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28/06/17
 

Public Statement 2/17 Regarding Vertical Price Maintenance Arrangements (RPM)

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Date of Publication:
28/06/2017

 

 

 The Antitrust Authority

Public Statement 2/17

Regarding Vertical Price Maintenance Arrangements (RPM)

1.     Introduction

The subject of this public statement is vertical price maintenance arrangements, i.e. arrangements in which one link in the supply chain of goods dictates the price charged for the goods by the next link in the chain. Arrangements of this kind are known as "Resale Price Maintenance" or "RPM", and they may set minimum prices ("minimum RPM"), maximum prices ("maximum RPM") or fixed prices ("fixed RPM").

Since minimum RPM and fixed RPM are very similar in their effects on competition, for the purpose of this statement these two types will be treated as one, and the term "RPM arrangements" will therefore refer to these kinds of arrangements. Reference will also be made to price recommendations that are not considered price maintenance arrangements. Brief reference will also be made to maximum RPM arrangements, which usually do not raise the competitive concerns that may be raised by other types of RPM arrangements.

The need to publish a public statement became acute following the judgement of the Supreme Court in the Shufersal case,{C}[1]{C} in which it was ruled that vertical arrangements shall not fall under the conclusive presumptions specified in Section 2(b) of the Restrictive Trade Practices Act, 5748-1988 (hereinafter: "the Law"), under which arrangements are considered restrictive. Until the judgement of the Supreme Court regarding Shufersal, the accepted interpretation was that RPM arrangements fall under the conclusive presumption specified in Section 2(b)(1) of the Law, although some interpreters disputed this position. Furthermore, the Antitrust Rules (Block Exemption for Non-Horizontal Arrangements that do not Include Price Restrictions), 5773-2013 (hereinafter: "Block Exemption for Arrangements between Non-Competitors"),{C}[2]{C} also specify that the block exemption shall not apply to RPM arrangements. RPM arrangements were therefore regarded as arrangements which are conclusively presumed to harm competition, i.e. restrictive arrangements. The judgment in the Shufersal case changed the interpretation of the law, by ruling, as mentioned, that the conclusive presumptions specified in Section 2(b) of the Law shall only apply to arrangements between competitors.{C}[3]

Following the precedent established by the Shufersal judgement, RPM arrangements should therefore, as a rule, be examined in accordance with the provisions of Section 2(a) of the Law. Against this background, the Authority finds it prudent to present its position regarding how RPM arrangements should be examined, and when such arrangements should be regarded as preventing or harming business competition.

RPM arrangements are essentially different than most vertical restrictions, in that their direct effect is limiting intra-brand competition regarding price, in comparison with a situation where no RPM arrangement exists. The Antitrust Authority will therefore treat such arrangements more severely than other vertical arrangements. As a rule, the position of the Authority is that RPM arrangements have no place in the retail sector, unless the market characteristics indicate that sufficient competition exists in the market, and only for the purpose of gaining clear pro-competitive benefits. RPM arrangements that are not related to the retail sector shall generally be examined in accordance with the nature of the relations between supplier and distributer, and subject to the provisions specified in the following sections of this document.{C}[4]

To dispel any doubt, the subject of this public statement is only RPM arrangements, i.e. vertical arrangements between supplier and retailer or distributer. Arrangements involving horizontal coordination – for example, a mutual or coordinated appeal by retailers to a mutual supplier to establish and enforce RPM arrangements, or an agreement between suppliers to mutually establish RPM arrangements – shall not be considered RPM arrangements, but rather horizontal arrangements disguised as vertical.{C}[5] Nothing in this public statement or in the judgement regarding the Shufersal case derogates from the application of the conclusive presumptions specified in Section 2(b) of the Law to such horizontal arrangements, and any such arrangement shall be dealt with using the proper enforcement measures.

As will be presented below. RPM arrangements may raise a variety of competitive concerns, including a concern of facilitating coordinated equilibrium in the supplier or retailer sectors, a concern of diminishing the incentive of retailers to restrain the market power of a dominant supplier and a concern of harming the competitive ability of small suppliers or retailers.

2.     General – Vertical Arrangements in Antitrust Law

Section 4 of the Law prohibits any person from being a party to a restrictive arrangement, unless such a person has obtained the permission of the Antitrust Authority. The term "restrictive arrangement" is defined in Section 2 of the Antitrust Law, as follows:

"2. (a) a restrictive arrangement is an arrangement between persons who conduct business, according to which at least one of the parties restricts itself in a way that may prevent or reduce the business competition between itself and some or all of the other parties to the agreement, or between itself and any person who is not a party to the agreement".

In addition to this wide definition, Section 2(b) specifies that any arrangement will be considered a restrictive arrangement, if it contains restrictions relating to any of the following:

"(1)           The price to be demanded, offered or paid;

(2)             The margin to be earned;

(3)             Division of the market, in whole or in part, by location or by persons or type of persons with whom business is conducted;

(4)             The quantity of assets or services in a business, their quality or type".

 

The presumptions specified in Section 2(b) have been interpreted by the Supreme Court as conclusive presumptions.{C}[6]{C} Until recently, according to the accepted interpretation, Section 2(b) of the Law has also been applied to vertical arrangements, i.e. arrangements between entities that operate in different stages of the supply chain.{C}[7] This means that many vertical arrangements, including any arrangement involving vertical price maintenance, were conclusively presumed, under Section 2(b)(1) of the Law, to be restrictive agreements, which are prohibited unless permitted via one of the mechanisms prescribed by law.

