Horisontal agreements - Oligopoly, tacit collusion, collective dominance and cooperation agreements Flashcards
The Oligopoly problem
A market that contains only a few firms relatively equal in size.
- Parties are largely interdependent, acutely aware of each other, and (relatively) bound by one another
Problem –> market presents structural issues
- It might allow players to “tacitly collude” or coordinate
- Makes the undertakings able to earn supracompetitive prices
- Tacitly collude –> Collusion without meeting of minds, because of the way the market is structured
Conditions for tacit collusion
Transparency –> Ability to quickly monitor what others are doing, detect deviation from “standard”
Sustainability –> Coordination only sustainable if incentive to “cheat” is nullified by other’s reaction – “deterrent mechanism”
Absence of effective constraints –> No suitable reaction from customers, potential competitors
Criticism
How interdependent are oligopolists really?
- Is there a delay in reaction or other types of restraints?
Can it really predict “real” markets?
- Only a theory, many different types of markets exist
Why are oligopolistic markets in many cases competitive?
- Other parameters than price, maybe?
- Offering of better quality, after care service
Are they really able to raise prices?
- Dominant price leadership –> cannot happen, since none of the undertakings are dominant
- Barometric price leadership –> increase in price due to higher costs, objctive reason and should not be condemned
- Collusive price leadership –> understanding between firms
Dealing with oligopolistic markets
Structural approach? –> Prevent structure of market from materialising
- Can we simply take a knife and cut up the undertakings if we believe they tacitly collude?
- You can see this approach within merger control, where we try to aprehend a merger leading to an ologpoly situation
Behavioural approach? –> Prevent oligopolists from behaving uncompetitively
- But who is to say that they are behaving uncompetitively and how should we define what is uncompetitively?
Regulatory approach? –> Try to determine prices or other parameters
- Very difficult and against the meaning of the compeition law, the market forces should determine the prices alone
Market investigation? –> Try to determine what is working less well and remedy it
- Not possible because of the conditions in each oligopolistic markets are not the same
Approach under art. 101
Problem: does parallel behaviour amount to a concerted practice?
Parallel behaviour is in itself not enough to constitute a concerted practice
- Intelligent responses to competitors’ behaviour cannot be condemned –> The market conditions leads to parallel behaviour
- Parallel behaviour can be evidence of a concerted practice when there is no plausible alternative explanation
The market is probably already fragile, therfore the undertakings must be carefull not to remove the existing competition
- Exhange of information –> Less evidence before finding an infringement (recent data)
Approach under art. 102
Collective dominans –> Legally and independent firms can be jointly dominant
- From an economic view present themselves or act on a market as a collecitve entity
Possible in an oligopolistic market, because the parallel behaviour can make it seem that the undertakings are a collective entity
To establish collective dominans
- Examine the economic links or factors which give rise to a connection between the undertakings concerned
- Does the links enable the undertakings to act independently of their competitors?
- The oligopolistic nature of the market enables the undertakings to behave parallel
- Do not need to be a single economic unit or have any agreement between them
Three cumulative conditions
- Transparency –> Each member must know, what the others are doing and be able to react (monitor)
- Sustainable –> Incentive not to depart from common policy (reactions of others, common sense)
- No outside constraints –> Reactions of competitors (potential) cannot jeopardize coordination (nor consumers)
Horizontal Cooperation Agreements in General
UP –> Competitors must act independently
U –> Horizontal co-operation can be a means to share risk, save costs, Increase investment, pool know-how, enhance product quality and variety, and increase rate of innovation.
When determining which form of agreement the “centre of gravity” of the agreement is important
- If both R&D and production, we have to determine which is the more important part of the agreement
Basic principles for the assessment of horizontal cooperation under art. 101
Concerns regarding cooperation agreements
- Higher prices
- Coordination
- Forclosure
By object
- Content and objectives of the agreement
- Objects considered purely restrictive –> Raise prices, sharing markets or customers or limiting output
By effect
- Does the parties become able to affect competitive parameters (prices, output, quality or innovation)
- Counterfactual
Information exchange
Key principle –> Every undertaking must indepedently determine its market conduct
- Exchange of information related to strategic/commercially sensitive information reduces uncertainty and increases transparency
- Uncertainty on the market is reduced, which enables competitors to adabt to one another
- Entails risks of collusion or coordination
Two types of exchanges of information:
Exchange of information as part of a horizontal cooperation agreement:
- Shall be assessed in the context of the agreement and can be BER-“ered” (specialisation and R&D).
Exchange of information as part of a cartel.
- Deemed to be anti-competitive and thus strictly prohibited.
Some types of information is more sensitive
- Prices
- Production and sales
- Costs
- Commercial strategies
Increases risk
- Future and current information
- Less aggregated information
Risk falls
- Information is already public
By object
- Exchange of information regarding future pricing and quantities.
