Abstract
This paper attempts, on the one hand, to reveal the main principles of Competition Law (regulatory and case law framework) covering the prevention of parallel trade, mainly the prohibition of parallel imports, and on the other hand to cast light on the main effects of parallel imports prohibition imposed by an upstream supplier on the competitive structure of the downstream market. Especially, the regulatory framework that relates to Block Exemption Regulation 330/2010, (ex Block Exemption Regulation 2790/99), with Block Exemption Regulation 461/2010 (ex Block Exemption Regulation 1400/2002) in order to determine whether prohibition of parallel imports constitutes a hardcore restriction or not, while the economic analysis evaluates it in a geographical vertical market with upstream suppliers and downstream buyers which sell goods to the final (domestic) consumers. Administrative anticompetitive measures are considered as well. The results indicate that the prohibition of parallel imports by upstream firms cause vertical restraints to the domestic customers of the buyers.
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Notes
O.J. L102/1, 23.4.2010.
O.J. L336/21, 29.12.1999.
O.J. L 129/52, 28.05.2010.
O.J. L 203/30, 01.08.2002.
According to BER 330/2010, 1(i), ‘customer of the buyer’ means an undertaking not party to the agreement which purchases the contract goods or services from a buyer which is party to the agreement.’
This is the reason why for example [see the Opinion of Advocate General Jacobs in case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. Glaxosmithkline AEVE] from early November 2000 GSK stopped meeting orders from pharmaceutical wholesalers and stated instead that it would supply hospitals and pharmacies directly. “It alleged that the export of the relevant products by wholesalers was leading to significant shortages on the Greek market. It subsequently reinstated supplies to wholesalers, but still refused to meet their orders in full” [para 6].
See the Opinion of Advocate General Jacobs in case C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. Glaxosmithkline AEVE.
See Joined Cases C468/06 to C478/06 [Sot. Lélos kai Sia].
See Τ-168/01 (GlaxoSmitheKline Services Unlimited v. Commission) para 273 (“Third, parallel trade has the effect of reducing that income, to an uncertain but real degree. That practice, which economists know as ‘free riding’, is characterised by the fact that the intermediary leaves the role which he traditionally plays in the value chain and becomes an arbitrageur and thus obtains a greater part of the profit. The legitimacy of that transfer of wealth from producer to intermediary is not in itself of interest to competition law, which is concerned only with its impact on the welfare of the final consumer. In so far as the intermediary participates in intrabrand competition, parallel trade may have a pro-competitive effect. In the medicines sector, however, that activity is also seen in a special light, since it does not bring any significant added value for the final consumer”) [emphasis added by the authors].
Price differences may exist due to price discrimination by manufacturers, different level of competition intensity across countries and price setting by governments.
For example, exchange rate fluctuations, distribution costs, price and product regulation or strategic policy by the manufacturer.
See Crampes et al. (2007, p. 2) and the footnotes therein.
See Stothers (2007, p. 2).
Except from “(1) the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer, (2) the restriction of sales to end users by a buyer operating at the wholesale level of trade, (3) the restriction of sales by the members of a selective distribution system to unauthorised distributors within the territory reserved by the supplier to operate that system, and (4) the restriction of the buyer's ability to sell components, supplied for the purposes of incorporation, to customers who would use them to manufacture the same type of goods as those produced by the supplier”.
See O.J. L102/1, 23.4.2010, p. 5.
See Dethmers et al. (2009, p. 425).
O.J. C130/01, 19.05.2010.
See para 25 (a).
See Tzouganatos (2001, pp. 196–197).
See the Guidelines on Vertical Restraints [O.J. C130/1, 19.05.2010], para 48.
See the Guidelines on Vertical Restraints [O.J. C130/1, 19.05.2010], para 227.
