Aims to restrict market competition

Article 81 aims to restrict market competition, it monitors the safety of consumers and ensure efficiency of resources. In order to advise Pleasing Perfumes Ltd, which distribution method would be more suitable for them to apply, I will be explaining the relevant issues, apply it the law of competition and evaluate these issues. This essay will first identify whether Pleasing Perfumes are an undertaking under Article 81 of the EC Treaty. Secondly, it will briefly illustrate whether an agreement if form and its effect, identify how trade may be affected and define the product market. I will also be discussing the different types of distribution strategy and indentify which of the latter, is most suitable to Pleasing Perfumes and lastly discuss how they may be affected by competition law followed by an illustration of block exemption clauses then a conclusion.

Businesses that offer goods or services, is said to be engaging in an ‘economic activity', as stated in the case of Spanish Courier Services. An undertaking is generally considered as a company whom engages in economic activity, “regardless of the legal status of the entity and of the way in which it is financed”. As a perfume manufacturer in the UK, Pleasing Perfume may be regarded as an undertaking, considering they are manufacturing perfumes, which is considered to be distributing goods. This may therefore be regarded as engaging in an ‘economic activity'. Considering the above it is logical to identify whether an agreement has been formed.

There are certain objects that Pleasing Perfumes needs to take into consideration, these objects may either restrict or promote competition, therefore causing them to fall outside the scope of Article 81 (1). Upon launching their new product, they will need to form an agreement with distributors or customers. Pleasing Perfumes will have to ensure that the agreement formed does not fall outside the scope of Article 81(1). In addition, they need to ensure that the agreement will not have an effect on trade either nationally or between member states, therefore causing competition restricting trade. Effect on trade may be identified where agreements and abuse are applied within various member states, where only one or a part of the member state is affected by trade and where undertakings are positioned in numerous member states.” This was also illustrated Raiffeisen Zentralbank Osterreich AG v Commission.

Upon identifying the trading effect of the agreement and assuming that it is non-competitive and falls under Article 81(1), it is arguable that the agreement formed is a vertical agreement. In applying this form of agreement, there are certain detriments that should be considered such as: Single branding group, Limited distribution group and Resale price maintenance group.

It is essential that Pleasing Perfume, identify the relevant market before identifying the types of distribution strategy to use in order to launch their new product. The reason for identifying the relevant market is to categorise all the “competitors of the undertaking concerned that are capable of constraining its behaviour”. There are two types of market, firstly the relevant product market, in order to sustain a relevant product market Pleasing Perfume will have to identify whether the retailers or consumers will switch to competing brands considering their initial prices increase, products in this market must include substitutability. This was illustrated in United Brands v Commission, where it was held that bananas are not substitutable by other product and therefore will not be affected by price fluctuation considering it is a unique product. In conjunction, Pleasing Perfume, may find it difficult to apply this principle, considering there are other fashionable perfumes within the high brand market which they intend to diverse to. Secondly, the relevant geographical market needs to be kept at a similar cost, where transportation to all its traders is concerned; this was therefore formulated in Hilti AG v Commission.

The case of Volk v Vervaecke, illustrates that where an agreement does not have a noticeable impact on inter-state trade or on competition, it will not fall under Article 81. The general principle indicates that, undertakings market share does not restrict competition, where it is below 10 per cent in cases where they are ‘actual or potential competitors'. However, the parties within the relevant market are deemed non-competitive, if the market share held is 15 per cent. The 10 per cent threshold applies, where it is deemed difficult to identify an agreement between competitors and non-competitors. Alternatively, where there is a ‘cumulative effect of agreement', between either non-competitors or competitors the threshold is reducing to 5 per cent. However, where the market share does not surpass 5 per cent, it will not be classified as ‘significantly to a cumulative foreclosure of effect'. The commission may state that, Pleasing Perfume will not obtain a noticeable impact on inter-state trade or on competition, taking into account their market share fall under the 10 per cent threshold.

It is advisable that Pleasing Perfumes uses a distribution strategy to launch their new luxury product, in order to add a margin, therefore covering the cost of distribution. In order to add such margin, they will need to supply the goods to a distributor (retailer), who will then distribute the product to the consumers. In addition, they may choose to use commercial agents to distribute their products, such an agent distributes the goods to the customers and does so on behalf of the manufacturer, this approach does not bear any risk. On the other hand, distributers ‘assume liability' and therefore bear a ‘large degree of risk', Pleasing Perfumes must consider that the distribution margin is determined based on the level of risk.

Where a company aim to launch new goods, they have to promote it effectively, in order to get recognition. The product life cycle starts in the introductory stage then evolve and may subsequently decline. During these phases, the company may need to apply different vertical arrangements (distribution strategy), in order to satisfy customer demands, such as: selective and exclusive distribution, franchising. Below is an explanation of the available vertical arrangements, how they may help Pleasing Perfumes to distribute their new product and the form of block exemption, which applies.

‘Vertical restraints' summarises all form of ‘restrictive distribution arrangements, formulated between manufacturers and distributors. This is formulated when the manufacturers appoint ‘end-users' to sell their products, the retained right to control how the products are distributed within the market. This form of restrain may be applied in a selective distribution strategy:

Suppliers who appoint a distributor under this system, agrees to appoint other distributors only where they meet specific criteria. In applying this type of distribution, the level of additional distributors, within a particular territory will be limited. Where the nature of the product requires ‘an enhanced level of service' and the supplier are required to provide ‘after-sale service', selective distribution is most applicable. As a result of these arrangement procedures, competition law may become problematic. Selective distribution aim to deliver quality service, the supplier also retains ‘tight control' in relation to how the products are distributed. Selective distribution network is a ‘contractual obligation', it can restrict manufactures, dealers or retailers, preventing them from supplying third parties, therefore only supplying to authorised dealers. Pleasing Perfumes are intending to launch a prestige product on the luxury perfume market, in accordance they should consider the fact that there retailers in putting up strong resistance, may apply restriction under this distribution network, restricting them from supplying goods to unauthorised dealers as formulated under the case of Metro v Commission. However, if Pleasing Perfumes decides to apply this distribution system they may face competition problems.

