� An example of commitment: Nespresso Nespresso is committed to communicating information to competitors about technical changes when it is giving an order to produce new machines, without waiting for marketing. It has, furthermore, embarked on a deadline for incompressible safeguard guaranteeing competitors that it will have this information at least 4 months (as opposed to 3 months for the initial version) before putting the machines on the market. Nespresso is committed to making prototypes and new machines available to competitors via trusted third parties , at least 15 of these so that they can carry out compatibility testing on their capsules, when only three prototypes were originally offered; It is finally committed to be more transparent on the origin of technical changes to machines and on new technical specifications.
To conclude: Towards civil action in Europe?
• the application of articles 101 and 102 remains mainly because of the public authorities, while " private enforcement " is under-developed in Europe (in contrast to the United States) • now the full effectiveness of the rules on competition also assumes the right to compensation for victims of CAP • to fill in this "delay", the Commission adopted a directive in November 2014
Competition policy II- From cartels to concerted practices Pr. Emmanuel COMBE 17 June 2016 EuraAuditInternational Conference
� Economic reminder • The best profit for a company is that of a monopoly • In situation where there is an oligopoly (and even more so if there is competition), the sum of profits is always less than that of a monopoly Monopoly Oligopoly Competition €15 €50 Close to €0 €15
Issue for a company: how to come closer to a monopoly situation? Monopoly Competition €50 Oligopoly €15 €15
• Differentiation strategies (R&D, advertising, quality of service/product, cut costs, etc.) � a priori lawful • Strategy of agreements � competition law • Strategies of eviction/discrimination � law on abuse of a dominant position • M&A strategy � merger regulations (concentrations)
Cartel practices
• in law all agreements, including between competitors are not unlawful " Horizontal co-operation agreements can lead to substantial economic benefits, in particular if they combine complementary activities, skills or assets. Horizontal co-operation can be a means to share risk, save costs, increase investments, pool know-how, enhance product quality and variety, and launch innovation faster. (Guidelines 2011) • in economics: rule of reason = balance efficiency gains/distortion of competition
• cartel: horizontal (= between competitors) agreement (therefore concordance of wills)with the sole aim of restricting competition NB: in law, often quick to conclude there is concordance of wills Reminder of burden of proof • two possible cases: - to avoid prices falling (defensive cartel) - artificially increasing prices (offensive cartel)
� Cartels in a nutshell • intermediate or standard product markets • small number of offerers/highly concentrated market • barriers on entry • repeated interactions between firms/multi- market contacts
Cartels
� Conditions cartelisation • direct fixing of the sale price, margins, discounts, commercial terms, etc. • collective boycotting of a new competitor • production quotas • special case of invitations to tender: cover offer, exchanging quotations, etc. • division of markets (by customer or by area)
The steel cartel
� the stability of cartels • Chicago School theory: cartels are unstable (each participant has an interest in cheating, giving secret rebates � return to competition) • An approach not really borne out... empirically and theoretically
Company A Reduce price Respect price Reduce price (3 ; 3) (8 ; 0) Company B Respect price (0 ; 8) (5 ; 5) � The result is (3,3): A and B are cheating!
The members of a cartel have no incentive to cheat if: • Rapid detection of cheating • Severe punishment of cheats
� Structural factors of stability • transparency of transactions (faster detection): B to C • frequency of transactions (faster punishment): • symmetry of production capacities and costs ("balance of terror") • multi-market contact
� Practices encouraging stability • regular exchanges of information on the transactions between the members of the cartel (monitoring) • commitment to buy back production from competitors (punishment) • best price clause (monitoring)
The steel cartel
"The three distributors sanctioned also actively took part in these monitoring practices: This was notably the case of Carrefour which set up a promotional campaign called ‘Carrefour reimburses the difference times 10' for several successive years, thus encouraging consumers to monitoring prices on its behalf. Using information obtained when reimbursing consumers, Carrefour systematically asked the relevant suppliers to ‘solve the problem' caused by the lower prices offered by its competitors."