Over the years, there was a growing consensus in the professional literature that Section 2(b) should not be applied as is to vertical arrangements.{C}[8]{C} As the base of this view is the understanding that the accepted interpretation of Section 2(b) of the Law precludes many arrangements that are made every day in the market, that do not raise any competitive concerns, and in many cases even contribute to competition and consumer welfare. In 2004, the Supreme Court raised the possibility of not applying the conclusive presumptions specified in Section 2(b) to vertical arrangements, but the issue remained unresolved.{C}[9]

Over the years, a substantial number of vertical arrangements have been approved by the Antitrust Commissioner (hereinafter: "the Commissioner") as part of various block exemptions that have been established over the years under Section 15A of the Law, and subject to their terms. In particular, block exemptions have been established regarding exclusive acquisition agreements,{C}[10]{C} exclusive distribution agreements,{C}[11]{C} franchise agreements{C}[12]{C} and arrangements whose harm to competition is immaterial.{C}[13]

In 2013, the Commissioner published the Block Exemption for Arrangements between Non-competitors, according to which parties to non-horizontal arrangements that do not involve price maintenance are exempt from the requirement to receive court approval for such arrangements, provided that the arrangement meets the terms specified in Section 14(a) of the Law regarding the authority of the Commissioner to issue exemptions.{C}[14] The actual result of the block exemption for arrangements between non-competitors is to apply a "self-assessment" regime to most vertical restrictions. Nevertheless, RPM arrangements were specifically excluded from the block exemption, and therefore their status according to the accepted interpretation was similar to that of horizontal arrangements: prohibited, unless a specific permission had been obtained.

In 2015, the change in the legal treatment of vertical arrangements was completed with the judgement of the Supreme Court in the Shufersal case, which determined that, as a rule, vertical arrangements should be examined in accordance with Section 2(a) of the Law, rather than in accordance with Section 2(b).

As part of its judgement, the Supreme Court differentiated between vertical and horizontal arrangements, in terms of their frequency, the concern they raise of harming competition, and their potential competitive benefits. As the honorable Judge Hendel explained, the aim of the conclusive presumptions, according to the explanations to the Law, is to identify cases where "the consequence of an arrangement between parties is unquestionably to reduce competition"{C}[15] – a presumption that is not necessarily founded in the case of vertical arrangements. The Supreme Court also found that vertical arrangements may actually contribute to competition and social welfare, so that the application of Section 2(b) to such arrangements may not serve the aims of the Law. In the words of the Deputy President, the honorable Judge Rubinstein:

"As the literature and foreign rulings show, prohibition per se – which is in effect the result of applying the conclusive presumptions specified in Section 2(b) – of vertical arrangements may diminish social welfare and therefore miss the goals that the Antitrust Law was intended to protect".{C}[16]

The Supreme Court determined therefore that, as a rule, vertical arrangements should be examined in accordance with their possible impact on competition under Section 2(a). In other words, vertical arrangements that do not prevent or reduce competition shall no longer be classified as restrictive arrangements, even if they contain provisions related to issues specified in Section 2(b).

As will be shown later, this ruling also applies to RPM arrangements, which by their nature relate to product price. Accordingly, as a rule, Section 2(b) of the Law should not be applied to these arrangements. The classification of these arrangements depends therefore on the results of an individual examination of their impact on competition, in accordance with the standards specified in Section 2(a) of the Law. The aim of this public statement is to explain how RPM arrangements are examined by the Antitrust Authority and the complexity of such examinations, and to clarify that RPM arrangements will be examined by the Authority more severely than other vertical arrangements.{C}[17]

To complete the picture, a dispute arose between Judge Rubinstein and Judge Hendel, which was not resolved by the judgement, as to whether to allow an option to apply the conclusive presumption specified in Section 2(b) to "extremely irregular" vertical arrangements.{C}[18]{C} Still, even according to the position that such an option should be allowed, the arrangements referred to by the Supreme Court were not necessarily RPM arrangements.{C}[19]

3.     RPM Arrangements Related to the Retail Sector

This chapter will analyze RPM arrangements between a supplier and a retailer or other entity that markets products directly to the final purchaser (hereinafter: "retailer"), while next chapter will deal with arrangements between a supplier and an entity that does not sell products directly to the final purchaser (hereinafter: "distributor").

Before we begin, we will clarify that this chapter will focus on arrangements between a supplier and a retailer that sells products to private consumers. Most of the analysis in this chapter is also relevant to a retailer that sells products to final purchasers who are not private consumers (such as selling an industrial input or selling to the institutional sector), mutatis mutandis. The exception to this is a case in which a retailer sells the products subject to the arrangement to final purchasers (who are not private consumers) subject to an exclusivity arrangement between it and the supplier. In this case, the RPM between the retailer and the supplier is more similar, in terms of the concerns it raises and the benefits it might achieve, to an arrangement with a distributor, and so should be examined according to the principles in Chapter 4 below. Similarly, when there is a consignment arrangement between a supplier and a retailer, including a retailer that sells to private consumers, this will generally not be seen as an RPM, since in essence, the supplier is the owner of the goods being sold to the consumer, as will be expanded in Chapter 4.

1.      {C}Intra-Brand Competition Versus Inter-Brand Competition

For the purpose of analyzing the impact of RPM arrangements on competition, it is important to differentiate between intra-brand competition and inter-brand competition. Inter-brand competition exists when different products or services provided by different suppliers are close substitutes for one another. In contrast, intra-brand competition relates to the competition in the marketing of products from the same supplier. Intra-brand competition may be found, for example, in the competition between retailers or distributers over the price of a product to the end consumer or over the provision of accompanying services (such as demonstrations, employment of salespeople or investment in presentation or advertisement).

By its nature, an RPM arrangement relating to the retail sector limits intra-brand competition in this sector, and may set a higher price for consumers for the products under the arrangement than without such RPM arrangement. Yet the analysis of the impact of an RPM arrangement on competition in the retail sector and its impact on social welfare does not end with the examination of its impact on intra-brand competition. On the contrary: with regards to vertical arrangements, including RPM arrangements, it is necessary to consider the impact of such arrangements on inter-brand competition, and in turn, on product quality and availability, the quality and quantity of accompanying services provided and the ability to introduce a product into the market, when the position of such a product before the arrangement is not well established (in particular new products).

