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Barış Ekdi
Cambridge, 2003
VERTICAL RESTRAINTS OF DOMINANT
UNDERTAKINGS WHICH CREATE MARKET
FORECLOSURE
© Barış Ekdi, 2003
UNIVERSITY OF CAMBRIDGE FACULTY OF LAW
LL.M. THESIS 2003
BARIŞ EKDİ
GIRTON COLLEGE
VERTICAL RESTRAINTS OF DOMINANT UNDERTAKINGS
WHICH CREATE MARKET FORECLOSURE
© Barış Ekdi, 2003
This thesis is prepared for the University of Cambridge LL.M Program
of 2002-2003. I thereby thank to late Mr. Dan GOYDER, who
encouraged me on writing this thesis, and also Dr. Albertina ALBORS-
LLORENS for her fruitful lectures.
© Barış Ekdi, 2003
- in memory of Daniel G. Goyder
© Barış Ekdi, 2003
TABLE OF CONTENTS
INTRODUCTION ................................................................................................... 1
CHAPTER ONE
VERTICAL RESTRAINTS, FORECLOSURE AND MARKET POWER
1.1. Vertical Restraints .............................................................................................. 3
1.2. Foreclosure ......................................................................................................... 9
1.3. A Note on the Market Power ............................................................................ 19
CHAPTER TWO
THE UNITED STATES PRACTICE
2.1. Legal Framework .............................................................................................. 20
2.2. Leading Cases in the US ................................................................................... 22
2.3. Evaluating the US Practices ............................................................................... 29
CHAPTER THREE
THE EUROPEAN COMMUNITIES PRACTICE
3.1. The Legal Framework....................................................................................... 31
3.2. Leading Cases in the EC ................................................................................... 36
3.3. Evaluating the EC Practices.............................................................................. 44
CHAPTER FOUR
THE TURKISH PRACTICE
4.1. Legal Framework .............................................................................................. 45
4.2. Leading Decisions in Turkey ........................................................................... 47
4.3. Evaluating the Turkish Practice ........................................................................ 57
CHAPTER FIVE
COMPARISON AND CONCLUSION
5.1. The Theory of Foreclosure ............................................................................... 59
5.2. Elements to be assessed in identifying foreclosure .......................................... 60
5.3. Differences between the US, the EC and Turkish practices ............................. 63
5.4. Does being dominant make a difference? ......................................................... 67
TABLE OF CASES & DECISIONS ........................................................................ 69
BIBLIOGRAPHY ................................................................................................. 70
© Barış Ekdi, 2003
1
INTRODUCTION
Ronald [Coase] said he had gotten tired of antitrust
because when the prices went up the judges said it was
monopoly, when the prices went down they said it was
predatory pricing, and when they stayed the same they
said it was tacit collusion .
The competition law distinguishes vertical restraints from horizontal ones, pointing
out that they may increase consumer welfare by creating efficiencies. On the other
hand, there is no consensus among scholars of economics and law regarding the
negative effects of the vertical restraints. According to the Chicago School, vertical
restraints should be lawful per se, because they only increase consumer welfare, and
they do not have any anticompetitive effects. Nevertheless, other scholars defend the
rule of reason approach, demonstrating that dominant firms may use vertical
restraints strategically to foreclose the market. On these grounds, the concept of
“foreclosure” is important in the assessment of vertical restraints.
It is also known that most of the theoretical debates in economics are founded on
assumptions that limit the application of these theories to the real world of law and
policies. Therefore, despite the fact that the theory focuses on dominant firms and
strategic use of vertical restraints, it can be seen that in some jurisdictions the
concept of “foreclosure” extends beyond the theory by covering non-dominant firms.
William LANDES, "The Fire of Truth: A Remembrance of Law and Econ at Chicago", JLE (1981) p. 193.
© Barış Ekdi, 2003
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Hence, it is important to study the positions of dominant and non-dominant
undertakings in the light of the theory and case law. For example, even though the
theory emphasizes the market power and strategic intention, case law usually
associates foreclosure with the “horizontal effect” of the networks of vertical
restraints that are employed by several firms; and thus shades the consistency. Thus,
the aim of this paper is to demonstrate the relevance of being dominant in creating
foreclosure via vertical restraints.
Therefore, the first chapter is devoted to the vertical restraints and foreclosure theory,
which shows that firms can prevent market access by exclusive contracts (or other
restraints, such as quantity forcing), or tying. However, in order to limit the scope of
this paper, the case law concerning tying will not be discussed in the subsequent
chapters.
The second chapter focuses on the United States, where the foreclosure doctrine was
born and flourished following the theory of economics. The shifts in the US case law
are also important to highlight the difference between the theory and the practice.
The European Communities case law, which pursues market integration, freedom of
market access and consumer welfare at the same time, is studied in the third chapter.
The fourth chapter examines the Turkish practice, since it involves two significant
cases that are important to demonstrate the foreclosure capacity of dominant firms,
and foreclosure through vertical restraints on complementary products.
The last chapter is reserved for conclusion, in addition to comparison of the
practices, identifying the elements that are to be taken into consideration in the
assessment of foreclosure, and the relevance of dominance in the light of the case
law.
© Barış Ekdi, 2003
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CHAPTER ONE
VERTICAL RESTRAINTS, FORECLOSURE
AND MARKET POWER
1.1. Vertical Restraints
Knowing how to make a product and making that product are not enough for a firm
to survive in the market. Firstly, the firm has to obtain raw or intermediate materials
or components that are required to manufacture the product in question. Secondly, it
has to organize the machinery and human resources for production, and finance its
operations. Thirdly, it has to find customers to buy its products and get its products to
these customers.
The functions of obtaining inputs, manufacturing the products and getting them to
the customers also link several markets vertically. Therefore, a firm may choose to
perform in these markets, either expanding its business to these markets directly (or
by founding subsidiaries), or merge with or acquire the firms that are extant in those
markets. The latter option is usually subject to ex-ante examination on certain
conditions by the competition authorities.
Another choice could be making agreements with the independent firms existing in
these markets. In this case, the firm can sell its products to a wholesaler or to an
appointed distributor to reach the customers, or sign contracts with the input
suppliers to meet the materials necessary for its production. These agreements made
with the firms in upstream and/or downstream markets are generally known as
“vertical agreements”. In cases where these agreements involve some restrictions on
one or both of the parties, they may be subject to the competition law, depending on
the nature and the effect of the restraint(s).
© Barış Ekdi, 2003
4
The firm may choose one or all of the methods mentioned above. For example, if the
firm expands, costs of organizing additional transactions will rise or the entrepreneur
may fail to maximize the utility of the resources, and at a certain point, it may be
more profitable for a firm to carry out the transaction in the open market: Hence, it is
expected that the firm will adopt the most efficient way (Coase, 1988:43). Korah and
O'Sullivan (2002:4) give other examples: Manufacturers may prefer local dealers that
are familiar with local conditions to cope with regional problems; small firms may
not find enough resources to expand their business into other markets; or different
regulations in different countries may play a decisive role.
Like any other agreement, these agreements put some obligations and restraints on
the parties to avoid opportunistic behaviour, or to capture positive externalities, or to
avoid negative externalities (Dobson and Waterson, 1996:8). In addition, it should be
stressed that, vertical restraints are not limited to distribution level, and they can also
be seen widely in the input supplier-manufacturer relationship. Hence, a vertical
restraint may be defined broadly as
an agreement relating to the supply of goods or services between undertakings which
operate at different stages of the production chain (for example, manufacturing,
retailing, wholesaling, distribution, input supply, etc.), and which imposes
restrictions on the commercial freedom of at least one party that go beyond the spot
exchange of a certain quantity at a fixed price per unit… (Hughes, 2001:424)
leaving a controversial area for both scholars of economics and practitioners of
competition law.
On the one hand, as summarized below in Bork‟s (1993:297) words, the Chicago
school of thought defends that the vertical restraints should be legal per se, because
…vertical price fixing (resale price maintenance), vertical market division (closed
dealer territories), and, indeed, all vertical restraints are beneficial to consumers and
should for that reason be completely lawful. Basic economic theory tells us that the
manufacturer who imposes such restraints cannot intend to restrict output and must
(except in the rare case of price discrimination, which the law should regard as
neutral) intend to create efficiency. The most common efficiency is the inducement
or purchase by manufacturer of extra reseller sales, service or promotional effort.
© Barış Ekdi, 2003
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Basic argument of Chicago is that, since the parties to the agreement are not rivals,
but producers of “complementary” goods and services, they will have no interest in
raising the price of the complementary product, as this will decrease the demand for
their own product. So, a manufacturer accepts a vertical restraint only in case of an
offsetting efficiency justification (Hughes, 2001: 425).
In contrast, Comanor (1985:989) questions Bork‟s argument asking, “whether the
increase in services is worth the increase in the price of the product” after the
imposition of vertical restraints. Some scholars, namely Comanor and Frech (1985
and 1987), Krattenmaker and Salop (1986a), Aghion and Bolton (1987), Mathewson
and Winter (1987), Rasmusen et.al, (1991), Rey and Tirole (1997), Bernheim and
Whinston (1998), and Simpson and Wickelgren (2001) examine exclusivity clauses
(non-compete obligations) in various economic models with different assumptions,
while the others, like Mathewson and Winter (1984 and 1988), Rey and Tirole
(1986), and Waterson (1998) focus on resale price maintenance (RPM) and exclusive
territories. Jullien and Rey (2000) and Krattenmaker and Salop (1986b) study
collusion-facilitating effects of vertical restraints that result in high prices. All of
them state their objections to per se legality of vertical restraints, favouring a rule of
reason approach.
Furthermore, in one of their studies, Rey and Stiglitz (1995: 446) take part at the
other end of the scale suggesting “a policy in which vertical restraints should be
considered presumptively illegal, unless there can be shown to be significant
efficiency-enhancing effects (a) that could not be obtained (at reasonable cost) in
other ways, without the ensuing anticompetitive effects, and (b) that outweigh any
anticompetitive effects.”
© Barış Ekdi, 2003
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Likewise, Neven et al. (1998:21-25) give three reasons against Chicago‟s conclusion
of per se legality: First, a vertical contract harms third parties (consumers,
competitors or potential entrants to the industry) driving the rivals out or preventing
market access, or secondly, certain types of contracts can be found to be illegal,
because of hold-up problems (related to relation-specific investments) that lead to the
exploitation of one of the parties, and thirdly, if one of the parties has market power,
vertical restraints may result in inefficiency harming the consumers.
Considering the fact that most of the theoretical debates in economics have some
assumptions which limit the application of these theories to the real world of
policies, we will focus on certain kinds of vertical restraints that are directly related
to the aim of this paper. However, in order to set the framework of this paper, it
might be useful to identify the types of vertical restraints, their benefits and
anticompetitive effects.
1.1.1. Types of Vertical Restraints
Although there is no consensus on the number of types of vertical restraints, this is of
no importance. Vertical restraints can broadly be divided into two groups, as price-
related vertical restraints and non-price vertical restraints at first sight. In the earlier
periods of competition law practices all the price-related restraints were deemed to
be illegal per se, but later on maximum or recommended prices are allowed. Also a
certain degree of substitution between these two categories is widely accepted in
economics1.
Dobson and Waterson (1996:5) list vertical restraints as follows:
1 For example, see Matthewson and Winter (1984 and 1988) and Rey and Stiglitz (1995:937) on the
substitution between price restraints and territorial restraints.
© Barış Ekdi, 2003
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Table 1 – Types of Vertical Restraints
Form Examples
Non-linear Pricing
Two-part tariff with a franchise fee plus a constant per-unit charge.
Aggregated rebate scheme with discounts for taking full product
range.
Quantity Forcing A specified minimum quantity the retailer is required to distribute;
e.g. beer sales in tenanted public houses.
Service Requirements
A specific level of pre- and post-sales service or promotional
effort.
Using trademark equipment; e.g. fast-food franchises
Resale Price Maintenance
[RPM]
Retail price fixed by the producer; e.g. the book market
A price floor or price ceiling
Refusal to Supply Selective distribution limiting the number of distributors; e.g. fine
fragrances
Exclusive Distribution Distributor assigned exclusively within a geographic area or over a
particular class of consumer goods; e.g. newspaper distribution
Exclusive Dealing The retailer is prohibited from dealing stocking competing; e.g.
petrol retailing
Tie-in Sales Distributors contractually required to take other products, or even,
with full-line forcing, an entire product range.
Neven et al. (1998:26-27) assess vertical restraints in three main categories: (i)
Price/quantity restrictions such as RPM, minimum or maximum price settings and
quantity forcing. (ii) Restrictions on substitutes like non-linear pricing, exclusive
distribution and exclusive dealing. (iii) Restrictions on dealing in complements, such
as service requirements, selective distribution or tie-in sales.
An alternative classification comes from the European Commission, which officially
denotes eight kinds of vertical restraints in its Guidelines On Vertical Restraints2
separating them into four broad categories. Since this classification does not
introduce any new item to the restraints mentioned above, and will be examined in
the third chapter of this paper, no further information is given on it in this section.
2 OJ [2000] C 291/1.
© Barış Ekdi, 2003
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1.1.2. Motivation Behind the Vertical Restraints
As long as the vertical restraints yield more profits than to offset the losses of the
parties to the vertical agreement in question, the parties would be willing to restrict
their freedom (Neven et al.,1998:27-28). Apart from that, the party with the market
power can use vertical restraints against its rivals.
Therefore, the motivation behind vertical restraints can be studied in two categories:
a. Motivation between the parties
Motivation between the parties can emerge from direct externalities for contractible
strategy components, -like maximum RPM to avoid “double marginalisation
problem” or indirect externalities for non-contractible strategy components, -such as
two-part tariffs where the pricing of the final product is non-contractible (Neven et
al.,1998:27-28).
