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VERTICAL RESTRAINTS OF DOMINANT

UNDERTAKINGS WHICH CREATE MARKET


FORECLOSURE

Barış Ekdi
Cambridge, 2003
© Barış Ekdi, 2003

UNIVERSITY OF CAMBRIDGE
FACULTY OF LAW

LL.M. THESIS 2003

BARIŞ EKDİ

GIRTON COLLEGE

VERTICAL RESTRAINTS OF DOMINANT UNDERTAKINGS


WHICH CREATE MARKET FORECLOSURE
© Barış Ekdi, 2003

This thesis is prepared for the University of Cambridge LL.M Program


of 2002-2003. I thereby thank to late Mr. Dan GOYDER, who
encouraged me on writing this thesis, and also Dr. Albertina ALBORS-
LLORENS for her fruitful lectures.
© Barış Ekdi, 2003

- in memory of Daniel G. Goyder


© Barış Ekdi, 2003

TABLE OF CONTENTS

INTRODUCTION ................................................................................................... 1

CHAPTER ONE
VERTICAL RESTRAINTS, FORECLOSURE AND MARKET POWER

1.1. Vertical Restraints .............................................................................................. 3


1.2. Foreclosure ......................................................................................................... 9
1.3. A Note on the Market Power ............................................................................ 19

CHAPTER TWO
THE UNITED STATES PRACTICE

2.1. Legal Framework .............................................................................................. 20


2.2. Leading Cases in the US ................................................................................... 22
2.3. Evaluating the US Practices ............................................................................... 29

CHAPTER THREE
THE EUROPEAN COMMUNITIES PRACTICE

3.1. The Legal Framework....................................................................................... 31


3.2. Leading Cases in the EC ................................................................................... 36
3.3. Evaluating the EC Practices.............................................................................. 44

CHAPTER FOUR
THE TURKISH PRACTICE

4.1. Legal Framework .............................................................................................. 45


4.2. Leading Decisions in Turkey ........................................................................... 47
4.3. Evaluating the Turkish Practice ........................................................................ 57

CHAPTER FIVE
COMPARISON AND CONCLUSION

5.1. The Theory of Foreclosure ............................................................................... 59


5.2. Elements to be assessed in identifying foreclosure .......................................... 60
5.3. Differences between the US, the EC and Turkish practices ............................. 63
5.4. Does being dominant make a difference? ......................................................... 67

TABLE OF CASES & DECISIONS ........................................................................ 69


BIBLIOGRAPHY ................................................................................................. 70
© Barış Ekdi, 2003

INTRODUCTION

Ronald [Coase] said he had gotten tired of antitrust


because when the prices went up the judges said it was
monopoly, when the prices went down they said it was
predatory pricing, and when they stayed the same they
said it was tacit collusion .

The competition law distinguishes vertical restraints from horizontal ones, pointing

out that they may increase consumer welfare by creating efficiencies. On the other

hand, there is no consensus among scholars of economics and law regarding the

negative effects of the vertical restraints. According to the Chicago School, vertical

restraints should be lawful per se, because they only increase consumer welfare, and

they do not have any anticompetitive effects. Nevertheless, other scholars defend the

rule of reason approach, demonstrating that dominant firms may use vertical

restraints strategically to foreclose the market. On these grounds, the concept of

“foreclosure” is important in the assessment of vertical restraints.

It is also known that most of the theoretical debates in economics are founded on

assumptions that limit the application of these theories to the real world of law and

policies. Therefore, despite the fact that the theory focuses on dominant firms and

strategic use of vertical restraints, it can be seen that in some jurisdictions the

concept of “foreclosure” extends beyond the theory by covering non-dominant firms.

William LANDES, "The Fire of Truth: A Remembrance of Law and Econ at Chicago", JLE (1981) p. 193.

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Hence, it is important to study the positions of dominant and non-dominant

undertakings in the light of the theory and case law. For example, even though the

theory emphasizes the market power and strategic intention, case law usually

associates foreclosure with the “horizontal effect” of the networks of vertical

restraints that are employed by several firms; and thus shades the consistency. Thus,

the aim of this paper is to demonstrate the relevance of being dominant in creating

foreclosure via vertical restraints.