2.      {C}Competitive Concerns

As a rule, RPM arrangements that relate to the retail sector raise competitive concerns primarily when high market concentration exists in the supplier sector, the retail sector, or both, as explained below.

Concern of facilitating coordinated equilibrium in the supplier sector

In the supplier sector, an RPM arrangement may facilitate and help maintain a coordinated equilibrium. With no RPM arrangement, suppliers set only the wholesale price, and cannot set the retail price. Since wholesale prices are not generally transparent to suppliers competing with one another, this makes it more difficult for suppliers to stabilize a coordinated equilibrium related to wholesale prices. 

RPM arrangements, in which a supplier dictates a fixed price for retailers, make it easier to reach a coordinated equilibrium between suppliers, since they diminish the diversity of retail prices. The transparency of retail prices to the supplier's competitors makes it easier, in turn, to reach a coordinated equilibrium between suppliers, and to identify deviations from this equilibrium, which makes the equilibrium more stable.

The use of retail price transparency to enforce coordinated equilibrium between suppliers, which is made possible by the RPM arrangements, may also reduce the incentive of suppliers to deviate from the equilibrium by reducing wholesale prices. Such a deviation from the coordinated equilibrium between suppliers by reducing wholesale prices, may be beneficial as far as the retailer discount is rolled over to the consumer in a way that increases demand for a product and increases sales, or when the retailer increases its acquisitions from the supplier, so that the supplier benefits. Fixing retail prices as part of an RPM arrangement and their transparency may mean that lower wholesale prices will not, in themselves, result in lower retail prices, i.e. will not be rolled over to the consumer. Under such circumstances an increase in sales is not expected.{C}[20]

The concern of facilitating a coordinated equilibrium becomes more acute when the proportion of products in the relevant market covered by RPM arrangements increases. The concern also becomes more acute when the conditions of the market in which the RPM arrangements exist increase the likelihood of the existence and maintenance of such an equilibrium.{C}[21]{C}However, it should be noted that a high proportion of coverage may also indicate that this is a market and a product the characteristics of which raise concerns of market failures which the RPM arrangements are intended to solve, as we will expand below. 

Concern of diminishing the incentive of retailers to restrain the market power of a dominant supplier

RPM arrangements may, under certain circumstances, facilitate the exercise of market power by a dominant supplier, as they may diminish the incentive of strong retailers to utilize their bargaining power to restrain the supplier. When there is a dominant supplier operating opposite a number of strong retailers that compete with one another, RPM arrangements between the supplier and the retailers may support an equilibrium that allows suppliers to maintain a higher price level for their products than if there was competition between these retailers, in terms of price to consumer.{C}[22]

The impact of RPM arrangements under such circumstances is based on the following economic mechanism: the more bargaining power the strong retailers in such a market have towards the supplier, the more they are able to use this power to receive discounts on the wholesale price, in order to increase their ability to compete with other retailers and enlarge their market share at the expense of competing retailers by lowering consumer prices.{C}[23]{C} In such a scenario, sometimes there is a mutual incentive for both supplier and retailers to reach an agreement that will soften competition in the retail sector. By fixing consumer prices, an RPM arrangement with retailers prevents them from rolling the discounts they receive on wholesale prices over to consumer prices, and therefore reduces the incentive of retailers to demand discounts from the supplier in the first place. Reducing the incentive of retailers to demand discounts that would result in lower consumer prices increases the overall profit of the supplier and retailers at the expense of consumer welfare, and, in particular, contributes to the ability of a dominant supplier to exert market power towards consumers.{C}[24]

This concern related to RPM arrangements exists in cases when inter-brand competition is weak, allowing a supplier to increase its profit by raising prices (as compared to the price without the RPM).

Concern of facilitating coordinated equilibrium in the retail sector

In certain cases, RPM arrangements may assist retailers who are interested in reaching a coordinated equilibrium between themselves without resorting to prohibited horizontal coordination. This is possible in two main ways: firstly, the mutual supplier serves as an "enforcer" to identify deviations from the coordinated equilibrium and enforce their correction; secondly, the mutual supplier may make it harder for enforcement agencies to identify the illegitimacy of the arrangement and its obvious horizontal aspects by providing a "cover" of legitimacy to an arrangement that has no pro-competitive benefit.{C}[25]

As a rule, suppliers do not have an incentive to help retailers reach a coordinated equilibrium, since that is expected to lead to a reduction in demand , and in turn, to a reduction in the supplier's profitability. Given that, the concern of facilitating a correlated equilibrium increases in one of the following cases: the supplier itself has an anti-competitive incentive to embrace such an arrangement, since it is interested in creating or maintaining a coordinated equilibrium in the supplier sector, as expanded in the first concern above; or it is a dominant supplier interested in exercising its market power, as expanded in the second concern above; or the retailers or distributers are dominant and the supplier is relatively weak and dependent on them. In this last scenario, RPM arrangements will be effective in limiting competition, primarily when parallel RPM arrangements exist with other suppliers. Otherwise, consumers may begin to purchase competing brands from suppliers that are not parties to the RPM arrangement.{C}[26]

We will examine a hypothetical case, where Purim costumes are marketed by two large toy chains. The chains do not want to compete over the price of costumes. However, reaching a horizontal arrangement between them is legally very risky. On the other hand, any attempt to reach an tacit coordinated equilibrium, without an explicit arrangement, is economically very risky. This is because the period of demand for costumes is short, so that a chain that advertises lower prices is expected to gain a large share of the sales, at the expense of the other chain, before the other chain can respond with its own price reduction. In such a case, an RPM arrangement between each chain and the leading costume manufacturer (or with a large portion of costume manufacturers, if no one leading manufacturer exists), may allow the chains to overcome such difficulties and reach the desired coordination: the mutual supplier (or suppliers) could respond to deviations from the coordinated equilibrium by contractual means, and at the same time, the arrangement would have the appearance of an "innocent" vertical arrangement, with lower legal exposure.