Cartels: from punishment to detection
• cartels are considered as ILLEGAL practices - in the United States: section 1 of the Sherman Act (1890) - in the EU: Article 101 (paragraph 1) of the TFEU - in France, Article L 420-1 • a "per se" approach (no "rule of reason") • their very PURPOSE is enough to condemn them (whilst their EFFECT is presumed)
Paragraph 1 of Article 101 of the TFEU: "The following shall be prohibited as incompatible with the internal market: 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 internal market (…) »
Article L 420-1 of the French Commercial Code "shall be prohibited, when they have the aim or may have the effect of preventing, restricting or distorting the free play of competition in a market, Common actions, agreements, express or tacit undertakings or coalitions, particularly when they are intended to: 1. Limit access to the market or the free exercise of competition by other undertakings; 2. Prevent price fixing by the free play of the market, by artificially encouraging the increase or reduction of prices; 3. Limit or control production, opportunities, investments or technical progress; 4. Share out the markets or sources of supply"
• an effective punishment = a DISSUASIVE punishment • a rational agent does not break the law if: gain from the breach < probability of detection x average punishment � to be effective, the punishment must therefore be at least equal to the ratio of the gain divided by the probability of detection: Illegal gain Optimum punishment = Probability of detection
� How to come closer to the optimum punishment? • increase the level of financial sanctions • widen the sanctions: - civil action? still not very common in Europe/very frequent in the USA - criminal penalties? in the USA, prison sentences in big cartel affairs
Total amount of fines imposed by the European Commission against cartels (in millions of Euros)
Source: DOJ Antitrust division [2015]
� Reinforce the detection of cartels • increase the powers competition authorities' of investigation (cf. telephone records in France) • "get those who know to talk"! � role of leniency policies; success in the USA, in the EU (since 1996) ….and in France (since 2004), thanks to adequate design; A FORMIDABLE INSTRUMENT
Article L 464-2 of the French Commercial Code "A total or partial exemption from financial penalties may be granted to a company or a body which, along with others, has implemented a practice prohibited by the provisions of Article L. 420-1, if it has helped to establish the existence of the prohibited practice and to identify its perpetrators by providing information which the council or the administration did not have access to beforehand
� The French legal framework Article L 464-2 of the French Commercial Code The financial penalties are proportionate to the seriousness of the charges brought, to the scale of the damage caused to the economy, to the financial situation of the body or company penalised or to the group to which the latter belongs, and to the likelihood of any repetition of practices prohibited by the present Part. They are individually determined for each company or body penalised, with reasons given for each penalty."
� Steps in determining a penalty 1/ Value of the sales x duration of the offence = base for the fine 2/ Rate (severity + damage) x base = basic amount of the sanction 3/ mitigating/aggravating circumstances + other factors of individualisation + reiteration = individualised amount of the penalty
4/ comparison with the legal ceiling (10% of turnover) (capping if necessary) 5% if the company does not contest truth of allegations ("NCG"), 3 million Euros if not a company 750,000 if simplified procedure 5/ application of NCG + leniency + taking into account of ability to pay = final amount of the penalty
� The counterfactual principle
� Individualisation • mitigating circumstances ("maverick", coerced company, practice encouraged or authorised by public authorities) • aggravating circumstances (leader, coercion exercised, "particular moral authority") • other factors: - financial difficulties (-) - size of the company (+) - belonging to a group (+) � the extra rate can be very substantial (up to + 50%)
companies penalty before penalty after reduction Ciblex 4,4 millions 25,000 -94% Lambert 6.7 million 500 000 -92% Valette XP 11.8 million 900,000 -92% Heppner 34.1 million 3 million -91 % Ducros 4.3 million 300,000 -93 % Ziegler 8.3 million 10,000 -99.9 %
Exchanges of information between competitors
� The notion of "concerted practices" • concerted practice = agreement that does not go as far as a cartel, but which has an anti-competitive aim/effect reducing uncertainty between competitors • the concerted practice may take place in secret or in public (e.g. a system of announcing future prices) • exchanges of information between competitors are at the heart of the analysis of concerted practices
"although it is correct to say that this requirement of independence does not deprive traders of the right to adapt themselves intelligently to the existing or anticipated conduct of their competitors, it does however strictly preclude any direct or indirect contact between such traders, the object or effect of which is to create conditions of competition which do not correspond to the normal conditions of the market in question (CJEC, 1998, John Deere)
• Analysis case by case: exchanges of information are not anti-competitive in principle; they may even be pro-competitive! • Exchanges of information are anti-competitive in certain cases � List of criteria
� Characteristics of the market • market not very transparent before the exchange of information • concentrated market (narrow oligopoly) • stability of supply and demand (unless the aim of the exchange is to stabilise the market) • symmetry of positions ( � strong punishment) • frequency of transactions ( � fast punishment)
� Type ofinformation exchanged • individualised (not aggregated) • strategic: prices/quantities/discounts/negotiating parameters • frequent (in relation to the characteristics of the market) • past/future • confidential
On the reciprocity of the exchanges of information
� Differing degrees of seriousness • Exchanges of information on future prices are considered as more serious (object infringement) than on past prices • A famous case: "Parisian palaces" (2005)
� The special case of price scales • Practise of dissemination of price scales by a professional federation: not "immune" to competition law! • Strict burden of proof on the implication of the members of the federation
Competition policy III- Vertical agreements in the retail sector Pr. Emmanuel COMBE 17 June 2016 EuraAuditInternational Conference
� The vertical structure of the retail sector Producer (Wholesaler; Buying group) Distributor (retailer) End consumer
The motivations for vertical restraints
� A manufacturer must choose between: • distributing its products itself = vertical integration ("do- it-yourself" eg Dell) • sell its production to all distributors = market ("laissez-faire" eg agricultural produce) • select its distributor, by imposing restrictive clauses on them = "vertical restraints" (example of branded perfumes)
� Main vertical restraints • Purchasing quotas (min. or max.) • Territorial exclusivity • Selective distribution (qualification of personnel, location of point of sale, homogeneity of range, brand promotion, etc.) • Exclusive distribution • Resale price maintenance (RPM) and its variations
� Why introduce vertical restraints? • Double margin argument • Service offer argument • Trademark protection argument • Discrimination argument • Foreclosure argument (locking up)
Vertical restraints and competition policy
82 Article 101 TFEU paragraph 3 " The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, (...) 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."
