CH5: Horizontal and Vertical Agreements

What is Article 101 TFEU?

Article 101 TFEU prohibits agreements, decisions by associations of undertakings, and concerted practices that prevent, restrict, or distort competition within the EU internal market.

The provision applies to both horizontal agreements (agreements between competitors) and vertical agreements (agreements between firms at different levels of the supply chain)

What examples of prohibited conduct fall under Article 101 TFEU?

Examples:

• price fixing,

• market sharing,

• output restrictions,

• information exchange,

• certain licensing agreements,

• resale price maintenance,

• territorial restrictions

• most-favoured-nation clauses.

What are the key economic questions under Article 101 TFEU?

1. Does the agreement restrict competition under Article 101(1)?

2. Do efficiencies outweigh the restrictive effects under Article 101(3)?

What is a restriction by object?

A restriction by object is an agreement considered inherently harmful based on experience and economic theory.

For these agreements, proving existence is enough → Harm is presumed → authorities don’t need to prove actual market effects.

Examples: cartels, price fixing, market sharing, and bid rigging.

What is a restriction by effect?

A restriction by effect is an agreement where authorities must assess and prove negative effects on competition through market conditions, competitive effects, and possible efficiencies.

If negative effects are not proven, the assessment is insufficient.

What is the De Minimis Safe Harbour?

Agreements are generally considered unlikely to appreciably restrict competition when the parties’ market shares remain below:

• For competitors, the combined market share < 10%.

• For non-competitors, market share must be «15%.

However, these safe harbours never apply to hardcore restrictions such as price fixing, market sharing, and cartels.

What are block exemptions?

Certain categories of agreements are automatically exempt when specific conditions are met.

• Vertical agreements where both firms have market shares < 30%

• Certain sector-specific agreements such as insurance or motor vehicles.

These agreements are generally considered more likely to generate efficiencies than anti-competitive harm.

What is the efficiency defence under Article 101(3)?

The efficiency defence under Article 101(3) means that even if an agreement restricts competition, either by object or by effect, it may still be allowed if it creates sufficient economic benefits.

4 cumulative conditions must be satisfied:

• efficiency gains,

• indispensability,

• fair share for consumers, and

• remaining competition.

What are the four cumulative conditions for Article 101(3)?

The four cumulative conditions are:

1. Efficiency gains: the agreement must improve production, distribution, technical progress, or economic progress.

2. Indispensability: the restriction must be necessary to achieve those efficiencies.

3. Fair share for consumers: consumers must receive part of the benefits.

4. Remaining competition: competition must not be eliminated entirely.

The burden of proof lies with the firms, making Article 101(3) difficult to invoke successfully in practice.

What are horizontal agreements?

Horizontal agreements occur between actual or potential competitors operating in the same market. Competitors may coordinate prices, output, or information exchange. Because competitors are supposed to compete against each other, such agreements often attract close scrutiny from competition authorities.

What are hardcore cartels?

Cartels are considered the most serious competition-law infringement. Hardcore cartels are agreements between competitors that directly restrict competition. The lecture identifies four classic forms:

• price fixing,

• output fixing,

• market sharing

• bid rigging.

What is price fixing?

Price fixing is a hardcore cartel practice where competitors jointly determine prices instead of competing.

What is output fixing?

Output fixing is a hardcore cartel practice where competitors restrict production levels.

What is market sharing?

Market sharing is a hardcore cartel practice where competitors divide territories, customers, or product markets.

What is bid rigging?

Bid rigging is a hardcore cartel practice where competitors coordinate bids in procurement procedures.

How is a hardcore cartel different from other types of horizontal agreement?

Hardcore cartels differ from other horizontal agreements because they generally produce no meaningful pro-competitive effects. These practices are considered per se infringements, meaning no balancing of efficiencies is required and anti-competitive harm is presumed.

How are cartels enforced in Europe?

Cartels are investigated frequently across Europe. Examples include trucks, power cables, cement, sugar, and FOREX. Many investigations begin through leniency programmes, under which cartel members reveal the cartel in exchange for immunity or reduced fines. The European Commission has imposed billions of euros in cartel fines in recent years.

What is information exchange between competitors?

Information exchange occurs when actual or potential competitors coordinate by sharing information. Horizontal cooperation does not always involve explicit cartels. The growth of digital platforms has increased market transparency and made information more accessible.

What are the potential benefits of information exchange?

Information can improve market functioning by:

• improving market forecasts

• speeding up responses to new market developments

• improving risk assessment (customer data pooling for insurance)

• lowering search costs for customers such (through public announcements)

What are the potential harms of information exchange?

Information exchange may facilitate collusion by reaching a focal point for coordination and monitoring adherence to the terms of coordination. The key competition question is whether increased transparency leads to anticompetitive effects and whether the market is prone to coordination.

What are the four building blocks of cartel damages estimation?

The four building blocks of cartel damages estimation are: 1. Value of commerce. 2. Overcharge. 3. Pass-on. 4. Interest.

What is value of commerce in cartel damages estimation?

Total value of products purchased during the infringement period.

Evidence from invoices, contracts, and transaction databases.

The main challenge: cartels often last many years, historical data may be incomplete.

What is overcharge in cartel damages estimation?