Likewise, Dobson and Waterson (1996:6-15) list several problems to be solved by
vertical restraints: Double marginalisation, retailer (intrabrand) competition, location
and free-rider effects. Hold-up and lock-in are the other problems mentioned (Korah
and O'Sullivan, 2002:30, and Taylor, 1999:44).
b. Motivation against third parties
Vertical restraints may also be employed to avoid free-riding at interbrand level or to
eliminate the rivals. In Dobson and Waterson‟s (1996:17) words
… a vertical restraint, like exclusive dealing, which prohibits the dealer from
stocking rivals‟ products or a less direct method which puts pressure on the dealer to
stock fewer rival products such as contract terms covering tie-in sales or quantity
requirements, may handle both effects. However, the two externalities have very
different implications for economic efficiency. On the one hand, actions to control
the former effect are generally in society‟s interest, where, for example, efficiencies
result from manufacturers investing optimally in selling and promotional activities.
On the other hand, attempts to control the latter effect, i.e. restrict competition, say,
by dividing up the market, creating entry barriers, or inducing existing rivals to leave
the market, are by definition „anti-competitive‟ and are likely to lead to a reduction
in societal welfare…
© Barış Ekdi, 2003
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Therefore, identifying pro-competitive and anti-competitive effects of vertical
restraints are important, since vertical restraints can be used to deter entry or impair
rivals competitive actions. On these grounds, foreclosing a market by vertical
restraints will be studied in depth in the following section.
1.2. Foreclosure
Foreclosure can be defined as the
[s]trategic behaviour by a firm or group of firms to restrict market access
possibilities of potential competitors either upstream or downstream. Foreclosure
can take different forms, from absolute refusal to deal to more subtle forms of
discrimination such as the degradation of the quality of access. A firm may, for
example, pre-empt important sources of raw material supply and/or distribution
channels through exclusivity contracts, thereby causing a foreclosure of
competitors3.
In economics, the study on foreclosure through vertical restraints can be divided into
two broad categories according to the vertical restraints employed: Foreclosure can
either be achieved by exclusive dealing agreements (including other restraints that
have the same effect, such as quantity forcing or refusal to deal), or by tying. In
practice, the application of foreclosure theory may not be limited to the conduct of
dominant firms. Vertical restraints of non-dominant firms are also condemned for
their foreclosure effects in certain circumstances.
1.2.1. The Foreclosure Theory of Exclusive Dealing
Many scholars of economics worked on the effects of vertical restraints with the
debate stimulated by Chicago School. Some of these studies focus on exclusivity
contracts that lead to foreclosure.
Comanor and Frech (1985) show that a single dominant manufacturer producing a
single product with constant unit costs, can raise the costs of entry into a market for a
3 The European Commission's Directorate-General for Competition, “Glossary of Terms Used in
Competition Related Matters”, http://europe.eu.int/comm/competition/general_info/f_en.html#t128,
(April 2003).
© Barış Ekdi, 2003
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rival firm if there are two classes of consumers, one of which distinguishes between
the products of incumbent and entrant. Therefore exclusive dealing can be a credible
strategy for entry deterrence.
Mathewson, and Winter (1987:1057-58) criticize the model above, arguing that the
impact on rivals‟ entry cost was the wrong criterion for assessing the efficiency.
They demonstrate that exclusive dealing imposed by the dominant manufacturer both
reduces actual competition and restricts the consumers‟ choice set by eliminating its
rival from the market. But on the other hand, manufacturers compete for the right to
be selected by the retailer. As a result, “potential competition under exclusive dealing
may be stronger in disciplining the dominant manufacturer than actual competition
when exclusive dealing is prohibited”, if the retailer has no monopsony power4.
Simply creating “shortage” for the inputs required by rivals through exclusive
contracts would not be enough for the foreclosure: When a firm concludes an
exclusive contract, that does not only cause the supply curve for the goods in
question to shift to the left (raising the prices up), but leads the demand curve for
these goods to shift to the left, too, offsetting the price increase. Thus, this kind of
foreclosure is discredited. But, there are four distinct methods of foreclosure, and
they are credible since they raise the rivals‟ cost (Krattenmaker and Salop,
1986b:231-242):
(a) Bottleneck (Essential Facilities) refers the method in which the purchaser
obtains exclusionary rights from all (or a sufficient number of) the lowest-
cost suppliers, where those suppliers determine the input‟s market price,
forcing the competitors to shift to higher cost suppliers or less efficient
inputs.
4 See Dobson and Waterson (1996:20) and Schwartz (1987) comparing and criticising Comanor-
Frech and Matthewson-Winter models.
© Barış Ekdi, 2003
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(b) Real Foreclosure occurs when “…the purchaser acquires an exclusionary
right over a representative portion of the supply, withholding the portion from
rivals and thereby driving up the market price for the reminder of the input
still available to rivals…” in case of entry and expansion barriers. This
method differs from the bottleneck method, which stresses on the unique
quality of the input foreclosed, since it emphasizes the sheer amount of it.
(c) Cartel Ringmaster method has two variants: In the first variant, the purchaser
(of the exclusive right) induces a number of its suppliers to deal with its rivals
on disadvantageous terms. The second variant involves the outright refusal to
deal with the purchaser‟s competitors. These two methods are named as the
cartel ringmaster technique because the purchaser of the exclusionary right
orchestrates cartel-like discriminatory input pricing against its rivals.
(d) Frankenstein Monster technique is the method by which the purchaser of an
exclusionary rights contract provides a ground for remaining unrestrained
suppliers to collude successfully. This technique differs from the previous
one because rivals' cost increase is inflicted by suppliers that are not parties to
the exclusionary rights agreement.
Hence, the first two techniques succeeded by restricting rivals‟ output directly, while
the latter two encourage suppliers to restrict output in response to incentives created
by the exclusionary rights agreement, and facilitate tacit or express collusion.
These methods affect competitive abilities or incentives in three ways: (a) Selling
prices of remaining firms can increase in case of entry and expansion barriers, (b)
after the exclusion of the rivals, remaining firms may be few enough to manage
collusive behaviour, and (c) if the exclusionary rights significantly raise the costs for
© Barış Ekdi, 2003
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potential entrants, they will also raise barriers to entry (Krattenmaker and Salop,
1986b:243-247).
Likewise, an incumbent seller who faces the threat of entry into its market can sign
long-term exclusive contracts with buyers, imposing an entry cost on potential
competitors, either forcing them to wait until contracts expire, or to pay liquated
damages of the customers to induce them to break their contracts with the incumbent.
In that case, effective length of the contact (the length that the parties expect the
relationship to last at the time of the signing), rather than nominal length should be
taken into account, because signalling aspects to deter entry are more important in
the determination of contract length (Aghion and Bolton, 1987)5.
According to Rasmusen et al. (1991:1137),
Ordinarily, a monopoly cannot increase its profits by asking customers to sign
agreements not to deal with potential competitors. If, however, there are 100
customers and the minimum efficient scale requires serving 15, the monopoly need
only lock up 86 costumers to forestall entry. If each costumer believes that the others
will sign, each also believes that no rival seller will enter. Hence, an individual
customer loses nothing by signing the exclusionary agreement and will indeed sign.
Thus, naked exclusion can be profitable6.
After comparing vertical agreements with vertical integration in a model with an
upstream monopolist, selling to two downstream firms, Rey and Tirole (1997:27)
conclude that, “exclusive dealing may actually be privately and socially less
desirable than vertical integration”. Because, the upstream monopolist may have
interest in continuing to supply the remaining downstream firm after integrating with
the other, whereas after concluding an exclusive dealing agreement with one of the
downstream firms it loses its chance to supply the other.
5 Posner (2001:232-233) disagrees with these authors arguing that (a) the payments made to the
retailers to secure exclusivity and deter entry will be transferred to customers in the from of lower
prices (b) penalty clauses are generally unenforceable. Innes and Sexton (1994) argue that these
contracts only deter inefficient entry, and thereby increase social welfare. They also examine another
model in which buyers can coordinate against incumbent. 6 See Innes and Sexton (1994) for the criticism of the model.
© Barış Ekdi, 2003
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Finally, Simpson and Wickelgren (2001) present another game theoretic model to
examine the exclusive contracts: If (a) an incumbent monopolist sells to competing
downstream firms; (b) an entrant can not initially supply a buyer at the same cost as
the incumbent; and (c) this entrant can supply buyers at the same cost as the
incumbent if it can make some sales during an interim period to at least one firm; the
incumbent monopolist can often place each downstream firm in a prisoner‟s dilemma
by offering downstream firms a discount if they sign an exclusive contract covering
later periods. The significance of this paper is that it shows where these assumptions
hold, an incumbent monopolist can profitably deter entry by offering discounts to
firms that sign exclusive contracts, even in the absence of the economies of scale.
1.2.2. The Foreclosure Theory of Tying
Not only exclusivity but also tying clauses condemned for creating foreclosure: The
foreclosure theory of tying basically suggests that, the tie may facilitate single firm
dominance or oligopoly by preventing more aggressive competitors or potential
entrants from accessing to the tied-goods market7. In that case there must be some
economy of scale or other impediment at one market level to prevent entry to the
tied-goods market. Therefore, foreclosure by tying occurs only in rare circumstances,
and even if a tie forecloses a large percentage of the market, there is no risk if the
entry to both markets is easy (Hovenkamp, 1999:419).
Tying can lead to a monopolization of the tied good market through foreclosure
when the tied good market has an oligopolistic structure: A monopolist can reduce
the sales –and profits- of its competitors in tied good‟s market, below the level that
would justify continued operation. This type of foreclosure is called strategic
foreclosure, since tying represents a commitment to foreclose sales in the tied good
7 For example, if a seller of a patented machine also ties the goods to be used by this machine, the
market for the tied-goods may be foreclosed.
© Barış Ekdi, 2003
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market. The same result is valid for the tying of complementary products (Whinston,
1989) 8
.
1.2.3. Input Foreclosure and Customer Foreclosure
Riordan and Salop (1995) refer to two major types of vertical foreclosure, namely
input foreclosure and customer foreclosure, in studying vertical mergers. This
classification can also be applied for defining foreclosure through vertical restraints:
a) Input Foreclosure refers to the case in which the input supplier exclude some
of the downstream firms by raising their costs, either through refusing to
supply or charging discriminatory prices for the inputs. This strategy can be
successful if the other input suppliers ability to expand their production is
limited or they choose to benefit (i.e. collusion) from this output restriction,
which raises the price of the input in question. As a result, consumers are
harmed by the higher downstream prices, and efficiency can be reduced since
the consumers reduce their purchases or efficient firms may be forced to use
an inefficient input mix.
b) Customer Foreclosure is another exclusionary practice in which the firm
excludes its rivals by preventing them from accessing a sufficient customer
base. In other words, if the firm persuades enough customers to refuse to buy
from its competitors, the competitors may be unable to attract a sufficient
number of customers to produce efficiently or to survive in the market. As a
result, the excluding firm can raise the price above competitive levels.
It may also be possible for a firm to apply both types of foreclosure at the same tame,
requiring the rivals to enter two levels of the market. Salop (2001:179-194) places
8 For illustrations of Winston‟s theory, and other tying-foreclosure relationships in complementary
products see Hylton and Salinger (2001).
© Barış Ekdi, 2003
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“limited distribution” into the first category and “single branding” into the second
and gives eight illustrative examples9.
1.2.4. Competition Policy and Effects of Foreclosure on Consumers
So far, it has been demonstrated that most scholars agree that foreclosing a
substantial part of the inputs or consumers may result in driving the rivals out of the
market or in deterring their entry. This brings us to ask the crucial question: Does
harming competitors mean harming consumers?
Considering the fact that competition itself inherently “harms” rivals, and the main
aim of the competition law is to promote consumer welfare10
, the focus should be on
consumer welfare. According to the “contestable markets theory”, although a firm
may obtain a dominant position or maintain this dominance by driving rivals out, it
may not be able to exploit this (i.e. apply monopolistic prices) due to potential entry.
Therefore, driving rivals out or foreclosing the market does not automatically result
in deteriorating consumer welfare. That is why Krattenmaker and Salop (1986b)
suggest a “two-step analysis of consumer harm”. But before moving into that
analysis, it is worth examining some potential defences for foreclosure:
Whinston (1989:5-6), find the effects of foreclosure on aggregate efficiency and
consumer welfare “ambiguous”, stating that it may create efficiency in some cases.
Likewise, White (2002) shows that although the literature –which is based on
complete information models – demonstrates that foreclosure is harmful, in an
incomplete information model high-cost firms have signalling incentives to restrict
output in the absence of foreclosure, and these incentives disappear if vertical merger
9 See Salop (2001) for the illustrations and their assessment under EC Regulation 2790/99.
10 See Salop (2001:180) for the difference between “customer welfare standard” and “aggregate
welfare standard”.
© Barış Ekdi, 2003
16
or exclusive dealing are allowed (in some cases increasing profits, output and
welfare).
Potential competition and competition for exclusionary rights are other major
defences for foreclosure: Although exclusive dealing may result in both reducing
actual competition and restraining the consumers‟ choice set by eliminating rivals
from the market, it also provides manufacturers competing on the basis of wholesale
prices for the right to be selected by the retailer. Hence, “potential competition
replaces actual competition as the disciplining force in the market and may drive
down the retail price, even to a level where welfare increases with the restraint”
(Mathewson and Winter, 1987:1057-62).
In contrast, Krattenmaker and Salop (1986a:110) conclude that
…The market for exclusionary rights are essentially is a market for competition.
Unfortunately, even if this market is well functioning, it will fail to yield the
efficient outcome because competition is a classic public good [11]
.
Salop (2001:195-198) also lists four arguments against competition for exclusive
agreements:
- An incumbent firm may conclude long-term exclusivity contracts with input
suppliers or customers before there is a competitor on the horizon, and
competition for exclusives may never occur.
- The entrant can earn only duopoly return, which is more competitive and less
then monopoly return, after the entry, whereas the dominant incumbent may
earn monopoly return if it is successful at deterring or constraining the entry.