The manufactures market share must be below 30%, in order to benefit from the block exemption on vertical agreement under Regulation 2790/99. The Commission can in some circumstances withdraw the block exemption if the selective distribution strategy, only benefit from the block exemption, where it is minimal in enhancing its effect. Nonetheless, the Commission also indicate that the only cases where block exemption is withdrawn is where there is a ‘cumulative effect problem' and that this is likely to occur when the undertakings market share is less than 50%.

In addition, Pleasing Perfumes may also use exclusive distribution strategy to launch their product, this distribution arrangement restrict manufacturers, to supply their products to a specific distributor in a specific territory, the manufacturer in this strategy has to refrain from distributing goods to any other distributor within that territory. However, if Pleasing Perfumes decides to apply this strategy, they should be aware that such an arrangement is sometimes used to exploit products within that territory. This strategy, places “restraints imposed on buyers active selling outside the territory combined with quantitative or qualitative selective distribution at the same level of distribution”. The manufacturers, in this case appoint distributors with ‘local knowledge' and with a well recognised business. In accordance, the distributor will be responsible with promoting the product, as well as accumulates all the risk and cost relating to this. Subsequently, the distributor will be the only one that benefits from this arrangement, in addition the distributor has to meet their target sale and the manufacturer may threaten to withdraw, if targets are not met. Pleasing Perfume may consider applying the latter strategy however, they will be obliged to supply the products to only one retailer and is therefore unable to “grant delivery either, directly or indirectly” to any other retailers within that territory. This arrangement was applied in Consten and Grundig v Commission. Block exemption clauses apply to exclusive distribution considering the manufacturer market share, is below 30% and has not applied a ‘hard core' restriction under Article 4. Pleasing Perfume need to monitor agreements, if the market share is above 30%, hard core restraints are deem to apply , therefore falling outside the requirements of Article 81 (3).

Franchising is classified as a form of distribution strategy, it is where the franchisor, allow the franchisee to operate an independent business, with guidelines set by the franchisor. The franchisee in this case uses the logo, trade mark and applies the same or required strategy laid down by the franchisor. If this strategy is applied block exemption may be applied independently. This may not be a suitable vertical agreement strategy for Pleasing Perfume to apply, considering the product they are aiming to launch, is exclusive and is a single product. They may not benefit from this strategy as the product is new and has not yet been recognised.

Providing Pleasing Perfumes does not use any hard core restriction and keep their market share below 30%, in order to distribute the new perfume, competition law may not be affected and Article 81 (1), will not be infringed. They need to take into consideration that, if the chosen distribution strategy meet the criteria of block exemption, it will ‘automatically [be] exempt', not considering its ‘negative effects'. The fact that the market share Pleasing Perfumes is aiming to accumulate is below the 30% the agreement falls within the block exemption. This is due to the fact that, they are not threatening to the inter-brand trading and therefore has no market power. In addition, the agreements may benefit from block exemption, considering hard core restrictions falls below the threshold. If Pleasing Perfumes decides to apply hard core restraints such as price fixing or resale price maintenance, territorial/ customer's sale restrictions, restriction to active sales in a territory reserved by them, restrictions to end users and in selective distribution restrictions to unauthorised distributors, the agreements may not benefit from block exemption.

In regards to the types of distribution strategy illustrated above, it may be appropriate for Pleasing Perfume to use the selective strategy as they will have the chance to deal directly with resellers. In applying selective distribution strategy, they will be able to control the way in which the products is distributed and the risk of any competition is minimal. However, if the decide to use exclusive distribution strategy, they will not be involved in the promotion of after sales, as the resellers in this case act as a single entity. The retailers under a exclusive agreement, may also restrict them from distributing to other retailers within that territory and the product may face risk of exploitation. Nonetheless, the retailer under this agreement has to maintain the level of sale targets. Considering, the market share pleasing perfume is aiming to target is less than 30%, using either strategy, indicates that they will benefit from the block exemption clause.

Bibliography

Books

Craig, P. & De Burca, G., ‘EU Law, Text, Cases and Materials', (Oxford : Oxford University Press, 2007)

Whish, R., ‘Competition Law', (Oxford: Oxford University Press, 2009)

Cases

[1994] 5 C.M.L.R. 331 Consten and Grundig v Commission

[1999] C.M.L.R 418 Etablissements Consten and Grundigverkaufs-GmbH. v Commission

[1990] ECR II-163 Hilti AG v Commission

C-41/90 ECR - I 1979 Hofner & Elser v Macrotron GmbH

[1994] 5 C.M.L.R. 331 Metro v Commission

(2007) 5 C.M.L.R. 13 Raiffeisen Zentralbank Osterreich AG v Commission

C-L223/19 Spanish Courier Services

[1978] ECR 207 United Brands v Commission

C-5/69 [1969] ECR 295, 1969 C.M.L.R. 273 Volk v Vervaecke

Journals:

Alese, F., ‘Unmasking the masquerade of vertical price fixing' (2007) European Competition Law Review

Communication from the Commission, ‘Guidlines on the application of Article 81 (3) of the Treaty', (2004/C 101/08)

Notice, Guidelines on the application of Article 81 (3) of the Treaty (2004/ C 101/ 08)

Parkash, R., Nourry, A., Aziz, S., Hopkinson, E. And Chance, C., ‘Distributorships: overview', www.partiallaw.com/6-107-3648

Websites:

Europa www.europa.ec