify  for  exemption  (see  recital  8  to 
Regulations  Nos  1983/83  and  1984/83). It is immaterial  whether  the price  is a fixed price  or 
a maximum  or  minimum  price. In the  Commission's  decisions  any  limitation  of the  dealer's 
freedom  with regard  to discounts or advertising  of sales promotions has been treated the same 
way.  The  only  pricing  practice  generally  allowed  is  that  whereby  the  supplier  provides  the 
dealer with lists of recommended  prices; provided  these are not followed  up with  instructions 
or  other  binding  measures  they  fall  outside  the  ban  in  Article  85(1). 

46 

158.  Article  85 also  catches  agreements  by which  an exclusive  dealer  undertakes  to  apply 
differentiated  prices  to  certain  categories  of  purchaser  (such  as  parallel  importers  or  users 
outside  the  allotted  territory). 

159.  Agreements of this kind usually impose several obligations of a promotional nature on 
the dealer. An exclusive dealer may  for  example be required to achieve a minimum  turnover, 
to  advertise,  to  maintain  a  sales network,  to  comply  with  certain  minimum  requirements  as 
with  respect  to  stocks,  to  provide  customer  and  guarantee  services,  to  employ  staff  having 
specialized  or  technical  training,  or  to  sell  the  goods  only  under  trade  marks  or  packed  and 
presented  as  specified  by  the  supplier.  These  obligations  will  not  as  a  rule  be  caught  by 
Article  85(1).(55) 

Beer  supply  and  service-station  agreements 

No  obligation  can  be  imposed  on  the  reseller  either  with  respect  to  his  resale  price  or  any 
special  sales efforts.  He may be required to sell only from  designated  premises, but he  is  free 
to  promote  his  business  without  territorial  or  other  restrictions. 

Selective  distribution  agreements 

160.  The  supplier  may not seek to have his dealers observe a certain level of prices by  any 
means  whatever,  whether  fixed,  minimum  or  maximum  prices. 
In  the  same  way,  the 
Commission  cannot  as  a rule  exempt  restrictions  which  limit  an  approved  dealer's  freedom 
to determine the level of discount he allows his customers. Article  85 also prohibits a supplier 
from  refusing  to  approve  dealers  who  are  qualified  but  who  are  suspected  of  charging  low 
prices. 

161.  The  Commission  accepts  that  a  supplier  may  provide  his  approved  dealers  with  lists 
of recommended  prices, provided these are not followed  up with instructions or other  binding 
measures  obliging  or  inducing  retailers  not  to  depart  from  those  prices.  On  that  condition 
recommended  prices  are  not  considered  to  restrict  competition. 

162.  As we have  already  seen,  obligations  of a promotional  nature  are usually  regarded  as 
compatible  with  Article  85(3); these  would  include  clauses  requiring  the  dealer  to  achieve  a 
reasonable  level  of  business and  stock  turnover,  and to play his part  in promotion  campaigns 
organized  by  the  supplier. 

Franchise  agreements 

163.  Regulation  4087/88  denies  the  benefit  of  the  block  exemption  "where  the  franchisee 
is restricted  in determining  its prices."(56) This rules out any form  of resale price  maintenance 
(fixed  prices,  minimum  prices  or  maximum  prices).  But  the  franchiser  "should  be  free  to 
recommend  prices to the franchisees...  to the extent that it does not lead to concerted  practices 
for  the  effective  application  of  these  prices"  (recital  13);  such  illicit  practices  might  be 

(55)See  Regulation  1983/83, Article  2(3). But this assessment  is subject to the condition that "the obligations may 
not be formulated  or applied  in such  a way  as to take on the character of restrictions  of competition  that  are not 
permitted"  {Notice,  paragraph  19) 

(56)Recital  13; see  also  Article  5(e). 

47 

concerted  between  the franchiser  and the franchisee  or between  the franchisees  themselves. 
It is worth  noting here that in Pronuptia  the Commission  insisted  on the removal  of a clause 
according to which the franchisee  was not to charge prices that might damage the brand image 
of the contract goods. That obligation was replaced by a maximum price which the  franchisee 
was  recommended  not to exceed  in advertising  and promotions.(57) 

164.  The  Regulation  takes  the  approach  that  promotional  obligations  imposed  on  the 
franchisees  are usually  outside the scope of Article  85(1) provided they are confined  to what 
is  necessary  in  order  to  maintain  the  common  identity  and  reputation  of  the  franchised 
network.  Article  3(1 )(f)  refers  expressly to clauses whereby the franchisee  agrees to  achieve 
a minimum  turnover,  to keep a sufficiently  representative  stock and to provide  customer and 
warranty  services. 

165.  Other  obligations  specific  to  franchised  networks  which  limit  the  freedom  of  the 
franchisee  in  order  to protect  the know-how  provided  by the franchiser  also  fall  outside the 
ban  in Article  85(1). But the block  exemption  ceases to apply where the franchiser  prohibits 
the  franchisee  from  challenging  the validity  of the  industrial  or  intellectual  property  rights 
which  form  part  of the franchise  (Article  5(f)). 

No-competition  clauses 

Exclusive  distribution  agreements 

166.  The  block  exemption  covers  agreements  whereby  the  dealer  undertakes  "not  to 
manufacture or distribute goods which compete with the contract goods" (Article  2(2)(a)). But 
the obligation  may not be entered  into for a period  longer than the duration  of the  agreement 
itself.(58) The Commission must  also seek to ensure that in the economic  context in which the 
agreement operates the no-competition clause does not give it a significant  exclusionary  effect. 

Exclusive purchasing  agreements 

167.  Regulation  1984/83 states that apart from the exclusive purchasing obligation "no other 
restriction  of  competition  shall  be  imposed  on  the  reseller  than  the  obligation  not  to 
manufacture  or distribute goods which compete with the contract goods." (Article  2(2)). That 
restriction will be covered by the block exemption only provided the agreement is for a period 
of no more than five years (Article  3(d)), "so that access by other undertakings to the  different 
stages  of distribution  can be ensured"  (recital  11). The Commission's  practice  confirms  that 
a no-competition  clause in an exclusive purchasing  agreement  which  is concluded  for a long 
time or for an indefinite  period will normally prevent exemption on an individual  basis too.(59) 

(57)OJ  No L  13, 15.1.1987,  p.39. On resale price maintenance and recommended  prices see also the decisions in 
Yves Rocher (OJ No L  8, 10.1.1987, p. 49), Computerland (OJ No L 222, 10.2.1987, p.  12), and  ServiceMaster 
(OJNo  L 332, 3.12.1988,  p. 38). 

(58:]Notice,  paragraph  18. 

(59)See  the Scholler  decision,  OJ No L  183,  26.7.1993,  p. 1. 

48 

Beer  supply  and  service-station  agreements 

A  publican  can  be  obliged  not  to  sell  beers  and  other  drinks  which  are  supplied  by  other 
undertakings  and  which  are  of  the  same  type  as those  supplied  under  his  agreement.  If  the 
agreement  relates only to specified  beers it may not  run  for  more than  ten years;  if it  relates 
to  specified  beers and  other  drinks it may not run for  more than five years. A  service-station 
operator  can  likewise  be  obliged  not  to  sell  fuels  supplied  by  other  undertakings.  The 
agreement  may  not  run  for  more than ten years. If the  supplier  owns the  premises  exploited 
by  the reseller,  however,  a beer  supply  agreement  or  a service-station  agreement  can  run  for 
as long as the reseller  operates the premises. Under  a beer  supply  agreement  with  a  supplier 
who  owns  the  premises,  the  publican  must  also  be  entitled  to  turn  to  other  firms  for  his 
supplies  of  drinks  other  than  the  beer  supplied  under  the  agreement  if  they  are  offered  on 
more  favourable  terms  or  if  they  carry  other  trade  marks. 

Selective  distribution  agreements 

168.  A selective  distribution  agreement  may not  contain  a no-competition  clause  if it  is to 
be  compatible  with  Article  85. 

Franchising  agreements 

169.  There  are  two  kinds  of  no-competition  obligation  which  may  be  imposed  on  a 
franchisee:  one  is  concerned  with  competing  goods,  and  the  other  with  competing  business. 

170.  As  regards  competing  goods,  Regulation  4087/88  distinguishes  between  the  goods 
covered  by  the  franchise  and  spare  parts  or  accessories  for  them.  It  exempts  "an  obligation 
on  the  franchisee  not  to  manufacture,  sell  or  use  in  the  course  of  the  provision  of  services, 
goods  competing  with  the  franchiser  goods  which  are  the  subject-matter  of  the  franchise" 
(Article  2(e)), but the exemption does not extend to spare parts and accessories  manufactured 
by  the  franchiser  competitors.  It  also  distinguishes  between  goods  covered  by  the  franchise 
and  other  goods. For  goods outside the  scope of the franchise  the  franchiser  may  require  the 
franchisee  "to  sell,  or  use  in  the  course  of  the  provision  of  services,  exclusively  goods 
matching  minimum  objective  quality  specifications 
franchiser" 
(Article  3(l)(a)),  in  order  to  maintain  the  common  identity  and  reputation  of  the  franchised 
network.  He may restrict the franchisee  to goods manufactured  by himself, or by third  parties 
he  designates,  "where  it  is  impracticable,  owing  to  the  nature  of  the  goods  which  are  the 
subject-matter  of  the  franchise,  to  apply  objective  quality  specifications"  (Article  3(l)(b)). 

laid  down  by 

the 

171.  As  regards  competing  business,  the  Regulation  provides  that  an  obligation  on  the 
franchisee  "not  to  engage,  directly  or  indirectly,  in  any  similar  business  in  a territory  where 
it  would  compete  with  a  member  of  the  franchised  network,  including  the  franchiser"  is  no 
obstacle  to  the  block  exemption  in  so  far  as  that  obligation  is  necessary  to  protect  the 
franchiser  industrial  or  intellectual  property  rights  or the  common  identity  and  reputation  of 
the  network.  The  obligation  may  not  run  for  more  than  one  year  after  termination  of  the 
contract  (Article  3(c)). 

49 

Restrictions  on  choice  of  customers 

Exclusive  distribution  agreements 

172.  Regulation  1983/83  states that  clauses  "which  limit the exclusive  distributor's  choice 
of  customers... cannot  be exempted  under this Regulation"  (recital  8). As regards  restrictions 
on territorial  grounds, based on the customer's place of residence, we have seen that the block 
exemption  applies  only  provided  the  dealer  is  free  to  meet  unsolicited  orders  from  buyers 
outside his allocated territory  ("passive  sales"). As regards restrictions based on other  criteria, 
the  Regulation  allows  clauses  which  require  the  dealer  to  sell  only  to  dealers  who  are 
members  of a  selective  distribution  network  admission to  which is based  solely  on  objective 
criteria  of  a  qualitative  nature.(60)  Outside  this  general  exemption  restrictions  on  choice  of 
customers «can be  exempted  only  on  an  individual  basis  and  in  special  circumstances.(61) 

Exclusive  purchasing  agreements 

173.  What  has  been  said  with  regard  to  exclusive  distribution  agreements  applies  mutatis 
mutandis  to  exclusive  purchasing  agreements  too,  including  beer  supply  and  service-station 
agreements. But as exclusive purchasing agreements are not in fact normally used in selective 
distribution  networks,  the  exception  we  have  described  for  an  obligation  to  sell  only  to 
approved  retailers  is  of  negligible  practical  importance  here. 

Selective  distribution  agreements 

174.  As  we  have  seen,  the  integrity  of  a  system  of  selective  distribution  requires  that 
approved  dealers agree to sell the contract goods only to final consumers or to other  members 
of the supplier's network. With that proviso, selective distribution agreements are incompatible 
with  Article  85 if  they  contain  clauses  restricting  the  approved  dealer's  choice  of  customers 
on  territorial  grounds,  for  example  on  the  basis  of  the  customer's  place  of  residence,  or 
without  an  objective  requirement  of  a qualitative  nature.(62) 

Franchising  agreements 

175.  The  need  for  cohesion  in a franchised  network justifies  an obligation  on the dealer  to 
sell the goods covered  by the franchise  only to end users, to other  franchisees  and to  resellers 
within other channels of distribution  supplied by the manufacturer,  such as a parallel  selective 
distribution  network.  The  restriction  is outside the  ban  in Article  85(1)  provided  it  does  not 
go  beyond  what  is  necessary  to  protect  the  licensed  know-how  or  the  common  identity  and 

mNot  ice,  paragraph  20. 

(61)In  SABA  I,  for  example,  the  Commission  considered  that  a ban  on  wholesalers  supplying  to  end  users  was 
compatible  with  Article  85  because  it was  in  line  with  the  requirements  of  domestic  legislation  separating  the 
functions  of wholesaler  and  retailer  (OJ  No  L  28, 3.2.1976,  p.  19). In Distillers  the Commission  took  the  view 
that  Article  85  did  not  stand  in  the  way  of  an  obligation  on  dealers  supplied  duty-  and  tax-free  to  sell  only  to 
buyers operating  on a duty- and tax-free  basis (The Distillers Company Ltd/Victuallers,  OJ  No  L 233, 4.9.1980, 
p.  43). 

(62)See  the  decisions  in  Grohe  (OJ  No  L  19,  23.1.1985,  p.  17)  and  Ideal  Standard  (  OJ  No  L 20,  24.1.1985, 
p.  38). 

50 

reputation  of  the  franchised  network  (Regulation  4087/88,  Article  3(1 )(e)).  Any  further 
restriction  on the  choice of  customers  is caught  by Article  85(1) and  is not  exempted  by  the 
Regulation  (recital  13). 

IV.  Withdrawal  of  the  benefit  of  a block  exemption 

176.  All  three  of  the  block  exemption  regulations  we  have  been  considering  specify 
conditions  under  which  the  Commission  may  withdraw  the  benefit  of  the  block  exemption 
from  agreements  which  formally  comply  with the  requirements  laid  down. 

