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Vertical Agreements and the VBER Competition Law LLM Notes
Table of Contents
LLM Competition Law Lecture Notes
Vertical Block Exemption Regulation Introduction This area is quite black-letter but does include some discussion of policy considerations, which can be very important here. Vertical agreements are more justifiable than horizontal agreements because they are more necessary for the market structure to work at all - you need some kind of distribution in order for the market to operate, or goods just sit and stagnate. Some would go as far as to say that vertical agreements should never be the subject of competition law. Bork (1978), for example, states that exclusive dealing (as seen in cases such as Delimitis) is welfare improving. The reason we might like vertical integration is because it lowers transaction costs (Coase) and because it might reduce the risk of "double marginalisation", where there is monopoly profit at more than one level of the supply chain. Harvard Schoolers would disagree - this is just a leveraging of monopoly profits from one sector to another. Article 101 doesn't apply to single economic entities, see Viho (Parker Pens). Deutsche Telecom Could squeeze margins at both wholesale and retail level. Guilty of an offence under Article 101, despite this being a vertical agreement. Vertical integration is an alternative to vertical agreements, but integration is still problematic, and not available to all firms - some firms want to specialise in one part of the chain of production. However, increasingly (Apple) firms are integrating downward, if not always upward. Why might a lack of agreement be problematic? For this we turn to the 'free-rider problem' - some parties expend resources and other parties take advantage of that expenditure without contributing anything. This means that there is no incentive for the distributor, for example, to invest in services - sunglasses being bought on the Internet after trying them on in a fancy shop with excellent customer service, nice lighting, mirrors etc. This is a reason, but is it a justification? Bork argues that all vertical restraints should be per se legal in the USA - a manufacturer can never extract monopoly profits through vertical restraints, and the efficiency arguments fall on the side of being in favour of vertical restraints. This doesn't apply to disguised horizontal restraints or cartels, though. EU law goes against this, and looks at Art 101 TFEU as a potential barrier - hub and spoke collusion is more likely now, and this fits with Bork's analysis. The free-rider problem only holds for the first time someone uses a service anyway - after that, price competition becomes more important.
Application of Art 101 TFEU to Vertical Agreements Consten and Grundig Exclusive dealership arrangement that applied for France, coupled with TM protection, which had the effect of preventing imports. The TM protection insulated the market, so the court turned its back on STM, and said that this is an absolute territorial restriction. Thus, they ignored the economic context, and looked at the object only. This was a vertical agreement - obviously it applies, if it has the object or effect of restricting competition.
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