Concern of undermining the ability of small suppliers or retailers to compete

In certain circumstances, RPM arrangements may raise a unilateral concern of preserving the market power of a dominant supplier by foreclosing smaller competitors. Suppose there is a dominant product which is marketed by a number of competing chains, and then a new competing product is introduced to the market. Without an RPM arrangement, the new product will be sold for a competitive price, which is lower than the price of the dominant product, so that some of the demand for the dominant product will be diverted to the new product. But if an RPM arrangement exists regarding the dominant product, retailers benefit from a higher margin on the dominant product than on the new product. Under these circumstances, the retailers' incentive to market the new product may be diminished. The RPM arrangement can thus assist a dominant supplier in preventing competition in the retail sector from other suppliers.{C}[27]

In addition to the concern of harming the competitive ability of suppliers attempting to compete with a dominant supplier, RPM arrangements may also raise a concern of undermining the competitive capability of small and efficient retailers, or raising entry barriers preventing such retailers from penetrating into the market. The reason for this is that the RPM arrangement establishes a minimum consumer price and limits the ability of efficient retailers to roll the savings achieved by their efficiency over to the end consumer through a lower price. This concern arises when RPM arrangements cover a high proportion of both the supplier sector and the retailer sector.{C}[28]

3.      {C}Pro-Competitive Justifications

Alongside the concerns described above, RPM arrangements can sometimes improve the accompanying services provided to consumers by a distributer . This is true, for example, when an RPM arrangement helps to solve the "agency problem" caused by the difference in interests of a supplier and the retailers or distributers that sell its products. The agency problem arises when the decisions of a retailer or distributer affect the profits of the supplier without the retailer or distributer internalizing these effects. Thus, for example, the decisions of a retailer regarding its investment in sales promotion and provision of accompanying services to the end customer may influence the demand for products, while the resulting profits are divided between the retailer and the supplier.

In some cases, the agency problem will cause the retailer to invest too little in providing accompanying services to consumers, which harms inter-brand competition and consumer welfare. This problem becomes more acute when a "free rider problem" exists. A "free rider problem" in this context exists when one retailer can benefit for free from the investments of another competing retailer in providing accompanying services.{C}[29]

To demonstrate, let us assume that a supplier is interested in marketing washing machines through electrical appliance stores. Marketing washing machines requires investment in a display floor with professional salespeople who can explain and demonstrate the use and unique advantages of the products to consumers. Marketing washing machines often also requires the retailer to provide after-sales services. These investments allow consumers to choose the right machine for them and derive the maximum benefit from it, and therefore may increase demand.

However, this investment is not necessarily worthwhile for the electrical appliance store, since its profit margin from selling each machine may be small. A situation may therefore arise in which the electrical appliance store does not profit at all, or does not profit enough, from the required investment in additional display areas, additional salespeople and additional service personnel. In contrast, for the supplier such an investment may increase sales and is therefore very worthwhile. That is the agency problem.

In addition, the store owner may be concerned that someone could open a small warehouse next door to him, with no display floor or salespeople, just a single employee and packaged machines. Thanks to its lower costs, the warehouse could offer the washing machines at lower prices than the nearby appliance store. The store owner may be concerned that consumers would use his display floor to examine the various models of washing machines and get advice and demonstrations from the salespeople, and then go to the warehouse next door to purchase the machine. Naturally, a similar concern exists in relation to online stores, which need to invest less in certain accompanying services, such as setting up physical display areas. In this situation, the incentive of the store owner to invest in salespeople is diminished, and in turn, so is the ability of customers to learn about various products and enjoy demonstrations. That is the free rider problem.

Under such circumstances, a supplier may wish to establish an RPM arrangement with all distributers, in order to prevent the agency and free-rider problems. RPM arrangements, in this case, benefit consumers by encouraging investment in marketing and accompanying services, which in turn, increases the consumer benefit from the machines and increases inter-brand competition.

Another example of the possible pro-competitive benefits of RPM arrangements is the case of the introduction of a new product into the market. Let us assume, for example, that a certain supplier is interested in entering the washing machine market by launching a new brand of washing machines. Since this brand is unknown to consumers, its introduction may require special investment by the electrical appliance stores to promote its sales, beyond the investment required in the case of more familiar brands (such as displaying the new machines at a prominent location in the store, instructing salespeople to recommend the new product, etc.). Without an RPM arrangement, the profit of retailers from the sale of these new washing machines may not justify this special investment. In this case, an RPM arrangement may help close the gap between the interests of retailers and the interests of the supplier of the new product, in a way that encourages adequate investment by retailers in introducing the new product, and therefore improves inter-brand competition.

4.      {C}Examining RPM Arrangements in the Retail Sector

In order to classify a RPM arrangement regarding retail pricing as a restrictive arrangement, two cumulative aspects should be examined:

The first aspect relates to the possibility of harming competition as a result of a low level of competition in the supplier or retail sectors. In order to assess this aspect, the characteristics of the relevant market should be examined, in both the supplier and retail sectors.

The impact of the RPM arrangement on the likelihood of a coordinated equilibrium existing and being maintained should be examined in both sectors, including considering the number of players and the level of concentration in each sector, the coverage of RPM arrangements in each sector and the existence of barriers to market entry or expansion. In addition, the market share and market power of the supplier party to the arrangement should be examined. Generally, in markets with a low level of inter-brand competition, due to a small number of suppliers or a non-competitive equilibrium between suppliers, the RPM arrangement is liable to harm competition, and therefore is considered a restrictive arrangement.

