Vertical Restrictions on Competition

Vertical competition restriction agreements are agreements between companies operating on different production or distribution levels, e.g. an agreement between a supplier and a distributor. The restriction may for instance appear in a way that a manufacturer sets on distributors restrictions that relate to prices, customers or marketing areas. Different distribution systems are often subject to vertical restrictions.

Vertical competition restrictions may concern prices, be export or import restrictions or other restrictions. Setting fixed prices have traditionally been prohibited. Setting a specific price or lowest acceptable price as well as agreements on discounts to be given are also prohibited. Vertical agreements may not include provisions which have direct effect or indirectly impede trade between the member states e.g. provisions on absolute territorial protection. Other vertical competition restrictions are more harmless provided that the parties do not have great market power and the competition is efficient in the referring markets.

The harmful nature of vertical competition restrictions relates generally to companies’ market power in relevant product and geographical markets. According to the European Commissions block exemption on vertical agreements, a vertical restriction is automatically allowed, if the market shares of parties to a distribution agreement, i.e. a manufacturer or a supplier on the one hand and the market share of a purchaser on the other hand, are less than 30 percent. In this case the agreement may, however, not include any so-called hardcore restrictions, e.g. such as setting resale prices or including prohibited territorial restrictions.

Even though the conditions of the block exemption are not fulfilled the agreement is not automatically considered to violate competition rules. Vertical competition restrictions which fall outside the block exemption may be separately permitted if the action concerned:

• increases the efficiency of production or distribution of products, or furthers technical or economic development;

• leaves a reasonable part of benefits gained to the consumer;

• does not set restrictions that are not necessary to achieve the mentioned targets, on the relevant undertakings; and

• does not give the undertakings the opportunity to significantly remove competition in respect of a significant part of the relevant product market.