177.  Regulation  1983/83, on exclusive distribution, provides for withdrawal  where  "(a)  the 
contract goods are not subject,  in the contract territory, to effective  competition from  identical 
goods  or  goods  considered  by  users  as  equivalent  in  view  of  their  characteristics,  price  and 
intended  use;  (b)  access  by  other  suppliers  to  the  different  stages  of  distribution  within  the 
contract  territory  is  made  difficult  to  a  significant  extent;  (c)  for  reasons  other  than  those 
referred  to  in  Article  3(c)  and  (d)  it  is  not  possible  for  intermediaries  or  users  to  obtain 
supplies  of  the  contract  goods  from  dealers  outside  the  contract  territory  on  the  terms  there 
customary;  (d)  the exclusive distributor:  1. without any objectively justified  reason refuses  to 
supply  in  the  contract  territory  categories  of  purchasers  who  cannot  obtain  contract  goods 
elsewhere  on  suitable  terms  or  applies to them  differing  prices  or  conditions  of  sale; 2.  sells 
the  contract  goods  at  excessively  high  prices"  (Article  6). Regulation  1984/83, on  exclusive 
purchasing, contains similar rules. There are provisions identical to those in points  (a) and  (b) 
just  mentioned,  followed  by the stipulation that the Commission may withdraw  the benefit  of 
the  block  exemption  where  "the  supplier  without  any  objectively  valid  reason:  1. refuses  to 
supply  categories  of  resellers  who  cannot  obtain  the  contract  goods  elsewhere  on  suitable 
terms or applies to them differing  prices or conditions of sale; 2.  applies less favourable  prices 
or  conditions  of  sale  to  resellers  bound  by  an  exclusive  purchasing  obligation  as  compared 
with other resellers at the same level of distribution" (Article  14). Under Regulation  4087/88, 
on franchise  agreements, withdrawal  may be justified  where access to the market  is restricted 
"by the  cumulative  effect  of parallel  networks  of  similar  agreements"  or  where  the  goods  or 
services  do  not  face  effective  competition  in  a  substantial  part  of  the  common  market.  The 
Commission  may  also  withdraw  the  benefit  of  the  block  exemption  where  either  party 
prevents  end  users  from  obtaining  the  goods  or  services,  directly  or  through  intermediaries, 
because of their place of residence, or takes advantage  of differences  in the specifications  for 
the  goods  or  services  to  isolate  markets.  The  same  applies,  lastly, where  franchisees  engage 
in  concerted  practices  relating  to  sale  prices,  or  where  the  franchiser  misuses  his  right  to 
inspect  the franchisee's  premises  or means of transport  or his right to refuse  a request  by  the 
franchisee  to  move  the  contract  premises. 

51 

Chapter  V 

ADVANTAGES  OF  THE PRESENT  SYSTEM 

178.  This chapter is devoted to the advantages of the present system.  Its disadvantages and 
criticisms  are  outlined  below  in  Chapter  VII  (Results  of  Fact  Finding). 

179.  Community  competition  policy  has  two  fundamental  goals:  the  promotion  of 
integration  of  the  economies  of  the  Member  States  into  a  single  internal  market;  and  the 
establishment  and  protection  of effective  competition  throughout  the  Community. 
In  many 
cases,  these  aims  are  promoted  by  certain  types  of  agreement  between  undertakings  which 
improve  the  efficiency  of  distribution  and  do  not harm  the  Community's  market  integration 
goal.  Where  such  agreements  are  covered  by  Article  85(1)'s  prohibition,  they  may  qualify 
for  either  an  individual  exemption  or  fall  within  a block  exemption  under  Article  85(3). 

I. 

Questions  of  substance 

180.  Protecting  competition  and  promoting  agreements  beneficial  to  competition 
In order to constitute a violation of Article 85(1), an agreement, decision or concerted practice 
must have an  "appreciable" effect  on trade between the Member  States.  The Court of  Justice 
has  held  that  an  assessment  of  appreciability  requires  assessment  of  the  economic  and  legal 
context  of  the  arrangement  and  of  the  cumulative  effect  of  other  similar  arrangements. 

The  appreciability  requirement  is designed  to exclude  economically  insignificant  cases  from 
the  coverage  of  Article  85(1).  However,  the Notice  on  agreements  of  minor  importance  is 
careful  to  exclude  from  its coverage  agreements  where,  "in a relevant  market  competition  is 
restricted  by  the  cumulative  effect  of parallel  networks  of  similar  agreements  established  by 
several  manufacturers  or  dealers." 

In assessing possible restrictive practices, the notion that the competitive structure of markets 
must not suffer  should always be the foremost consideration.  In its decisions, the Commission 
has  consistently  demonstrated  a willingness  to  consider  economic  factors  such  as  efficiency 
and  consumer  welfare. 
the 
production/distribution chain and both interbrand and intrabrand competition. The Commission 
makes  this  analysis  under  Article  85(3),  which  provides  that  an  agreement  which  results  in 
the  elimination  of  competition  may  not  be  exempted. 

to  protect  competition  at  all 

levels  of 

It  seeks 

Economic  analysis plays an important role  in  the application of Community  competition  law 
to  vertical  restraints.  This  has  been  stressed  in  several  recent  decisions  of  the  Community 
Courts  which  require  consideration  of  the  cumulative  effect  of  parallel  networks.(63) 
In  the  Langnese  case  the  Court  of  First  Instance  found  that 

...  it is appropriate,  according to the case-law, to consider whether, taken together,  all 
the similar agreements entered  into in the relevant market and the other features  of the 
economic  and  legal  context  of  the  agreements  at  issue  show  that  those  agreements 

(63)  Delimitis  v.  Henninger  Brau  AG,  [1991]  ECR  1-935,  and  Langnese-Iglo  GmbH  v.  Comm'n,  T-7/93 
(8.6.1995). 

52 

cumulatively  have  the  effect  of  denying  access  to  that  market  for  new  domestic  and 
foreign  competitors. If,  on examination, that is found  not to be the case, the individual 
agreements  making  up  the  bundle  of  agreements  as  a  whole  cannot  undermine 
competition  within  the meaning  of Article  85(1) of the Treaty.  If,  on the  other  hand, 
such examination reveals that it is difficult  to gain access to the market, it is necessary 
to  assess  the  extent  to  which  the  contested  agreements  contribute  to  the  cumulative 
effect  produced,  on  the  basis  that  only  agreements  which  make  a  significant 
contribution  to  any  partitioning  of  the market  are prohibited.(64) 

181.  Market  integration 
Under the present  system, exclusive  distribution  agreements containing bans on passive  sales 
by  the  distributor  outside  its  allotted  territory  are  not  exemptible.  This  protects  the  market 
integration  goal  and  maintains  the  freedom  of parties to a distribution  agreement  to  respond 
to third  party  traders who  engage  in parallel trade, thereby  contributing  to  the elimination  of 
significant  price  differences  between  Member  States. 

182.  Consumer  Benefits 
Article 85(3) requires that consumers obtain a fair share of the benefits of a restrictive practice 
if  it  is  to  qualify  for  exemption.  The  block  exemptions  take  specific  notice  of  the  benefits 
which  consumers  are  likely  to  realize  from  the  various  exempted  activities.  Exclusive 
distribution agreements in general allow consumers a fair share of the resulting benefit  as they 
gain  directly  from  the  improvement  in  distribution,  and  their  economic  and  supply  position 
is  improved  as they  can  obtain  products  manufactured  in particular  in  other  countries  more 
quickly and more easily.  However, it is clear that in individual cases the benefit  to consumers 
has  to  be  demonstrated  in  a  concrete  manner  before  an  exemption  can  be  granted. 

Parties  who  believe  they  have  been  injured  by  an  anticompetitive  agreement  are  protected 
under the current  system.  The  Court of Justice held that  "as the prohibitions  of Articles  85(1) 
and  86  tend  by  their  very  nature  to  produce  direct  effects  in  relations  between  individuals, 
these  Articles  create  direct  rights  in  respect  of  the  individuals  concerned  which  the  national 
courts  must  safeguard."(65)  Since  Article  85(1)  has  direct  effect,  individuals  may  bring  an 
action  before  a national  court.  They  may  also  raise  issues under  Article  85(1)  in  a  national 
court  action  based  chiefly  on  some  other  claim,  for  instance  under  contract  law  or  franchise 
law.  They  may  file  a  complaint  with  the  Commission(66). 

183.  Other  goals  (Promotion/protection  of SMEs") 
The  Commission's  Notice  on  agreements  of  minor  importance  (C368  23/12/94  p.  20)  is 
designed  to provide  small and  medium  sized  enterprises  with legal  certainty  without  needing 
to  notify  agreements.  Moreover,  many  provisions  in  the  block  exemptions  are  designed  to 
benefit  SME's.  For  instance,  block  exemption  1983/83  provides  that  it  does  not  apply  to 
exclusive  distribution  arrangements  between  competitors,  unless  "one  of  them  has  a  total 

<64)Case  T-7/93  [1995]  ECR  11-1539. 

(65)  BRT  v.  Sabam,  [1974]  ECR  51,  para.  16. 

(66) Automec  v. Comm'n,  1992 ECR  11-2223 however  confirmed  that the Commission  has  discretion  to reject  a 
complaint  on  the  ground  that  it  lacks  significant  Community  interest,  provided  adequate  redress  is available  at 
national  level. 

53 

annual  turnover  of  no  more  than  ECU  100 million.' 

184.  Freedom  to  establish  type  and  detail  of  distribution  system 
Parties have the choice of seeking an individual  exemption  or structuring their  agreements  to 
meet the requirements of a block exemption.  Parties who prefer  not to follow  the parameters 
established  by  the  block  exemption  may  draw  up  agreements  as  they  wish,  and  may  still 
qualify  for  an  individual  exemption. 
qualify  for  an  individual  exemption 

II. 

Questions  of  procedure 

185.  Regulation  17/62 (Article 4(1)) establishes a system of notification  for  agreements  for 
which  the parties  want  negative  clearance  or  an exemption  under  Article  85(3).  Regulation 
17/62  itself  attempted  to  restrict  the  number  of  agreements  subject  to  the  notification 
requirement  through  Article  4(2),  which  sets  forth  limitations  on  the  types  of  transactions 
subject  to the notification  requirement.  Nevertheless,  after  the adoption  of Regulation  17/62 
the  Commission  was  faced  with  a  "mass" problem  of  a large  number  of  notifications,  many 
of  which  concerned  vertical  restraints  (nearly  30,000  notified  agreements).  The  Commission 
responded to the challenge in two ways.  Firstly, for many cases, the Commission has adopted 
block  exemption  Regulations  which  exempt  a  class  of  similar  agreements  whose  pro-
competitive benefits  are considered to outweigh their anti-competitive effects.  Secondly it has 
dealt  with the remaining  cases by  individual  decision  or comfort  letter.  This policy  has been 
successfully  applied  so that the large backlog of notified  cases has been substantially  reduced. 

186.  Formal decisions are not an appropriate way to deal with a large number  of  individual 
cases.  The  procedures  laid  down in Regulation  17 and  Commission  resources  do not  permit 
the Commission to make a large number of decisions(67).  Decisions lay down policy,  establish 
procedure, bring to an end serious violations of the rules (e.g. interference  with parallel trade) 
and  punish  (fine)  their  perpetration.  Block  exemptions(68)  and  comfort  letters  are  the 
"instruments"  the  Commission  uses  for  the  bulk  of  cases. 

187.  The  benefits  of  a  block  exemption  may  be  withdrawn  by  the  Commission,  thereby 
providing  it with great flexibility.  In order to withdraw the benefit  of a block  exemption,  the 
Commission  must  follow  the  full  procedure  leading  to  adoption  of  a decision  under  Article 
85(1).  In  practice,  thisis  a very  rare  occurrence.. 

188.  Effectiveness  of  notification  system 
The  notification  system  provides  the  Commission  with  a steady  source  of  information  about 
transactions,  including  vertical  agreements.  A  substantial  portion  of  the  Commission's 
decisions  are  triggered  by  notifications.  This  indicates  that  many  contractual  provisions 
deserving  careful  scrutiny  have  been  brought  to  the  Commission's  attention  through 
notifications.  They  also  provide  the  basic  material  for  the  Commission  to  determine  the 
necessity  and  scope  of  block  exemptions. 

The  Commission  is  aided  in  its  decision-making  on  individual  notifications  by  a  provision 
which  allows  interested  third  parties  to  submit  comments  following  publication  of  an 

<67)  The  Commission  currently  makes  on  average  20  decisions  a year  and  receives  250  notifications. 

(68)  Including  non-opposition  provisions. 

54 

obligatory  notice  in  the  Official  Journal. 

The  exemption  system  is  flexible  since  exemption  must  be  limited  in  time  and  may  be 
renewed.  The renewal process allows the Commission to reconsider the competitive  structure 
of  the  market  at  issue.  The  benefits  of  an  individual  exemption  may  be  withdrawn  by  the 
Commission  if  conditions  change  or  new  facts  are  revealed. 

189.  Speedy  and  Efficient  Enforcement 
Despite  the  fact  that  formal  decisions  are  feasible  only  in  a  limited  number  of  cases  the 
Commission  has  various  tools  to  ensure  that procedures  are  speedy  and  efficient 
-  Regulation  17 (Art.  4(2))  limits  the  number  of  cases that  need  to  be  notified 
-  block  exemptions  cover  the  bulk  of  vertical  agreements,  with,  where  appropriate,  non-
opposition  procedures 
-  comfort  letters  are  a  crucial  instrument  which  helps  the  Commission  cope  with  the  large 
number  of  notifications  it receives. 