The second aspect relates to the existence or absence of a pro-competitive benefit from the arrangement. If an RPM arrangement has no clear and direct pro-competitive benefit, the Authority will consider it a restrictive arrangement.

As a rule, the Authority is willing to recognize the pro-competitive benefits described above – encouraging retailers to invest in the promotion of products through accompanying services (demonstrations, salespeople, a wide display, investing in advertisement, etc.), especially in the case of launching new products, while preventing and minimizing the agency and free rider problems described above. Accordingly, the more that the nature of the product and the inter-brand competition require investment in accompanying services by retailers, the more willing the Authority will be to recognize the benefits of an RPM arrangement to inter-brand competition. This conclusion will be supported by evidence of actual agency or free rider problems. It should be emphasized that, in order to justify pro-competitive benefits, concrete evidence must be given that the RPM arrangement actually improved or will improve accompanying services or that there is a concrete plan for such improvements as a result of the RPM arrangement; in this regard, general statements about encouraging retailers to provide better service or increase their investments are not enough.

The IAA will also tend not to take enforcement steps regarding RPM arrangements relating to what are clearly luxury goods – goods the nature of whose use indicates that the consumer is not price sensitive or that he wishes to purchase them specifically because of their high price.

Regarding the scope of the coverage of the RPM arrangement of each of the sectors, a high or low proportion of coverage may be weighed in two directions: on one hand, the higher the proportion of coverage of RPM arrangements in one or both sector, the greater the concerns of facilitating a non-competitive equilibrium, as explained above. On the other hand, wide RPM coverage may also indicate that the characteristics of the relevant market require RPM arrangements in order to overcome agency problems and free-rider problems as explained above. Therefore, the effect of scope of coverage on the intensity of the competitive concerns and the pro-competitive benefits will be determined in each case according to its specific circumstances.

These two aspects are cumulative conditions for the approval of an RPM arrangement: only an arrangement in a sector where sufficient competition exists, which is additionally required to promote competition and benefit consumers, will be considered as an arrangement that does not prevent or harm competition. The more the market's characteristics indicate a lesser degree of competition in the market, the more it will be required to show a clear and significant justification, that derives in a direct and concrete manner from the RPM arrangement, in order to tip the scales towards the conclusion that the arrangement does not raise concern of harming competition but rather its overall outcome actually to improve competition.

4.     {C}RPM Arrangements outside the Retail Sector

As mentioned above, the analysis given above is related to arrangements between suppliers and retailers or other entities that market products to final purchasers. When an RPM arrangement exists between a supplier and a distributor, the analysis of the RPM arrangement will depend on the nature of the relation between the supplier and the distributer, as will be explained below.

We shall first clarify that the analysis presented in this section is only relevant to arrangements between a supplier and a distributer that serves as an independent intermediary link between supplier and retailer. RPM arrangements between a distributer and a retailer are the same as arrangements between suppliers and retailers and should be analyzed in accordance with the principles specified in the previous section. In addition, if the distributor is a current or potential competitor in terms of manufacture of the goods, then the arrangement has horizontal aspects that are beyond the scope of this document.

An important difference between supplier-distributer arrangements and supplier-retailer arrangements relates to the level of price transparency in the relevant sector. The concern of harming competition between suppliers due to a coordinated equilibrium is mostly relevant when an RPM arrangement relates to retail prices, because of their level of transparency to other competing suppliers. This concern is not equally raised by an RPM arrangement that relates only to wholesale prices, as they are generally not transparent to competing wholesalers.

Considering the different roles that a distributer may occupy within the supply chain, two aspects of the nature of the relations between supplier and distributer should be examined:

First, the distribution of risks between the supplier and the distributer should be examined. There exist a wide spectrum of possibilities: at the one end are consignment arrangements, in which all risks related to the marketing of products are borne by the supplier, and the distributer acts only as a tool for sales; and on the other end are arrangements in which the supplier sells its goods to the distributer and then is completely out of the picture, so that responsibility to market, promote and sell the products rests entirely upon the distributer, and the distributer alone bears the results of its success or failure.

The greater the share of the risks involved in the sale of products assumed by the supplier,  this indicates that the distributer is not acting as an independent decision-maker, and in this sense is not an commercially or competitively significant factor in the supply chain.{C}[30]{C} In such a case, it is only logical that the supplier should make the business decisions regarding the conditions of the sale – including the price.{C}[31] Therefore, as a rule, an RPM arrangement between a supplier and a distributer shall be considered legitimate if the supplier assumes most of the risks involved in the marketing of the products.

On the basis of this reasoning, the block exemptions for exclusive acquisition agreements and exclusive distribution agreements also allow RPM arrangements with an exclusive agent, provided that such agent is not an "independent agent" (see Section 4A(b) of each block exemption). For this matter, "independent agent" is defined as an agent "that is a party to an exclusive agency agreement the execution of which requires it to make investments that are significant and specific to the agreement or to assume risks that are significant and specific to the agreement."

Second, it should be examined whether the distributer acts as the "long arm" of the supplier, in the sense that the distributer is in any case not expected to contribute to intra-brand competition in the supplier sector. A distributer will be considered as the long arm of a supplier when mutual exclusivity exists between the supplier and distributer regarding marketing and distribution, as well as in other cases (such as exclusive distribution only). In such cases, intra-brand competition in the marketing and distribution sector is in any case highly limited; therefore, assuming that the exclusivity arrangement does not harm competition, the RPM arrangement is not expected to have any additional negative impact.{C}[32]

Therefore, an RPM arrangement with a distributer that does not sell to end consumers is not a restrictive arrangement, if the supplier assumes most of the risks involved in the marketing of the products, or if the distributer acts as the long arm of the supplier.