Therefore, the first chapter is devoted to the vertical restraints and foreclosure theory,

which shows that firms can prevent market access by exclusive contracts (or other

restraints, such as quantity forcing), or tying. However, in order to limit the scope of

this paper, the case law concerning tying will not be discussed in the subsequent

chapters.

The second chapter focuses on the United States, where the foreclosure doctrine was

born and flourished following the theory of economics. The shifts in the US case law

are also important to highlight the difference between the theory and the practice.

The European Communities case law, which pursues market integration, freedom of

market access and consumer welfare at the same time, is studied in the third chapter.

The fourth chapter examines the Turkish practice, since it involves two significant

cases that are important to demonstrate the foreclosure capacity of dominant firms,

and foreclosure through vertical restraints on complementary products.

The last chapter is reserved for conclusion, in addition to comparison of the

practices, identifying the elements that are to be taken into consideration in the

assessment of foreclosure, and the relevance of dominance in the light of the case

law.

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CHAPTER ONE

VERTICAL RESTRAINTS, FORECLOSURE


AND MARKET POWER

1.1. Vertical Restraints

Knowing how to make a product and making that product are not enough for a firm

to survive in the market. Firstly, the firm has to obtain raw or intermediate materials

or components that are required to manufacture the product in question. Secondly, it

has to organize the machinery and human resources for production, and finance its

operations. Thirdly, it has to find customers to buy its products and get its products to

these customers.

The functions of obtaining inputs, manufacturing the products and getting them to

the customers also link several markets vertically. Therefore, a firm may choose to

perform in these markets, either expanding its business to these markets directly (or

by founding subsidiaries), or merge with or acquire the firms that are extant in those

markets. The latter option is usually subject to ex-ante examination on certain

conditions by the competition authorities.

Another choice could be making agreements with the independent firms existing in

these markets. In this case, the firm can sell its products to a wholesaler or to an

appointed distributor to reach the customers, or sign contracts with the input

suppliers to meet the materials necessary for its production. These agreements made

with the firms in upstream and/or downstream markets are generally known as

“vertical agreements”. In cases where these agreements involve some restrictions on

one or both of the parties, they may be subject to the competition law, depending on

the nature and the effect of the restraint(s).

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The firm may choose one or all of the methods mentioned above. For example, if the

firm expands, costs of organizing additional transactions will rise or the entrepreneur

may fail to maximize the utility of the resources, and at a certain point, it may be

more profitable for a firm to carry out the transaction in the open market: Hence, it is

expected that the firm will adopt the most efficient way (Coase, 1988:43). Korah and

O'Sullivan (2002:4) give other examples: Manufacturers may prefer local dealers that

are familiar with local conditions to cope with regional problems; small firms may

not find enough resources to expand their business into other markets; or different

regulations in different countries may play a decisive role.

Like any other agreement, these agreements put some obligations and restraints on

the parties to avoid opportunistic behaviour, or to capture positive externalities, or to

avoid negative externalities (Dobson and Waterson, 1996:8). In addition, it should be

stressed that, vertical restraints are not limited to distribution level, and they can also

be seen widely in the input supplier-manufacturer relationship. Hence, a vertical

restraint may be defined broadly as

an agreement relating to the supply of goods or services between undertakings which


operate at different stages of the production chain (for example, manufacturing,
retailing, wholesaling, distribution, input supply, etc.), and which imposes
restrictions on the commercial freedom of at least one party that go beyond the spot
exchange of a certain quantity at a fixed price per unit… (Hughes, 2001:424)

leaving a controversial area for both scholars of economics and practitioners of

competition law.

On the one hand, as summarized below in Bork‟s (1993:297) words, the Chicago

school of thought defends that the vertical restraints should be legal per se, because

…vertical price fixing (resale price maintenance), vertical market division (closed
dealer territories), and, indeed, all vertical restraints are beneficial to consumers and
should for that reason be completely lawful. Basic economic theory tells us that the
manufacturer who imposes such restraints cannot intend to restrict output and must
(except in the rare case of price discrimination, which the law should regard as
neutral) intend to create efficiency. The most common efficiency is the inducement
or purchase by manufacturer of extra reseller sales, service or promotional effort.

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Basic argument of Chicago is that, since the parties to the agreement are not rivals,

but producers of “complementary” goods and services, they will have no interest in

raising the price of the complementary product, as this will decrease the demand for

their own product. So, a manufacturer accepts a vertical restraint only in case of an

offsetting efficiency justification (Hughes, 2001: 425).