190.  Legal  certainty 
Individual  exemption  decisions provide  complete  legal  certainty  throughout  the  Community. 
Block  exemptions also provide  complete legal certainty  for  those  agreements which  squarely 
fall  within  their  terms.  Negative  clearances  provide  legal  certainty,  but  a national  authority 
or  national  court  may  reach the  conclusion  that  an agreement  which  has  received  a  negative 
clearance  nonetheless  violates  national  law,  although  this  is  an  extremely  rare  occurrence. 
This  is  not  possible  with  respect  to  an  exemption. 

The  opposition  procedure  in  some  block  exemptions  is  a  tool  which  provides  the  greatest 
degree  of  legal  certainty  for  the  minimum  administrative  time  and  effort. 

Comfort  letters  carry  considerable  authority  although  they  do  not  provide  complete  legal 
certainty.  Companies can reasonably rely upon comfort  letters for  several reasons.  First, they 
indicate  the  Commission's  prima  facie  favourable  opinion  and  its  lack  of  interest  to  pursue 
the  case  further,  at  least  in  the  immediate  future.  The  Commission  would  not  revoke  a 
comfort  letter  or  take  a  decision  at  odds  with  one  unless  a  major  change  in  the  facts  or 
circumstances  were  to  occur.  These  are  the  same  conditions  under  which  the  Commission 
might  withdraw  the  benefit  of  a  formally  granted  exemption  decision.(69) 

Second,  a comfort  letter  demonstrates  an informal  commitment  by the  Commission  that  if  it 
were  to  become  necessary,  a formal  decision  would  be  issued. 

Third,  a comfort  letter  discourages  third  parties  from  challenging  an agreement,  although  in 
several  instances  they  have  done  so  when  in  possession  of  new  evidence.  For  example,  the 
Court  of  First  Instance  concluded  that  since the Commission's  provisional  analysis of  market 
conditions  on which  a comfort  letter  had been based  changed  sufficiently  due to the  entry  of 

(60) Art  8 of Regulation  17/62 enables the Commission  to withdraw  the benefit  of an exemption  decision  where: 
"(a)where  there  has  been  a change  in  any  of  the  facts  which  were  fundamental  in  the  making  of  the  decision, 
(b)where  the  parties  commit  a breach  of  any  obligation  attached  to  the  decision, 
(c)where  the  decision  is  based  on  incorrect  information  or  was  induced  by  deceit, 
(d)where  the  parties  abuse  the  exemption  from  the  provisions  of  Article  85(1)  of  the  Treaty  granted  to  them 
by  the  decision." 

55 

new  competitors,  and  barriers to  market  access existed  which  the  Commission  had  not  been 
aware  of at the time  it issued  the comfort  letter,  the Commission's  reopening  of  a procedure 
after  it had  issued  a  comfort  letter  was justified.(70) 

Finally,  although  not  bound  by  a  comfort  letter,  no  national  court  or  national  authority  has 
ever  issued  a decision  at  odds  with  the  position  expressed  in  one.  These  comfort  letters  are 
highly persuasive because they indicate the Commission's assessment of the agreement. Thus, 
a  national  court  may  be  confronted  with  the  question  of  the  legality  of  an  agreement  for 
which  the  Commission  had  granted  a  comfort  letter  stating  that  the  agreement  merits 
In  such  a  case,  the  court  "may  take  account  of  these  letters  as  factual 
exemption. 
elements."(7,) 

The legal certainty provided by a comfort  letter is even stronger if a notice has been published 
pursuant to Regulation  17, Article  19(3), which has not elicited adverse comments from  third 
parties. 

191.  Consistency 
The current  system promotes consistent  and uniform  application  of Article  85 throughout  the 
Community  for  vertical  restraints. Regulation  17 confers  on the Commission  the  function  of 
central  antitrust  authority,  granting  it  sole  power  to  declare  Article  85(1)  inapplicable  by 
granting  an exemption  pursuant to  Article  85(3), subject  only to review by the  Court of  First 
Instance  and  the  Court  of  Justice.  Once  an  exemption  has  been  granted,  it  is  binding 
throughout the Community, and national Courts and competition authorities may not  thereafter 
decide that the agreement violates Community competition  law.  In this way, decisions which 
involve  complex  evaluations  of  economic  matters  or  balancing  competition  policy  against 
other  policies  of  the  Community  and  which may have far-reaching  consequences  throughout 
the  Community  are  taken  by  competent  Community-level  authorities. 

192.  One  Stop  Shopping/decentralisation 
The  current  system  creates  for  vertical  restraints  a  "one  stop  shop" for  business  with  respect 
to  obtaining  an  exemption  under  Article  85(3). National  authorities  and  courts  can  play  an 
appropriate  role  determining  whether  the  block  exemptions  apply,  dealing  both  with 
complaints  and  with  restrictions  of  competition  that  cannot  be  exempted. 

(70)  Langnese-Iglo  GmbH  v.  Comm'n,  T-7/93  (8.6.1995),  paras.  38-40. 

(71) Notice on cooperation  between national courts and the Commission  in applying Articles 85 and 86 of the EEC 
Treaty,  93/C  39/05,  13.2.1993,  para.  25(a). 

56 

Chapter  VI 

COMPARISON  OF  COMMUNITY  LAW  WITH  MEMBER  STATE  AND  SOME 
THIRD  COUNTRY  LAWS  APPLICABLE  TO  VERTICAL  RESTRAINTS 

193.  This chapter compares Community  law and policy with Member  State and some third 
country  laws,  both  substantive  and  procedural,  as  they  apply  to  vertical  restraints(72). 
It 
demonstrates  that  in  general,  the  Member  States  and  third  countries  surveyed  place  greater 
emphasis  than  the  Commission  on  economic  analysis  of  the  market  in  determining  whether 
a  vertical  restraint  constitutes  a  violation.  Moreover,  since  none  of  these  jurisdictions  is 
concerned  with  market  integration,  they  do not provide  for  protection  of parallel  imports,  as 
the  Community  system  does. 

I.SUBSTANTIVE  LAW 

Member  States  With  Laws  Similar  to  Article  85 

194.  The  laws of  9 Member  States (Belgium,  France,  Greece, Ireland,  Italy,  Luxembourg, 
Portugal,  Spain  and  Sweden)  follow  the  approach  of  the  Community,  with  national  laws 
which resemble Article  85 with its two-part structure, containing  a general prohibition  and an 
exemption  provision.  They  follow  the  Community's  classification  scheme  for  vertical 
restraints, including both territorial and non-territorial restraints, and they apply similar criteria 
to  analyze  whether  a  violation  exists  (e.g.,  market  position  of  parties,  foreclosure  effect, 
effects  on  intrabrand  and  interbrand  competition).  In cases which have been  decided  to  date 
by  national  courts  or  authorities  under  these  laws,  the  influence  of  Community  law  is  often 
apparent.  Resale Price Maintenance (RPM) is per se prohibited in France and Spain, although 
recommended  prices  are  allowed.  In  Italy,  RPM  is not  per  se  illegal,  but  is  analyzed  on  a 
case-by case basis.  National  block exemptions have been adopted  by 3 of the Member  States 
with  laws  similar  to Article  85 (Ireland,  Spain and  Sweden).  In all  instances, national  block 
exemptions  correspond,  to a greater  or lesser extent,  to Community  block  exemptions.  Only 
two of these Member  States (Spain and  Sweden) have adopted a de minimis rule.  France and 

(72)  The  information  in  this  chapter  is based  on  three  sources. 

The  first  ("Survey  of  the  Member  State  National  Laws  Governing  Vertical  Distribution  Agreements")  was 
prepared  by  DG  IV  in  1995,  and  published  in  1996  by  the  Office  of  Official  Publications  of  the  European 
Communities. 
It  contains  basic  information  about  the  national  systems  concerning  vertical  distribution 
agreements. 
The  second  ("Proceedings  of  the  European  Competition  Forum")  concerns  the  Forum  organized  by  DG  IV  in 
the  spring  of  1995,  which  was  attended  by  representatives  of  each  of  the  Member  State  national  authorities, 
among others. It consisted of three panels: exclusive distribution, selective distribution,  and suppliers'  economic 
dependence on large distribution  groups. The proceedings, copublished  in  1996 by John Wiley and  Sons Ltd and 
the  Office  for  Official  Publications  of  the  European  Communities.  A  summary  was  published  in  DG  IV 
Newsletter  No.  5 Vol.  I  Summer  1995  by  Larraine  Laudati. 

The  third  ("Surveys  of  the  Member  States'  Powers  to  Investigate  and  Sanction  Violations  of  National 
Competition  Laws")  prepared  in  1994,  and  published  in  1996  by  the  Office  of  Official  Publications  of  the 
European  Communities,  was  used  with  respect  to  certain  procedural  issues  pertaining  to  notifications.  Whilst 
every  case  has  been  taken  to  check  the  accuracy  of  the  information  given  in  this  chapter  relating  to  Member 
States and third  countries  it represents the opinion  of the Commission  and does not necessarily  reflect  the views 
of  Member  States  or  third  countries. 

•57 

Italy  have  indicated  that they  do not  have  such  a rule  because  they  prefer  to  carry  out  a  full 
analysis  of  the  market  and  the  market  position  of  the parties. 

195. 
Several  Member  States  which  have  laws  similar  to  Article  85  indicated  that  their 
application  of  national  law  governing  restrictive  agreements  differs  from  the  Commission's 
application  of  Article  85.  For  instance,  the  Italian  authority  carries  out  a  rule  of  reason 
analysis  both  to  determine  whether  a restriction  exists  and  whether  an  exemption  should  be 
granted,  relying  heavily  on  economic  analysis,  especially  the  economic  impact  of  the 
agreement  in the relevant  market.  Market  access, market  position  of  the parties, duration  of 
the  agreement,  and  cumulative  effect  of the  network  of  distribution  systems  are  considered. 
The  Italian  authority  stated  in  its  comments: 

[W]hat  is to  be considered  a restriction  of competition  under  Article  85 of the  Treaty 
as  well  as  under  the  corresponding  national  provisions  is  in  no  way  a  self-evident 
issue. 

Under  a traditional,  legalistic  approach one may consider  Article  85 to prohibit  some 
clauses  in  vertical  agreements.  Nevertheless,  an  increasingly  shared  view  is  that 
Article  85(1)  should  be  interpreted  as  prohibiting  vertical  agreements  only  in  so  far 
as they  have  an  economic  impact  restricting  competition  on the  market.  Notably,  in 
many judgments  the  European  Court  of  Justice  has held  that  the  restrictive  nature  of 
a  vertical  agreement  within  the  meaning  of  Article  85(1)  can  be  considered  only  by 
reference  to its economic and legal context.  On an economic appraisal, there is ample 
support  for  the view that  an examination  of the potentially  restrictive nature  (in  terms 
of  competition)  of  a  vertical  agreement  should  not  be confined  to  its  formal  aspects. 

196. 
In  France, the  lawfulness  of  distribution  agreements  is assessed  with reference  to  the 
clauses  in  the  contracts  and  the  way  in  which  they  are  applied  in  the  economic  context  in 
which  the  distribution  system  operates.  This  method  is  utilized  irrespective  of  whether  the 
exclusivity  clauses  are  in  an  isolated  contract  or  a network  of  contracts. 

The  French  authority  believes that  its interpretation  differs  from  the  Commission's,  because 
under French practice exclusivity  in sales or purchasing does not in itself restrict  competition. 
Thus,  it  takes  a  favourable  view  of  distribution  systems,  believing  that  they  contribute  to 
economic  efficiency  and  generally  comply  with Article  85(1)  or the national  law  equivalent, 
except  where  they  are  accompanied  by  clauses which  may  be  injurious  to  competition.  The 
authority  decides  whether  a  restriction  exists  on  the  basis  of  an  economic  analysis,  taking 
account  of  the  increased  competition  that,  more  often  than  not,  is  generated  by  this  type  of 
system.  Foreclosure  and  the  cumulative  effect  of  a  network  of  agreements  constitute 
principal  criteria  for  assessing  whether  a  restriction  of  competition  is  present.  The  French 
authority  views  the  presence  of  a degree  of  permanent  competition  as  a justification  for  not 
finding  a restriction,  which  it contrasts  with  the  Commission's  approach,  which  considers  it 
as  a  condition  for  granting  an  exemption. 

If,  after  this  initial  assessment,  the  French  competition  authority  concludes  that  an 
197. 
appreciable restriction of competition is present, it considers whether an exemption is justified. 
Its  analysis  is more  strict  than  the  Commission's  at  this point.  The  authority  explained: 

58 

[R]ecent exchanges among Member State authorities, notably that held in Brussels last 
spring,  [at the European  Competition Forum] showed that several countries  [with laws 
similar  to  Article  85]  consider  that  vertical  agreements  may  have,  in  certain  cases, a 
favourable  effect  on  competition. 

It is only  when vertical  agreements have a potentially  anticompetitive  object  or  effect 
that  they  are  prohibited  under  the  1986  competition  law,  unless  they  result  in  a 
sufficient  economic benefit.  The provision  on abuse of dominant position  is based  on 
the  same  conditions. 

Member  States  With  Laws  Not  Similar  to Article  85 

198.  The  laws  applicable  to  restrictions  of  competition  in the  remaining  6 Member  States 
(Austria,  Denmark,  Finland,  Germany, 
the  Netherlands  and  the  UK)  do  not  resemble 
Community  law.  A  violation  is  generally  based  on  the  finding  of  some  type  of  abuse: 

- 
- 
- 

- 

- 
- 

in  Austria; 
in  Denmark,  where  a  "dominant  influence"  may  be  exerted; 
in  Finland,  the  agreement  affects  price  formation,  decreases  efficiency,  prevents  or 
complicates  the  practising  of  trade  by  another  party,  or  is  incompatible  with  a  binding 
international  agreement  in a manner  incompatible  with  sound  and  effective  competition; 
in Germany, the restraints have an adverse effect  on competition (for exclusive  distribution 
agreements,  exclusive  purchasing  agreements,  and  selective  distribution  systems),  or  the 
restraints  exceed  the  scope  of  licensed  rights  (for  license  agreements); 
in  the  Netherlands,  the  restraints  are  contrary  to  the  general  interest; 
in  the  UK,  contrary  to  the  public  interest. 