5.     {C}Other Vertical Price Maintenance Arrangements

So far we have focused on minimum or fixed RPM arrangements between suppliers and retailers or distributers. In this section we will briefly address a number of other related cases:

Price recommendation

Instead of entering into an RPM arrangement, a supplier may recommend a price for its products to retailers or distributers. Such a recommendation in itself does not raise competitive concerns, provided that it is a "pure" recommendation – i.e. a recommendation that is not the result of an explicit or implicit agreement between the parties, which the retailers or distributers are free to deviate from and are not likely to refrain from doing so. If any indication exists that a "recommendation" is not really a recommendation, but rather price maintenance in disguise, then it is no different than any other RPM arrangement and should be examined in accordance with the principles described above.

In order to determine if a recommendation is "pure" or price maintenance, the first thing to examine is the ability to deviate from the recommendation in practice; clear indications that retailers or distributers allow themselves to deviate from the recommended price will support the conclusion that it is only a recommendation. On the other hand, incentives or conditions by the supplier or unequal power relations biased in favor of the supplier, such that the retailers would not dare to deviate from the recommendation, will indicate that the "recommendation" is a recommendation in name only. Since the impact of a recommendation on the freedom of decision of retailers or distributers in practice may change, the recommendation, degree of deviation from it and the ability to deviate from it, should be examined from time to time.

Maximum RPM arrangement

In addition to RPM arrangements that establish a minimum price, whether by establishing a fixed price (fixed RPM) or by establishing a minimum price only (minimum RPM), a supplier may enter into an agreement with retailers or distributers that only limits the maximum price consumers may be charged for products (maximum RPM). As a rule, such arrangements do not raise the competitive concerns described in Chapter C.2 above.

A maximum RPM arrangement can be used by a supplier to solve the "double marginalization" problem that may be caused by the difference in interests between supplier and retailer: a supplier sells a product to a retailer at a price that maximizes its profit. The supplier would prefer that the retailer sell the product at the lowest possible price – i.e. at cost– in order to maximize the quantity of products sold, and in turn its profits. The retailer, on the other hand, would prefer to sell the product at a price that would maximize its own profits; if the product is not sold in a market with perfect competition, this price will be higher than the cost. This creates a double margin above the product manufacturing cost, which leads to a lower volume of sales than the supplier would have preferred. A maximum RPM arrangement may solve this problem by establishing a maximum price lower than the market price.

A maximum RPM arrangement may also protect consumers from the exercise of market power by a dominant retailer. To demonstrate, a vehicle importer may set a maximum price for vehicle parts sold in garages, in order to prevent the exercise of market power by a garage that is not restrained by competition from other garages in a given geographical area. In this example, restraining the power of such a garage may assist the vehicle importer in the competition in the vehicle market, when consumers also weigh the cost of parts when buying a new vehicle.

In light of the aforesaid, such arrangements will usually be considered economically efficient, since they do not limit competition.{C}[33] Nevertheless, the price established in a maximum RPM arrangement may sometimes serve in reality as a pricing focal point for all retailers or suppliers; in other words, a maximum RPM arrangement may become, de facto, a fixed RPM arrangement. It is therefore important to examine such arrangements periodically, in order to evaluate their actual economic nature and accordingly, their effect on competition.

6.     {C}Conclusion

Following the judgement in the Shufersal case, RPM arrangements are similar to other vertical restrictions: RPM arrangements are not automatically disqualified or classified in themselves as restrictive arrangements; their legality is to be examined in accordance with the concern of competitive harm that they raise. Nevertheless, the starting point for examining RPM arrangements is different than for most vertical restrictions, since the direct result of RPM arrangements is to limit intra-brand competition in terms of product price. Therefore, parties should enter into such arrangements related to the retail sector only when these two cumulative conditions are met: first, that the arrangement is not related to a market in which, due to its characteristics, little competition exists or there is a concern of collusion between players; and second, that the arrangement is required in order to promote inter-brand competition, in a way that benefits consumers. The more that the market characteristics indicate insufficient competition, the more it will be required to show a clear and significant justification that directly and concretely derives from the RPM arrangement. As for arrangements that are not related to the retail sector, such arrangements will be classified as restrictive arrangements in accordance with the nature of the relations between supplier and distributer, as explained above.

 

 

 

Michal Halperin

 

Director General of the Israel Antitrust Authority


{C}[1]{C} CA 5823/14 Shufersal Ltd. vs. the State of Israel (10/8/2015) Antitrust 500841 (hereinafter: "the Shufersal Case").

{C}[2]{C} The Antitrust Rules (Block Exemption for Non-Horizontal Arrangements that do not Include Price Restrictions), 5773-2013, Collection of Regulations 1549, Amended Collection of Regulations 5776 2255.

{C}[3]{C} The judgement left unanswered the question of whether to leave a narrow opening to allow applying the conclusive presumptions specified in Section 2(b) to extremely irregular vertical arrangements. Nevertheless, it seems that even according to the position that such an option should be allowed, the arrangements to which the Supreme Court referred were not necessarily RPM arrangements, as we shall see in the next section of this document.

{C}[4]{C} The aim of this public statement is to examine RPM arrangements in light of the Antitrust Law. The statement does not address the status of such arrangements in accordance with the Law for Promoting Competition in the Food Industry, 5774-2014, nor does it derogate therefrom.

{C}[5]{C} See, for example, the judgement in Criminal Case 1274/00 The State of Israel vs. Modgal (22/3/2010) Antitrust 5001595, stating: "I will say this here, that even if the defendants accurately describe the principle nature of the relation between Modgal and each one of them as a vertical relation, this is without a doubt only part of the picture and not the whole picture. The other, important part of the picture, regarding the alleged arrangements, is the horizontal relations between the distributers themselves…" (Paragraph 22, emphasis in original); and also the judgement in Criminal Case 1142/01 The State of Israel vs. Shulstein (2/11/2008) Antitrust 5001304, stating: "the arrangement which is the subject of the indictment is not only vertical. Its horizontal aspect is clear: the evidence shows, as specified below, that Tambour acted to protect the interest of "Tambour Shops", who also distribute the paints – and served in effect as its distribution network – and for this purpose acted to maintain prices between all chains. This created horizontal price coordination." (Paragraph 36, emphasis in original).