Therefore, the exclusive agreements may be worth more to a dominant
11
Which means, an individual distributor or consumer ignores the effect of its decision on others, or
may believe that the entrant likely will fail because the others are granting exclusives (to the
incumbent) and do not want to deprived of the “compensation” that the incumbent will pay in
exchange to the exclusivity (Salop, 2001:198).
© Barış Ekdi, 2003
17
incumbent than undoing them is worth to an equally efficient rival12
. In this
case, the exclusivity raises “artificial” entry barrier.
- The exclusivity agreements can also increase the switching costs of the
suppliers or consumers and prevent them devoting a portion of their business
to entrant. Besides, if these are long-term contracts and do not all expire at
the same time (staggered contracts), difficulty of coordination for the entrant
and barriers to entry will increase13
. In addition, the entrant may not desire
exclusivity contracts at all, and would be satisfied or better off with non-
exclusive contracts. But the requirement to meet the switching costs of the
suppliers or consumers and coordination14
problems would increase its
bidding disadvantage.
- Even if the exclusivity agreements are of short-term or terminable in will, the
entrant would still face the problem of getting enough suppliers or
distributors to achieve minimum viable scale rapidly and maintain adequate
investments.
For measuring anticompetitive effects and consumer welfare effects of foreclosure,
Krattenmaker and Salop (1986b:253-266) suggest a two-step test:
12
Salop (2001:196) gives the following example:
Suppose that the incumbent could earn $200 if it gets the exclusive and so retains its
monopoly. If the entrant gets distribution and breaks the monopoly, suppose that the entrant
and the incumbent each would earn $70, for a total of $140. Because competition transfers
wealth from producers to consumers, the total profits fall from competition (e.g., from $200
to $140). In this case, the entrant would be willing to bid up to $70 to obtain distribution, an
amount equal to its profits from entry. In contrast, the entrant would be willing to bid up to
$130 for an exclusive that prevents the entry, an amount equal to the reduction in its profits
from competition. The incumbent thus would win the bidding. This result obtains for as long
as the aggregate market profits fall from competition. 13
Even though all the contracts expire at the same time, getting enough users to switch at the same
time may be a difficult problem, too (Salop, 2001:197;fn.26). 14
See Aghion and Bolton (1987), Rasmusen et al. (1991), Innes and Sexton (1994) for coordination
problems
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18
First, the increase on rivals‟ cost must be evaluated. This involves assessing the
number and quality of alternative suppliers along with the prices they are likely to
charge. This is because, remaining suppliers may not be able to expand the output
due to the capacity constraints, or they may have higher costs and prices compared to
the ones that are party to exclusive agreements, or if they are small in number, they
may have an incentive to collude to raise the prices they charge.
Whether the exclusionary rights arrangement will so limit remaining supply
available to rivals that it will lead them to bid up the price of that supply, thereby
increasing their costs to the point that the purchaser obtains power over price
depends on the cost share, on what we call the net foreclosure rate, and on factors
concerning market definition and entry barriers. The net foreclosure rate (NFR)
measures the shrinkage resulting from the exclusionary rights agreement of supply
open to rivals. The NFR is the percentage of the suppliers' capacity that was
available to rivals before the exclusionary rights agreement. Thus, any pre-
agreement consumption of supply by the purchasing firm is subtracted from the total
amount of supply foreclosed and from the amount previously available … The
greater the share of supply foreclosed, the greater the price increase the purchaser
would be able to charge in the output market in which it sells (Krattenmaker and
Salop, 1986b:259)15
.
Krattenmaker and Salop (1986b:261-262) suggest treating the restrained suppliers‟
capacities as a “market” and then computing HHI16
for that market and comparing it
with the HHI of the entire supply market before the restraints –as if assessing a
merger case.
Likewise, if there are close substitutes to the inputs (or customers) foreclosed, or if
the input foreclosed does not constitute a significant portion in rivals‟ costs, the
effect will be smaller.
Second step - evaluating the power over price- involves the potential injury to
customers whereas the first one examines the injury to competitors. By raising rivals‟
cost, the firm may have the opportunity to raise or maintain high prices, and harm the
15
“This last condition sometimes is overlooked in vertical restraint analysis. Doing so creates a
significant potential for error.” (Salop, 2001:183). Also see Baker (1996) for horizontal consequences
of vertical restraints. 16
HHI – The Herfindahl-Hirschman Index is the sum of the squares of each firm‟s share on the
relevant market. This index is used in assessing mergers. (Hovenkamp, 1999:512).
© Barış Ekdi, 2003
19
consumers. Sometimes, partially excluded rivals may be forced to cooperate as a
result of their costs. But, if there are other actors competing in the output market, or
there are close substitutes to that output the firm may not be able to raise its price.
The competition among non-excluded firms may remain intense. In some cases,
multiple exclusive systems in the market can cause less anticompetitive effects
(creating a “reverse cumulative effect”), since these firms compete with each other
(Salop, 2001:184). As a result, if these two steps are proved, this conduct harms
consumers and reduces economic efficiency.
1.3. A Note on the Market Power
Krattenmaker et.al (1987) criticizes courts and antitrust authorities for creating a
false dichotomy by distinguishing between “market power” and “monopoly power”
and for failing to recognize the two distinct ways that anticompetitive economic
power can manifest itself. These two concepts are qualitatively identical and refer to
the same phenomenon –the ability to price above competitive level (or to prevent
likely price decreases).
Thus, they identify “two fundamentally different ways in which a firm or group of
firms may exercise anticompetitive economic power” and threat consumer welfare:
Firstly, the firm may raise its own prices (restrict its output), which is called
“classical Stiglerian power”, and secondly the firm may raise its competitor's costs
(by foreclosure or other means) known as “exclusionary Bainian power”. The
authorities, however, usually overlook the latter.
According to Krattenmaker et.al (1987), the “two types of power can be exercised
singly or in tandem” and the presence of either type will facilitate the exercise of the
other. Therefore, in antitrust cases both of these powers should be inquired and
presence of one should be sufficient.
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CHAPTER TWO
THE UNITED STATES PRACTICE
2.1. Legal Framework
2.1.1. Statutes
The United States‟ competition (or antitrust, more accurately) legislations date back
to the Sherman Act of 1890, the Clayton Act17
and the Federal Trade Commissions
Act in 1914. The main provisions related to this work are embodied in the §§1-2 of
the Sherman Act and §3 of the Clayton Act. Hence, §1 Sherman Act aims to prevent
cartels stating 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
declared to be illegal…18
while §2 Sherman Act stresses on the monopolization:
Every person who shall monopolize, or attempt to monopolize, or combine or
conspire with any other person or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign nations, shall be deemed guilty
of a felony…19
In addition §3 Clayton Act provides:
It shall be unlawful … to lease or make a sale or contract for sale of goods, wares,
merchandise, machinery, supplies, or other commodities … on the condition,
agreement, or understanding that the lessee or purchaser thereof shall not use or deal
in the goods, wares, merchandise, machinery, supplies, or other commodities of a
competitor or competitors of the lessor or seller, where the effect … may be to
substantially lessen competition or tend to create a monopoly in any line of
commerce20.
17
Amended by the Robinson-Patman Act (1936) and the Celler-Kefauver Act (1950). 18
15 USC §1. 19
15 USC §2. 20
15 USC §14.
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2.1.2. Guidelines on Vertical Restraints
In the framework of these three provisions, several vertical restraints cases were
brought before the courts, and in 1985, the Department of Justice issued guidelines
on the vertical restraints. These Guidelines were withdrawn in August 1993.
Alternatively, National Association of Attorneys Generals (NAAG) issued guidelines
on vertical restraints in 1985 and revised them in 1995. Since the Department of
Justice withdrew its guidelines on vertical restraints, the remaining soft rules lie in
the NAAG Guidelines.
NAAG Guidelines cover three categories of vertical restraints, namely RPM, non-
price vertical restraints and tying, and state that RPM is illegal per se. They list
potential anticompetitive effects –like elimination of intrabrand competition,
facilitation of collusion, exclusion of competitors, allocative inefficiency from retail
promotion induced by vertical restraints, and reinforcement of oligopolistic
behaviour21
. Intrabrand competition effects, product differentiation, existence of
multiple exclusive distributorships, dealer involvement in the imposition of a
restraint, the requirement and performance of additional services under vertical
restraints, natural and contractual longevity of restraints, concentration and coverage
of the markets, indicia of tacit collusion or conscious parallelism, entry barriers and
effect on consumer choice are referred to be the main criteria for analysing the
effects of vertical restraints22
. In Section 5, it is stated that the Supreme Court held a
tying arrangement unlawful per se if it (1) the tying and tied products (services) are
distinct; and (2) the arrangement forecloses a "substantial volume of commerce" or
there is a "substantial potential" of such impact on competition, and (3) the firm tying
the products has sufficient "market power" in the tying product to make
anticompetitive "forcing ... probable."
21
NAAG-GVR, §§ 3.2-3.3. 22
NAAG-GVR, §4.
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22
2.2. Leading Cases in the US
The US case law presents a great deal of cases regarding foreclosure. Even though
the Sherman Act was almost dormant regarding vertical restraints, after the adoption
of Clayton Act parties brought foreclosure cases under both of the statutes.
Supreme Court ruled on the exclusivity clauses leading foreclosure first in Standard
Fashion23
in 1922, and Sinclair Refining Co.24
in 1923. Succeeding cases were
Standard Stations25
, Tampa Electric26
, Beltone 27
, Ryko28
, Omega Environmental 29
and 3M v. Appleton 30
.
Another group involves less controversial cases like Alcoa31
and Loraine Journal32
:
Alcoa, the aluminium manufacturer agreed with the electricity suppliers not to
supply electricity to rival aluminium manufacturers. Since Alcoa did not buy any
electricity but just the exclusivity, this kind of input foreclosure is called “naked
exclusion”. Likewise, Loraine Journal required its advertisers (customers) not to deal
with the competing radio station, creating costumer foreclosure.
2.2.1. Standard Fashion
In Standard Fashion, the Supreme Court held Standard Fashion and two other
pattern companies were “controlling two-fifths of some 52,000 pattern agencies”,
and therefore Standard Fashion‟s agreements that prevented retailers from selling
competing patterns “…substantially lessened competition and tended to create
monopoly”. Therefore, the Court found the contracts infringing §3 Clayton Act.
23
Standard Fashion Company v. Magrane-Houston Company, 258 US 346 (1922). 24
FTC v Sinclair Refining Co., 261 US 463 (1923). 25
Standard Oil Company of California et al. v. United States, 337 US 293 (1949). 26
Tampa Electric Co. v. Nashville Coal Co. et al., 365 US. 320 (1961). 27
Beltone Electronics Corporation, 100 FTC 68, 204 (1982). 28
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987). 29
Omega Environmental, Inc. v. Gilbarco, Inc., 127 F3d 1157 (1997). 30
Minnesota Mining & Mfg. Co. and Imation Corp. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138
(1999). 31
United States v. Aluminium Co. of Am., 148 F.2d. 416 (2dCir.1945). 32
Loraine Journal v. United States, 324 US 143 (1951).
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2.2.2. Standard Stations
Standard Oil Company (“Standard”) was the largest gasoline seller with 23% share
of the total gasoline sold in the "Western area". Retail sales through its own outlets
constituted 6.8% of the total sales in the market where 6.7% of the sales in the
market made under its exclusive supply contracts with the independent dealers in
petroleum products. The 16% of the total retail gasoline outlets in the area signed
exclusive purchasing contracts with Standard. The duration of most contracts was
one year with an early termination. Standard‟s six leading competitors had also
absorbed 42.5% of the total volume of the retail sales in the market through such
kind of exclusive dealing agreements, where the remaining sales were divided among
more than seventy small companies.
The Supreme Court stated that even including the sales through its own stations,
Standard's share [13,5%] of the retail market for gasoline was “hardly large enough”
to conclude that it occupied a “dominant position”33
. But in the absence of showing
that the supplier dominated the market, the practical effect of the contracts was
important, and Standard's requirements contracts affected 6.7% of the total business
in the area “supporting the inference that competition has been or probably will be
substantially lessened”34
. Therefore,
… Standard was a major competitor when the present system was adopted, and it is
possible that its position would have deteriorated but for the adoption of that system.
When it is remembered that all the other major suppliers have also been using
requirements contracts, and when it is noted that the relative share of the business
which fell to each has remained about the same during the period of their use, it
would not be farfetched to infer that their effect has been to enable the established
suppliers individually to maintain their own standing and at the same time
collectively, even though not collusively, to prevent a late arrival from wresting
away more than an insignificant portion of the market. If, indeed, this were a result
of the system, it would seem unimportant that a short-run by-product of stability
may have been greater efficiency and lower costs, for it is the theory of the antitrust
33
337 US 302. 34
337 US 304-305.
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24
laws that the long-run advantage of the community depends upon the removal of
restraints upon competition…35
Regarding the efficiency claims, the Court argued that the service stations could
continue to supply all their requirements from only one company if they found it
efficient, and hence there was no need to bind them to refrain from looking
elsewhere36
.
Posner (2001:229) criticises the case arguing that since Standard had only 23%
market share, and there were already many large oil companies there was “plenty of
competition already” and constructing new gasoline stations would not be a “big-
ticket item” for the entrants.
2.2.3. Tampa Electric
Tampa Electric Company (“Tampa”), a public utility that produced electricity, made
an agreement with Nashville Coal Company to meet all of its expected coal
requirements over a 20-year period. The District Court and the Court of Appeals
ruled the agreements violated §3 Clayton Act.
However, the Supreme Court reversed the case after introducing a three-part test for
determining whether a lessening of competition was „substantial‟, in the light of
earlier decisions: First, the line of commerce involved, and second, the area of
effective competition “ …in which the seller operates, and to which the purchaser
can practicably turn for supplies” were to be determined, and third, “…the
competition foreclosed by the contract [had to] be found to constitute a substantial
share of the relevant market” 37
. “A mere showing that the contract itself involves[d]
a substantial number of dollars [was] ordinarily of little consequence”38
.