199.  The classification  scheme for violations varies considerably among these countries, but 
all  of  them  have  per  se  rules  against  RPM.  Austria  is  the  only  country  in  this  group  which 
has  adopted  block  exemptions,  which  are  similar  to  Community  block  exemptions. 

200.  Five  of these  countries  (all  but Finland) are currently  considering  reforms  of  national 
competition  law  which  may  bring  them  more  into  line  with  Community  law. 

201.  The German authority takes the view that a restrictive organization of distribution does 
not  as a rule  endanger  workable  competition,  but can do so when combined  with  a degree  of 
market  power.  Thus,  under  German  law,  exclusive  distribution  agreements  and  exclusive 
purchasing  agreements  are  permissible  in  principle  but  subject  to  supervision  by  the 
competition  authorities  in  order  to  prevent  abuse. 

202. 
In the UK, exclusive distribution and exclusive purchasing agreements are not covered 
by  the  law  dealing  with  agreements,  but  rather  by  the  law  which  allows  the  authorities  to 
investigate on a case-by-case basis if a market share threshold of 25% is reached either by one 
firm  or  a  group  of  firms  through  a  network  of  vertical  arrangements.  A  rule  of  reason 
analysis  is followed,  which  involves  a balancing  of  the  effect  that  vertical  restraints  have  on 
competitive  rivalry  at both manufacturing  and retailing level against the benefits  arising  from 
efficiency  gains. 
In  making  this  analysis,  two  main  structural  conditions  are  considered 
relevant: 

59 

-  market  imperfections  upstream  or  downstream,  giving  rise  to  significant  individual  or 

collective  market  power  in the  short  to  medium  term; 

-  widespread  use  of  vertical  restraints  in  a  given  product  market,  affecting  a  significant 

proportion  of  total  market  sales, with  no  history  of  significant  entry. 

Efficiency  gains  are  considered  by  UK  authorities  as  least  likely  to  be  strong  when  the 
product  is  simple  or  non-technical,  inexpensive,  subject  to  repeat  purchases,  sold  in 
convenience  outlets,  and  when  consumer  information  is widely  available,  strong  branding  is 
present,  the product  is mature, entry  barriers in retailing  are high, and  economies of  scale in 
retailing  are  substantial.  RPM is illegal, but  allowed  if the Restrictive  Practices  Court  rules 
that  failure  to  apply  minimum  RPM  would  cause  a net  detriment  to the public.  Several  in-
depth  studies have been  carried  out recently  which  involve  issues of vertical  restraints  in the 
beer,  petrol,  carbonated  drinks,  cars  and  ice cream  sectors. 

Third  Countries  (USA  and  Canada) 

-  United  States 

203.  The  goal  of  US  antitrust  law  is  to  promote  consumer  welfare;  it  has  no  goal  to 
promote  market  integration.  Vertical  restraints  are  mainly  governed  by  Section  1  of  the 
Sherman  Act,(73)  which  provides  that  every  contract,  combination  in  the  form  of  trust  or 
otherwise, or  conspiracy,  in restraint  of trade or commerce  among the  several  states, or  with 
foreign  nations,  is  illegal. 

In  1977, the Supreme  Court ruled  in GTE Sylvania{74) that non-price vertical  restraints 
204. 
are to  be  subjected  to  analysis  under  the rule of reason,  recognizing  that  such restraints  may 
"promote inter-brand  competition by allowing the manufacturer  to achieve certain  efficiencies 
in  the  distribution  of  his  products".  In  the  absence  of  market  power  by  the  manufacturer, 
distribution arrangements which contain non-price vertical restraints are generally  considered 
to  be  legal because  they promote  efficient  delivery  and a stable  supply of goods  and  services 
for  the  consumer,  and  to  increase  interbrand  competition  by  enhancing  the  ability  of 
manufacturers  within  an  industry  to  compete  for  customers.  Moreover,  the  anticompetitive 
risks  of  such  restraints  is  generally  believed  to  be  low,  as  the  manufacturer's  interest  is  in 
developing  effective  distribution  in  order  to  maximize  sales  to  consumers,  and  thus  it  has 
every incentive to encourage intrabrand competition among distributors in order to keep prices 
low. 

205.  Rule of reason analysis involves identification  of the relevant market,  establishing the 
defendant's  market  power  as well as a multitude of other factors  used to analyze whether  the 
restraint  adversely  affects  competition  in  the  inter-brand  market,  and  the  justifications 
establishing  a legitimate  objective  and the necessity  of the restraint to achieve that  objective. 
The  defendant  has  the  burden  of  establishing justifications  to  rebut  the plaintiffs  claim,  but 
the ultimate burden rests with thé plaintiff  to convince the court that the restraint,  on balance, 
has  an  anticompetitive  effect.  Whether  there  are  less restrictive  alternatives  to  the  restraint 
in  question  in  order  to  achieve  the  legitimate  objective  must  also  be  considered. 

(73)  In  certain  circumstances,  Section  2 of the  Sherman  Act  and  Section  3 of the Clayton  Act may  be  applicable 
to  vertical  restraints. 

(74)  Continental  T  v.  GTE  Sylvania,  433  U.S.  36 (1977). 

60 

206.  US  courts  tend  to  be  more  cautious  about  the  anticompetitive  effects  of  interbrand 
restraints, and may demand a thorough market analysis including inquiry into "both the extent 
of the foreclosure  and the buyer's and seller's business justifications. "(75)  The degree to which 
competing  manufacturers  are  deprived  of  outlets  for  their  products,  or  distributors  are 
prohibited  from  using alternative  suppliers, is a threshold  factor  in analysis of such restraints. 

207.  There  is  no  de  minimis  rule  in the  US.  RPM  is per  se  illegal  under  US  law.  Retail 
price  suggestions,  however,  do  not  fall  within  the per  se  prohibition. 

-  Canada 

208.  Exclusive dealing and tying arrangements which are likely to have exclusionary  effects 
on the market because they are engaged in by a major  supplier  of a product  or widespread  in 
a  market,  with  the  result  that  competition  is  likely  to  be  lessened  substantially,  may  be 
prohibited  by  the  Competition  Tribunal.  A  "market  restriction"  is  defined  as a  requirement 
imposed  by  the supplier  on the customer,  requiring  that a customer  supply  any product  only 
If  such  a  restriction  is  likely  substantially  to  lessen  competition  in 
in  a  defined  market. 
relation  to  the  product,  such  as  when  it  is  engaged  in  by  a  major  supplier  of  a  product  or 
because  it  is  widespread  in  relation  to  the  product,  it  may  be  prohibited  by  the  Tribunal. 
Finally,  a  supplier  may  be  ordered  by  the  Tribunal  to  sell  to  a  given  customer  who  may  be 
substantially  affected  in his business due to his inability to obtain adequate supplies, provided 
he  is  willing  and  able to meet  usual  trade terms.  Restrictions  on  interbrand  competition  are 
viewed  more strictly than restrictions on intrabrand  competition.  No de minimis rule applies, 
but  authorities  place  low priority  on  cases  of  low  economic  impact. 

II. 

NOTIFICATION  SYSTEM 

Member  States  With  Laws  Similar  to  Article  85 

209.  A  notification  requirement  for  restrictive  agreements  which  is  similar  to  that  of  the 
Community's  -  that  is,  requiring  notification  only  when  an  exemption  and/or  negative 
clearance  is  sought  -  exists  in  6  of  the  Member  States  with  laws  similar  to  Article  85 
(Belgium,  Greece,  Ireland,  Portugal,  Spain  and  Sweden).  However,  of these,  only  Belgium 
and  Sweden  have  the  same  rules  regarding  immunity  from  fines  after  notification.  No 
immunity  from  fines  is  available  in  Greece  or  Portugal;  Irish  law  does  not  provide  for 
imposition  of  fines. 

210.  France  and  Italy  do  not  require  notification  of  restrictive  agreements.  In  Italy,  a 
voluntary  notification  system  exists.  In  France,  no  notification  system  exists  for  restrictive 
agreements;  enforcement  authorities  rely  on  other  means  to  learn  of  violations: 

French  law  is  based  on  a  postulate  opposite  to  that  which  holds  that  agreements  or 
commercial  cooperation  in  vertical  relations  are  prohibited  a priori.  This  is why  we 
do  not  have  an  obligatory  notification  system.  Such  a  system  does  not  seem  to  us 
necessary  since  we  consider  vertical  agreements  to  be  a priori  lawful. 

(75)  Barry  Wright  Corp.  v.  ITT  Grinnell  Corp.,  724  F.2d  227,  236-37  (1st  Cir.  1983). 

61 

Member  States  With  Laws  Not  Similar  to  Article  85 

211.  A  notification  system  similar  to the Community's  exists  in Finland,  but  no  immunity 
from  fines  is provided  for. 

In Germany, vertical restraints are generally subject to abuse control, and need not be  notified; 
notification  is required  only  of  those  restrictions which  limit  freedom  to  set  prices  or  terms 
of  business,  which  are  generally  prohibited  but  may  qualify  for  exemption. 

Notification  of  restrictive  agreements  is required  in  Austria,  Denmark,  the  Netherlands  and 
the  UK,  without  regard  to whether  an  exemption  or  negative  clearance  is either  available  or 
sought.  Notifications  are  required  to  provide  authorities  with  the  information  needed  to 
determine  whether  an  abuse  exists. 

In  Luxembourg,  no  notification  system  exists  for  restrictive  agreements. 

Third  Countries 

212.  Neither  the  United  States  nor  Canada  has  a  notification  system  with  respect  to 
restrictive  agreements. 

III.  NUMBER  OF  CASES  BROUGHT 

213.  Member  States  in both  groups  have, in  general,  brought  a moderate  number  of  cases 
annually  for  violations  of vertical  restraints  laws.  Data, however,  are not  available  in  several 
Member  States or may not be comparable due to differences  in the national  systems or record 
keeping practices.  A rough indication of the range of activity  is from  0 cases brought  in some 
Member  States  (Belgium  and  Austria)  to  approximately  25  a year  in  Germany. 

In  the  US,  vertical  restraints  were  virtually  ignored  by  federal  enforcers  during  the 
214. 
1980's.  However,  state  enforcers  brought  some  actions for  RPM  violations.  In more  recent 
years, RPM cases have been prosecuted by both federal  and state enforcers,  sometimes jointly. 
However,  few  actions  are brought  with respect  to other  types  of vertical  restraints.  In  recent 
years,  some  have  been  brought  in  the  health  care  sector,  a  political  priority,  which  involve 
primarily  local  markets  and  when  significant  market  power  is more  likely  to  be  found. 

215.  Enforcement  appears  to  be  light  with  respect  to  vertical  restraints  in  Canada. 

IV. 

CONCLUSIONS 

216.  There  is  considerable  diversity  in  the  arrangements  for  handling  vertical  agreements 
employed  in the  Member  States  and  third  countries  discussed  here.  However,  certain  major 
aspects  in  which  these  systems  are 
consistent,  and  consistent  in  differing  from  the 
Community  system,  can  be  identified.  First,  they  hold  that  economic  analysis  should  be 
employed  in the  first  instance  to  determine  whether  a violation  is present.  This  is true  of  at 
least some of the Member  States with systems based on the Community  system (most  notably 
France and Italy), some of the Member States with systems which differ  from  the  Community 
system  (most  notably  Germany  and  the  UK)  and  third  countries  (both  the  US  and  Canada). 

62 

217.  Second, neither  several  Member  States, nor the US and Canada, employ a  notification 
system  with  respect  to  restrictive  agreements.  This  is  because  they  believe  enforcement 
resources  can  be  put  to  better  use  in  other  ways,  such  as  investigating  complaints  which 
involve  vertical  restraints.  The  absence  of  a  notification  system  is also  consistent  with  the 
premise  that  vertical  agreements  are  a priori  lawful. 

218.  Third,  only  a small  number  of  cases involving vertical  restraints are brought  in  these 
systems,  which  is  again  consistent  with the  notion  that  these  restraints  are  a priori  lawful. 

63 

Chapter  VII 

RESULTS  OF FACT  FINDING 

I.  Purpose  and  methodology 

219.  As part  of the preparation of the Green Paper,  it was decided to carry  out  a  fact-finding 
exercise  in  the  form  of  interviews.  Several  dozen  manufacturers,  retailers  (also  wholesale, 
import-export)  and  associations,  both  at  European  and  national  level,  were  contacted.  In 
addition,  a  number  of  interviews  were  held  with  research  institutions  or  individuals  with 
specific  knowledge  about marketing or distribution techniques in the various industry  sectors. 
The  majority  of  the  interviews  concerned  the  area  of  consumer  goods,  both  food  and  non 
food.  This list of  interviews was not fully  representative:  for  logistical  reasons the  Benelux, 
plus  the  neighbouring  areas  of  Northern  France,  Western  Germany  and  the  South  of  the 
United  Kingdom  were  over  represented. 

220. The overwhelming majority  responded favourably  to our invitations. Meetings were held 
between June and August  1994.  Discussions scheduled with some of the industry  associations 
turned  out to  be  full-fledged  round-table  discussions,  involving  a large  number  of  managers 
and  other  business  representatives  from  a  whole  range  of  industry  sectors.  Although  the 
Commission  tried  to  achieve  a maximum  balance  between  the  various  groups  and  parties  in 
order  to  get  the  broadest  range  of  existing  views,  it  is  obvious  that  the  results  of  these 
interviews  cannot  be  held  to  be  representative  for  any  statistical  purpose.  The  Commission 
would  appreciate  comments on the results of these interviews, particularly  if it is felt  that  the 
geographic  or  sector  sample  is not  representative. 