83 • automatic exemption of the agreement below a certain threshold (market share of 30%) …..unless "blatant restraints" • individual exemption above 30% of MS, if all the conditions of paragraph 3 are met
� The case of resale price maintenance • Price ceiling is not forbidden • Price floor and fixed price = blatant restraint (presumption of unlawfulness, virtually impossible to overturn) • A recommended retail price can sometimes be considered as disguised RPM
• RPM has ambivalent effects in economics: case-by- case approach • and yet, RPM is prohibited in Europe • usual argument: other instruments exist that are less restrictive on competition (such as selective distribution) to achieve the same aim
� The perfumes case (06-D-04) " Between 1997 and 2000, the above companies operating luxury perfume and cosmetics brands entered into agreements with the distributors in their commercial networks, and in particular the national chains Marionnaud, Nocibé and Séphora. The purpose of the agreements was to put a stop to Any competition between retailers, for each of the brands' products. Each supplier of perfumes or cosmetics set its distributors a "recommended retail price" for each of its products, and also indicated the maximum discount they were permitted to practise in order to level up the retail prices of the products concerned" 86
� The perfumes case (06-D-04) " Each agreement organised by the supplier also saw the introduction of a "pricing control system". This involved checks on the prices practised, and pressure and threats of commercial retaliation against any distributor who refused to apply the prices imposed by the brand, preferring to let competition play by selling at lower prices. An analysis of the price listings recorded during the course of the investigation revealed that the agreement was highly effective, as the prices applied largely adhered to the levels agreed between the companies. " 87
� The perfumes case (06-D-04) " Under national and European case law, brands with a "luxury" image are permitted to exercise a certain degree of control over the situation of the retail outlets distributing their products. They are allowed to check that their products are displayed advantageously. This approach, which is known as selective distribution, leads the brand to choose its sales outlets very rigorously. However, the case law in question does not permit brands to prevent the selected distributor from fixing its own margins, and therefore its own retail prices. This distributor's freedom to determine its own margins and prices is beneficial to ... 88
� Theperfumes case (06-D-04) …end consumers, who can take advantage of competition between retail outlets for the same brand products and obtain better prices. The accused brands unsuccessfully attempted to argue that by harmonizing retail prices at a high level, they were merely attempting to protect their products' "luxury image". In reality, the lack of competition resulting from the agreement between the producer and its distributors actually enables everyone to raise, and then share, the surplus obtained, at the consumer's expense. 89
Vertical restraints and online sales
• general principle: any distributor can a priori sell online • …except in exceptional cases: "objective justification"
Examples of blatant restraints in online sales • preventing passive sales: - practice of "re-routing" - limitation of payment according to the address of residence of the buyer • limiting online sales by imposing a proportion of sales online/hard sales; on the other hand it is possible to fix a minimum turnover (based on objective criteria) • dual pricing policy according to channel of distribution
� Justifications of blatant restraints • objective justification: public health, public order (e.g. dales of weapons), etc • efficiency gains under §3: example of launching of a new brand: to secure a distributor's investments, by banning the sales of other distributors on the internet for 2 years
Example of selective distribution • the producer cannot forbid its approved distributors from selling its products online, nor reserve this channel of distribution for itself • but the producer can transpose the criteria of selective distribution to online sales (quality of service, safety of products, etc.), as long as these criteria are equivalent to those imposed on physical stores
• the supplier may sell on the internet even if it has entrusted the distribution of its products to a network, from the moment the sales are passive + respecting of the same rules it imposes on its distributors for online sales • the supplier can refuse to sell to a "pure player" (no physical store)
• to avoid "ghost stores", the supplier can impose on its distributors the sale of a quantity of products in absolute terms … but it may not impose a proportion for online sales • the supplier may demand that its distributors not resell the products outside the network, for example to a marketplace but the recent decision of the Court of Appeal of in the Caudalie case places a nuance on this point
� the transposition of the criteria: the example of the cosmetic products (commitments) 97
� the transposition of the criteria (cont.) 98
� the transposition of the criteria (end) 99
� The Pierre Fabre case (1) 100
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