35
337 US 309. 36
337 US 313-314. 37
365 US 327-328. 38
365 US 329.
© Barış Ekdi, 2003
25
The Court expressed that a single contract between single traders might fall within §3
Clayton Act, and the contract could foreclose less than 0.77% of the market (in
volumes). However, the Court did not state that “such a trivial foreclosure was too
small to violate the law, but pointed out that there was no seller with a dominant
position in the market, nor any industry-wide practice of exclusive contracts…” and
that lead to a suspicion that even this small amount of foreclosure might be illegal
(Bork,1978:302).
2.2.4. Beltone
Beltone Electronics Corporation (“Beltone”), hearing aids manufacturer, was the
market leader with a market share declined from 21% to 16% from 1972 to 1977.
According to the Federal Trade Commission (“FTC”),
…the foreclosure in this case affects only about 7 or 8% of the dealers, or about 16%
of sales, which actually overstates the exclusivity, since other manufacturers'
products have accounted for at least 6 or 7% of Beltone dealers' sales. Moreover,
Beltone's dealership contracts are terminable by either party on 30-days written
notice. … this escape valve dilutes somewhat the limitation on other manufacturers'
access to Beltone dealers39.
The FTC also stated that relying on static foreclosure effects (and percentages) might
trigger liability compared to Standard Stations and Tampa decisions, but looking at
the dynamics of affected market was required. Therefore, it had to be assessed
whether the barriers to entry effectively rose by the foreclosure, or the competitors
effectively inhibited from pursuing other distribution channels, or rivals have been
driven from the market or their costs of reaching potential customers increased as a
result of Beltone's practices. Therefore, “other firms [had] recently entered the
market or grown vigorously, in part at the expense of the older firms” and they
experienced little difficulty in finding distributors. Beltone‟s restraints did not seem
39
100 FTC 68, 270-271.
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26
to confer upon it any „significant market power‟ and it had shown no ability or
inclination to use its restraints strategically to injure its rivals40
.
2.2.5. Ryko
In Ryoko, The Circuit Court ruled the requirement of dealing only in the supplier‟s
goods would violate §3 Clayton Act, if its performance foreclosed competition in
substantial part of the market. They “…no longer evaluate foreclosure under the
purely quantitative test of earlier decisions”. Therefore,
. . . where the degree of foreclosure caused by the exclusivity provisions is so great
that it invariably indicates that the supplier imposing the provisions has substantial
market power, we may rely on the foreclosure rate alone to establish the violation.
However, where, as here, the foreclosure rate is neither substantial nor even
apparent, the plaintiff must demonstrate that other factors in the market exacerbate
the detrimental effect of the challenged restraints41
.
According to the Court, Eden could not produce any evidence that Ryko‟s exclusive
dealing provisions had prevented its rivals from finding effective distributors or other
means for selling their products, and “where the exclusive dealing restraint operated
at the distributor level, rather than at the consumer level, a higher standard of proof
of „substantial foreclosure‟ was required, because it was less clear that a restraint
involving a distributor would have a corresponding impact on the level of
competition in the consumer market”42
.
2.2.6. Omega Environmental
Gilbarco was the largest of five petroleum dispensing equipment manufacturers, with a
domestic market share of 55%. It was selling two-thirds of its products to the
independent gasoline retail outlets through its distributors, and one-third directly to the
major oil companies and national convenience store chains.
40
100 FTC 68, 270-272. 41
Citing Beltone Electronics Corp. 100 F.T.C. 68, 204, 209-10 (1982). 42
823 F.2d 1236.
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Omega, without having a manufacturing capacity in the industry, introduced a "one-stop
shopping" network to consumers of petroleum dispensers, engaging in consolidated
purchasing from manufacturers. Therefore, it challenged Gilbarco‟s policy of doing
“business with service station equipment distributors who sell only the Gilbarco line of
retail dispensers”.
According to the Court of Appeals “the foreclosure effect, if any, depended on the
market share involved” and “the relevant market for this purpose included the full range
of selling opportunities reasonably open to rivals”. Therefore, Gilbarco foreclosed
roughly 38% of the relevant market for sales, since it made 70% of its sales through the
distributors and its market share was 55%. The foreclosure rate seemed significant but
also overstated the likely anticompetitive effect for two reasons: “First, exclusive dealing
arrangements imposed on distributors rather than end-users [were] generally less cause
for anticompetitive concern” because rivals could reach consumers through existing or
potential alternative channels, and in this case, “…competitors [were] free to sell
directly, to develop alternative distributors, or to compete for the services of the existing
distributors”. Second, the agreements had no potential to foreclose competition because
they were of short duration and easily terminable. The Court also rejected Omega‟s
claim regarding “…no distributor would abandon the Gilbarco line for an untested
product with no reputation”, stressing that success enjoyed in the market by a proven
product and strong reputation was the essence of competition43.
2.2.7. 3M v. Appleton
Appleton was the market leader in carbonless paper sheets that are used for business
forms and credit card charges, with an increasing market share from 50% to 67% in
last ten years. There were only three other firms in the market including Minnesota
Mining (3M). During the same period, 3M‟s market share declined from 26% to
13%, and 3M brought a case against Appleton, claiming that Appleton infringed §3
43
127 F3d 1162-63.
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Clayton Act and §§1-2 Sherman Act, by foreclosing the market through its exclusive
dealing agreements with fine paper merchants.
Carbonless paper, sold in rolls to mass-volume business from manufacturers
constituted 87% of the overall market, and in sheets to fine paper merchants for
resale accounted for 13%. The District Court stated that the market characteristics of
these two vary significantly in terms of pricing, customers, distribution, uses, and
manufacture44
. Assessing the facts the Court pointed out that the exclusive
arrangements with the fine-paper merchants led to significant foreclosure because of
the “…nearly precise correlation between distribution coverage/share and
manufacturer/brand market share”, and concluded
…3M has produced substantial evidence that the market for carbonless sheets is
vulnerable to foreclosure. First, 3M has shown that because of one-stop convenience
and special credit arrangements, most printers remain loyal to their distributors and
do not comparison shop. Second, 3M has demonstrated that because of a strong
trend toward consolidation at the merchant level, entry barriers at the distribution
level are likely to be high. Third, 3M has created a fact issue as to whether there are
practicable alternative methods of distribution for carbonless sheets beside paper
merchants. Fourth, it is virtually undisputed that: (1) consumer demand for
carbonless sheets is declining, (2) the possibility of future entry by other suppliers is
low, and (3) Appleton's market share is rapidly on the rise45.
Another aspect of the case is, although Appleton argued that since the agreements
with the merchants were terminable at any time its rival‟s could convert the
merchants, the Court insisted on the “…practical effect of tying up of the paper sheet
inventory of a merchant over a period of several years” relying on the evidence of
significant switching costs and Appleton's incentives46
.
In this case, although the Court made a distinction between rolls and sheets, and
stated that the sheets constituted only 13% of the total sales in the market, Appleton‟s
market share in sheets and the percentage of the foreclosure were not expressed.
44
35 F.Supp. 2d 1140. 45
35 F.Supp. 2d 1144-45. 46
35 F.Supp. 2d 1144.
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2.3. Evaluating the US Practices
Jacobson (2002), who evaluates several US cases related to foreclosure and indicates
major shifts in US practices, argues that exclusive dealing enjoyed laissez-faire in the
area between the adoption of the Sherman Act and the Clayton Act. The latter act
resulted in successful challenges to exclusive dealing arrangements, and gave rise to
the foreclosure doctrine.
Standard Fashion was the first case, which reached the Supreme Court, and the
Court emphasized the Standard‟s 40% market share in assessing foreclosure. In
Standard Stations the Court “quantitative substantiality” stating that “ …the
qualifying clause of §3 [Clayton Act was] satisfied by proof that competition [had]
been foreclosed in a substantial share of the line of commerce affected”, since more
than 45% of the retail market was covered by exclusive agreements.
In 1961, in Tampa Electric the Supreme Court demanded the product market and
geographic market be defined in order to assess the substantiality of the foreclosure
and then suggested a comprehensive analysis involving relative strength of the
parties, proportionate volume of commerce effected and probable immediate and
future anticompetitive effects. Therefore, Standard Fashion‟s emphasis on the
market share and Standard Station‟s strict focus on the percentage of the foreclosure
left their place to a broader economic analysis in Tampa Electric decision.
Beltone in 1982 is another corner stone in foreclosure doctrine, reflecting Chicago
School approach, since the FTC carried out a detailed analysis on the dynamic
effects in the market and assessed the trade of between foreclosure effects and
efficiency effects. In addition, the FTC emphasized the market power requirement
for foreclosure and in the Eighth Circuit's 1987 decision in the Ryko, foreclosure and
market power are held together. Meanwhile, raising rivals‟ costs is being considered
© Barış Ekdi, 2003
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in analysing foreclosure and §1 Sherman Act and §3 Clayton Act are somehow
converged (Jacobson 2002).
In Omega Environmental having 55% market share and foreclosing 38% of the
market were not enough to condemn the vertical agreements, because the rivals had
alternative channels, the exclusivity was imposed on distributors rather than end-
users. In contrast, in a declining industry without any potential entrants, 67% market
share and “correlation between distribution coverage/share and manufacturer/brand
market share” were enough to condemn Appleton in Minnesota Mining (3M) v
Appleton.
Jacobson (2002) concludes that the analysis of exclusive dealings shifted to the
effects of the conduct that may harm consumers and probability of gaining power
over the price, irrespective of the percentage of the market foreclosed.
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CHAPTER THREE
THE EUROPEAN COMMUNITIES PRACTICE
3.1. The Legal Framework
3.1.1. The EC Treaty Provisions on Competition
According to Article 3(g) of the EC Treaty, one of the aims of the EC is “the
establishment of a system ensuring that competition in the internal market is not
distorted”. In order to achieve this aim, the Treaty lays down several provisions
regarding the activities of undertakings and activities of governments, as well as the
procedural rules (Albors-Llorens, 2002:2-3).
Concerning the activities of undertakings, Article 81(1) EC prohibits
…all 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…
and Article 81(2) EC provides them “automatically void”.
Article 81 does not expressly distinguish between horizontal and vertical agreements.
So, application of this article to the vertical agreements questioned once –in Consten
and Grundig v. Commission47
– before the European Court of Justice (ECJ), where
the parties defended their agreement was not in the scope of this article, since they
were not competitors to each other. The Court stated (a) agreements those restrict
competition between one of the parties and third parties can restrict the competition
as well, and (b) the Community market may be divided along national lines because
of these vertical agreements (Albors-Llorens, 2002:21-22).
47
Joined Cases 56 and 58/64 [1966] ECR 299, [1996] CMLR 418.
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Given that some agreements that restrict competition may also improve customer
welfare, Article 81(3) introduces four cumulative conditions to exempt them from
the application of Article 81(1). Therefore, any agreement
….which contributes to improving the production or distribution of goods or to
promoting technical or economic progress, while allowing consumers a fair share of
the resulting benefit, and which does not:
(a) impose on the undertakings concerned restrictions which are not indispensable to
the attainment of these objectives;
(b) afford such undertakings the possibility of eliminating competition in respect of a
substantial part of the products in question.
will be exempted.
Simultaneously, Article 82 EC, the other major provision of the EC Treaty related to
competition law aimed at preventing abusive conduct of dominant undertakings:
Any abuse by one or more undertakings of a dominant position within the common
market or in a substantial part of it shall be prohibited as incompatible with the
common market insofar as it may affect trade between Member States.
Since a dominant firm can use vertical agreements to foreclose the market, both of
these provisions and secondary legislations concerning their application play an
important role.
3.1.2. Block Exemptions
To avoid enormous workload created by exemption notifications, the Commission
introduced a number of block exemption regulations regarding vertical restraints:
Regulation 1983/84 on “exclusive distribution agreements”48
, Regulation 1984/84 on
“exclusive purchasing agreements”49
, Regulation 4087/88 on “franchise
agreements”50
, Regulation 1475/95 on “motor vehicle distribution and service
48
OJ [1984] L173/1; amended by Regulation 1582/97 (OJ [1997] L214/2). 49
OJ [1984] L173/5; amended by Regulation 1582/97 (OJ [1997] L214/2). 50
OJ [1988] L359/46.
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agreements”51
, and Regulation 240/96 on “technology transfer agreements”52
(Albors-Llorens, 2002:50-51).
Nevertheless, these block exemptions were not enough to ease the Commission‟s
work, because the agreements were required to fit squarely within the scope of the
regulation. Thereby, the Commission adopted a new umbrella block exemption
regulation, Regulation 2790/9953
, and issued the Guidelines on Vertical Restraints54
(“Guidelines”) regarding the application of this regulation (Albors-Llorens, 2002:53-
54)55
.
Regulation 2790/99 introduces a 30% market share cap for the supplier56
to benefit
from the exemption and two main provisions for “parallel networks of similar
vertical restraints”:
Article 6 provides, where “the cumulative effect of parallel networks of similar
vertical restraints (implemented by competing suppliers or buyers) enjoying
exemption pursuant to the regulation” restricts access to the relevant market or
competition therein, the Commission may withdraw the benefits of the Regulation.
Likewise, Article 8 gives the power to the Commission to refuse the application of
the Regulation for specific restraints, if the parallel networks of them cover more
than 50% of a relevant market.
Therefore, relaying on Article 6, the Commission can withdraw individual
undertakings‟ agreements that significantly contribute foreclosure, simply by
adopting a decision. Furthermore, according to Article 8, the Commission can
51
OJ [1995] L145/25. 52
OJ [1996] L31/2. 53
OJ [1999] L336/21, [2000] 4 CMLR 398. 54
OJ [2001] C291/1, [2000] 5 CMLR 1074. 55
See Goyder (2000), Korah and O‟Sullivan (2002) and Taylor (1999) for the application of
Regulation 2790/99 and the Guidelines in detail. 56
Or for the buyer in case of exclusive supply agreements. See Article 3(2) of Regulation 2790/99.