See C-413/06 P, Bertelsmann AG & Sony Corporation of America v. Independent Music Publishers and Labels Association (Impala) & Commission 2008, ECR 4951, para 123 (“[…] tacit coordination is more likely to emerge if competitors can easily arrive at a common perception as to how the coordination should work, and, in particular, of the parameters that lend themselves to being a focal point of the proposed coordination. Unless they can form a shared tacit understanding of the terms of the coordination, competitors might resort to practices that are prohibited by Article 81 EC in order to be able to adopt a common policy on the market. Moreover, having regard to the temptation which may exist for each participant in a tacit coordination to depart from it in order to increase its short-term profit, it is necessary to determine whether such coordination is sustainable. In that regard, the coordinating undertakings must be able to monitor to a sufficient degree whether the terms of the coordination are being adhered to. There must therefore be sufficient market transparency for each undertaking concerned to be aware, sufficiently precisely and quickly, of the way in which the market conduct of each of the other participants in the coordination is evolving. Furthermore, discipline requires that there be some form of credible deterrent mechanism that can come into play if deviation is detected. In addition, the reactions of outsiders, such as current or future competitors, and also the reactions of customers, should not be such as to jeopardise the results expected from the coordination”).
See C-413/06 P, op.cit.
Exclusive sourcing is something different, since in this case the existence of exclusive distributors is demanded; according to para 162 of the Guidelines on vertical restraints [O.J. C130/01, 19.05.2010], “[e]xclusive sourcing, requiring the exclusive distributors to buy their supplies for the particular brand directly from the manufacturer, eliminates in addition possible arbitrage by the exclusive distributors, which are prevented from buying from other distributors in the system”.
See Goyder (2004, p. 187). See also para 129 of the Guidelines on vertical restraints [O.J. C130/1, 19.05.2010], referring that: “Under the heading of ‘single branding’ fall those agreements which have as their main element the fact that the buyer is obliged or induced to concentrate its orders for a particular type of product with one supplier. That component can be found amongst others in non- compete and quantity-forcing on the buyer. A non- compete arrangement is based on an obligation or incentive scheme which makes the buyer purchase more than 80% of its requirements on a particular market from only one supplier. It does not mean that the buyer can only buy directly from the supplier, but that the buyer will not buy and resell or incorporate competing goods or services” [emphasis added by the authors].
O.J. C138/16, 28.05.2010.
The new guidelines about the motor vehicle sector are called “supplementary”, since they should be read combined with the guidelines on vertical restraints. According to Clark and Simon (2010, p. 480), “[t]he guidelines carry the word supplementary in their title to signal that they have to be read in conjunction with the General Vertical Guidelines”.
See the Commission notice—Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles [O.J. C138/16, 28.05.2010], para 48.
See Karydis and Zevgolis (2009, p. 95).
As Goyder (2004, p. 203) has mentioned: ‘‘The motor car is probably the most complex consumer product of all, as well as being the most expensive purchase that many consumers ever make’’. See also Vezzoso (2004, pp. 190–191) who wrote: ‘‘The whole concept was centred on the belief that the car was not an ordinary good’’.
The notion that cross-border trade restrictions may harm consumers has been confirmed by the European Courts in Case C-551/03 P, para 67 and 68; Case C-338/00 P, para 44 and 49 and Case T-450/05, Peugeot/Commission (2009), para 46–49.
O.J. C138/16, 28.05.2010, para 49.
See Case IV/35.733—VW, Case COMP/36.653—Opel, Cases F-2/36.623/36.820/37.275.
See respectively Cases C-338/00 P, C-551/03 P and T-450/05.
O.J. C138/16, 28.05.2010, para 49.
See indicatively Korah and O’Sullivan (2002, p. 58).
Addition made by the authors.
Judgment in Cases 96-102, 104, 105, 108 and 110/82, para 6.
Judgment in Case 319/82, para 6.
Such principles are also to be found in the Community rules governing the application of Article 81 EC to distribution agreements [already Article 101 of the Treaty].
See Court’s decision, para 68.
See the Commission notice—Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles [O.J. C138/16, 28.05.2010], para 50.
Joined Cases 25 and 26/84.
See the Commission Evaluation Report on the Operation of Regulation (EC) No 1400/2002 concerning motor vehicle distribution and servicing (28 May 2008), p. 14 and the Commission Communication on The Future Competition Law Framework applicable to the Motor Vehicle sector of 22 July 2009 [COM(2009) 388].
See Clark and Simon (2010), p. 479.