- Reduces uncertainty of the foreseeable conduct of competitors
By effect
- High market transparency
- High market concentration
- High barriers to entry
- Low degree of innovation
- Similar companies
- Stable supply and demand
- Homogenous products
Research and development agreements
Market definition
- Existing products and tech –> Existing products and their substitutes form the relevant market, if no significant change in the product
- Competition in innovation –> When entirely new products - look for “competing poles of R&D” – are there any remaining credible poles left?
Market shares
- Existing products and tech –> Rely on the parties existing market shares – still distinguish between competitors and non-competitors for BER
- Competition in innovation –> Market shares cannot be calculated – treated as agreement between non-competitors under BER.
Application of article 101(1)
Outside, because too far away from the market
- Cooperation at an early stage
- Between non competitors
- Outsourcing of R&D to research institutions (not active with exploiting)
- “Pure” R&D agreements, i.e. with no joint exploitation
Competition concerns
- Reduction or slowing down of innovation
- Coordination or reduction of competition in markets outside scope of agreement
- Foreclosure of access to the market
Restrictions by object –> Agreements that serve as a disguised cartel – future exploitation can be OK.
Restrictions by effect –> Parties have market power or competition for innovation is appreciably reduced
Block exemption
Market shares
- Non-competitors –> Exemption throughout R&D process + 7 years after release to the market. As long as the parties does not hold a combined market share in excess of 25%.
- Competitors for an existing product and/or technology –> Exemption if the parties’ combined market share does not exceed 25% on the relevant product and technology markets. Specific rules where parties outgrow market shares cap.
- New rule? Competitors in innovation –> Exemption for the duration of the research and development if, at the time the R&D agreement is entered into, there are three or more competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement.
Conditions
- Full access to final results – but, parties can specialise in exploitation (Research institutes)
- When only R&D, access to pre-existing know-how if indispensable for exploitation
- Joint exploitation only permissible when results are IP-protected
- If one party is specialised in manufacturing, it must fulfil orders from other parties, unless one particular party undertakes to distribute.
Hard-core restrictions
Classic cartel behaviour
Limitation of output or sales
- U1 –> Productiongoals when shared production and salesgoals when shared distribution
- U2 –> Specialization with regards to exploitation
- U3 –> Non compete for duration of shared exploitation
Fixing prices
- U –> Shared exploitation when sales to direct customers
Restriction of territories (active sale)
- U –> Exclusively assigned to a party as part of specialization
Excluded restrictions
- No challenge of the validity of the IP-rights
- Grant back obligation
Production agreements
Competition Concerns:
- Restriction of competition between parties (even when marketing products independently)
- Coordination, particularly when large commonality of variable costs
- Foreclosure of access to the market (likely only if strong market position)
Object
- Price fixing, limit output, or market/customer sharing
- Agreements on supply quantities under the agreement, and fixing prices for jointly-produced products to be sold, are, however, not infringements by object.
Specialisation Block Exemption
- Unilateral –> One party takes over the production, the other party agrees to purchase the product (and not produce)
- Reciprocal –> Each party specialises in one product (or component) and agrees to purchase from each other
- Joint production –> Two parties produce a product together.
- Market share –> Combined market share below 20%
Hard-core restriction
- Price fixing
- Limitation of output –> Allowed to agree on amount if joint production
- Sharing markets or customers
Purchasing agreements
Accept this kind of agreement, because it benefit smaller undertakings with competitive advantage
Competition concerns:
- Lack of incentive to consumer pass-on of lower prices,
- Reduced product portfolio up-stream as a result of buyer power and coordinated behaviour, and
- Foreclosure of competing buyers.
Can both form a by object and a by effect infringement:
- By object –> Agreement serves as a disguised cartel (e.g. downstream selling prices) An agreement on prices under a joint purchasing agreement are; however, not by object infringements.
- By effect –> Market power an important parameter – large commonality of variable costs, could lead to reduced independence
Safe harbour
- Presumption of no infringement if the combined market shares on up- and down-stream markets below 15 %.
No block exemption
Commercialisation agreements
Competition concerns – may lead to cartel behaviour:
- Price fixing,
- Output limitation,
- Market division, or
- Parallel behaviour through information exchange
Can both form a by object and a by effect infringement:
- By object –> Focus on horizontal price fixing – joint selling limits/eliminates price competition. May also limit amount of products in circulation. Reciprocal distribution agreements between parties in different geo. markets may act as market division.
- By effect –> Not normally a restriction if objectively necessary to allow one party to enter market that could not have entered without the agreement (consortia projects/joint bidding)
Safe harbour
- Presumption of no infringement if the combined market shares on up- and down-stream markets below 15 %.
No block exemption
Standardisation agreements
Primary objective –> Defining technical or quality requirements for future products, production processes
Competition concerns
- Weakened price competition,
- Foreclosure of innovative technologies, and
- Barriers for effective access to the standard.
Will as the starting point not constitute an infringement, if:
- Participation in forming the standards is unrestricted,
- Procedures for deciding on the standard is transparent,
- There is no obligation to participate/comply with the standard, and
- Effective access to the standard is available on so-called ”FRAND” terms (Fair, Reasonable And Non-Discriminatory).
Sustainability agreements