© Barış Ekdi, 2003
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exclude all the undertakings‟ specific restraints from exemption in a given market –
without addressing a specific undertaking - by adopting a regulation57
.
In parallel, the Guidelines stress the Regulation is also applicable to intermediate and
final goods and services, and to all levels of trade as well as to the distribution of
goods58
. They emphasise the market integration as “an additional goal of EC
competition policy” besides protection of competition59
.
The Guidelines present a methodology for analysing vertical restraints: Defining the
relevant market, and finding out the market share are essential steps. For the
agreements of the firms with less than 30% market share, checking the accordance
with the conditions of the regulation will be enough. But if the market share of the
firm exceeds this threshold, the Commission will make a “full competition analysis”.
This analysis involves assessing (a) market position of the supplier, (b) market
position of competitors, (c) market position of the buyer, (d) entry barriers, (e)
maturity of the market, (f) level of trade, (g) nature of the product, (h) other factors60
.
The Guidelines examine eight types of vertical restraints61
in detail, pointing out their
anticompetitive effects. Regarding foreclosure, single branding, exclusive
distribution (if combined with single branding), selective distribution, exclusive
supply (if the buyer has market power) and tying agreements are found to have the
capacity of foreclosing market if the other conditions, such as high market shares of
the parties, long durations for the contracts, existence of entry barriers and lack of
adequate alternative channels of distribution are met62
. However, franchising and
57
Also see Guidelines, para.71-87. 58
Guidelines, para.2 and 24. 59
Guidelines, para.7. 60
Guidelines, para.120-136. 61
In four broad categories: “single branding group”, “limited distribution group”, “resale price
maintenance group” and “market partitioning group”. See Guidelines, para.106-108, 109-110, 111-
112, 113-114 respectively. 62
Guidelines, para.141-160, 165-171, 185-194, 204-210 and 217, respectively.
© Barış Ekdi, 2003
35
recommended and maximum resale prices are not found “liable” to create
foreclosure63
. In contrast, Taylor (2000:56) argues that exclusive customer allocation
can foreclose buyers or suppliers in some cases, where the Guidelines remain
silent64
. Therefore, foreclosure effects of some vertical restraints can be summarized
in the table below:
Table 2 – Foreclosure Effects of Some Vertical Restraints65
Single
Branding
Group
Non-compete
obligation
Foreclosure of other suppliers, if the supplier has
market power.
Lim
ited
Dis
trib
uti
on G
roup
Exclusive
distribution
a. Foreclosure of other suppliers, if non-compete
obligation imposed on the distributors.
b. Foreclosure of other buyers, if the distributor
with strong buying power (i.e. supermarket
chains) imposes exclusivity on the suppliers.
Exclusive customer
allocation
a. Foreclosure of other suppliers, if non-compete
restrictions are imposed on the buyer.
b. Foreclosure of other buyers, if there is only one
distributor or the distributor has market power
other suppliers may not be able to make a
sufficient number of appointments.
Selective distribution
a. Foreclosure of other suppliers: The ones outside
the selective distribution network who need to
develop brand image still may face difficulties,
even though selective distribution cannot be
combined with non-compete obligation.
b. Foreclosure of other buyers is more accentuated
than in exclusive distribution, depending on the
selection criteria of the suppliers. (If the buyer
has market power and can impose selection
criteria to the suppliers).
Franchising -
Exclusive supply Foreclosure of other buyers if the buyer has market
power.
Retail Price Maintenance Group -
Market Partitioning Group -
63
Guidelines, para.199-201 and 225-228. 64
Guidelines, para.178-183. 65
This table is derived from the Guidelines (para.138-228) and Taylor (2000:52-61).
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36
3.2. Leading Cases in the EC
Two types of cases regarding foreclosure can be identified in EC case law: The first
set involves foreclosure cases through a network of similar vertical restraints of non-
dominant firms. Beer cases, Braserie de Haecht v. Wilkin66
and Delimitis v.
Henninger Bräu67
(“Delimitis”), and ice-cream cases Langnese-Iglo v. Comission68
(“Langnese-Iglo”) and Schöller v. Commission69
are the examples.
The second set covers foreclosure by exclusivity agreements (or other restraints with
the same effect) of dominant firms although the word “foreclosure” is not always
explicit: Hoffmann–La Roche v. Commission70
(“Hoffman-La Roche”), BPB
Industries v Commission71
(“BPB Industries”) and Masterfoods v. HB Ice Cream72
(“Masterfoods“) are some of them. Hoffmann –La Roche and BPB Industries differ
from the first set of cases because they involve dominant firms and they are related to
the different level of trade (supply of intermediate goods for producers).
Nevertheless, foreclosure is not analysed in these cases since “denying market access
through exclusivity” was found enough to condemn them under Article 82.
Hence, Delimitis case, in which the Court suggested a test for foreclosure, will be the
embarking point.
3.2.1. Delimitis
The first case regarding horizontal effects of network of agreements in EC
jurisdiction is Braserie de Haecht v. Wilkin, but Delimitis is more significant since
the ECJ laid down a two-step test for the applicability of Article 81(1). Facts are as
follows:
66
Case 23/67 [1967] ECR 407, [1968] CMLR 26. 67
Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210. 68
Case T-7/93 [1995] ECR II-1663, 5 CMLR 602. 69
Case T-9/93 [1995] ECR II-1663, 5 CMLR 602. 70
Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211. 71
Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32. 72
Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 449.
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37
Henninger Bräu AG (“Henninger”) licensed a public house to Mr. Delimitis,
requiring him to supply all the beer from it, and soft drinks from its subsidiaries.
Henninger also imposed a minimum quantity requirement supported by a penalty
provision. Delimits challenged these clauses before the German courts, under Article
81(2) EC. On appeal, the higher court sought a preliminary ruling from the ECJ.
According to the referring court 60% (on a numeric and weighted basis) of outlets in
the relevant market were subject to exclusive purchasing agreements. In the
Commission‟s view, 27 large brewers accounted for 50%, while 100 brewers
accounted for 86%, of beer production in the market, and Henninger was part of the
second largest group with 6.4% share in the production. Draught beer constituted
0.3% of Henninger‟s sales and 1.1% of the tied market (Pheasant and Weston,
1997:326).
In reply, the ECJ defined the relevant market as “national market for the distribution
of beer in premises for the sale and consumption of drinks” 73
and introduced a two-
stage test for analysing foreclosure effects of vertical restraints:
The first stage is related to evaluating the effect of the agreements on market access.
The ECJ stated several relevant factors to analyse74
:
(i) The number of the outlets tied in relation to the outlets that are not tied,
(ii) The duration of the agreements, and quantities sold under these
agreements, compared to the quantities sold by free distributors.
(iii) Other possibilities of penetration (According to the ECJ, even though the
bundle of similar contracts had negative effects on market access, it would
not be enough to declare that the market was inaccessible without
73
Delimitis, para.15-18. 74
Delimitis, para.19-22.
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38
considering the other opportunities of penetration, such as acquiring a
brewery with its network of sales outlets, or opening new outlets, or
making use of the other wholesalers‟ that are not tied to producers‟
distribution network).
(iv) Market structure, the number and size of the producers.
(v) Degree of saturation of the market, and customer loyalty, since it would be
more difficult to penetrate a saturated market in which customers are loyal
to a small number of large producers.
If this step shows the bundle of the agreements do not deny market access, Article
81(1) will not be applicable. In contrast, where the examination reveals that it is
difficult to access the market,
… responsibility for such an effect of closing off the market must be attributed to the
breweries which make an appreciable contribution thereto. Beer supply agreements
entered into by breweries whose contribution to the cumulative effect is insignificant
do not therefore fall under the prohibition under Article 85(1) 75.
Thereby, the second stage of the Delimitis test requires assessing each brewery‟s
contribution to market access, where market position of the contracting parties had to
be taken into account. The ECJ emphasized that market position was not solely
determined by market share, but by the number of outlets tied to the brewery, in
relation to the total number of outlets in the market. The duration of the agreements
was also stressed, since a “brewery with a relatively small market share which ties its
sales outlets for many years may make as significant a contribution to a sealing-off
of the market as a brewery in a relatively strong market position which regularly
releases sales outlets at shorter intervals”76
.
75
Delimitis, para.24. 76
Delimitis, para.25-26.
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39
However, it was unclear whether the Court referred to “a single contract” (between
the brewery and the public house) or to “a single standard-form agreement (all the
agreements, in the same terms) when speaking of ''one beer supply contract” (Lasok,
1991:196-199).
In addition, Korah (1992:172-173) suggests that the assessment of “a minimum
efficient scale of production may be supported by sales partly through each kind of
outlet on the supply side” and criticizes the Court‟s reasoning in acquiring a brewery
to penetrate the market as follows:
I wonder how often it would be possible to market a new brand of beer by buying an
existing brewery when there are few free bars. Part of the assets would be the
brewery itself and its tied outlets might not be able to take both the old and the new
beer in sufficient quantities. The view that new bars might be opened in the absence
of regulation, however, seems likely to be of wide application, except in country
districts when the minimum economic scale for a bar might be large in relation to the
small number of social drinkers in the neighbourhood or in the United Kingdom
where the licensing laws often make it impossible.
The importance of the Delimitis case lies in the wider application of Article 81(1),
which prohibits the agreements that have “the effect” of restraining competition.
Although the object of the agreements was not to restrain competition, their effect
was (Lasok, 1991:196-197).
3.2.2. Langnese-Iglo and Schöller
Subsequent case law involves two ice-cream cases77
, where the Commission adopted
two decisions against Langnese78
and Schöller79
, applying Article 81(1) to their
agreements and refusing exemption.
77
Langnese-Iglo v. Commission, Case T-7/93, and Schöller v. Commission, Case T-9/93 ([1995] ECR
II-1663, 5 CMLR 602). 78
93/406/EEC, OJ [1993] L183/19. 79
93/405/EEC, OJ [1993] L183/1.
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40
Rather than applying Delimitis test, the Commission asked three questions in order to
determine the validity of the application of Article 81(1) (Pheasant and Weston,
1997:326-327):
(1) Does the agreement itself have an appreciable effect on competition in the
common market or trade between Member States?
(2) If not, do all the agreements of this kind entered into by the undertaking
concerned have this effect?
(3) If not, do all the agreements of this kind which exist in the relevant market have
this effect?
Answering any of these questions in affirmative would be enough to apply Article
81(1). Since the numeric and volume weighted foreclosure effect of Langnese-Iglo's
and Scöller‟s agreements were more than 25% in total, the Commission prohibited
the agreements without considering the effect of other manufacturers' agreements on
the market. The CFI did not reject the Commission‟s conclusion, but applied
Delimitis test (Pheasant and Weston, 1997:326-327).
According to the CFI, “the networks of exclusive purchasing agreements set up by
the two main producers affect[ed] about more than 30% of the market”, both in
number and volume 80
. The large number of freezer cabinets lent by Langnese to
retailers made market access difficult for new competitors, since the entrants had to
persuade the retailer either to exchange Langnese‟s cabinet or install another one.
The first option would fail, if the newcomer was able to offer only a limited range of
products compared to the incumbent supplier, and the second option might fail
particularly because of lack of space in small sales outlets. Economies of scale, and
strength of the brands were also important81
. Besides, the agreements subject to tacit
renewal that might endure beyond five years had to be regarded as having been
concluded for an indefinite duration82
.
80
Langnese-Iglo, para.104-105. 81
Langnese-Iglo, para.107-110. 82
Langnese-Iglo, para.135-138.
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41
Like Delimitis, both the Commission and the CFI showed that in order to create a
foreclosure effect in the market, being dominant was not required, underlining the
“strong position” occupied by Langnese83
.
In addition, the Commission was not required to indicate “which agreements do not
make a significant contribution to any cumulative effect caused by similar
agreements on the market”, while withdrawing the entire benefit of block exemption,
but to examine the actual impact of the network of agreements on competition84
.
Korah (1994:173-174) criticizes the Commission for stressing market shares, since
there might be “ample free outlets to take the output of Mars”, and avoiding
“comparison with the minimum viable scale of distribution, as required by the Court
in Delimitis”.
3.2.3. Hoffmann-La Roche
In 1976, the Commission issued a decision, finding that Hoffmann-la Roche & Co.
Ag (Roche) had abused its dominant position on the markets of certain vitamins, by
concluding exclusive purchasing agreements with 22 purchasers or granting them
fidelity rebates or applying English clause. On appeal, the ECJ stated:
Obligations of this kind to obtain supplies exclusively from a particular undertaking,
whether or not they are in consideration of rebates or of the granting of fidelity
rebates intended to give the purchaser an incentive to obtain his supplies exclusively
from the undertaking in a dominant position, are incompatible with the objective of
undistorted competition within the common market, because - unless there are
exceptional circumstances which may make an agreement between undertakings in
the context of Article 85[81] and in particular of paragraph (3) of that Article,
permissible - they are not based on an economic transaction which justifies this
burden or benefit but are designed to deprive the purchaser of or restrict his possible
choices of sources of supply and to deny other producers access to the market85
.
This case can be seen as an example of customer foreclosure, since Roche prevents
rival vitamin suppliers from dealing with customers.
83
Langnese-Iglo, paragraphs 112, 165, 182 and 190. 84
Langnese-Iglo, para.188-196. 85
Hoffmann-La Roche, para90. Emphasis added.
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42
3.2.4. BPB Industries
BPB Industries was controlling about half the production capacity for plasterboard in
the Community and its wholly owned subsidiary, British Gypsum Ltd (“BG”), had
supplied about 96% of the plasterboard sold in the UK. BG provided loyalty rebates
to the merchants in exchange of exclusive purchasing when two rival companies
importing plasterboard from France and Spain entered into the market. The
Commission decided that BG abused its dominant position and imposed fines.