221.  Many  points  raised  by the  interlocutors  were  industry-  or  sector-specific.  Others,  such 
as  the  issue  of  the  power  relation  between  manufacturers  and  retailers,  or  the  problem  of 
parallel  trade, were discussed  at virtually  every meeting.  All meetings were  held  informally, 
and  off  the  record.  Therefore,  most  interlocutors  were  prepared  to  use  clear  language,  to 
reveal  sensitive  facts  and  to  support  their  views  with  anecdotal  evidence  based  on  their 
experience,  or  even  involving  confidential  information.  The  following  pages  contain  a 
summary  of  the  basic  findings  without  mention,  however,  of  any  company  specific  data. 

H.Changes  in  society  and  customer  demand 

222.  Customer  dynamics  have  changed  remarkably,  with  greater  polarization  in  terms  of 
income  and  a  population  which  is  growing  older.  Market  saturation  has  triggered  new  and 
more  complex  demand  structures  of  the  individual  customers.  Demographic  changes  affect 
patterns  in shopping  which  have essentially  led to a concentration  in terms  of  ownership and 
outlets.  For  fast  moving  customer  goods  (fmcg)  customers  shop  less frequently,  and  like  to 
make  all  their  purchases  at  one  go  rather  than  in  several  different  outlets.  The  increasing 
differentiation  in  customer  demand  is said to be  one  of  the major  reasons  of  success  for  the 
new  specialised  discounters.  As an example,  furniture  makers are expanding  into  decoration 
and  other  accessory  items.  The  print  sector  was  quoted  as  a  prototype  sector  where 
proliferation  and  specialization  of  the  products  offered  to  the  customers  could  be  observed. 

64 

III. 

Technological  changes 

Information  Technology  (IT) and in particular electronic point-of-sale  scanning, more 
223. 
and  more  used  for  stock  control,  have  boosted  the  just-in-time  systems  and  changed  the 
balance  of  information.  These  new  technologies,  together  with  retail  loyalty  cards,  allow 
retailers  nowadays  to  define  the  old  marketing  strategies  without  having  to  rely  on 
manufacturers'  information.  Management  of  information  will  allow  to  control  just-in-time 
deliveries even when a large product range is involved (hypermarkets), to lower stocking costs 
and to improve productivity through automatic re-ordering of goods.  Possible cost reductions 
through the introduction of IT technology are generally  said to be of limited scope.  However, 
since  margins  in  distribution  are very  low, any  reduction  in cost  may  have  significant  effect 
on  profitability. 

224.  Mail order and distance selling companies are increasingly using audio- and video-text, 
CDI,  CD-Rom  as  well  as  interactive  television  for  the  distribution  of  their  products. 
Teleshopping  is  said  to  have  the  potential  to  become  an  extremely  important  tool  in  the 
distribution  of  retail  goods.  Some  interlocutors  were  quite  optimistic  about  present  trial 
projects  concerning  distribution  via  interactive  television  without  being  able,  however,  to 
determine  the  main  beneficiary  of  IT  technology  among  the  big  retailers,  manufacturers,  or 
even television  channels and  media undertakings.  Some voiced  concerns  that IT tools  might 
become  monopolised  by  either  manufacturers  or  retailers.  Developments  in  interactive 
television  were  said  to  be  no  major  danger  to  the  well  established  business  of  mail-order 
companies, since the former  was essentially targeting upmarket segments, while the latter was 
said  to  be  a relatively  downmarket-oriented  business. 

225.  Another  recent  trend  concerns  the  development  of  in-house  transport  and  logistic 
infrastructures.  Use  of  own  transport  facilities  allowed  large  distributors  to  rationalize  their 
deliveries  and  intra-networks  supplies,  while  reducing  costs.  These  new  developments  have 
also  triggered  important  changes  in  the  way  products  are  being  marketed.  For  instance, 
products are often  packaged  only at the last minute so that specific  marketing promotions can 
be  incorporated  into  the  labels. 

IV. 

Structure  of  distribution 

226.  Many interlocutors described  the distribution of the 60's and 70's as being  fragmented 
and  unorganised,  totally  dependent  on  industry  and  often  confronted  with  compulsory  sale 
prices  and/or  boycotts.  Progressively,  the  distribution  function  has  emancipated  itself  from 
the manufacturing  industry, and is now constituting  an industry  in its own rights.  Distributors 
gather  and  own  information  on  how  and  where  which  products  are  sold,  and  have  the 
capability  of  advising  suppliers  on  consumer  demand. 

In  the  past,  distribution,  and  in particular  food  distribution,  has  followed  a  volume-
227. 
oriented  strategy.  The  introduction  of  IT  and just-in-time  distribution  will  gradually  bring 
about  the emergence  of  new  logistical  functions,  such as order-grouping.  A  number  of  small 
companies are already  specializing  on home deliveries, especially in the area of beverages and 
frozen  foods. 

228.  There  has  been  a  fragmentation  of  retail  format  and  a proliferation  of  the  variety  of 
store  types.  In  addition  to  traditional  grocery  retail,  normally  supermarkets,  new  discount 
stores,  club  stores  and  cash  and  carry  stores  are  emerging.  The  main  groups  to  be 

65 

distinguished  are the  'classic', small retail, the urban warehouses, the discounters, the  special 
multiples  and  new  forms  of  distribution,  such  as  direct  marketing  companies  (mail-order, 
telemarketing  fulfilment  houses, printers  and  publishers,  teleshopping  and  small  specialized 
agencies).  For example, telemarketing  companies are already  well established  in the  field  of 
computers, books, and records.  Banking is an area of growth. The success of direct marketing 
techniques  seems to  depend  on the product.  For  instance, while  75 % of  car-insurance  sold 
in  the  Netherlands  are  sold  through  the  phone,  pension  schemes  still  require  face  to  face 
interviews. 

229.  Fulfilment  houses process and carry out  actual fulfilment  of an order on behalf of the 
manufacturer.  They  do not purchase the goods, do not handle stocks and do not fix the price 
for  the  end-consumer.  Mail  order  companies  usually  carry  out  the  fulfilment  of  orders  in-
house.  Specialised  agencies offer  the service to smaller  companies.  This new industry  offers 
the possibility  of test sales of  new products in a much cheaper  way than having to  distribute 
the  products  to  retail  outlets.  This  is important  since  roughly  two thirds  of  all  new  product 
introductions  failed. 

230. 
In some sectors, the classic separation between producer, agent, wholesaler and retailer 
no longer exists.  Large retailers nowadays source directly from producers.  To take beverages 
as  an  example,  in  some  Member  States  more  than  60  %  of  wines  are  purchased  in 
supermarkets. 

231. 
Some  industry  sectors,  such  as  pharmaceuticals,  have  not  yet  witnessed  any  sizable 
vertical  integration.  In other  sectors, such  as beverages,  producers  have pursued  a policy  of 
vertical  integration  and  have  taken  over  exclusive  national  importers. 

232. 
It was generally acknowledged that information technology has resulted in goods being 
pulled  down  the  supply  chain  by  retailers  rather  than  pushed  down  the  supply  chain  by 
manufacturers.  It  was  also  recognised  that  there  is now  a concentration  at  either  end  of  the 
supply  chain and that many  intermediaries/wholesalers  have disappeared,  a factor  which  may 
increase  barriers  to  producer  entry.  There  was  no  mainstream  opinion  on  the  question  on 
whether  the  disappearance  of  wholesalers  had  resulted  in  the  decline  of  exclusivity.  Some 
interlocutors pointed  out that concentration  in the retailing  sector had forced  the producers  to 
look  for  new  outlets,  e.g.  sales through  service  station  shops. 

V. 

Relations  between  manufacturers  and  retailers 

233.  Although  the  balance  of  power  has  clearly  shifted  towards  retailers  in  the  course  of 
the last years, the question of whether it is the manufacturer  or the retailer who can  determine 
the terms and  conditions  of their  mutual  relation  seems to depend  very  much  on the  position 
of a specific  brand  in a given market  segment.  Manufacturers  are more  and more  dependent 
on distributors  and grocery  retail for  getting their products to the consumers. Since the shelve 
space  for  new  products  is  limited,  conflicts  arise  between  the  increasing  number  of  new 
product  launches and the retailers'  objective  for profit  optimization. This conflict  has resulted 
in retailers  asking  for  listing  fees  (key money) or for  discounts schemes which  sometimes  go 
beyond  possible  cost  savings  of  the  manufacturers.  Given  the  pressure  on  shelve  space, 
products  which  are  not  in  a  number  one  or  two  position  increasingly  run  the  risk  of  being 
delisted  and  replaced  by  large  retailers'  own  brands.  As  a  consequence,  in  many  market 
segments,  the  position  of  the  number  one  and  two  suppliers,  has  in  many  instances  been 
copperfastened.  Market  access  for  other  suppliers  is becoming  increasingly  difficult. 

66 

234.  Some  interlocutors  were  of  the  opinion  that  basically  three  types  of  companies  have 
a chance to  survive  in the long run  :  large manufacturers  with  a broad  area of products  who 
'own  label  producers'  (i.e. 
invest  in  R&D  and  new  launches  of  product  leaders, 
manufacturers  who produce products for sale by retailers under their respective brand names), 
and  niche  operators.  On the  other  hand,  second  tier manufacturers  (i.e. those with  brands  in 
'sandwiched'  between  brand  leaders  and 
third  and  fourth  position)  are  increasingly 
downmarket  own  brands  of  big  retailers  and  often  have  no  choice  other  than  to  become  a 
subcontractor  and  to  produce  under  a retailer's  brand. 

In  the  view  of  some  independent  research  analysts,  there  are  limits  to  the  retailers' 
235. 
capability  to develop their own brands.  While manufacturers  are able to concentrate research 
and  development  as  well  as  marketing  costs  on  product  development  and  differentiation  in 
their  particular  area  of  market  presence,  retailers  need  to  assure  a broad  range  of  products 
available  via  their  network.  For  those  reasons,  they  can  achieve  only  limited  sales  per 
product.  As a consequence,  most  retailers  are unlikely  to  have  the  necessary  scale to  invest 
in  brands  since  research  and  development  costs  are  too  onerous  and  marketing  costs  with 
respect  to  each  product  need to  be  amortized  over  a wide  geographic  distribution  network. 

VI. 

Single  market,  parallel  trade 

236.  Many  interviewees  stated  that  the  legal  framework  set  by  the  Community  has  not 
worked  sufficiently  well  as a vehicle  capable  of  leading to  market  integration  in the form  of 
price  adjustments.  The  obstacles  to  parallel  trading  are  still  numerous  and  complex.  Some 
interlocutors  felt  that  competition  policy  made  companies  pay  the price  of  European  market 
integration.  It  was  argued  that  companies  should  be allowed  to  charge  what  markets  would 
bear.  Some  also  felt  that  the  distinction  between  active  and  passive  sales  was  outdated, 
especially  since  the  arrival  of  IT  on  the  market  place. 

There  are  still  very  significant  price  differences  within  the  European  Union,  and  sometimes 
even  for  the  same products  manufactured  by the  same company.  Transport  costs,  regulatory 
constraints and the relations between producers and distributors in the various Member  States 
account  for  these  differences.  Distributors  are  very  powerful  in  certain  areas  (France, 
Germany)  and  more  fragmented  in  others  (Greece,  Southern  Italy).  Price  differences  are 
important in the non-food  sector, but even more significant  for  food products.  It became quite 
obvious,  during  the  interviews,  that  many  retailers  do not take  advantage  of  opportunities  to 
exploit price differences  between Member  States, for  fear  of spoiling long-term relations with 
manufacturers  or,possibly,  being  faced  with  retaliatory  actions,  such  as  boycotts  or  price 
discrimination.  Cross-border  purchasing  groups  do  not  yet  seem  to  have  had  a  significant 
impact. 

Logistic  and  other  'natural'  constraints 

237.  For  some  markets,  transportation  costs  are  simply  too  high  to  trigger  a  substantial 
amount  of  parallel  trade  and  so prevent  goods  from  being  shipped  cross-border.  In  addition, 
there are huge discrepancies as to national preferences and local tastes of the consumers which 
are unlikely to fade quickly.  Because consumers have different  attitudes and demand  different 
qualities,  there  are  also  huge  product  differentiations  and  different  distribution  techniques  to 
be  observed. 

67 

Some  of the  price differences  can be  explained  by  the  fact  that  manufacturers  are  operating 
on  the  basis  of  separate  manufacturing  facilities  with  their  own  specific  costs  structures.  To 
towards  sourcing  on  a  European  level,  the  cost 
the  extent  that  manufacturers  are  moving 
structure  of  the  respective  industrial  subsidiaries  are  moving  closer.  This,  in  turn,  will 
contribute  to  the  reduction  in  price  differences.  For  some  products  where  trade  between 
Member  States  is  easy,  price  convergence  has  occurred  due  to  competitive  pressures. 

While many manufacturer  markets can be said to have a unified  European supply and demand 
structure,  consumer  good  markets  at  retail  level  are  very  much  segmented  along  national 
boundaries.  Hugh  differences  can  be  observed  in  customer  behaviour. 

Regulatory  constraints 

238.  Different  national  requirements  still  isolate  markets  and  prevent  parallel  trade.  For 
example, labelling requirements - often  arising primarily  from  environmental  considerations -
are  still  very  different.  In  addition,  packaging  and  coding  requirements  are  different. 
Reference  was also made to the  growing  importance of national  codes of practice on matters 
such  as advertising  and  marketing. 

Trademarks are sometimes used to partition a market nationally.  On the other hand,  it is said 
to  be  difficult  to  get  the  same  trademark  registration  throughout  Europe  because  of  the 
existence  of  different  prior  rights  on  the  different  national  registers  and  also  because  of 
differences 
in  dealing  with 
counterfeiting  and  in  preventing  unfair  competition. 

in  culture.  Nonetheless,  trademarks  are  of  great  value 

239.  Even  for  direct  marketing  and  mail-order  companies,  barriers  to  trade  are  still 
important.  Postal  monopolies  create  problems  of  reliability  in  many  countries.  In  addition, 
copyright issues, unclear fiscal regulations, exchange rates and charges associated with transfer 
of  money  are  additional  impediments.  Advertising  across  frontiers  is  complicated,  and 
consumer  products  need  to  be  adapted  to  important  local  preferences.  Demand  is  strongly 
national  oriented.  One  product  may  be  sold  in  one  country  for  different  reasons  than  in 
another. 