In contrast, Comanor (1985:989) questions Bork‟s argument asking, “whether the

increase in services is worth the increase in the price of the product” after the

imposition of vertical restraints. Some scholars, namely Comanor and Frech (1985

and 1987), Krattenmaker and Salop (1986a), Aghion and Bolton (1987), Mathewson

and Winter (1987), Rasmusen et.al, (1991), Rey and Tirole (1997), Bernheim and

Whinston (1998), and Simpson and Wickelgren (2001) examine exclusivity clauses

(non-compete obligations) in various economic models with different assumptions,

while the others, like Mathewson and Winter (1984 and 1988), Rey and Tirole

(1986), and Waterson (1998) focus on resale price maintenance (RPM) and exclusive

territories. Jullien and Rey (2000) and Krattenmaker and Salop (1986b) study

collusion-facilitating effects of vertical restraints that result in high prices. All of

them state their objections to per se legality of vertical restraints, favouring a rule of

reason approach.

Furthermore, in one of their studies, Rey and Stiglitz (1995: 446) take part at the

other end of the scale suggesting “a policy in which vertical restraints should be

considered presumptively illegal, unless there can be shown to be significant

efficiency-enhancing effects (a) that could not be obtained (at reasonable cost) in

other ways, without the ensuing anticompetitive effects, and (b) that outweigh any

anticompetitive effects.”

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Likewise, Neven et al. (1998:21-25) give three reasons against Chicago‟s conclusion

of per se legality: First, a vertical contract harms third parties (consumers,

competitors or potential entrants to the industry) driving the rivals out or preventing

market access, or secondly, certain types of contracts can be found to be illegal,

because of hold-up problems (related to relation-specific investments) that lead to the

exploitation of one of the parties, and thirdly, if one of the parties has market power,

vertical restraints may result in inefficiency harming the consumers.

Considering the fact that most of the theoretical debates in economics have some

assumptions which limit the application of these theories to the real world of

policies, we will focus on certain kinds of vertical restraints that are directly related

to the aim of this paper. However, in order to set the framework of this paper, it

might be useful to identify the types of vertical restraints, their benefits and

anticompetitive effects.

1.1.1. Types of Vertical Restraints

Although there is no consensus on the number of types of vertical restraints, this is of

no importance. Vertical restraints can broadly be divided into two groups, as price-

related vertical restraints and non-price vertical restraints at first sight. In the earlier

periods of competition law practices all the price-related restraints were deemed to

be illegal per se, but later on maximum or recommended prices are allowed. Also a

certain degree of substitution between these two categories is widely accepted in

economics1.

Dobson and Waterson (1996:5) list vertical restraints as follows:

1
For example, see Matthewson and Winter (1984 and 1988) and Rey and Stiglitz (1995:937) on the
substitution between price restraints and territorial restraints.

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Table 1 – Types of Vertical Restraints

Form Examples

Two-part tariff with a franchise fee plus a constant per-unit charge.


Non-linear Pricing Aggregated rebate scheme with discounts for taking full product
range.

A specified minimum quantity the retailer is required to distribute;


Quantity Forcing
e.g. beer sales in tenanted public houses.

A specific level of pre- and post-sales service or promotional


Service Requirements effort.
Using trademark equipment; e.g. fast-food franchises

Resale Price Maintenance Retail price fixed by the producer; e.g. the book market
[RPM] A price floor or price ceiling

Selective distribution limiting the number of distributors; e.g. fine


Refusal to Supply
fragrances

Distributor assigned exclusively within a geographic area or over a


Exclusive Distribution
particular class of consumer goods; e.g. newspaper distribution

The retailer is prohibited from dealing stocking competing; e.g.


Exclusive Dealing
petrol retailing

Distributors contractually required to take other products, or even,


Tie-in Sales
with full-line forcing, an entire product range.

Neven et al. (1998:26-27) assess vertical restraints in three main categories: (i)

Price/quantity restrictions such as RPM, minimum or maximum price settings and

quantity forcing. (ii) Restrictions on substitutes like non-linear pricing, exclusive

distribution and exclusive dealing. (iii) Restrictions on dealing in complements, such

as service requirements, selective distribution or tie-in sales.