{C}[6]{C} ACD 4465/98 Tivol (1993) Ltd. vs. Chef-HaYam (1994) Ltd., Judgement 56(1) 56, 94-98 (2001), hereinafter: "the Tivol Case". See also, CA 4855/02 the State of Israel vs. Borowich, Judgement 59(6) 776; CA 845/02 the State of Israel vs. Tnuva Communal Center for Agricultural Produce Marketing for Israel Ltd., Judgement 62(2) 307; and more.

{C}[7]{C} In the Tivol Case, the Supreme Court determined in a majority decision that Section 2(b) applied to any arrangement specified in Section 2(b), and that the test was primarily a formalistic one. The judgement did not differentiate between horizontal and vertical arrangements. However, since the judgement in the Tivol case and other consequent judgements related to arrangements that were horizontal in nature, the issue of the application of the Tivol precedent to vertical arrangement was not clarified (see paragraph 62 of the opinion of the Hon. Judge Rubinstein in the Shufersal case). 

{C}[8]{C} See: David Gilo, "Should the Dam of Restrictive Agreements be Broken and the Flood of Ad-Hoc Limitations Blocked? It's Time to Differentiate between Vertical and Horizontal Arrangements" in TAU Law Review 27(3) (2004), p. 751 [Hebrew]; David Gilo & Y. Spiegel, "Vertical Arrangements" in Legal and Economic Analysis of the Antitrust Laws – Volume 1 323, 405-412 (5768-2008) [Hebrew]; David Gilo, "Changes in the Attitude towards Restrictive Vertical Arrangements" in The Law 13 (5769), 50 [Hebrew]; M. S. Gal, A. Israeli and M. Perlman, "Restrictive Arrangements – the Foundations of the Prohibition" in Legal and Economic Analysis of the Antitrust Laws 193, 290 (5768-2008) [Hebrew]; Michal Gal, "Separating the Wheat from the Chaff – the Extent of the Application of the Prohibition against Restrictive Agreements in accordance with Recent Judgements" in Din Udvarim A (5765) [Hebrew]. See also: Paragraphs 65-73 of the Hon. Judge Rubinstein's opinion  in the Shufersal case.

{C}[9]{C} CAP 6233/02 Extil Ltd. vs. Kalma-V Aluminium, Glass and Fitting Industry and Marketing Ltd. et al. Judgement 58(2) 635.

{C}[10]{C} Antitrust Rules (Block Exemptions for Exclusive Acquisition Agreements) (Temporary Order), 5761-2001, Collection of Regulations 668, last amended in Collection of Regulations 5776 2253 (hereinafter: "Block Exemption for Exclusive Acquisition Agreements").

{C}[11]{C} Antitrust Rules (Block Exemptions for Exclusive Distribution Agreements) (Temporary Order), 5761-2001, Collection of Regulations 669, last amended in Collection of Regulations 5776 2256 (hereinafter: "Block Exemption for Exclusive Distribution Agreements").

{C}[12]{C} Antitrust Rules (Block Exemptions for Franchise Agreements) (Temporary Order), 5761-2001, Collection of Regulations 672, last amended in Collection of Regulations 5776 2251.

{C}[13]{C} Antitrust Rules (Block Exemptions for Arrangements Whose Harm to Competition is Immaterial) (Temporary Order), 5766-2006, Collection of Regulations 796, last amended in Collection of Regulations 5776 2251.

{C}[14]{C} i.e. that the restrictions in the arrangement do not limit competition in a significant part of the affected market or else do not significantly harm competition in the affected market; that the essence of the arrangement is not to reduce or prevent competition; and that the arrangement does not involve unnecessary restrictions.

{C}[15]{C} The Antitrust Bill, 5744-1983 1647 p. 42, quoted in paragraph 5 of the honorable Judge Hendel's judgement.

{C}[16]{C} Paragraph 75 of the judgement.

{C}[17]{C} To complete the picture, this change in the view of Israel law towards vertical arrangements is similar to the change in the view of US law. In 1977, the US Supreme Court determined that vertical arrangements that do not restrict price should be examined in accordance with the rule of reason, and not with the presumption of illegitimacy (the per se prohibition) (Continental Television Inc. et al. v. GTE Sylvania Inc., 433 U.S. 36 (1977)). This precedent was also extended to include maximum RPM arrangements in 1997 (State Oil Co. v. Khan, 522 U.S. 3 (1997)) and minimum and fixed RPM arrangements in 2007 (Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007). In the judgement regarding Leegin, the US Supreme Court noted the various possible pro-competitive justifications for RPM arrangements, as will be discussed later. The Supreme Court recognized the competitive concerns that RPM arrangements may pose, but found that RPM arrangements do not "always or almost always" harm competition. For this reason, there is no room for a sweeping disqualification of such arrangements under the per se rule. Rather, the risks and benefits of any specific arrangement should be evaluated.

The view of the law in the European Union is more suspicious of RPM arrangements in comparison with US law, but it still leaves room to the examination of their contribution to competition. The block exemption established by the European Commission regarding vertical restrictions (Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJ L 102, 1 (23.4.2010)) excludes RPM arrangements. As the guidelines of the European Commission to the block exemption explain (SEC (2010) 411, (10.5.2010)), the meaning of the non-application of the block exemption is the presumption that such restrictions harm competition. It is also presumed that RPM arrangements fail to meet the conditions of Section 101(3) of the Treaty on the Functioning of the European Union (TFEU), which allows restrictive arrangements that contribute 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, subject to the conditions specified in the aforementioned section. Nevertheless, parties to an RPM arrangement have the right to claim that the RPM arrangement to which they are parties is beneficial to competition. In this case, the concerns of harming   competition and consumers as a result of the arrangement shall be examined against its benefits, in order to decide on the application of Section 101(3) of the treaty.