In  some  industries,  for  instance  pharmaceuticals,  it  is  apparently  difficult  to  get  the  same 
trademark  recognised  in  different  Member  States.  This  in  spite  of  the  fact  that  many 
companies  pursue  the  policy  of  worldwide  trademarks. 

Private  constraints 

240.  Many  manufacturers  are  not  convinced  that  efficiency  gains  from  a  single  product 
formulation  and  presentation  for  all  Member  States  would  outweigh  losses  arising  from  a 
reduction  in  the  ability  to price  differentiate  between  national  markets  as  a result  of  parallel 
trade.  Therefore,  many  manufacturers  are  said  to  impede  parallel  trade  wherever  possible, 
according  to  many  retailers.  The  quantities  available  through  parallel  exports  have  always 
been  too  small  to  become  a  reliable  source  of  supply. 

241. 
In many interviews, representatives from the distribution sector accused  manufacturers 
of  seeking  to  split  market  within  the  Community.  Such  strategies  were  said  to  be  mainly 
pursued  through  an  abusing  exploitation  of  intellectual  property  rights  and  the  operation  of 
selective distribution  systems.  For example, in the consumer  electronics sector, it was argued 

68 

that  manufacturers/exclusive  distributors  do  not  apply  the  principle  of  the  "European 
guarantee".  Parallel  sourcing  of  consumer  electronics  is  relatively  easy  if  the  goods  are 
designed  to  be  sold  under  the  distributor's  brandname,  whereas  supplies  are  refused  if  the 
retailer  -  without  being  member  of  the  selective  distribution  system  -  wishes  to  sell  them 
under  the  manufacturer's  brandname. 
It  was  further  argued  that,  within  the  consumer 
electronics market,  the customer  advice/aftersale  service  inherent to the selective  distribution 
system  can  only  be justified  in  respect  of the  more  sophisticated,  top-of-the-range  products. 

In many  instances  cross-border purchase requests are referred  back to the respective  national 
subsidiary  of  the  manufacturer.  The  vast  majority  of  our  interlocutors  from  the  retail  side 
indicated  that  they  would  not  be  interested  in  parallel  trade,  for  fear  of  spoiling  their  long 
term relations with their manufacturers.  Undertaking  parallel trade without the knowledge of 
if  not  impossible.  Computer-controlled 
the  manufacturer  was  increasingly  difficult, 
distribution networks with on-line connection to manufacturers  made track-and-tracing  easier, 
and  distribution  more  transparent. 

Some  large  retailers  are  sourcing  worldwide  and  are  able  to  surmount  attempts 

to 
242. 
partition  the  market,  without  risking  rebate  losses  or  the  uncertainty  as to  the  continuity  of 
supplies.  Some  interlocutors  implicitly  questioned  the distinction  between  active  and  passive 
sales.  Since most  consumers  did  not yet have the confidence  to shop crossborder  because  of 
the  lack  of  after-sale  service  and  the  difficulties  with  pursuing  legal  actions  against  foreign 
retailers, the permissibility  of passive  sales was  said to be mere window-dressing  in the  face 
of territorial exclusivity.  In some sectors sellers seem to actively discourage crossborder  sales 
solicited  from  individual  customers. 

Identification  numbers  can  also  be  used  by  manufacturers  to  trace  sources  of parallel  trade. 
Instances were reported  in which  suppliers had been  forced  to compensate exclusive  national 
distributors  who  had  been  harmed  by  parallel  trade. 

243. 
In  some  cases,  large  multinational  food  groups  maintain  compartmentalized  national 
markets.  A manufacturer  might have different  pricing  for  its products  in different  countries, 
depending  on,  for  instance,  whether  its  brand  is  a  leader  or  a  second  brand  in that  country. 
These  price  differences  are  maintained  by  forcing  retailers  to  purchase  from  the  local 
subsidiary  of the  manufacturer  at  local conditions.  This  seems to be a matter  of  concern  for 
many  distributors. 

VII.  Market  expansion  and  globalization 

244.  Expansion  into  new  territories  seems  to  depend  very  much  on  the  differential 
advantage that can be exploited by a distributor.  There have been examples of failed  attempts 
to  enter  the  North  American  market  for  instance,  whereas  the  same  companies  could 
successfully  establish themselves in other parts of Europe, Latin America or South East Asia. 

245. 
It  was  pointed  out  that,  at  present,  large  retailers  found  it  extremely  difficult  to 
penetrate  new markets  by opening up new points of  sale under their  own trade-names.  There 
seems to be, in each national market, a rather strong consumer  loyalty to national  distribution 
chains.  Furthermore, national legislation regulating commerce can in some instances represent 
an  obstacle  for  new  entrants. 

246.  Acquisition  of  local  retailers  seems  to  be  the  main  route  for  expanding  distribution 

69 

networks beyond national boundaries. Concentration at the distribution  level has forced  many 
small  specialised  retailers  out  of  the  market.  This trend  has  become  particularly  noticeable 
during  the  80's.  However,  there  is  still  room  for  new  entrants,  in  particular  in  the  area  of 
distance  selling (mail-order, video-sales).  Furthermore, large and small  scale distribution  can 
coexist  in  certain  specific  markets  (such  as jewelry). 

247.  To  the  extent  that  distributors  second-source  products,  it was  observed  that  sourcing 
outside the Community  is fast  developing  as supplies, namely  for  the Far East,  become  more 
reliable  in  terms  of  quality  and  of  continuity.  However,  import-quotas  into  the  Community 
especially  in  the  area  of  textiles, 

still  impede  the  full  exploitation  of  such  sources. 

VIII.  Legal  issues 

Overall  regulatory  framework 

248. 
It  was  common  ground  among  all  interlocutors  that  governmental  intervention, 
including  control  by  competition  authorities,  should  be  kept  at  a  strict  minimum.  Some 
interlocutors  were  afraid  of  a  possible  proliferation  of  competences  which  would  trigger 
parallel control mechanisms by the various national competition authorities, in addition to the 
Commission  control.  On the  other  hand,  some  interlocutors  wanted  to  see  a  more  rigorous 
enforcement  of  the  law,  and,  in  particular,  more  cases  in  which  the  Commission  would 
withdraw  the  benefit  of  a  block  exemption  under  certain  circumstances. 

According  to  some  interlocutors  the  block  exemptions  constitute  an  appropriate  response  to 
the legal uncertainty  caused by the lack of general rules as to the application  of the principles 
of  Article  85.  Some  voiced  fears  that  the  abandoning  of the block  exemption  system  might 
trigger  a new  area  of  uncertainty. 

249.  A number of interlocutors criticized the Commission emphasis on clause analysis. They 
argued that the effects  on the market should be more on the forefront  of competition analysis. 
It was  suggested  that  all vertical  agreements including  all clauses should  be considered  valid. 
Only  if  important  anticompetitive  effects  would  be  felt  after  some  time  the  Commission 
should  intervene. 
It  was  argued  that  only  a  minority  of  distribution  systems  were 
anticompetitive  and  that  the  vast  majority  was -legitimate,  since  distribution  agreements 
normally  help to  regulate relationship  and would  not  normally  lead  to competition  concerns. 
The United  States Guidelines approach was felt useful  although some interlocutors mentioned 
the  lack  of  legal  certainty. 

250.  Many  of the interlocutors criticised the current block exemption  regulations for  a lack 
of  flexibility.  Notifications  were  said  to be  extremely  burdensome  for  companies  and  to  tie 
up a lot of internal resources. Especially  small and medium  sized enterprises without  in-house 
legal departments had sometimes problems to interpret the block exemption regulations. It was 
requested  that  the  Commission  should  draft  new  regulations  in  a  more  comprehensible 
manner,  or  publish  a  list  of  uniform  interpretations  incorporating  the  jurisprudence  of  the 
European  Court  of  Justice. 

251.  Block  exemptions  are  generally  believed  to  have  a  straightjacket  effect. 
In  some 
industry  sectors, the  Commission  is perceived  as regarding  block  exemptions  as  constituting 
guidelines for  clearance under  Article 85(3), rather than looking at applications for  individual 
clearance  strictly  on their merits. However,  while the concerns with  regard to the  conformity 

70 

with  the  block  exemptions  seems  to  be  rather  limited,  there  is a more  general  concern  with 
regard  to  the  cost  and  time  involved  in  applications  for  clearance  and  the  impossibility  of 
obtaining quick clearance where an agreement does not entirely fall within a block exemption. 
Comfort  letters  are  perceived  as  being  no  satisfactory  basis  for  the  industry.  If  block 
exemptions  had  to  exist,  for  reasons  of  administrative  efficiency  and  legal  certainty,  they 
should  have  a more  limited  scope  and  contain  clear  criteria  requiring  evidence  of  consumer 
benefit. 

252.  Virtually  all interlocutors with a legal background  spoke out in favour  of the principle 
It  was  felt 
of  severability  for  clauses  falling  outside  the  scope  of  a  block  exemption. 
unacceptable that the existence of a provision not covered by the block exemption may  result 
in the entire agreement  loosing the benefit  of the block exemption.  It was suggested that new 
block  exemptions  should  cover  intermediate  products,  and  that  regulations  1983/83  and 
1983/84  should  be  amended  to  cover  distribution  of products  by  competitors  since,  in  many 
cases, the national  subsidiaries of competing manufacturers  are said to be the only viable way 
of getting  access to  a market.  The  introduction  of market  share thresholds  could  be useful  in 
this  context. 

Buying  groups  /  Retail  associations 

253.  The single most prominent  issue mentioned as a concern voiced by small and  medium 
sized  retailers  was  the  question  of  how  to  enable  a  survival  in  the  long  term.  Their  main 
message  was  to  request  a  level  playing  field  with  respect  to  their  main  competitors,  the  big 
integrated  retail  chains.  In  particular,  the  ability  to  take  advantage  of  certain  franchise 
concepts  with  the  association  acting  as  franchiser  towards  its  members,  was  perceived  to  be 
essential.  They  called  on the  Commission  as a competition  authority  to  safeguard  a plurality 
of  distribution  forms.  A  legal  framework  which  would  allow  associations  of  independent 
retailers  would  be  the  only  way  to  add  some  muscle  to  small  and  medium  enterprises. 

254. 
Is  was  recognised  that  many  of  the  obligations  contained  in  such  cooperatives 
(purchase  obligations  for  individual  members,  etc.)  may  be  caught  by  Article  85(1).  They 
argued,  however,  for  an  economics-based  overall  assessment,  which  would  definitely  be  in 
favour  of  these  forms  of  cooperation.  A 85(3)  type mechanism,  ideally  set  down  in  a  block 
exemption,  would  pave  the  way  to  legal  certainty  for  such  associations. 

255.  A  competition  policy  in  favour  of  such  retail  associations  was  said  to  be  of  great 
potential  significance  for  the  survival  of  small  retailers  in  Southern  Europe  (Italy,  Portugal, 
Greece)  where  the  concentration  process  of the retail  industry  is  less advanced.  The  present 
set-up  of rules  was said to contain  important  inconsistencies.  Whereas certain  obligations  are 
perfectly  acceptable  in vertical  relationship, similar  clauses imposed  by cooperatives  on  their 
members  are  prohibited  due  to  their  horizontal  nature.  Although  the  restrictions  of 
competition  are  vertical  in  one  case,  and horizontal  in the  other,  both  forms  of  cooperation 
would  seem  to  serve  the  same  purpose. 

256.  The  inability  to  have  a  uniform  pricing  strategy  is  perceived  as  the  single  most 
important  disadvantage  of  retail  associations  compared  to their  main  competitors,  integrated 
retailers.  While  big  retailers  are  able  to  publish  leaflets  and  other  marketing  material  with 
fixed  prices,  retail  associations  can  only  operate  with  non-binding  price  recommendations. 
However,  the  situation  appears  to  be  very  different  in  each  Member  State.  Some  of  our 
interlocutors,  in particular  in  the  food  sector,  held  that  the  price  component  was  much  more 

71 

important  for  their  business  than  other  non-price  aspects  of  their  strategic  planning.  For 
example,  it  was  felt  essential  to  be  able  to  enforce  a  chosen  price  on  the  market. 

257.  Another  problem  is  the  inability  of  retail  associations  to  guarantee  sales  in  their 
negotiations with manufacturers  which put them at a competitive disadvantage vis-à-vis their 
integrated  competitors.  However,  the  need  for  a  level  playing  field  in  this  respect,  i.e.  the 
right  for  associations  to  impose  fixed  quantities  of  goods  on  their  members,  was  less  clear. 
Some interlocutors even signalled that many members would oppose such contractual systems. 

Price  restraints 

258.  Although  resale  price  maintenance  (RPM)  is formally  prohibited,  many  interlocutors 
were  of  the  view  that  non-binding  price  recommendations  would  continue  to  serve  the 
appropriate  purpose.  It was  argued  that  in  new  innovative  high-tech  products,  RPM  should 
be allowed  until the product was established and well  known.  A five years time-limit  or the 
reach  of  a certain  market  share  could  serve  as a useful  threshold.  Otherwise,  dealers  would 
not  invest  in  pre-sale  services  and  the  launch  of  products  would  be  slower. 

259.  Several interlocutors mentioned the example of the United States where not only RPM 
but  also  discriminatory  pricing  - for  all  companies,  not  only the  dominant  ones  - was per  se 
illegal.  Some  went  so  far  as  to  argue  for  the  need  of  a  legal  provision  similar  to  the 
Robinson-Patman  Act of the United  States pursuant to which prices offered  by  manufacturers 
must  be  available  to  all  customers.  Others  equalled  the  European  attitude  towards  absolute 
territorial  protection  to the  negative  stance  of the  United  States  authorities  to  discriminatory 
pricing.  Interlocutors  advocated  the publications  of price-lists by manufacturers  and retailers, 
with  discounts  directly  related  to  efficiency  and  in-store  marketing. 