An alternative classification comes from the European Commission, which officially

denotes eight kinds of vertical restraints in its Guidelines On Vertical Restraints2

separating them into four broad categories. Since this classification does not

introduce any new item to the restraints mentioned above, and will be examined in

the third chapter of this paper, no further information is given on it in this section.

2
OJ [2000] C 291/1.

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1.1.2. Motivation Behind the Vertical Restraints

As long as the vertical restraints yield more profits than to offset the losses of the

parties to the vertical agreement in question, the parties would be willing to restrict

their freedom (Neven et al.,1998:27-28). Apart from that, the party with the market

power can use vertical restraints against its rivals.

Therefore, the motivation behind vertical restraints can be studied in two categories:

a. Motivation between the parties

Motivation between the parties can emerge from direct externalities for contractible

strategy components, -like maximum RPM to avoid “double marginalisation

problem” or indirect externalities for non-contractible strategy components, -such as

two-part tariffs where the pricing of the final product is non-contractible (Neven et

al.,1998:27-28).

Likewise, Dobson and Waterson (1996:6-15) list several problems to be solved by

vertical restraints: Double marginalisation, retailer (intrabrand) competition, location

and free-rider effects. Hold-up and lock-in are the other problems mentioned (Korah

and O'Sullivan, 2002:30, and Taylor, 1999:44).

b. Motivation against third parties

Vertical restraints may also be employed to avoid free-riding at interbrand level or to

eliminate the rivals. In Dobson and Waterson‟s (1996:17) words

… a vertical restraint, like exclusive dealing, which prohibits the dealer from
stocking rivals‟ products or a less direct method which puts pressure on the dealer to
stock fewer rival products such as contract terms covering tie-in sales or quantity
requirements, may handle both effects. However, the two externalities have very
different implications for economic efficiency. On the one hand, actions to control
the former effect are generally in society‟s interest, where, for example, efficiencies
result from manufacturers investing optimally in selling and promotional activities.
On the other hand, attempts to control the latter effect, i.e. restrict competition, say,
by dividing up the market, creating entry barriers, or inducing existing rivals to leave
the market, are by definition „anti-competitive‟ and are likely to lead to a reduction
in societal welfare…

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Therefore, identifying pro-competitive and anti-competitive effects of vertical

restraints are important, since vertical restraints can be used to deter entry or impair

rivals competitive actions. On these grounds, foreclosing a market by vertical

restraints will be studied in depth in the following section.

1.2. Foreclosure

Foreclosure can be defined as the

[s]trategic behaviour by a firm or group of firms to restrict market access


possibilities of potential competitors either upstream or downstream. Foreclosure
can take different forms, from absolute refusal to deal to more subtle forms of
discrimination such as the degradation of the quality of access. A firm may, for
example, pre-empt important sources of raw material supply and/or distribution
channels through exclusivity contracts, thereby causing a foreclosure of
competitors3.

In economics, the study on foreclosure through vertical restraints can be divided into

two broad categories according to the vertical restraints employed: Foreclosure can

either be achieved by exclusive dealing agreements (including other restraints that

have the same effect, such as quantity forcing or refusal to deal), or by tying. In

practice, the application of foreclosure theory may not be limited to the conduct of

dominant firms. Vertical restraints of non-dominant firms are also condemned for

their foreclosure effects in certain circumstances.

1.2.1. The Foreclosure Theory of Exclusive Dealing

Many scholars of economics worked on the effects of vertical restraints with the

debate stimulated by Chicago School. Some of these studies focus on exclusivity

contracts that lead to foreclosure.

Comanor and Frech (1985) show that a single dominant manufacturer producing a

single product with constant unit costs, can raise the costs of entry into a market for a

3
The European Commission's Directorate-General for Competition, “Glossary of Terms Used in
Competition Related Matters”, http://europe.eu.int/comm/competition/general_info/f_en.html#t128,
(April 2003).

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rival firm if there are two classes of consumers, one of which distinguishes between

the products of incumbent and entrant. Therefore exclusive dealing can be a credible

strategy for entry deterrence.

Mathewson, and Winter (1987:1057-58) criticize the model above, arguing that the

impact on rivals‟ entry cost was the wrong criterion for assessing the efficiency.