As it has already been mentioned, for good reasons, the pharmaceutical industry is exempted from the analysis in this paper. See also Τ-168/01 (GlaxoSmitheKline Services Unlimited v. Commission) para 141 (“No parallel can therefore be drawn between the cases to which the Commission refers, which, as the Commission itself observed at the hearing, concerned price freezing measures relating to new vehicles (BMW Belgium v Commission, paragraph 115 above, paragraph 5) or vehicle refinishing paints (BASF v Commission, paragraph 139 above, paragraph 123) in force in a single Member State of the Community, and the present case, which is characterised by the fact that the price of the products in issue, which is finally set by the Member States, falls structurally outside the play of supply and demand and is established at structurally different levels throughout the Community, notwithstanding a residual competition which may be revealed by parallel trade”) [emphasis added by the authors].
See Barnard (2010, p. 72).
The case concerns second hand vehicles.
(1987) ECR 2717.
See para 14 of the Court’s decision.
If the tax system encourages employee remuneration through the provision for cars, then car purchases fall in the hand of the Human Resources bureaucracy in companies. Product and costumer characteristics may also determine the degree of price elasticity of demand among distinct geographical areas. The elasticity may vary among countries depending on many factors, amongst which are different degrees of brand loyalty between customers in different countries and different types of tax regimes.
That is, “the ratio of prices to marginal costs is different in different sales”. See Posner (2001 pp. 79–80).
See Ramsey (1927, pp. 58–60).
As a consequence of this, new firms may enter the market since parallel trade creates excessive profitability. However, that depends on the nature of the barriers of entry that exist in the imported country.
See also Crampes (2007, p. 7).
Konkurrensverket Swedish Competition Authority, Parallel Imports—Effects of the Silhouette Ruling, 1999:1 Rept. Series at 133 (1999). See also, Competition Commission of India (2010, p. 19).
See Intellectual Property and Competition Review Committee Review of Intellectual Property legislation under the Competition Principles Agreement.
OECD (2002).
See NERA., Berwin & Co., IFF Reasearch (1999).
Even though parallel trade in the pharmaceutical sector is not examined in this paper, the results from Rey’s (2003) paper are presented here since they are informative both from economic and settled case law perspective.
The effect of free parallel trade on low willingness to pay country is ambiguous.
Emphasis added by the authors.
Also para 44 of the same decision states that “Second, GSK AEVE points out that parallel trade in medicines reduces the profits that pharmaceuticals companies can invest in research and development activities on which they depend in order to remain competitive and attractive to investors. By contrast, distributors which profit from parallel trade make no contribution to pharmaceutical innovation. Furthermore, in the Member States where the prices of medicines are fixed at relatively low levels, the marketing of new medicines might be affected if it became impossible for pharmaceuticals companies to hold back supplies with the aim of limiting parallel trade. In such circumstances, those companies would have an interest in delaying the launch of new products in Member States where the prices are low” [emphasis added by the authors].
Emphasis added by the authors. See also paras 180 and 220 of the Court’s decision.
OJ L104/01, 08.04.2004.
OJ L168/05, 21.06.2006.
OJ 196/1, 16.08.1967.
OJ L 200/1, 30.07.1999.
In our view, in issues of consumer protection the Greek authorities can not presented as more “sensitive” then the German or the French authorities, for example.
The authors cannot refer in this paper in full detail all the necessary preconditions demanded for ‘legal’ parallel imports of detergents for domestic use in Greece. However, if necessary, they can provide with further details-information about these preconditions.
Probably, this is the reason why the Greek market mainly in the sector of detergents for domestic use is one of the most expensive (or maybe the most expensive) in the E.U.
See Fotis et al. (2011, pp. 76–77) for a review of major concentrations that have been cleared by Hellenic Competition Commission (HCC) during the period from 1995 to 2010. Also, see Fotis et al. (2009, pp. 219–222) and Fotis and Polemis (2011) for a financial and statistical analysis of concentrations in Greece respectively during the same period. In Fotis and Polemis (2011) the review the use in economic tools in merger analysis and in Fotis and Polemis (2012) the authors present a competitive assessment of four phase II concentrations that cleared from HCC during the last decade.