The CFI affirmed the case considering that these exclusivity clauses amounted an
abuse, since the competition in the market was already restricted because of the
dominant position of an undertaking, and “the conclusion of exclusive supply
contracts in respect of a substantial proportion of purchases constitute[ed] an
unacceptable obstacle to entry to that market”86
.
3.2.5. Masterfoods
Masterfoods is another ice-cream case, but this case differs from the previous ice-
cream cases since it involves a dominant firm and application of Article 82, as well
as Article 81. The case is still pending before the CFI, but the Commission‟s
Decision87
and the Opinion of Cosmas AG88
upon a reference from the Supreme
Court of Ireland is quite helpful to examine the case.
Van den Bergh Foods Limited, formerly “HB”, provided freezer cabinets to retailers
to stock its ice-cream products on the basis of cabinet exclusivity” in Ireland, and
prevented Mars Ireland‟s (“Mars”) products from being placed in these cabinets by
obtaining an order from the Irish High Court89
.
86
BPB Industries, para.65-68. 87
98/531/EC OJ [1998] L246/1. 88
Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 14. 89
See Murphy (1992) for the comment on this decision.
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43
Mars applied to the Commission, which adopted a decision in 199890
, finding HB
infringing Articles 81-82 EC. The Commission stated that HB‟s cabinet exclusivity
was leading de facto outlet exclusivity and foreclosing “some 40% of all outlets in
the relevant market91
, representing some 40% of total impulse ice-cream sales in the
relevant market”92
. Therefore, Article 81(1) was applicable but not Article 81(3)
since all the conditions for exemption were not met93
.
Regarding Article 82, HB was in a dominant position, because (a) its share in the
relevant market never fell below 70% for many years, (b) it had great economic
strength by virtue of its volume of production and scale of supply, (c) its product
range was superior to its rivals (d) it had other advantages in distribution due to its
parent group. Hence, de facto exclusivity94
constituted an abuse within the meaning
of Article 82, since it made market penetration and expansion more difficult for the
rivals, and limited the freedom of choice of the retailers and consumers95
.
Likewise, Cosmas AG applied Delimitis test to the agreements of HB, and agreed
with the conclusions of the Commission regarding Article 81(1) and 81(3) stating,
“competition between brands may not be replaced by competition for access to retail
shops”96
.
90
Before adopting the decision, the Commission issued a Statement of Objections against HB in 1993
and requested HB to make certain amendments in its agreements to benefit from exemption under
Article 81(3). McDowell (1995) considers this statement as a compromise, and after comparing ice-
cream distribution markets in US and Ireland he applies Whinston‟s (1989) model to the facts of the
case. He concluded that the freezer exclusivity would not lead to market foreclosure effect described
by Whinston and HB‟s arguments regarding efficiency should have been taken into account.
See also Robertson and Williams (1995) finding Irish Court‟s decision and UK Monopolies and
Mergers Commission‟s decision inappropriate in their respective cases related to freezer exclusivity
and inviting the European Commission act against freezer exclusivity. 91
“single wrapped items of impulse ice cream in Ireland”. 92
98/531/EC, para.142-210. 93
98/531/EC, para.221-247. 94
It is interesting to compare this case with FTC v Sinclair Refining Co. (261 US 463, 1923), where a
similar situation rose: Sinclair had prohibited gasoline stations from using its dispensers for selling
rival companies‟ oil. The Supreme Court ruled that retailers were free to install other companies‟
dispenser, so there was no foreclosure, even though this conduct has resulted in station exclusivity. 95
98/531/EC, para.255-271. 96
Masterfoods, A65-89 and fn:65; A99 and A102.
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3.3. Evaluating the EC Practice
In the EU experience, the concept of “foreclosure” attached to the cumulative effect
of vertical restraints in a market. Therefore, if certain conditions are met, the network
of the agreements that contributes significantly to this effect is to be condemned
under Article 81, not because of its “object” but because of its “effect”.
However, foreclosure potential of vertical agreements are taken into consideration
under Article 82 before Delimitis. For example, in Hofman-La Roche, Roche was
condemned for practices that deny market access to the rivals (in other words,
customer foreclosure). But, unlike Delimitis, detailed analysis of foreclosure was not
required, perhaps given the dominant position of Roche and the level of trade.
Nevertheless, in Masterfoods, the Commission applied Article 81 and 82, as well as
Delimitis test.
Another issue is that, Langnese-Iglo and Schöller introduced a new concept called
“strong position”, which referred to the strength below dominance. This concept is
taken to the Guidelines as “market power”. Therefore, the vertical agreements of the
firms, which do not have market power, were exempted automatically, where the
agreements of the firms with market power were found able to create foreclosure
effect and analysed in detail under 81(1) and 81(3). On the other hand, dominant
firms‟ agreements are evaluated under 81 and mostly 82. This issue will be discussed
in the last chapter.
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45
CHAPTER FOUR
THE TURKISH PRACTICE
4.1. Legal Framework
4.1.1. The Act
The Act on the Protection of Competition (“APC”)97
came into force in December
1994, as a result of the liberalization process and the adoption of acquis
communautaire. The Competition Authority started functioning in November 1997.
Substance of Articles 81-82 EC is almost identically reflected in Articles 4-6 APC,
save that 81(1)EC and 81(2)EC are embodied in Article 4 APC whereas exemption
provisions take place in Article 5 APC. Therefore, Article 4 APC reads as follows:
Agreements and concerted practices of the enterprises and decisions and practices of
the associations of enterprises the object or effect or the possible impact of which is,
directly or indirectly, to prevent, distort or restrict competition in a certain market for
goods and services, are unlawful and prohibited.
There are two minor differences between the examples listed in Article 4(a-e) APC
and Article 81(1)(a-e) EC, but since these lists are not delimited, the differences are
of no importance in practice.
Two positive and two negative conditions –like the ones provided in Article 81(3)
EC– for granting exemption, and the capacity of issuing communiqués are set in
Article 5 APC.
Article 6 APC deals with abuse of dominance in line with Article 82 EC:
Any abuse, by one or more enterprises acting alone or by means of agreements or
practices, of a dominant position in a market for goods and services within the whole
or part of the territory of the State, is unlawful and prohibited.
Again, there are a few minor differences between the examples listed in Article 4(a-
e) APC and Article 82(a-d) EC.
97
The Act on the Protection of Competition and communiqués can be found in English on the
Competition Authority‟s website: www.rekabet.gov.tr
© Barış Ekdi, 2003
46
4.1.2. The Communiqués
The details of and changes in the European competition law are reflected in the
communiqués, which are essentially secondary legislations to the APC.
From 1997 to 2001, vertical restraints were regulated by block exemption
communiqués on “the exclusive distribution agreements”98
, “the exclusive
purchasing agreements”99
, “distribution and servicing agreements in relation to
motor vehicles”100
, “franchise agreements”101
, which were parallel to those of the
European Commission.
In 2002, pursuing Commission Regulation 2790/1999 (“ECRVR”), the Block
Exemption Communiqué on Vertical Agreements102
(“BECVR”) is introduced and all
the regulations cited above are abolished.
The main provisions of these two regulations (i.e. „black clauses‟) are in line with
each other, except for the market share threshold requirement and some provisions
related to the duration of the agreements and withdrawal103
.
According to Article 6 BECVR, the Competition Board may withdraw the benefit of
the Communiqué from an agreement that is incompatible with the principles laid
down in Article 5 APC, after hearing the parties. The Board can also withdraw the
block exemption –by issuing another communiqué – from an entire market if the
parallel networks of vertical agreements foreclose a substantial part of it.
The most important difference is the lack of thresholds. All the undertakings can
benefit from that regulation regardless of their market shares, unlike the ECRVR.
98
Communiqué 1997/3 RG [1997] 23100, corresponding Regulation 1983/83 EEC. 99
Communiqué 1997/4 RG [1997] 23105, corresponding Regulation 1984/83 EEC. 100
Communiqué 1997/4 RG [1997] 23105, corresponding Regulation 1475/95 EEC. 101
Communiqué 1998/7 RG [1998] 23555, corresponding Regulation 4087/88 EEC 102
Communiqué 2002/2 RG [2002] 24815. 103
Compare Article 5 ECRVR to Article 5 BECVR.
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47
Besides, although the power to declare the regulation inapplicable for certain markets
is given to the Authority, no thresholds for market coverage is stated unlike Article 8
ECRVR104
.
4.2. Leading Decisions in Turkey
Given the six years history of competition law in Turkey, there are only two
decisions regarding market foreclosure. It is required to bear in mind that these
decisions are administrative decisions –like those of the Commission – and although
some of the decisions of the Authority are pending before the Court d‟État for
appeal, almost no judgement has been given yet.
4.1.1. BİRYAY Decision105
In May 1996, YAYSAT and BBD, newspaper distribution companies of two leading
media groups, established a joint venture called BİRYAY. They ended all of their
existing contracts with the third party publishers and drove them to BİRYAY as the
sole distributor of third party materials106
. Therefore, duopolistic structure of the
market transferred into a monopolistic structure. At the same time, BİRYAY raised
commission rates for these publishers, and BBD and YAYSAT started using their de
facto exclusive sales points reciprocally.
A few months later, a newspaper publisher parted from BİRYAY and established a
rival newspaper distribution company, DBD, which tried to access sales points. BBD
and YAYSAT forced these sales points to “make a choice” and signed exclusive
104
Comparing that in ECRVR, withdrawal provisions take place in three different articles: Article 6
gives power to the Commission to withdraw the benefit of the regulation from an agreement,
Article 7 gives that kind of power to the national authorities on certain conditions, and Article 8
provides that the “Commission may by regulation declare that, where parallel networks of similar
vertical restraints cover more than 50 % of a relevant market, this Regulation shall not apply to
vertical agreements containing specific restraints relating to that market.” 105
Decision No:00-26/292-162, [2001] RG 24384. (“BIRYAY”) 106
Hereinafter, the world “materials” will be used to refer to newspapers and magazines.
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48
contracts. Upon being prevented from accessing the sales points, DBD‟s distribution
was limited to a few magazines until it ceased its services in September 1997107
.
Following a complaint the Board carried out an investigation and made a decision in
2000, imposing fines on BBD, BİRYAY and YAYSAT for the breach of Articles 4
and 6 APC, dismissing the exemption request for BİRYAY, annulling exclusivity
clauses in the relevant market and introducing certain obligation for some outlets.
The relevant market was countrywide “market for the distribution of newspapers and
journals”, including the processes of taking materials form the publishers, shipping
them -through regional offices and designated wholesalers- to the sales points for
display and sale. Hence, all these services were integrated and they had to be
assessed as a whole, while noting that regional offices were the natural extensions of
these distribution companies whereas the designated distributors and sales points
were contractive parties.
The market share of BBD fluctuated between 30-40%, whereas YAYSAT‟s market
share was 70-60% during the last six years. Besides enjoying 100% of the market
together, their parent groups had more than 70% market share on newspaper
publishing market, and several broadcasting stations. There was no entry to the
relevant market during the last six years, and BBD and YAYSAT had managed to
raise the prices more than 50% on one day via BİRYAY. Conversely, BBD or
YAYSAT could not raise the price to such an extent without the other‟s consent.
Therefore, BBD and YAYSAT were jointly dominant.
Due to the buying patterns of the customers, geographical features of the country and
inefficiencies in postal services, there was no subscription or delivery service which
could substitute this distribution network. All the publishers of periodical materials
107
Two months later, in November 1997, The Competition Authority completed its organization and
started functioning.
© Barış Ekdi, 2003
49
had to use distribution companies (which had to deal with the sales points) to reach
the readers.
The Board divided the outlets into two categories: Groceries, supermarkets and all
the outlets alike (non-kiosk outlets) were brought into the first category, while kiosks
were held in the second. There were three main differences between them108
:
- The main affair of non-kiosk outlets was to sell other goods rather than
newspapers and magazines, and they sold only a limited range –enough to attract
customers–, and the revenue generated by these materials was not important in
contributing to their turnover. On the other hand, kiosks‟ business was limited to
selling newspapers and magazines, and they were usually banned from selling
other goods by administrative regulations. Thereby, their turnovers were solely
generated by these sales.
- Kiosks were installed in public squares or along avenues, under the
administrative authorities of the municipalities. They were limited in number and
hired via bidding process. The installation of numerous kiosks alongside one
another in a given area was not possible and municipalities were not able to offer
a place for every distribution company. Thus, there was no close substitute for
kiosks.
- Compared to non-kiosk outlets, kiosks were more important for the distribution
companies, because although they were limited in number, their aggregate sales
volume was higher than those of non-kiosk outlets.
Three kinds of vertical agreements, (a) between BİRYAY and the publishers, (b)
between distribution companies and their designated wholesalers, (c) between
distribution companies and sales points, were mentioned in the decision.
108
BİRYAY, §K.4.
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50
The experts carrying out the investigation reported that the agreements between
BİRYAY and the publishers infringed the law, as they were restricting competition
and were not in the scope of block exemption regulations109
, but the Board declared
that these agreements enjoyed the block exemptions regulations, without reasoning
its argument110
. Besides, agreements between distribution companies and their
designated wholesalers enjoyed block exemption on exclusive dealing.
It is shown that BBD and YAYSAT concluded almost identical agreements with
sales points111
. Each of them prohibited outlets dealing with the materials supplied by
competing firms, without written consent. However, BBD and YAYSAT did not
recall this non-compete obligation reciprocally against each other‟s materials, but for
the entrants‟.
The impact of these restraints on access to the market was widely discussed. The
importance of the outlets and the problem of product range/capacity were stressed at
first:
In order to access to the newspaper and magazine distribution services market and
survive there, two elements are of critical importance:
a) Accessing to/establishing sufficient number of retailers that will sell the
materials to the readers.
b) Supplying these retailers with adequate range and volume of materials112
.