They demonstrate that exclusive dealing imposed by the dominant manufacturer both

reduces actual competition and restricts the consumers‟ choice set by eliminating its

rival from the market. But on the other hand, manufacturers compete for the right to

be selected by the retailer. As a result, “potential competition under exclusive dealing

may be stronger in disciplining the dominant manufacturer than actual competition

when exclusive dealing is prohibited”, if the retailer has no monopsony power4.

Simply creating “shortage” for the inputs required by rivals through exclusive

contracts would not be enough for the foreclosure: When a firm concludes an

exclusive contract, that does not only cause the supply curve for the goods in

question to shift to the left (raising the prices up), but leads the demand curve for

these goods to shift to the left, too, offsetting the price increase. Thus, this kind of

foreclosure is discredited. But, there are four distinct methods of foreclosure, and

they are credible since they raise the rivals‟ cost (Krattenmaker and Salop,

1986b:231-242):

(a) Bottleneck (Essential Facilities) refers the method in which the purchaser

obtains exclusionary rights from all (or a sufficient number of) the lowest-

cost suppliers, where those suppliers determine the input‟s market price,

forcing the competitors to shift to higher cost suppliers or less efficient

inputs.

4
See Dobson and Waterson (1996:20) and Schwartz (1987) comparing and criticising Comanor-
Frech and Matthewson-Winter models.

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(b) Real Foreclosure occurs when “…the purchaser acquires an exclusionary

right over a representative portion of the supply, withholding the portion from

rivals and thereby driving up the market price for the reminder of the input

still available to rivals…” in case of entry and expansion barriers. This

method differs from the bottleneck method, which stresses on the unique

quality of the input foreclosed, since it emphasizes the sheer amount of it.

(c) Cartel Ringmaster method has two variants: In the first variant, the purchaser

(of the exclusive right) induces a number of its suppliers to deal with its rivals

on disadvantageous terms. The second variant involves the outright refusal to

deal with the purchaser‟s competitors. These two methods are named as the

cartel ringmaster technique because the purchaser of the exclusionary right

orchestrates cartel-like discriminatory input pricing against its rivals.

(d) Frankenstein Monster technique is the method by which the purchaser of an

exclusionary rights contract provides a ground for remaining unrestrained

suppliers to collude successfully. This technique differs from the previous

one because rivals' cost increase is inflicted by suppliers that are not parties to

the exclusionary rights agreement.

Hence, the first two techniques succeeded by restricting rivals‟ output directly, while

the latter two encourage suppliers to restrict output in response to incentives created

by the exclusionary rights agreement, and facilitate tacit or express collusion.

These methods affect competitive abilities or incentives in three ways: (a) Selling

prices of remaining firms can increase in case of entry and expansion barriers, (b)

after the exclusion of the rivals, remaining firms may be few enough to manage

collusive behaviour, and (c) if the exclusionary rights significantly raise the costs for

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potential entrants, they will also raise barriers to entry (Krattenmaker and Salop,

1986b:243-247).

Likewise, an incumbent seller who faces the threat of entry into its market can sign

long-term exclusive contracts with buyers, imposing an entry cost on potential

competitors, either forcing them to wait until contracts expire, or to pay liquated

damages of the customers to induce them to break their contracts with the incumbent.

In that case, effective length of the contact (the length that the parties expect the

relationship to last at the time of the signing), rather than nominal length should be

taken into account, because signalling aspects to deter entry are more important in

the determination of contract length (Aghion and Bolton, 1987)5.

According to Rasmusen et al. (1991:1137),

Ordinarily, a monopoly cannot increase its profits by asking customers to sign


agreements not to deal with potential competitors. If, however, there are 100
customers and the minimum efficient scale requires serving 15, the monopoly need
only lock up 86 costumers to forestall entry. If each costumer believes that the others
will sign, each also believes that no rival seller will enter. Hence, an individual
customer loses nothing by signing the exclusionary agreement and will indeed sign.
Thus, naked exclusion can be profitable6.

After comparing vertical agreements with vertical integration in a model with an

upstream monopolist, selling to two downstream firms, Rey and Tirole (1997:27)

conclude that, “exclusive dealing may actually be privately and socially less

desirable than vertical integration”. Because, the upstream monopolist may have

interest in continuing to supply the remaining downstream firm after integrating with

the other, whereas after concluding an exclusive dealing agreement with one of the

downstream firms it loses its chance to supply the other.