See Zevgolis and Fotis (2009, pp. 1184–1190). According to the paper, the clause of prohibition of parallel imports constitutes a hardcore restriction of competition, since, ceteris paribus, it consists of a barrier to entry for potential competitors. By prohibiting the supply of products of a significant brand name by cheaper sources of supply, the clause has as its indirect (if not direct) object the maintenance of a minimum level of supply prices and resale prices of the specific products. As far as it concerns the Greek geographical market, the clause of prohibition of parallel imports aggravates the already restrictive national regulatory framework which rules the sector of detergents for domestic use, having as its result the restriction –if not the disappearance- of parallel imports of the specific products.
Sellers, wholesalers and producers are used interchangeably.
Supermarkets and buyers are used interchangeably.
A small fraction of the upstream sales are sold to downstream wholesalers. Since that fraction of upstream sales consists of <10% of the total sales in the downstream market, in the remainder of the paper will assume that retailers are the only buyers of the upstream sales.
The same producer or different producers in each product market.
Therefore, the prohibition of parallel trade by upstream firms has an appreciable effect on competition (see Case 5/69 Volk v Vervaecke [1969] ECR 295, Case 22/71 Beguelin Import v GL Import Export [1971] ECR 949 and Dec 80/256 Pioneer Hi-Fi Equipment [1980] OJ L60/21; Joined Cases 100-103/80 Musique Diffusion Francaise and others vCommission [1983] ECR 1825).
Stackelberg product market whereas the other firms of the product market are assumed to be the followers.
See for example, inter alia, cases No IV/M.1612 (Wal-Mart/ASDA), No. IV/M. 784-Kesko/Tuko; No. IV/M. 1221-Rewe/Meinl or No. IV/M.1541-Kingfisher/ASDA.
Motta (2009, p. 104).
For an example of that see para 48, of the Commission notice—Supplementary guidelines on vertical restraints in agreements for the sale and repair of motor vehicles and for the distribution of spare parts for motor vehicles [O.J. C138/16, 28.05.2010].
The supermarket will not increase the price of the final good in the future since that will give the opportunity to other supermarkets to enjoy increased profits.
Sectors characterized by increasing returns to scale and/or large costs of exit in case of high fixed or sunk costs are among the fundamental examples in which a ‘war of attrition’ may take place.
See J. Tirole (1998, pp. 425–426).
The intuition of game theoretic approach in this paper is to model the above mentioned vertical relationship in Greek market of detergents for domestic use, both in short and long run horizon. It also provides a simple example of how National markets are linked with European single market and the effect of firm strategies on their profits and consumer welfare with or without cooperation among upstream producers and downstream customers.
The specific payoff functions do not incorporate, inter alia, the effect of differences in tax regimes and costumer/product characteristics among distinct geographical areas on price elasticity of demand. Even though these matters are interesting and maybe influence the results of the games reported here, they constitute an issue which is completely out of the scope of this paper and therefore will not be further analysed.
The lower the selling price of the final good, the higher the market penetration and hence the profits of an individual supermarket.
The first column presents the producer’s payoff and the second column presents the supermarkets’ payoff.
The value today of a euro to be received one period later, where r is the interest rate per period.
This strategy is called trigger strategy.
The infinite payoff when a supermarket cheats or cooperates is \( 50 + \frac{25\delta }{1 - \delta } \) or \( \frac{40}{1 - \delta } \) correspondingly. A supermarket cooperates if \( \frac{40}{1 - \delta } \ge 50 + \frac{25\delta }{1 - \delta } \) or \( \delta \ge 0.4 \).
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The authors wish to thank two anonymous referees for their helpful and constructive comments. Warm thanks are also expressed to Mrs Danielle Apostolatos. Usual disclaimer applies.
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The views expressed herein are purely those of the authors and do not necessarily reflect the Hellenic Competition Commission or any individual Commissioner.
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Zevgolis, N.E., Fotis, P.N. Prohibition of parallel imports as a vertical restraint: per se approach or a misunderstanding?. Eur J Law Econ 38, 317–342 (2014). https://doi.org/10.1007/s10657-012-9315-6
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DOI: https://doi.org/10.1007/s10657-012-9315-6
Keywords
- Antitrust law
- Vertical restraints
- Block Exemption Regulation
- Case law
- Market imperfection
- Repeated games of oligopoly theory