The parent groups of BBD and YAYSAT were also jointly dominant in the upstream
market, and they had the advantage of supplying the sales points with adequate range
and volume of the materials. Then, it was examined whether these exclusive sales
point networks created an entry barrier, and whether they were essential for market
access.
109
BİRYAY, §H. 110
BİRYAY, §L.1. 111
BİRYAY, § I.3.1.3. 112
BİRYAY, §K.4.
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Lack of objectivity in the exclusivity clauses and reciprocity practices were also
criticized. According to the Board, all these vertical agreements and the reciprocity
practice could also be assessed as „a horizontal agreement‟ against newcomers.
The features of newspapers and magazines and buying patterns of the readers were
studied: The prices of these products were relatively low compared to most goods
(i.e. they were not luxury, specific services were not required for sale, they “expired”
on the same day etc.), the buying decisions of the consumers were prompt, and
readers used to switch to other papers according to price changes and promotion
campaigns, and if a reader could not find the paper that he was looking for in a given
sales point, he would likely substitute it with a similar one, instead of searching
further113
.
Newspaper and magazine publishers (customers of the distribution companies) aimed
to deliver their materials to as many readers as possible, providing they were
displayed and sold in consistency with their image, without facing physical damage.
Therefore the Board stated:
… it is not plausible to think that any given publisher would like to contract with a
distribution company, which have the publisher‟s newspapers and magazines
displayed and sold in butcheries, greengrocers, millineries, draperies or on the
benches laid on the pavements, parted from the rivals‟ materials[114]
. Then the natural
outcome is, the new distribution companies trying to enter the market, without
managing access to sales points, will not be able to make any agreements with the
publishers and therefore will be driven out in a short period of time115
.
When the sales points were forced to make a choice between the materials of BBD-
YAYSAT and newcomers, they would tend to choose the distribution companies that
carry the largest product range, since they had no alternatives to obtain them from
elsewhere.
113
BİRYAY, §K.4. 114
That was actually what DBD had to do during nine moths before it was driven out of the market. 115
BİRYAY, §K.4.(Emphasize original)
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The Board concluded that demanding that each entrant establish more than ten
thousand new sales points was an entry barrier, considering existing sales points
were not easily substitutable, and doing that was not economically rational. This
barrier was the outcome of incumbent firms‟ vertical restraints on sales points. After
annulling exclusivity obligation, all the distribution companies would have the
chance to use the same sales points, providing them with a greater product range, and
stimulating the competition in the publishing market.
The total impact of all the vertical agreements in the market is also assessed:
In this case, the impact of all the agreements concluded between the distributors and
sales points should be assessed as a whole, rather than being assessed as individual
agreements. Since the BBD and YAYSAT are the major supplier of the sales points,
and the companies that distribute only limited kind of products cannot offer similar
conditions to these points, the sales points purchase all their requirements from BBD
and YAYSAT, making it difficult for the suppliers to penetrate. This exclusivity also
harms the sales points and readers by limiting their freedom of choice, as well as the
potential entrants. Vertical agreements that bear exclusivity clauses can be exempted
in several markets, but not in the relevant market where the competition is already
weakened (…)116.
The Board stressed, “even if these vertical restraints were under the scope of block
exemption regulations, it was to be decided that these regulations would not be
applicable to the agreements in the relevant market due to the structure of the
market”.
As a result, the Board prohibited all the existing and future distribution companies
from applying exclusivity clauses (or any clause that has a similar effect) on the sales
points in the relevant market. In addition, new regulations were introduced for the
kiosks allocated by the municipalities, due to their different characteristics from
other sales points –such as difficulties in substituting them and their sales capacities.
116
BİRYAY, §K.4.
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X
READERS
YAYSAT
DOGAN (Leader)
All Other Publishers
BBD
SABAH (2nd Biggest)
Designated S. YAYSAT
Designated S. BBD
Sales point Y Sales point B
BİRYAY
READERS
YAYSAT
DOGAN (Leader)
All Other Publishers
BBD
SABAH (2nd Biggest)
Designated S. YAYSAT
Designated S. BBD
Designated S. YAYSAT & BBD
Sales point Y Sales point B Sales point Y&B
NEWSPAPER &
MAGAZINE
PUBLISHING
MARKET
NEWSPAPER &
MAGAZINE
DISTRIBUTION
MARKET
1 June 1996 Before After
NEW ENTRANT
X
X
Access to inputs/ retailers prevented.
BİRYAY DECISION
(Decision of The Turkish Competition Authority)
Structure of the Market
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4.1.2. Turkcell Decision117
Telsim, a Turkish GSM operator, charged its rival, Turkcell, for abusing its dominant
position by tying handset distributors exclusively and foreclosing handsets market to
Telsim lines.
The Board defined the relevant market as “Turkish GSM services”, including GSM-
900 and GSM-1800 bands, and “Turkish GSM handsets market” was found
“ancillary” to that. In addition, Turkcell was found in a dominant position in the
relevant market.
The Board explained the de facto exclusivity between Turkcell and mobile phone
distributors, stating that Turkcell organized campaigns with the distributors of
handset brands preventing them dealing with rival operators during the campaign,
and surprisingly the campaigns lasted ever, constituting the 98% of the total handset
sales with Turkcell line. The Board also showed aggregate market share of four
handset distributors that took part in these campaigns was about 60%118
.
Turkcell and Telsim used to give SIM cards to distributors and parallel importers of
handsets, who matched these cards with the handsets and sold them to retailers.
Therefore, the [handset] distributors are unavoidable partners for the operators.
Engagement of these distributors by the dominant undertaking in GSM services
market and foreclosing them to rival operators distorts competition in GSM services
market119
.
Meanwhile, Turkcell had made exclusive agreements with 610 outlets called
“TAM”s. They were entitled to conclude “mobile service contracts” besides giving
other services, and undertook “not to sell or activate the handsets of Turkcell‟s rivals120
.
117
Decision No: 01-35/347-95 on 20.07.2001, (“Turkcell”), not published yet. 118
Turkcell, §H.3.1.1.2. 119
Turkcell, §H.4.1.3. 120
Emphasis added.
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Apart from the TAMs, there were about 6500 “independent” handset retailers that
used to sell different handset brands, regardless of GSM operators. In 2000, 4381 of
them were “attached” to TAMs and called TANs, on which Turkcell established de
facto exclusivity by indirect financial supports. Therefore, they started selling
“Turkcell handsets” only, among the ones supplied by the distributors.
Simultaneously, Turkcell ceased to support the handset retailers in case they sold
“Telsim handsets” or lines.
The exclusivity regarding TAMs and TANs resulted in almost all the handsets
displayed and sold in the retailers being “Turkcell handsets”. The crucial point was
that, through these agreements, the distributors lost their ability to sell “Telsim
handsets” to their own retailers –even if they did not have an exclusive campaign
with Turkcell - since the retailers undertook not to sell or to activate the handsets of
Turkcell‟s competitors.
As a result, the rival operators had to supply handsets through parallel imports, and
provide outlets for their sale. Since the distributors refused to give service to parallel-
imported handsets, the operators had to pay the service and maintenance costs of
these handsets and subsidize them more than they would “the Turkcell handsets” in
order to attract customers. Parallel imports also lacked regular shipment of handsets,
and supply of well-known brands, causing extra costs for the rival operators121
.
The Board took the view that; the case exclusivity creating market foreclosure can be
regarded as an abuse:
Exclusivity clauses of a dominant undertaking either put on its suppliers or
customers, force them to refuse to deal with all the undertakings but the dominant
one. This kind of exclusivity can constitute an abuse, provided that it leads
121
On the other hand, although the distributors also used to sell handsets without SIM-lock, the
customers did not prefer them, because they were relatively expansive since they were not
subsidized and it was required to pay extra for the line.
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“foreclosure” or “exclusion” of the rivals of the dominant undertaking from the
market.
... Accepting exclusivity as an abuse depends on the foreclosure of the substantial
part of the market, therefore lessening competition in the market 122
.
It is also shown that the integration of the independent retailers to Turkcell would
create an entry barrier for future operators, as well as hardening the activities of
Telsim. The Board estimated that, newcomers would not be able to deal with
“formerly independent” handset retailers, and would have to bear extra costs that
would not emerge in normal conditions. Consumers‟ choice was limited as they were
deprived of matching the handsets with the lines according to their wishes.
Therefore, the Board imposed fines on Turkcell for concluding vertical agreements
contrary to Article 4 APC, and for abusing its dominant position (a) by maintaining
de facto exclusivity on handset distributors through promotion campaigns and
preventing them from supplying handsets that are suitable for use with rival
operators‟ lines, (b) by hardening the activities of the rivals unlawfully, through
converting the handset distributors‟ retailers into Turkcell customer points, and
thereby, binding them exclusively in this overlapping structure, (c) by discriminating
the handset distributors in favour of its own subsidiary, or the distributors that
exclusively deal with Turkcell.
In addition to imposing fines, the Board also ordered that Turkcell cease preventing
distributors from making campaigns with rival operators, and annulled the
exclusivity clauses on the TAMs and TANs in cases they were retailers of mobile
phone distributors at the same time.
122
Turkcell, §H.4.2.3.
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4.3. Evaluating the Turkish Practice
In BİRYAY, the agreements with the retailers were already void, since they do not
meet the requirements of the block exemption communiqués. But it is worth noting
that the Authority emphasized, “even they enjoyed exemption, the exemption would
be withdrawn due to their horizontal effects.” Besides, other factors like minimum
viable scale of penetration, and switching costs of the readers and outlets were also
studied in the decision. On that account, the decision traces the Commission‟s
decision against HB Ice Creams123
.
However there are still two points to be made: First, it is surprising that the Authority
remained silent regarding foreclosure effects of the vertical agreements concluded
with the publishers, despite pointing out the requirement of supplying the retailers
with (and therefore access to) an adequate range and volume of materials.
Secondly, the Authority withdrew the benefit of the block exemptions not only from
the agreements of BBD and YAYSAT, but also from the entire market. The decision
is remarkable on these grounds, except the way it is done from the point of view of
law: In principle, the Authority should have issued another communiqué concerning
the market to revoke the benefits granted by previous communiqués, instead of being
satisfied with addressing the parties.
123 98/531/EC OJ [1998] L246/1. See Section 3.3.2 of this work. It also seems that the Authority
followed the reasoning of Jacobs AG in Oscar Bronner v Media Print Case (C-7/97 [1998] ECR I-
7791). but reached a different conclusion because of the facts of the case: DBD was trying to enter a
distribution market whilst Bronner was trying to enter the newspaper market, and in Turkey, there was
no alternative than to deal with the outlets for a distribution company. Therefore, besides finding
access to outlets vital, the Authority went further and obliged kiosks to deal with all the distributors on
equal terms, but without expressing “essential facilities”. By doing so, the Authority also rejected the
defence of “competition for exclusivity” regarding kiosks, since they were significantly important for
reaching a viable scale of consumers.
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In Turkcell, the Authority took vertical restraints with handset dealers, as well as the
handset distributors. The de facto exclusivity on distributors of handsets is not
vertical in nature, since the handsets are regarded as complementary products to
GSM services. But the Authority pointed out Turkcell‟s attempt to foreclose the
market by tying the retailers of handsets exclusively.
The last criticism is related to the new regulation on vertical restraints: It is quite
surprising that after these two decisions, the Authority did not see the need to
introduce any thresholds while replacing the previous straightjacket regulations with
a broader one, which is more prone to abusive practices.
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CHAPTER FIVE
COMPARISON AND CONCLUSION
5.1. The Theory of Foreclosure
The theory of foreclosure, with the Krattenmaker & Salop‟s theory of “raising rivals‟
costs”, suggests that a firm can use vertical restraints (mainly, exclusivity contracts
such as exclusive purchasing or single branding, or equivalent restraints like quantity
forcing) in order to foreclose the customers or the efficient suppliers. The potential
rivals are either denied access to the market or forced to operate relatively high costs.
The latter risk is also valid for extant rivals as well as the potential ones. These high
costs may arise because the rivals have to either use less efficient suppliers‟ products
that are rather expensive or of inferior quality, or because of the collusive conduct of
remaining suppliers. Therefore, the firm using vertical restraints may achieve the
power to raise the price of the product (or prevent it from falling), due to its rivals‟
high costs, even though they are not driven out.
Input foreclosure occurs where the rivals are prevented from dealing with efficient
suppliers, while customer foreclosure exists where the rivals are deprived of reaching
a sufficient number of customers. A firm can also foreclose both inputs and
customers forcing the competitors to enter into both levels of the market. The
foreclosure strategy is credible if the foreclosed input is of high importance for the
rivals or the rivals cannot reach a viable scale as a result.
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Competition for exclusive rights and contestable markets theory are sometimes put
forward as defence for offsetting the effects of foreclosure, but the theory also shows
that their application is limited.
Apart from exclusive dealing, a firm can also foreclose a market through another
type of vertical restraint: tying. In this case, the rivals are deprived of reaching a
viable scale in the tied-goods market.
Nevertheless, in theory, keeping the rivals out by foreclosing the market does not
result automatically in diminishing consumer welfare. Therefore, at the second stage,
actual or potential harm to consumers must be proven in addition to the foreclosure.
The way to do is to prove that the firm employing vertical restraints to create the
foreclosure will have enough power on prices –thereby harm consumers– as a result.
Otherwise the injury will be limited to rivals. But, this requirement varies in practice
among different jurisdictions, since Lever and Neubauer (2000:15) suggest, “…in
both welfare economics and the application of competition law, it is the factual facts
that matter and rule of thumb cannot provide a complete substitute for a detailed
investigation of the facts”.
5.2. Elements to be assessed in identifying foreclosure
The US, the EC and the Turkish practices take into consideration similar elements in
assessing foreclosure: definition of the relevant product and geographic markets and
the level of trade; availability of alternative sources; the power of the parties; the
object and the effect of the vertical restraints; features of the market; nature of the
products and duration of the agreements.