5
Posner (2001:232-233) disagrees with these authors arguing that (a) the payments made to the
retailers to secure exclusivity and deter entry will be transferred to customers in the from of lower
prices (b) penalty clauses are generally unenforceable. Innes and Sexton (1994) argue that these
contracts only deter inefficient entry, and thereby increase social welfare. They also examine another
model in which buyers can coordinate against incumbent.
6
See Innes and Sexton (1994) for the criticism of the model.

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Finally, Simpson and Wickelgren (2001) present another game theoretic model to

examine the exclusive contracts: If (a) an incumbent monopolist sells to competing

downstream firms; (b) an entrant can not initially supply a buyer at the same cost as

the incumbent; and (c) this entrant can supply buyers at the same cost as the

incumbent if it can make some sales during an interim period to at least one firm; the

incumbent monopolist can often place each downstream firm in a prisoner‟s dilemma

by offering downstream firms a discount if they sign an exclusive contract covering

later periods. The significance of this paper is that it shows where these assumptions

hold, an incumbent monopolist can profitably deter entry by offering discounts to

firms that sign exclusive contracts, even in the absence of the economies of scale.

1.2.2. The Foreclosure Theory of Tying

Not only exclusivity but also tying clauses condemned for creating foreclosure: The

foreclosure theory of tying basically suggests that, the tie may facilitate single firm

dominance or oligopoly by preventing more aggressive competitors or potential

entrants from accessing to the tied-goods market7. In that case there must be some

economy of scale or other impediment at one market level to prevent entry to the

tied-goods market. Therefore, foreclosure by tying occurs only in rare circumstances,

and even if a tie forecloses a large percentage of the market, there is no risk if the

entry to both markets is easy (Hovenkamp, 1999:419).

Tying can lead to a monopolization of the tied good market through foreclosure

when the tied good market has an oligopolistic structure: A monopolist can reduce

the sales –and profits- of its competitors in tied good‟s market, below the level that

would justify continued operation. This type of foreclosure is called strategic

foreclosure, since tying represents a commitment to foreclose sales in the tied good

7
For example, if a seller of a patented machine also ties the goods to be used by this machine, the
market for the tied-goods may be foreclosed.

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market. The same result is valid for the tying of complementary products (Whinston,

1989) 8.

1.2.3. Input Foreclosure and Customer Foreclosure

Riordan and Salop (1995) refer to two major types of vertical foreclosure, namely

input foreclosure and customer foreclosure, in studying vertical mergers. This

classification can also be applied for defining foreclosure through vertical restraints:

a) Input Foreclosure refers to the case in which the input supplier exclude some

of the downstream firms by raising their costs, either through refusing to

supply or charging discriminatory prices for the inputs. This strategy can be

successful if the other input suppliers ability to expand their production is

limited or they choose to benefit (i.e. collusion) from this output restriction,

which raises the price of the input in question. As a result, consumers are

harmed by the higher downstream prices, and efficiency can be reduced since

the consumers reduce their purchases or efficient firms may be forced to use

an inefficient input mix.

b) Customer Foreclosure is another exclusionary practice in which the firm

excludes its rivals by preventing them from accessing a sufficient customer

base. In other words, if the firm persuades enough customers to refuse to buy

from its competitors, the competitors may be unable to attract a sufficient

number of customers to produce efficiently or to survive in the market. As a

result, the excluding firm can raise the price above competitive levels.

It may also be possible for a firm to apply both types of foreclosure at the same tame,

requiring the rivals to enter two levels of the market. Salop (2001:179-194) places

8
For illustrations of Winston‟s theory, and other tying-foreclosure relationships in complementary
products see Hylton and Salinger (2001).

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“limited distribution” into the first category and “single branding” into the second

and gives eight illustrative examples9.

1.2.4. Competition Policy and Effects of Foreclosure on Consumers

So far, it has been demonstrated that most scholars agree that foreclosing a

substantial part of the inputs or consumers may result in driving the rivals out of the

market or in deterring their entry. This brings us to ask the crucial question: Does

harming competitors mean harming consumers?

Considering the fact that competition itself inherently “harms” rivals, and the main

aim of the competition law is to promote consumer welfare10, the focus should be on

consumer welfare. According to the “contestable markets theory”, although a firm

may obtain a dominant position or maintain this dominance by driving rivals out, it

may not be able to exploit this (i.e. apply monopolistic prices) due to potential entry.