Exclusive  distribution  /  Exclusive  purchasing 

260.  Relatively  few  comments  were  made  on the Commission's  policy  as to the  exclusive 
dealing  (Regulation  1983/83  and  1983/84),  apart  from  the  more  general  remarks  described 
above.  Some  interlocutors  voiced  concerns  that  the  current  block  exemptions  regime  was 
based  on  a  system  of  wholesale  distribution  which  no  longer  existed.  Exclusivity  was  said 
to be no  longer  an  issue which would  deserve the  same amount  of concern on the part  of the 
Commission.  Others  suggested  a regular  update  of  the  accompanying  communications. 

Selective  distribution 

261. 
Selective  distribution  is generally  said to  be only  of  significance  in  a limited  number 
of products.  Cosmetics,  clothes,  liquor  and champagne, but also pharmaceutical  products  are 
most  commonly  quoted.  In many  instances, manufactures  have extended  the criteria  of their 
stores 
include 
selective 
("Weltstadtwarenhaus"), but not other  stores where the sales personnel  was said to be equally 
qualified. 

distribution 

department 

network 

flagship 

also 

to 

262.  The range of views expressed  on this issue was, however, extremely  broad and varied. 
Interlocutors  from  the  relevant  industry  sectors  were  generally  satisfied  with  the  criteria 
established  by  case-law  (perfume  cases).  These  criteria  would  help  to  guarantee  product 
image,  as  well  as  after-sales  and  other  technical  service.  Some  interlocutors  requested  that 
these  criteria  should  be  incorporated  in  a  special  block  exemption  on  selective  distribution. 

72 

263.  On  the  other  hand,  representatives  from  discounters  and  mail-order  houses  argued 
against  the  free-rider  argument  which,  according  to  them,  was  frequently  being  invoked  to 
justify  selective distribution with respect to products which require little or no contact between 
purchaser  and agent after  that sale has taken place (e.g. bicycles).  Also, the level of technical 
expertise  required  to  install  and  operate  many  of  the  products  sold  through  selective 
distribution  networks  has  decreased.  Therefore,  selected  distributors  often  are  required  to 
provide  little  or  no  service  in  respect  of  sales.  Finally,  discounters  and  mail-order  'houses 
generally claimed to be able to provide a level of service which is similar with the one  offered 
by  selective  distribution  networks. 

264.  Large  distributors excluded  from  the selective distributor  system seek  in certain  cases 
to obtain supplies  from  the main branch, and engage in legal battles in certain  instances.  The 
possibility to obtain legally these products in the parallel market and distribute them has  often 
been  enforced  by  national  Courts.  However,  in some  instances, once  a retailer  had  obtained 
access  through  a  Court  decision  to  a  product  previously  reserved  for  another  distribution 
channel, producers  had stopped manufacturing  that particular product  and replaced  it through 
a similar product to which the Court decision was not applicable.  Selective distribution  is not 
seen as a problem when the market is truly competitive.  However as long as objective  criteria 
are  followed  to  select  distributors,  without  discrimination  among  different  categories  of 
distributors, most interlocutors do not seem to see major  concerns at present.  However it was 
fact  that  these  conditions  were  not  always  fulfilled. 

265.  Some  interlocutors  however  criticized  selective  distribution  systems  as  a  means  of 
maintaining  artificially  high  prices.  According  to  interlocutors  from  consumer  associations, 
the  manufacturers'  argument  to  guarantee  more  choice  and  better  service  for  customers  was 
in  many  cases  a  false  pretence  to  control  the  flow  of  goods  and  shut  out  new  entrants.  The 
net result would be  less consumer  choice.  Particular problems were  identified  with regard to 
perfumes,  cars,  electrical  goods  and  microwave  ovens. 

Franchising 

266.  Ten years ago most franchise  networks were "pure", in that the network was composed 
entirely  of  franchisees.  Emerging  "mixed  systems"  include  both  integrated  subsidiaries  and 
franchisees  in the same systems.  Often,  pure integrated  systems become mixed  on expansion 
outside  the  home  base,  with  the  risks  associated  of  entering  new  markets.  These  mixed 
systems  were  also  said  to  be  very  efficient  since  they  allowed  expansion  in  more  flexible 
formats,  especially  into  other  Member  States.  However,  in  certain  mixed  systems,  for 
example  supermarkets,  the  ability  to  compete  inter-brand  depended  crucially  on  centralised 
IT. It appeared that whenever centralised computer systems (ordering/stocking/deliveries  given 
by  real-time  bar  code  information)  were  used,  the  franchisees  were  no  longer  free  to  buy 
where  they wanted  or to charge whatever  price they wanted.  In some cases, franchisees  were 
said to have  been transformed  into an agent-like  status, with goods remaining  the property  of 
the  franchiser. 

267.  More  generally,  franchising  appears to be a very dynamic  sector with  new  innovative 
forms  constantly  coming  on the market.  Interlocutors insisted that this innovation  should  not 
be  stifled  by  an  over-regulatory  approach.  The  present  block  exemption  does  not  appear  to 
have  hindered  this  process  too  much.  But  it  was  said  to  have  occasionally  created  legal 

73 

uncertainty. 

IX 

Beer  and  Petrol 

268.  There was general  satisfaction  both from producers and distributors with the operation 
of  the  block  exemptions  for  beer  and  petrol.  They  stressed  the  efficiencies  from  vertical 
restraints  in  these  sectors.  For  beer  it was  also  stressed  that  agreements  with  local  brewers 
was  often  the  most  efficient  way  to  break  into  the  market  of  another  Member  State  and 
distribute and compete efficiently.  All sides stressed the absolute need for  legal certainty and 
continuity  with minimum  changes,  in view of the very  many  contracts  found  in the  industry 
(in  the  hundreds  of  thousands).  However  several  more  detailed  aspects  of  the  Regulation 
called  for .comment,  which  on  certain  aspects  showed  a  divergence  between  producers  and 
distributors. 

269.  These  comments  included 

Article  85(1)  was  drawn  too  widely. 

Regulations  and  Guidelines  should  be  simpler  and  more  flexible  with  less 
regulatory/strait-jacket  effect. 

Longer  period  agreements  should  be  allowed. 

Retailers  called  for  greater  protection  from  producers  and  from  the  arbitrary 
ending  of  leases and  contracts.  Criticisms  concerning  the  imposition  of  over 
ambitious  sales  targets  by  producers  were  made. 

In  one  Member  State all producers  had been told by the Commission  services 
that they were not covered by the Regulation on grounds of what they  claimed 
was  a  technicality.  They  had  however  received  a  comfort  letter  which  they 
interpreted  as meaning  these  agreements  merited  an  Article  85(3)  exemption. 
Unfortunately  this  comfort  letter  had  proved  unenforceable  in  courts  and  led 
to  legal  insecurity. 

74 

CHAPTER  VIII 

OPTIONS 

I. 

INTRODUCTION  TO  THE  OPTIONS 

270. 
Green  Paper. 

This  chapter  sets out  a number  of  options  drawing  on the  analysis  contained  in the 

271. 
The  Commission's  overriding  concern  is  to  promote  and  preserve  integrated  and 
competitive  markets in the European  Community  and to implement  an efficient  and  effective 
competition  policy  in  order  to  serve the  consumer  interest  and  foster  the  competitiveness  of 
industry,  with  special  regard  for  SMEs. 

272. 
Those wishing to submit observations  should not consider themselves limited  by the 
options set out below in section II.  The options may be combined  in different  ways and other 
ideas  may  be  submitted. 

273. 
It should be borne in mind throughout that Article 86 remains applicable and that the 
Commission  does  not  contemplate  any  solutions  which  go  beyond  the  bounds  of  Article  85 
as  interpreted  by  the  Community  Courts.  Treaty  amendment  is not  an  option. 

274. 
welcome  comments. 

Section III sets out a number of matters on which the Commission would  particularly 

II. 

DESCRIPTION  OF  OPTIONS 

Common  observations  and  questions 

275. 

The following  observations and questions are relevant to all or several of the options. 

276. 
The policy  of treating resale price maintenance  and impediments to parallel trade  as 
serious violations  of the competition  rules would  continue. It is proposed that they be treated 
as per  se  contrary  to  Article  85(1),  as  long  as the  agreement,  concerted  practice  or  decision 
concerned  may  affect  trade  between  Member  States.  They  are  also  unlikely  to  benefit  from 
an  exemption  under  Article  85(3). 

277. 
The different  options relate only to vertical distribution agreements and do not cover 
horizontal agreements between competitors.  Nevertheless, the current block exemptions allow 
an  exception  for  non-reciprocal  agreements  between  competitors  where  one  party  has  a 
turnover  not  exceeding  100  MECU.  It  is  proposed  to  maintain  this  exception.  Comments 
would  be  welcome  on  the  appropriateness  of  this  figure. 

The question  arises whether  a non-opposition  procedure  similar  to that contained  in 
278. 
the  franchising  Regulation  (4087/88)  should  be  included  in  other  Regulations.  Comments 
would  be  welcome  on  how  this  issue  and  on  how  the  procedure  might  be  improved.  The 
Commission  does not  have the resources to investigate  a large number  of cases under  a non-
opposition procedure. The Commission  is aware that notifications,  even under  non-opposition 

75 

procedures, may be costly for companies. Consequently non-opposition procedures are not an 
appropriate  solution  for  a  large  number  of  notifications. 

279. 
Although  the main focus  of the Green Paper is on vertical  restraints for  distribution, 
it  has  been  suggested  that  attention  should  also  be paid  to  other  vertical  relationships  in  the 
supply  chain  (e.g.  relating  to  intermediate  goods  not  for  resale).  These  non-distribution 
vertical relationships often  raise different  issues from  those relating to distribution.  Comments 
would  be  welcome  on  competition  policy  aspects  of  vertical  arrangements  not  related  to 
distribution,  particularly: 
-  whether  they  are  already  effectively  dealt with  by the Notice  on  subcontracting(76) 
-  whether  such  agreements,  in  so  far  as  they  fall  within  the  scope  of  Article  85(1),  are 
infrequent  enough to enable the Commission to deal with them on an individual basis,  and 

-  whether  and,  if  so,  to  what  extent  the  different  options  set  out  below  can  be  usefully 

applied  to  such  agreements. 

The  Commission  is  preparing  a  revision  of  its  Notice  on  Agreements  of  Minor 
280. 
Importance  to  which  Article  85(1)  does  not  usually  apply.  This  is commonly  known  as  the 
de  minimis  notice.  As  a  working  hypothesis,  Article  85(1)  may  be  taken  not  to  apply  to 
vertical restraints between parties whose share of the relevant market is less than  10 % except 
as regards  resale price maintenance  and absolute territorial  protection,  in respect  of which no 
market  share  threshold  may  be  envisaged. 

OPTION  I  - Maintain  current  system 

281. 
arrangements  for  beer  and  petrol). 

Option  I  consists  of  maintaining  the  current  system  (including  the  special 

OPTION  II  - Wider  block  exemptions 

It  is  sometimes  suggested  that  current  block  exemptions  are  too  limited.  Option  II 
282. 
would  maintain  the  current  system,  with  some  changes  in  the  provisions  of  the  block 
exemption  Regulations.  There  would  be  no  significant  procedural  changes.  The  block 
exemptions  would  apply  more  widely  than  hitherto  by  an  extension  of  their  coverage  to 
different  clauses  set out below thus broadening  legal certainty.  Fewer  individual  cases  would 
require notification.  Some of these changes may be made by the Commission acting under the 
powers  already  granted  to  it  under  Council  Regulation  19/65.  Others  would  require 
amendment  of  that  Council  Regulation.  Some  suggested  changes  are  listed  below  and 
comments  on  their  appropriateness  and  on  other  possible  changes  are  welcome. 

283. 

Measures  to  increase  flexibility  in  general  could  include  one  or  more  of  the 
following  : 

- 

- 

the  block  exemptions  would  cover  not  only  the  precise  clauses  listed,  but  also  clauses 
which  are  similar  or  less  restrictive; 
the inclusion of prohibited  clauses might not deny the benefit  of the exemption  for the rest 
of  the  agreement; 

(76)  Notice  concerning  the  Commission's  assessment  of  certain  subcontracting  agreements  in relation  to  Article 
85(1).  (OJ  C  1,  3.1.1979) 

76 

- 
the  block  exemption  could  apply  to  agreements  involving  more  than  two  parties; 
-  a  block  exemption  or  a Commission  notice  for  selective  distribution  could  be  enacted. 

284. 
- 

Specific measures to increase flexibility  could include one or more of the following  : 
the block exemptions for exclusive distribution and exclusive purchasing could be extended 
to  cover  services  or  to  permit  the  distributor  to  transform  or  process  the  contract  goods. 
Distributors  could  be  allowed to  add  significant  value by changing  the economic  identity 
of  the  goods  without  losing  the  benefit  of  the block  exemption; 
the  block  exemption  for  exclusive  purchasing  agreements  could  be  extended  to  cover 
partial  as well  as  exclusive  supply; 
the block exemption for franchising  agreement could be extended to cover maximum resale 
price  maintenance  as  an  exception  to  the  general  principle  that  resale  price  maintenance 
will  not  be  exempted; 

- 

- 

-  associations  of  independent  retailers  could  be permitted  to  benefit  from  block  exemption 
regulations,  provided 
that  the  independent  retailers  are  small  and  medium-sized 
enterprises(77)  and  that  the  market  share  of  the  association  remains  below  a  certain 
threshold; 

-  an  arbitration  procedure  could  be  set  up  for  distributors  denied  admission  to  a  selective 

distribution  network. 