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Like most competition cases, definition of the market is crucial in the assessment of
the effects of the agreements in question and in the evaluation of the power of the
parties. Customer side substitution is an important element in defining the relevant
market. This can be seen in most foreclosure cases:
In beer and ice-cream cases in the EU and in Standard Stations124
and 3M v.
Appleton125
in the US, the markets are defined narrowly compared to the supply side.
For example in Delimitis126
, the relevant market is limited to “the distribution of beer
in premises for the sale and consumption of drinks”, although the breweries could
supply beers thorough supermarkets, off-licence shops etc. Likewise in those cases
involving ice-cream, despite the fact that the producers provide bulk ice-cream for
the catering industry and restaurants, and sell multipacks in supermarkets, the
relevant market is confined to “single wrapped items of impulse ice cream”. In
Standard Stations, the retail level was taken into account whilst most of the
production of the firms sold to industrial consumers.
Therefore, the level of trade is important in defining the relevant market and
assessing the effects of foreclosure. For example in Ryko127
, “where the exclusive
dealing restraint operated at the distributor level, rather than at the consumer level, a
higher standard of proof of „substantial foreclosure‟ was required”. Parallel to this,
in EC the Commission states that “foreclosure is less likely in case of an intermediate
product”, “for final products, foreclosure is in general more likely to occur at the
retail level, given the significant entry barriers for most manufacturers to start retail
outlets just for their own products” 128
.
124
Standard Oil Company of California et al. v. United States, 337 US 293 (1949). 125
Minnesota Mining & Mfg. Co. and Imation Corp. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138 (D.
Minn.1999). 126
Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210. 127
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987). 128
Guidelines, para.146, 148, 209.
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In addition, all the cases mentioned above point to the importance of defining
coverage, or to the trade effected under vertical restraints. Therefore, merely
calculating the number of outlets tied exclusively in relation to the number of “free”
outlets is not enough to be able to reach a satisfactory conclusion. The volume of
trade affected should be identified, and must be substantial for foreclosure (i.e.
preventing rivals from reaching a viable scale).
Besides this, other opportunities, such as the availability of alternative distribution
channels, suppliers and substitutable products should be considered129
. Likewise, the
number and the size of the producers (concentration), the degree of saturation of the
market, and customer loyalty should be taken into account.
Regarding the products in question, the following criteria could be helpful: Firstly,
since the brands play an important role in meeting the demand of final consumers,
retailers may face more difficulties compared to the manufacturers that can substitute
inputs (intermediate products) easily. Secondly, the substitution of homogeneous
products can be easier than those of heterogeneous ones130
. In addition, product
range, the buying patterns of customers and their switching costs play important roles
at retail level. For example, in Masterfoods and BİRYAY it is seen that on equal
grounds outlets tend to choose the firm with the widest product range.
Finally, the duration of the agreements should be taken into account. Long term
agreements increase potential rivals‟ cost of entry, while short-term agreements may
provide ground for competition for exclusive agreements, depending on the other
features of the market. In addition, the effective duration of the contracts rather than
“nominal” duration must be analysed.
129
See Korah (1992) for limits to penetration possibilities. 130
Guidelines, para. 209. However, this assumption also has certain limits, since in the US, Alcoa
managed to foreclose a homogenous, intermediate product: electricity. See United States v. Aluminium
Co. of Am., 148 F.2d. 416 (2d Cir.1945).
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5.3. Differences between the US, the EC and Turkish practices
In the US, §1 Sherman Act adopted to prohibit agreements, or conspiracies that have
the “aim” of restraining trade, and §2 Sherman Act condemns “monopolisation”,
requiring a “certain degree of power” and “intention to monopolize”. In addition, §3
Clayton Act is designed to capture the vertical agreements that have the “effect” of
reducing competition and creating monopoly. Since the US do not have an
“exemption system”, some agreements (mostly horizontal hardcore restraints and
RPM in vertical agreements) are regarded as illegal per se, while others, especially
vertical restraints, are assessed under the rule of reason test, which requires the
comparison of anticompetitive effects with the overall consumer welfare. Therefore,
§3 Clayton Act provides a fertile ground for alleging foreclosure, focusing on
vertical agreements, and stressing the “effect” and “substantial lessening of
competition”.
The US case law evolved from requiring straightforward market share and
foreclosure rate figures to demanding detailed analysis of market power and
anticompetitive effects on consumer welfare, in the light of the theory. Therefore, it
is required to demonstrate the “substantial market power” of the firm. Besides, the
“object” and “the effect” of the vertical restraints are somehow amalgamated, since
the “intention” and the “capacity” of the firms (to harm consumers) gained
importance in the evaluation of foreclosure. It is also accepted that, even in the case
where foreclosure is identified, firms will not be condemned unless it is also proven
that this foreclosure will harm consumers.
Regarding the EC, there are two main competition law provisions for dealing with
vertical restraints and foreclosure: Articles 81 and 82 EC. Article 81 differs from §1
Sherman Act, since it stresses the “effect” as well as the “object”, and it is in this
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way that vertical restraints between two undertakings are captured. However, in
some cases, where the individual agreements do not have an appreciable effect on
lessening competition, but where all the vertical restraints alike create a foreclosing
effect cumulatively, a broader interpretation of Article 81 is required. This step is
taken in Delimitis.
The test applied in Delimitis by the ECJ is substantially different to that employed in
the US: First it demands proof that all the similar vertical restraints in the market
prevent or harden access to the market. Then, the network that contributes to that
effect needs to be identified and prohibited under Article 81(1), while leaving the
other networks valid under Article 81(3) –if the other conditions are met.
The first step of this test is of crucial importance, because the CFI did not credit the
Commission‟s approach in Langense-Iglo131
and Schöller132
decisions. In these
decisions, the Commission emphasized the “strong position” of the firms in the
market and found their agreements capable of creating foreclosure, without
employing the first step of the Delimitis test133
. This means, the vertical restraints of
firms cannot be condemned for their “potentials” of foreclosure, even though the
firms occupy a strong position in the market.
This approach is also reflected in the relevant EC regulation and guidelines, giving
the Commission, and the Member States the power to withdraw the benefit of the
block exemption from an undertaking‟s agreements, if similar vertical restraints
foreclose a given market. In addition, the Commission can withdraw all the benefits
of the regulation from the entire market if the parallel networks of vertical
agreements cover more than 50% of the market.
131
93/406/EEC, OJ [1993] L 183/19. 132
93/405/EEC, OJ [1993] L 183/1. 133
Langnese-Iglo v. Commission, Case T-7/93 [1995] ECR II-1663, 5 CMLR 602, and Schöller v.
Commission, Case T-9/93 [1995] ECR II-1611, 5 CMLR 602.
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In addition, the approach of the ECJ in Delimitis and of the CFI in Langese-Iglo
essentially deviate from the theoretical US approach by focusing on market access
but ignoring countervailing consumer welfare effects of vertical restraints. In the US,
it is required to prove that not only rivals but also the consumers will be injured as
the result of foreclosure. However in the EC consumer harm is found inherent in
foreclosure. This approach, as also reflected in the EC Treaty, bears the risk of
overriding benefits of vertical restraints in favour of market integration, in the
following ways.
First, it is generally accepted in theory that there is a direct and positive link between
the number of actors in a market and competition. Therefore, consumer welfare is
maintained intrinsically by providing “freedom of access to a market”. Nevertheless,
the theory also suggests that consumers may benefit from vertical restraints even
though they limit competition to a certain extent.
On these grounds, Hawk (1995:977-981) argues that the EC approach is highly
affected by “the Freiburg School notion of restriction on economic freedom” and
highlights the weak points of it, such as the failure to provide an analytical
framework, the distance from microeconomics, the tendency to favour competitors
over consumers and consumer welfare and very broad application of Article 81(1).
Secondly, the goal of the competition policy is not limited to improving consumer
welfare in the EC. Another goal, of at least equal importance, is market integration,
and the competition policy is one of the most important tools for that. This aspect is
also reflected in vertical restraints regulations. The fear is that the undertakings can
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create “private” national barriers by vertical restraints and hinder market integration.
Therefore, providing access to the Member States‟ markets is of high importance134
.
Thus, there is no tolerance of any restraints that may harden market access, even
though there is “sufficient” competition in the market, since vertical restraints create
efficiency and they are not the result of strategic conduct but a mere outcome of a
competitive process. A good example of this argument can be the Delimitis case
involving 27 large brewers who accounted for 50% (and 100 brewers for 86%) of
total production.
Hawk (1995:977-981) draws attention to the conflict between these two goals stating
that market integration requires more sophisticated economic analysis to reconcile
the consumer welfare considerations, while the economic freedom notion eliminates
economics.
The Turkish legal framework is almost identical to those of the EC. Therefore,
Article 4 APC prohibits the agreements that have the “object” or “effect” of
restraining competition. Vertical restraints are assessed under this article, and
secondary legislation gives the Competition Authority the right to withdraw the
benefits of block exemption either from a network or from the entire market.
However, there is no practice regarding such kind of withdrawal, since all the
vertical restraints condemned for foreclosure so far were already out of the scope of
these regulations. Therefore the response of the Competition Authority and the courts
regarding vertical restraints of non-dominant firms that create foreclosure is eagerly
awaited.
134
Green Paper on Vertical Restraints ([1997] 4 CMLR 519), para. 82-84. Also see Bishop and
Ridyard (2002) referring “market partitioning as the case of Commission‟s schizophrenia which may
conflict with the promotion of competition”, and Peeperkorn‟s (2002) reply to them.
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5.4. Does being dominant make a difference?
Being dominant makes a difference both on economic and legal grounds: It is stated
that, the vertical restraints of non-dominant firms can create market foreclosure. This
kind of foreclosure should be separated from the foreclosure resulting from the
vertical agreements of dominant firms, since it refers to cumulative effect in the
market, rather than the strategic conduct to keep the rivals out135
. The theory, unlike
the practices, focuses on foreclosure as a “strategy” which also refers to “intention”.
From the perspective of law in the EC, there is no doubt that the dominant firms
cannot benefit from Regulation 2790/99, unlike Communiqué 2002/2 in Turkey. In
addition, according to the EC Guidelines on Vertical Restraints, dominant firms are
almost deprived of individual exemption, since they are required to justify these
restraints within the context of Article 82, in addition to Article 81(3)136
.
Article 82 (EC) and Article 6 APC (Turkey) prohibit any unilateral action by
dominant firms that restricts competition. Therefore, if a dominant firm uses vertical
restraint strategically to prevent market access, this constitutes an abuse and relevant
articles are therefore applicable. In the EC, Hoffman-La Roche and BPB Industries
were penalized because they were trying to prevent market access by foreclosing the
costumers. In Turkey, BİRYAY foreclosed both inputs and customers, and Turkcell
foreclosed complementary products. The crucial point in these cases is that the firms
were condemned because of their aims at concluding these agreements, rather than
the outcome of the agreements. So, is it enough for the authorities to show the
“intention” of the dominant firms without applying the Delimitis test?
135
If non-dominant firms agree or collude to employ vertical restraints as a strategy to prevent market
access, this can also be assessed as an horizontal agreement under Article 81. 136
See Guidelines, para.135, 141, 146 and 211.
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The Commission and the ECJ were satisfied with the demonstration of “intention” in
Hoffman-La Roche137
and BPB Industires138
, whereas the Commission chose to show
the detailed analysis of foreclosure in Masterfoods139
. So, is this the beginning of a
new era –as Korah (1992) mentioned right after Delimitis- in which the Commission
will condemn vertical agreements of firms (including the dominant ones) only if it is
proven that they create foreclosure? Or, will the application of Delimits only be
limited to retail level?
The answer to the first question is probably “no”, since the Guidelines show a degree
of “prejudice” towards dominant firms, and as for the second question, only future
case law will answer that one.
137
Hoffmann-La Roche v. Commission, C-85/76 [1979] ECR 461, [1979] 3 CMLR 211. 138
BPB v. Commission, Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32. 139
98/531/EC OJ [1998] L246/1.
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TABLE OF CASES & DECISIONS
United States
US Supreme Court
FTC v Sinclair Refining Co., 261 US 463 (1923).
Loraine Journal v. United States, 324 US 143 (1951).
Standard Fashion Company v. Magrane-Houston Company, 258 US 346 (1922).
Standard Oil Company of California et al. v. United States (Standard Stations), 337
US 293 (1949).
Tampa Electric Co. v. Nashville Coal Co. et al., 365 US. 320 (1961).
Other Courts Minnesota Mining & Mfg. Co. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138 (1999).
Omega Environmental, Inc. v. Gilbarco, Inc., 127 F3d 1157 (1997).
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987).
United States v. Aluminium Co. of Am., 148 F.2d. 416 (2dCir.1945).
Federal Trade Commission Decision Beltone Electronics Corporation, 100 FTC 68, 204 (1982).
European Communities
European Court of Justice Braserie de Haecht v. Wilkin, Case 23/67 [1967] ECR 407, [1968] CMLR 26.
Delimitis v. Henninger Bräu, Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210. Hoffmann–La Roche v. Commission, Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211. Masterfoods v. HB Ice Cream, Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 449.
Oscar Bronner v Media Print, Case C-7/97 [1998] ECR I-7791, [1999] 4 CMLR 112.
Court of First Instance BPB Industries v Commission, Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32.
Langnese-Iglo v. Commission, Case T-7/93 [1995] ECR II-1663, 5 CMLR 602
Schöller v. Commission, Case T-9/93 [1995] ECR II-1611, 5 CMLR 602.
EC Commission Decisions 93/405/EEC (Schöller), OJ [1993] L 183/1.
93/406/EEC (Langnese-Iglo), OJ [1993] L 183/19.
98/531/EC (Masterfoods ) OJ [1998] L 246/1.
Turkey
Competition Board Decisions BIRYAY, Decision No:00-26/292-162, [2001] RG 24384.
Turkcell, Decision No:01-35/347-95 (2001) not yet published.
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