Therefore, driving rivals out or foreclosing the market does not automatically result

in deteriorating consumer welfare. That is why Krattenmaker and Salop (1986b)

suggest a “two-step analysis of consumer harm”. But before moving into that

analysis, it is worth examining some potential defences for foreclosure:

Whinston (1989:5-6), find the effects of foreclosure on aggregate efficiency and

consumer welfare “ambiguous”, stating that it may create efficiency in some cases.

Likewise, White (2002) shows that although the literature –which is based on

complete information models – demonstrates that foreclosure is harmful, in an

incomplete information model high-cost firms have signalling incentives to restrict

output in the absence of foreclosure, and these incentives disappear if vertical merger

9
See Salop (2001) for the illustrations and their assessment under EC Regulation 2790/99.
10
See Salop (2001:180) for the difference between “customer welfare standard” and “aggregate
welfare standard”.

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or exclusive dealing are allowed (in some cases increasing profits, output and

welfare).

Potential competition and competition for exclusionary rights are other major

defences for foreclosure: Although exclusive dealing may result in both reducing

actual competition and restraining the consumers‟ choice set by eliminating rivals

from the market, it also provides manufacturers competing on the basis of wholesale

prices for the right to be selected by the retailer. Hence, “potential competition

replaces actual competition as the disciplining force in the market and may drive

down the retail price, even to a level where welfare increases with the restraint”

(Mathewson and Winter, 1987:1057-62).

In contrast, Krattenmaker and Salop (1986a:110) conclude that

…The market for exclusionary rights are essentially is a market for competition.
Unfortunately, even if this market is well functioning, it will fail to yield the
efficient outcome because competition is a classic public good [11].

Salop (2001:195-198) also lists four arguments against competition for exclusive

agreements:

- An incumbent firm may conclude long-term exclusivity contracts with input

suppliers or customers before there is a competitor on the horizon, and

competition for exclusives may never occur.

- The entrant can earn only duopoly return, which is more competitive and less

then monopoly return, after the entry, whereas the dominant incumbent may

earn monopoly return if it is successful at deterring or constraining the entry.

Therefore, the exclusive agreements may be worth more to a dominant

11
Which means, an individual distributor or consumer ignores the effect of its decision on others, or
may believe that the entrant likely will fail because the others are granting exclusives (to the
incumbent) and do not want to deprived of the “compensation” that the incumbent will pay in
exchange to the exclusivity (Salop, 2001:198).

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incumbent than undoing them is worth to an equally efficient rival 12. In this

case, the exclusivity raises “artificial” entry barrier.

- The exclusivity agreements can also increase the switching costs of the

suppliers or consumers and prevent them devoting a portion of their business

to entrant. Besides, if these are long-term contracts and do not all expire at

the same time (staggered contracts), difficulty of coordination for the entrant

and barriers to entry will increase13. In addition, the entrant may not desire

exclusivity contracts at all, and would be satisfied or better off with non-

exclusive contracts. But the requirement to meet the switching costs of the

suppliers or consumers and coordination14 problems would increase its

bidding disadvantage.

- Even if the exclusivity agreements are of short-term or terminable in will, the

entrant would still face the problem of getting enough suppliers or

distributors to achieve minimum viable scale rapidly and maintain adequate

investments.

For measuring anticompetitive effects and consumer welfare effects of foreclosure,

Krattenmaker and Salop (1986b:253-266) suggest a two-step test:

12
Salop (2001:196) gives the following example:
Suppose that the incumbent could earn $200 if it gets the exclusive and so retains its
monopoly. If the entrant gets distribution and breaks the monopoly, suppose that the entrant
and the incumbent each would earn $70, for a total of $140. Because competition transfers
wealth from producers to consumers, the total profits fall from competition (e.g., from $200
to $140). In this case, the entrant would be willing to bid up to $70 to obtain distribution, an
amount equal to its profits from entry. In contrast, the entrant would be willing to bid up to
$130 for an exclusive that prevents the entry, an amount equal to the reduction in its profits
from competition. The incumbent thus would win the bidding. This result obtains for as long
as the aggregate market profits fall from competition.
13
Even though all the contracts expire at the same time, getting enough users to switch at the same
time may be a difficult problem, too (Salop, 2001:197;fn.26).
14
See Aghion and Bolton (1987), Rasmusen et al. (1991), Innes and Sexton (1994) for coordination
problems

17
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First, the increase on rivals‟ cost must be evaluated. This involves assessing the

number and quality of alternative suppliers along with the prices they are likely to

charge. This is because, remaining suppliers may not be able to expand the output

due to the capacity constraints, or they may have higher costs and prices compared to

the ones that are party to exclusive agreements, or if they are small in number, they

may have an incentive to collude to raise the prices they charge.