285. 
Under this option the special provisions in Regulation N°  1984/83 for beer and petrol 
would remain in force with certain changes to increase the flexibility  of the application  of the 
Regulation.  One  possibility  could  be  to  limit  the  requirement  to  specify  the  'tied'  beers  to 
the type  of beer  concerned,  instead  of identifying  the individual  brands as required  under  the 
current  Regulation.  This  gives the brewer  the possibility  of  adding  or replacing  brands  of  a 
type of beer for  which the tenant is already tied, instead  of requiring  an additional  agreement 
with the tenant  for  such changes, as required by the Regulation.  As regards petrol  one  could 
consider  how  to  deal  with  forms  of  distribution  other  than  exclusive  purchase  in  relation  to 
goods  sold 
in  convenience  stores  that  form  part  of  the  service  station  business. 
Additiona!Jy,one  could  consider  whether  it  is justified  to  maintain  the  requirement  that  the 
supplier  should  make  available  or  finance  lubrication  equipment  in order  to  benefit  from  an 
exemption  for  exclusivity  of  supply  of  lubricants. 

OPTION  III  -  More  focused  block  exemptions 

286. 
This option  stresses  Community  competition policy's market  integration  objectives. 
Territorial  protection and vertical restraints are seen as a significant  contributory  factor  to the 
maintenance of considerable price differentials  between Member States. It is certainly the case 
that  many  markets  are  becoming  more  concentrated  at the production  and  distribution  level, 
while  vertical  restraints  can  foreclose  markets  and  raise  barriers  to  entry.  The  value  added 
by  distribution  is an  important  element  in  its own  right.  Intrabrand  competition  can  play  an 
important role in promoting competition in markets where interbrand competition is not fierce. 

287. 
The  current  block  exemptions  apply  without  any  market  share  limits.  They  could 
be  amended  so  as  to  apply  only  where  each  party  has  less  than,  for  instance,  40%  market 

(77)In  the  sense  of  the  Commission  recommendation  of  3  April  1996  concerning  the  definition  of  small  and 
medium-sized  enterprises,  O.J.  n° LI07  of  30.4.1996 

77 

share  of  the  relevant  market  in  the  contract  territory.  There  would  be  no  block  exemption 
above  that  threshold,  at  least  in  respect  of  the  following  restrictions: 

-  protection  against  active  sales  from  outside  the  territory 

-  protection  for  exclusive  dealing  (prohibition  to  sell  competing  products/services). 

288.  Within  the  framework  of the present  option,  comments  are  also  welcome  about  the 
appropriateness  to  adopt  a  block  exemption  regulation  in  respect  of  selective  distribution 
agreements,  to  the  extent  that  these  agreements  fall  within  Article  85(1).  In  case  such  a 
regulation  would  be  adopted,  it would  apply  only  where the producer  or  distributor  does not 
hold  more  than  for  instance,  40  %  share  of  the  relevant  market  or  a  lower  figure  in  an 
oligopolistic  market. 

289. 
share  threshold. 

The suggestions made in Option II could be applied to agreements below the market 

290. 
Parties  may  have  doubts  about the correct  definition  of a market  and  calculation  of 
their share thereof, which could lead them to notify  agreements to the Commission  in a search 
for  legal  certainty.  There  would  also  be  notifications  of  agreements  where  the  parties  have 
market  shares  in  excess  of  the  threshold. 

291. 
The Commission  would  appreciate  estimates of the number  and type  of cases  likely 
to  be  notified,  and  views  on  whether  guidelines  explaining  the  circumstances  in  which  the 
Commission  would  grant  exemptions  under  Article  85(3)  could  solve this problem.  Possible 
grounds  for  exemption  could  include  the  condition  that  there  be  no  significant  price 
discrimination  to  the  detriment  of  customers. 

292. 
In  line with the general  rule above, no protection  would  be  given to exclusive  beer-
supply  agreements  in favour  of a brewer  with a share above  eg 40% on  a given  national  on-
trade  market.  However,  a  sector  specific  alternative  could  be  to  limit  the  extent  of  the 
exclusivity  either  to  a  given  percentage  of  the  total  beer  throughput  of  a particular  pub  (eg. 
3/4  tied,  1/4  free)  or to certain  containers  (eg. draught  tied,  bottles and  cans  free).  A  further 
alternative could be to limit the scope of the exclusivity to beer only.  In the context of filling 
stations,  it  should  be  considered  whether,  in  cases  where  the  supplier  has  a  market  share  in 
excess  of  a  certain  percentage,  eg  40%,  the  maximum  contract  term  permitted  by  the 
exemption  should  be  reduced. 

OPTION  IV - Block exemptions with  measure  to specify  the economic  circumstances  in 
which  Article  85(1)  applies 

293. 
The idea underlying this option is that economic analysis of vertical restraints  should 
be  implemented  by  legal  instruments  which  give undertakings  a considerable  degree  of  legal 
certainty.  The economic criteria designed to determine the market conditions in which Article 
85(1)  would  apply  could  be  developed,  in  the  first  place,  within  the  framework  of  a  new 
Commission  notice  and  subsequently,  in  the  light  of  the  experience  acquired,  within  the 
framework  of  a negative  clearance  regulation. 

78 

294. 
This  option  would  provide  for  more  flexible  treatment  of vertical  arrangements  for 
agreements  between  parties  with  no  significant  market  power.  The  alleged  limiting  effect  of 
block  exemptions  and  emphasis  on  the  legal  classification  of  different  forms  of  distribution 
would  be  reduced. 

295. 
For  parties with less than,  for  instance,  20 % market share  in the contract  territory, 
there  would  be  a  rebuttable  presumption  of  compatibility  with  Article  85(1)  ("the  negative 
clearance presumption").  In other  words, vertical  restraints  in  such circumstances  would  not 
normally  be  caught  by  Article  85(1).  This  presumption  would  cover  all  vertical  restraints 
except those relating to minimum resale prices, impediments to parallel trade or passive sales, 
or  those  contained  in  distribution  agreements  between  competitors. 

This  negative  clearance  presumption  could  be  rebutted  by  the  Commission  on  the 

296. 
basis  of  a  market  analysis  which  would  take  account  of  factors  such  as: 
-  market  structure  (e.g.  oligopoly) 
-  barriers  to  entry 
- 

the degree  of integration  of the single market, evaluated  on the basis of  indicators  such as 
the price  differential  existing  between  Member  States and the  level  of market  penetration 
in  each  Member  State  of  products  imported  from  other  Member  States,  or 
the  cumulative  impact  of  parallel  networks. 

- 

297. 
Agreements  which,  as  a  result  of  this  market  analysis,  were  shown  to  fall  within 
Article  85(1)  could  benefit  from  a block  exemption  if they  fulfilled  the necessary  conditions 
(see  below  variants  I  and  II).  The  negative  clearance  presumption  could  be  implemented  by 
a  Commission  Notice  and  subsequently  in  the  light  of  the  experience  acquired,  within  the 
framework  of  a  negative  clearance  regulation  which  would  require  a  new  Council  enabling 
Regulation  under  Article  87 of  the  Treaty. 

298. 
which  fall  with  Article  85(1),  there  could  be two  possibilities,  as  follows: 

For  cases  with  market  share  above  for  instance  20  %,  and  for  those  below  20  % 

Variant  I 

299. 
II.  (wider  block  exemption) 

All  cases  over  20  % could  be  covered  by the  block  exemption  described  in  Option 

Variant  II 

300. 
(ie  inapplicability  of  block  exemption  to  certain  restrictions  above  40%  market  share). 

All cases over 20% would be covered by the block exemption described in Option  III 

Beer  and  petrol 

301. 
The  presumption  of  non-applicability  of  Article  85(1)  as  described  above  would 
apply  to  the  exclusive  beer-and  petrol  -supply  agreements  only  insofar  as  the  cumulative 
impact  of  parallel  networks  has  no  significant  foreclosure  effect. 

79 

III. 

SUGGESTIONS  FOR  TOPICS  TO  COVER  IN  COMMENTS 

302.  Whilst  those  wishing  to  submit  comments  are  free  to raise  any  issues  in relation  to 
vertical  restraints  and  are  not  necessarily  bound  by  the  options  listed  above,  it  would 
nevertheless  be  helpful  for  the  Commission  if  comments  could  be  made  in  relation  to  both 
questions of substance and questions of procedure and legal instruments.  The following  may 
be  useful  as a  guide  to  structure  comments  in these  two  areas  : 

303. 

Questions  of  substance 

Efficiency  -  The  efficiency  of  policy  in  distinguishing  competitive  from  anti-competitive 
restraints should be considered, along with the associated  "cost" of such a policy, eg cost may 
be  high  if &  strict  policy  identified  effectively  all  anti-competitive  restraints  but  only  at  the 
price  of  being  unduly  severe. 

Market  integration  - Policy  should  promote  market  integration. 

Innovation  and  entrepreneurial  freedom 
to 
accommodate  the  introduction  by producers  and  distributors  of new  or  appropriate  forms  of 
distribution  (sometimes  driven  by need  to introduce new technologies).  It should  not  impose 
any  unjustified  regulatory  cost  for  distribution. 

-  Policy  should  be  sufficiently 

flexible 

Consumers and SMEs - Policy  should  allow consumers to gain a fair  share of the benefit  and 
be  compatible  with  other  policy  goals,  in particular  the  promotion  of  SMEs, who  should  be 
encouraged  to  develop  their  activities  when  faced  with  some  more  powerful  participants  in 
the  production-distribution  process. 

Market  power  -  Policy  may  need  to  make  a  distinction  between  firms  depending  on  their 
market power.  Market power is used in this context to mean a degree of influence  over price 
and  output  where  this  influence  is  below  that  enjoyed  by  a  dominant  firm  (Article  86)  but 
enough  to bring  agreements  between  such firms within the scope of Article  85(1) because  of 
their  appreciable  impact  on  competition.  One  of  the  proxies  for  market  power  that  avoids 
individual  analysis  (impractical  in a  large number  of cases)  is a threshold  expressed  in  terms 
of  market  share.  Comments  would  be  welcome  on  the  effect  of  introducing  market  share 
thresholds  either  as 

-  a condition  for  an exemption  in a block exemption  (ie above a certain market  share  block 

exemption  does  not  apply) 

-  a condition for  non-opposition procedure  in a block exemption  (ie above a certain  market 

share,  parties  must  apply  for  exemption  by  non-opposition  procedure), 

-  a  guideline  in  a  block  exemption  indicating  a  level  below  which  the  Commission  is 

unlikely  to  withdraw  the  benefit  of  the  block  exemption,  or 

-  an  indication  of  the  level  below  which  vertical  agreements  are  generally  presumed  to  be 
compatible  with  Article  85(1)  and  beyond  which  they  are  subject  to  the  provisions  of  a 
block  exemption. 

The  comments  on  use  of  market  share  thresholds  should  particularly  address  the  procedural 
issues  listed  below  especially  their  impact  on  legal  certainty  and  ability  to  deal  with  a  mass 
problem  of  a  large  number  of  cases.  Where  specific  market  share  figures  are  given  in  an 
option  comments  should  also  be  made  on the  appropriateness  or  otherwise  of  the  figure. 

80 

304. 

Questions  of  procedure  and  legal  instruments 

Legal  certainty  - Policy  should  provide  legal  certainty. 

Mass  problem  -  Policy  should  lead  to  speedy  and  efficient  enforcement  without  giving  rise 
to  a  huge  number  of  individual  notifications,  the  so-called  mass  problem. 

Subsidiarity 
decentralisation  to  national  authorities  and  courts. 

-  Policy  should  strike  a  balance  between  one-stop-shopping  and/or 

Procedures  -  The  Commission  would  welcome  comments  on  whether  a  policy  can  be 
implemented  under current procedures or whether changes would be needed,  in particular to  : 
-  comfort  letters 
-  non-opposition  procedures,  or 
-  withdrawal  of  exemption  granted  under  block  exemptions(78) 

The  Commission  welcomes comments on the extent to which  an option  necessitates  changes 
to  current  rules  and  Regulations,  in  particular  whether  an  option  can  be  implemented  by 
relatively  easily  accomplished  changes  to  current  practice  eg  de minimis  notice,  or  changes 
to  administrative  practice  explained  in  a  regularly  updated  Commission  Administrative 
Guidance Notice  outlining  policy,  in particular  the  economic  circumstances  in which  Article 
85(1)  applies,  and  still  provide  adequate  legal  certainty.  On  the  other  hand,  certain  options 
necessitate changes to the three relevant block exemption Regulations  (1983/83,  1984/83 and 
4087/88). 

305.  The  Commission  realises  that  no  policy  towards  vertical  restraints  can  achieve 
simultaneously  to  the  desired  extent  all  the  substantive  objectives  and  be  consistent  with  all 
the procedural considerations.  Policy must therefore  achieve the best possible overall balance 
taking account of the objectives of competition policy within its overall context  in the Treaty. 

(78)  NB.  Withdrawal  of  exemption  under  current  block  exemptions  must  follow  procedures  laid  down  in 
Regulation  17/62,  which  is  not  feasible  to  carry  out  in  a  large  number  of cases. 

81 

306. 

Please  send  comments  by  31.07.1997 

By  mail  to  : 

Vertical  Restraints  Green  Paper 
Directorate  General  for  Competition 
European  Commission  (C  150) 

Rue  de  la  Loi  /  Wetstraat  200 
1049  Brussels 
Belgium 

or  by  electronic  mail  : 

X400  address  : 

S=vertical-restraints;  0=DG4;  P=CEC; A=RTT;  C=BE 

Internet  address  : 

vertical-restraints  @  dg4.cec.be 

307.  Extra  copies 

This  paper  is  also  available  in  all  Community  languages  on  the  World  Wide  Web,  on  the 
Europa  server  at:  http://europa.eu.int/en/comm/dg04/dg4home.htm. 

82 

ISSN 0254-1475 

COM(96) 721  final 

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