12th New Frontiers of Antitrust #2 Vertical restrictions : VBER, everything changed ?

2ème webinaire de la conférence « Demain la concurrence » 2021 organisée par Concurrences, en partenariat avec E.CA Economics, avec Svend Albaek (Adviser - CET, DG COMP), Laurence Idot (Professeur émérite, Université Paris II Panthéon-Assas), Luc Peeperkorn (Professeur, Brussels School of Competition | College of Europe), Thibaud Vergé (Professeur, ENSAE | Université de Bergen) et Alexis Walckiers (Directeur, E.CA Economics).

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Laurence Idot pointed that reform of VBER is underway, and new regulation is expected in May 2022. Looking back in time, we should not forget that, since the very beginning the treatment of vertical restrictions has a special standing in European law. One can recall the first major rulings in the mid-1960s which reaffirmed the applicability of the former Article 85 of the Treaty of Rome, which was somewhat revolutionary in a context where national laws only tackled horizontal relations and cartels. It has since changed a lot, and the French Competition Authority provided recent examples in the cases Apple and Dammann Tea. Beyond Europe, this dealing of vertical blocks by antitrust law is not yet generalised throughout the world.

On the changes ahead, and though the Draft Regulation has not yet been made public, the Commission’s very substantial Work¬ing Document issued in September 2020 has shown that there are many issues to be consid¬ered. The Impact Study also highlighted, among other key questions, the issue of dual distribution and the fate of parity clauses. All these issues cannot be dealt with, and panellists had made some choices.

Svend Albaek reminded the audience that the usual timeline for Regulation review is divided between the Evaluation Phase and the Impact Assessment Phase. The first one includes public consultation, workshop with stakeholders, study, and publication of a Staff Working Document (SWD). The Staff Working Document in this case provides a good evaluation of feedback from stakeholders – overall they seem to be satisfied that the current rules facilitate self-assessment and compliance. However, there is room for improvement, in the form of simplifications and clarifications. There is also a need to tackle the digital markets as well as possible, since their importance is booming, also because of the pandemic. A related question would be : is the balance, right ? When the old Regulation and Guidelines were adopted, there was a need to protect online sales, but now they seem to have developed to a point where they may threaten the remaining brick-and-mortar shops.

On another topic, rules around resale price maintenance (RPM) are often criticised by people who do not feel this should be regarded as a hard-core restriction. On dual distribution, we are seeing more sales through the online websites of manufacturers, so this is becoming an important concern. The policy options identified were : no change, limit exceptions to scenarios unlikely to raise horizontal concerns, remove the exception (and make it necessary to proceed to individual assessment in all cases) and finally extend the scope of the exception to importers and/or wholesalers.

On parity obligations, extended enforcement practice is now available, mostly about parity clauses that deal with the other online platforms, although in Germany also against parity clauses dealing with the direct sales channel. Considered options include : no change, removing the benefit of the VBER for parity obligations about specific types of sales channels, and removing the benefit of the VBER for all parity obligations. On active sales restrictions, giving more protection to exclusive and selective distribution systems has been suggested, also because people seem to prefer selective over exclusive distribution. On indirect measures restricting online sales, the new rules will need to consider that online sales are flourishing while physical stores are struggling. The options considered here are no change, change the rules to take dual pricing out of hard-core restrictions, or allow that the criteria for online sales need not be overall equivalent to those of offline sales.

On most-favoured-nation clauses (MFNs), they may create harm even when small market shares are involved. The narrow parity clauses fall somewhat more in the normal logic. There may be a similar effect to wide MFNs because of cross-connections, but it is not as obvious as it is for the wide parity clauses. Furthermore, on efficiencies, narrow clauses are a tool to prevent free-riding, which may result in increased consumer welfare.

Alexis Walckiers explained that vertical restrictions come with their share of complexity. One of the main issues is that one often needs to balance pros and cons more than they do in horizontal cases. On vertical, there is no worldwide understanding. That is why Guidelines are particularly important and help all parties and Member states achieve a level of convergence. In drafting the new regulation, the Commission needs to have a forward-looking perspective to ensure it comes up with a future-proof document. As regards the present situation, online sales have surged compare with the previous decade, and consumers now clearly engage in an omnichannel comparison.

On dual pricing, this is a moving issue, very different from horizontal cases. ECN discussion has been the occasion to question the necessity to protect online sales. There now seems to be an evolution in the way enforcers think about dual pricing. It is less and less viewed to circumvent buy¬ing online, and more to protect brand value via selective distribution systems. This can also create value for consumers, which now rely heavily on the possibility to switch from online to offline.

Luc Peeperkorn seconded the remarks by previous speakers on the rise of online sales. It is also necessary to keep in mind that, while drafting a regulation, the Commission is always faced with a trade-off between clarity and precision, i.e., between legal certainty and economic sophistication. A first area where this trade-off plays concerns the application of the VBER to online sales restrictions. While there seems to be a consensus that online sales no longer need the same degree of protection, this does not necessarily mean that online sales restrictions should be dealt with more lenient. It will be necessary to review the assumption that online sales allow a distributor or a buyer to sell to other customers further away from home than it would normally do if it was only selling offline. Based on this assumption that online sales allow distributors to reach more and different customers, online sales restrictions were and still are quickly equated with restrictions as to where and to whom to sell, the essence of what is considered hard-core under article 4 of the VBER to prevent price discrimination and market segmentation. This policy has been supported by the European Court. In Pierre Fabre and Coty, the ECJ supported the idea that, for example, a total blockage of online sales means that this diminishes the customers to whom and the areas where a buyer can sell, while a restriction not to use third-party platforms only restricts how the distributor can sell online. What needs to be investigated by the Commission is to what extent the increased use of online sales means that it more often starts to become a direct competitor for the same customers with the offline sales and whether this implies that certain restrictions are no longer about “where and to whom” to sell and more about “how” to sell ?