The extent to which input prices paid by the claimant or claimants were higher compared with the counterfactual.

Computation: cartelised price - competitive price.

The central challenge, constructing the counterfactual: what would prices have been without the cartel?

What is an example of overcharge calculation?

If the actual cartel price is €125 and the competitive price is €100, the overcharge is €25. This is equivalent to 20% of the cartel price. Observed overcharges vary substantially across cases.

What is the counterfactual in cartel damages estimation?

The price scenario that would have existed without the cartel.

The central challenge, constructing this counterfactual in order to compare actual cartelised prices with competitive prices.

What methods can be used to estimate the counterfactual?

3 major categories of methods:

• comparator-based methods,

• financial-analysis-based methods,

• market-structure-based methods.

The choice of approach depends on data availability and on what the court can best understand. Different methods can also be used complementarily.

What principles matter when choosing the appropriate method to estimate cartel harm?

• Prices vs margins analysis: consider the potential impact of the cartel on costs and ensure margins are consolidated across internal divisions.

• Controlling for external factors: assess whether the econometric specification requires controls for capacity utilisation or downstream demand.

• Dummy variable vs forecasting: the choice depends on data availability, the mechanism by which the cartel affects prices, and the extent of variation in the data.

• Precision vs bias: assess whether the model has good fit and predicts prices well in the clean period.

Why is regression often favoured in cartel damages estimation?

Regression is often favoured because it allows economists to control for other relevant factors that affect prices.

Why can adjusted interpolation and regression be more accurate than simple before-during-after comparisons?

Because prices may be influenced by factors such as exchange-rate movements, and post-cartel prices often remain artificially high for some time rather than immediately returning to the competitive level.

What is pass-on in cartel damages estimation?

The proportion of the overcharge that the claimant or claimants transferred downstream to their own customers.

Victims do not always absorb the full overcharge. They may pass some or all of it on to their own customers through higher prices.

Why is pass-on important for compensation?

Compensation for claimants should generally reflect only the portion actually absorbed by the claimant. The pass-on argument can be used as a defence by cartelists, but it also opens the possibility for other claimants further down the supply chain.

When is high pass-on more likely?

High pass-on is more likely when:

• all firms face the same cartel overcharge

• no alternative suppliers exist,

• downstream competition is strong.

When is low pass-on more likely?

Low pass-on is more likely when:

• non-cartel suppliers exist,

• the cartelised input is a small share of total costs,

• demand is highly price-sensitive,

• cartelists also compete downstream.

What is interest in cartel damages estimation?

Cartel damages often span many years.

Damages calculations therefore include interest, uprating of historical losses, and discounting where appropriate.

The objective is to express damages in present-value terms. This reflects the principle that €1 today is worth more than €1 tomorrow.

What are vertical agreements?

Vertical agreements occur between firms operating at different stages of the supply chain. They involve a restriction, by agreement, of the decisions of one or both parties in order to better align their incentives.

What are the main types of vertical restraints?

The main types of vertical restraints are:

• exclusivity or single branding,

• resale price maintenance

• most-favoured-nation clauses.

What is exclusivity or single branding?

Exclusivity or single branding refers to vertical restraints where a supplier sells only through one retailer, or a retailer buys only from one supplier.

What is resale price maintenance, or RPM?

Resale price maintenance occurs when the supplier imposes minimum resale prices or fixed resale prices. Retailers lose pricing freedom.

What are most-favoured-nation clauses, or MFNs?

Most-favoured-nation clauses occur when a supplier promises that one buyer will receive prices at least as favourable as any other buyer. These are sometimes called best-price clauses.

What competition concerns can vertical restraints create?

Vertical restraints may create anti-competitive effects by:

• foreclosing access to distribution networks to new entrants through exclusive dealing,

• reducing intra-brand competition between retailers through selective distribution

• reducing inter-brand competition through single branding

• facilitating collusion through recommended resale prices.

What efficiency justifications can vertical restraints have?

Unlike hardcore cartels, vertical restraints often have plausible efficiency justifications.

• They may solve vertical externalities by giving retailers incentives to provide customer service or other sales efforts on behalf of the manufacturer.

• They may prevent free riding by incentivising provision of technical training of a specific retailer by a manufacturer.

• They may protect brand image by allowing the manufacturer to differentiate itself from low-quality products and monetise its product through higher prices to customers.

What is a narrow MFN in online hotel booking platforms?

A narrow MFN means the hotel cannot offer a lower price on its own website, Pdirect, than on the platform, P1.

What is a wide MFN in online hotel booking platforms?

A wide MFN means the hotel cannot offer lower prices on its own website, Pdirect, or on competing platforms, P2, than on the platform, P1.

What are the potential harms of MFNs?

MFNs may soften competition between booking platforms, potentially foreclose new platforms, and facilitate collusion. Possible consequences include higher commissions and reduced direct sales.

What are the potential efficiencies of MFNs?

MFNs may reduce search costs for customers, reduce free-riding by other OTAs and hotels, and strengthen inter-brand competition.

What is the key challenge in assessing vertical restraints?

Vertical restraints may create anti-competitive effects but often generate efficiencies. The key challenge is balancing competition concerns against consumer benefits.