{C}[18]{C} In the words of the Deputy President, the honorable Judge Rubinstein, in paragraph 86 of his opinion, the suggested opening should be reserved for "extremely irregular [arrangements], that cannot be defined in advance in a closed list, in which the potential damage to competition is so obvious, while the positive economic benefit is very small, such that an actual examination of the possibility of competitive harm is unnecessary".

{C}[19]{C} As mentioned by Judge Rubinstein, the arrangement discussed in the Shufersal case had no other goal, competitive or other, other than harming the horizontal competition against Shufersal; as such, according to the position of Judge Rubinstein, the difference between this arrangement and a horizontal arrangement is minor. It seems, therefore, that when Judge Rubinstein suggested leaving an opening to examine particularly severe vertical arrangements in accordance to the conclusive presumptions specified in Section 2(b) of the Law, he did not necessarily mean RPM arrangements.

{C}[20]{C} For a discussion on this subject, see: OECD Roundtable on Resale Price Maintenance, DAF/COMP (2008) 37, Contribution by the European Commission, pp. 225-232 (hereinafter: "OECD Roundtable"). See also: https://www.oecd.org/daf/competition/43835526.pdf and Itai Paldor, Rethinking RPM: Did the Courts Have it Right All Along? (Thesis submitted in accordance with the requirements for the degree of SJD – Graduate Department of Law, University of Toronto, 2007) (Hereinafter: "the Paldor Paper"), pp. 121-126.

{C}[21]{C} See OECD Roundtable, p. 229. It should also be noted that this concern may not exist in the case of an entity that sells to a final purchaser who is not a private consumer, since the prices charged to such purchasers may not be transparent to other distributors and suppliers, or at least may be less transparent than the prices charged to private consumers.

{C}[22]{C}See the guidelines of the European Commission regarding vertical restrictions: EU Commission, Guidelines on Vertical Restraints, 2010/C 130/01, paragraph 48 (hereinafter: "the European Guidelines"), ¶ 224.

{C}[23]{C} An example for the bargaining power of a dominant retailer is given in the Paldor Paper, on p. 96, describing a scenario where a retailer is able to threaten a supplier with removing products from its shelves.

{C}[24]{C} See, among others, Daniel P. O'Brien and Greg Shaffer, Vertical Control with Bilateral Contracts, 23(3) RAND J. of Econ. 299 (1992).

{C}[25]{C} OECD Roundtable, pp. 23-58.

{C}[26]{C} See: Paldor Paper, pp. 58-61; OECD Roundtable, pp. 23-58 and 213-223.

{C}[27]{C} See in the EU Commission: Guidelines on Vertical Restraints, 2010/C 130/01 (hereinafter: "the European Guidelines"), 48 and 224; John Asker and Heski Bar-Isaac Raising Retailers' Profits: On Vertical Practices and the Exclusion of Rivals, 104(2) American Economic Review, 672 (2013), and Paldor article, pp. 240-253.

{C}[28]{C} See OECD Roundtable, 225-232.

{C}[29]{C} See OECD Roundtable, pp. 23-58.

{C}[30]{C} In light of this reasoning, a number of exemptions have been granted over the years regarding arrangements that include resale price maintenance in a consignment distribution relationship. See, for example, the decision regarding the exemption from a restrictive arrangement approval for the agreement between Danshar Ltd. and Agis Distribution and Marketing (1989) Ltd. and Denagis Ltd. (20/3/2001) Antitrust 3010585; decision regarding the exemption from a court approval for a restrictive arrangement between Diplomat Distributers (1968) Ltd. and Beit Zita Oil Industries (1999) Ltd. (23/8/2006) Antitrust 5000453; decision regarding the request for an exemption from a restrictive arrangement approval for the arrangement between Tempo Drinks Ltd. and Guri Consumer Products (1991) Ltd. (17/2/2008) Antitrust 5000777.

{C}[31]{C} For a discussion of the way risk distribution between supplier and distributer is examined and its effect on the competitive analysis of vertical arrangements, see: T-325/01 DaimlerChrysler AG v. Commission of the European Communities [2005] ECR II-3319. Even the European Guidelines, which are more strict regarding RPM arrangements, see room for different treatment of arrangements where a supplier sets the sale price for a distributer with whom it has an "agency agreement". Granted, the test in the Guidelines for classifying the relations between supplier and distributer as an agency agreement is a strict one, requiring that the Distributer assume no risk related to the marketing of products or assume only negligible risks. But the economic reasoning behind this approach is similar to the economic reasoning behind the position described here: according to the Guidelines, determining the terms of the sale of products, including the price, by a supplier, is in fact an inherent part of an agency agreement, required if the supplier is to assume the risks involved in the marketing of products, and therefore be in a position to determine the commercial strategy. In the words of the Guidelines: "The following obligations of the agent's part will be considered to form an inherent part of an agency agreement, as each of them relates to the ability of the principal to fix the scope of activity of the agent in relation to the contract goods or services, which is essential if the principal is to take the risks and therefore to be in a position to determine the commercial strategy:…the prices and conditions at which the agent must sell or purchase these goods or services". (p. 8 of the Guidelines).

{C}[32]{C} See the decision regarding an exemption from a restrictive arrangement approval for the arrangement between Diplomat Distributers (1968) Ltd. and Starkist Fodor Ltd. (31/7/2006) Antitrust 5000452.

{C}[33]{C} Provided that the maximum price is not a predatory price of a monopolist.