On dual distribution, the same choice between sophistication and clarity is emerging. At the time of the first modern VBER, the agreements between competitors that the Commission wanted the VBER to cover were the brewer that sells to pubs but also owns some pubs, or the petrol company that sells to petrol retailers but also operates some petrol retailers itself. In situations wherein practice the horizontal overlap was not very important. Since then, we have witnessed two major developments : the growth in online manufacturer activity, increasing their presence at the retail level, and the emergence of hybrid platforms (both marketplace and distributor). This implies that supplier and buyer may more often be competitors and their agreement may not be only vertical. Coverage by the VBER should thus be excluded or limited. A threshold in terms of overlapping market shares may be a proper proxy to tackle such situations, even if it requires more sophistication and create some uncertainty. In the context of dual distribution, another recurrent question is how to deal with the exchange of information between competitors in dual distribution schemes. I would argue that as long as the threshold to limit coverage of agreements between competitors is held low enough (probably the de minimis threshold of horizontal cooperation agreements of 10 per cent), then the potential problem of information exchange may not be very important. Overall, the logical route for the Commission would be to make sure that horizontal agreements, including vertical agreements with an important horizontal overlap between the parties, are excluded from the coverage of the vertical rules so that these rules are not being mixed with the need for horizontal assessments. This would also imply as a rule exclusion from coverage for agreements between hybrid platforms and distributors operating on these platforms.

The issue of dual pricing brings us also to the same question of sophistication versus certainty. The current policy reflects that a manufacturer can easily use dual pricing, by making the difference in wholesale price for units to be sold on- respectively offline big enough, to severely limit and even block online sales by the distributor. There is now a claim that firms increasingly want to use dual pricing not so much to hinder online sales but to protect efficiencies created by more costly offline sales. Addressing this question, the Commission should not so much focus on economic models showing theoretical possibilities of increased consumer welfare, but address whether such efficiencies are very rare in practice or not. It should be clear that if it would be accepted that dual pricing is no longer a hard-core restriction, this will result in a less clear-cut framework – i.e. this comes at a price in terms of complexity for enforcers and firms. RPM is still an important question as well, as sixty or seventy per cent of all vertical cases, mainly done by NCAs, address RPM. RPM remains continuously prohibited, and correctly so because no credible efficiencies have been and are offered by parties in these cases.

Parity clauses are different. The last couple of years have witnessed a general prohibition of wide parity clauses and an overall allowing of the narrow parity clauses. In that context, the most likely way forward for the Commission is obvious : narrow parity clauses should be covered by the Block Exemption, and there should be a discussion about putting the wide parity clauses in Article 5 as excluded restrictions.

Thibaud Vergé followed up on dual distribution. He mentioned that the mirror case to dual distribution that was mentioned in the Guidelines : was one where the retailer is also active on the upstream level by producing its brand for some of the goods. In addition, the same practice is now common for some online platforms or pure players that try to produce or have manufacturers produce their brands. This is not encompassed in the exemptions of the old Regulation, though it is mentioned in one paragraph of the Guidelines. However, the Guidelines should be clarified as they seem to suggest that private labels do not compete with branded products. In addition, online platforms are often hybrid players as they operate as retailers and marketplaces. One of the questions that arise around this increasingly blurred border between the marketplace, retailer and online platform through these various hybrid models is the way to treat agents. How should firms be treated when it is not clear whether they are the upstream or the downstream firm ? Are these players simply agents, or even service providers ? Are they active at the same time on the retail market ? Even though this question should be tackled carefully, both the Guidelines and the Block Exemption Regulation should be in a sense neutral and not necessarily favour one business model rather than the other. Whether a firm operates as an agent or as a retailer should not matter in the way we look at vertical restraints unless we can identify when one model is more likely to be pro- or anti-competitive...

On dual pricing, things have changed a lot too. Back at the time of the first Regulation, the general idea was to protect online sales to work towards price convergence in the single market. We see now that online sales are the new game in town, and that players that were almost purely offline are now extremely active everywhere. The Fnac/Darty merger, a recent development, is one example of the French market. This raises the question of whether dual pricing should remain a hard-core restriction. Jeanine Miklós-Thal and Greg Shaffer recently argued in a paper that dual pricing can be good. Their idea is that demand in online and offline markets might be different. For some online markets, geographic differentiation or location does not matter. As consumers are provided with lower search costs, they tend to be more price-sensitive than they would be in some of the offline markets. Therefore, dual pricing is one way for the manufacturers to use a form of price discrimi¬nation. If price discrimination is motivated by asymmetries in market power across markets those retailers enjoy, then pricing tends to increase the quantities that are sold and that tends to be welfare-improving.

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  • DG COMP (Brussels)
  • Brussels School of Competition (Brussels)
  • ENSAE (Paris)
  • E.CA Economics (Brussels)
  • University Paris-Panthéon-Assas