Whether the exclusionary rights arrangement will so limit remaining supply


available to rivals that it will lead them to bid up the price of that supply, thereby
increasing their costs to the point that the purchaser obtains power over price
depends on the cost share, on what we call the net foreclosure rate, and on factors
concerning market definition and entry barriers. The net foreclosure rate (NFR)
measures the shrinkage resulting from the exclusionary rights agreement of supply
open to rivals. The NFR is the percentage of the suppliers' capacity that was
available to rivals before the exclusionary rights agreement. Thus, any pre-
agreement consumption of supply by the purchasing firm is subtracted from the total
amount of supply foreclosed and from the amount previously available … The
greater the share of supply foreclosed, the greater the price increase the purchaser
would be able to charge in the output market in which it sells (Krattenmaker and
Salop, 1986b:259)15.

Krattenmaker and Salop (1986b:261-262) suggest treating the restrained suppliers‟

capacities as a “market” and then computing HHI16 for that market and comparing it

with the HHI of the entire supply market before the restraints –as if assessing a

merger case.

Likewise, if there are close substitutes to the inputs (or customers) foreclosed, or if

the input foreclosed does not constitute a significant portion in rivals‟ costs, the

effect will be smaller.

Second step - evaluating the power over price- involves the potential injury to

customers whereas the first one examines the injury to competitors. By raising rivals‟

cost, the firm may have the opportunity to raise or maintain high prices, and harm the

15
“This last condition sometimes is overlooked in vertical restraint analysis. Doing so creates a
significant potential for error.” (Salop, 2001:183). Also see Baker (1996) for horizontal consequences
of vertical restraints.
16
HHI – The Herfindahl-Hirschman Index is the sum of the squares of each firm‟s share on the
relevant market. This index is used in assessing mergers. (Hovenkamp, 1999:512).

18
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consumers. Sometimes, partially excluded rivals may be forced to cooperate as a

result of their costs. But, if there are other actors competing in the output market, or

there are close substitutes to that output the firm may not be able to raise its price.

The competition among non-excluded firms may remain intense. In some cases,

multiple exclusive systems in the market can cause less anticompetitive effects

(creating a “reverse cumulative effect”), since these firms compete with each other

(Salop, 2001:184). As a result, if these two steps are proved, this conduct harms

consumers and reduces economic efficiency.

1.3. A Note on the Market Power

Krattenmaker et.al (1987) criticizes courts and antitrust authorities for creating a

false dichotomy by distinguishing between “market power” and “monopoly power”

and for failing to recognize the two distinct ways that anticompetitive economic

power can manifest itself. These two concepts are qualitatively identical and refer to

the same phenomenon –the ability to price above competitive level (or to prevent

likely price decreases).

Thus, they identify “two fundamentally different ways in which a firm or group of

firms may exercise anticompetitive economic power” and threat consumer welfare:

Firstly, the firm may raise its own prices (restrict its output), which is called

“classical Stiglerian power”, and secondly the firm may raise its competitor's costs

(by foreclosure or other means) known as “exclusionary Bainian power”. The

authorities, however, usually overlook the latter.

According to Krattenmaker et.al (1987), the “two types of power can be exercised

singly or in tandem” and the presence of either type will facilitate the exercise of the

other. Therefore, in antitrust cases both of these powers should be inquired and

presence of one should be sufficient.

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CHAPTER TWO

THE UNITED STATES PRACTICE

2.1. Legal Framework

2.1.1. Statutes

The United States‟ competition (or antitrust, more accurately) legislations date back

to the Sherman Act of 1890, the Clayton Act17 and the Federal Trade Commissions

Act in 1914. The main provisions related to this work are embodied in the §§1-2 of

the Sherman Act and §3 of the Clayton Act. Hence, §1 Sherman Act aims to prevent

cartels stating that

Every contract, combination in the form of trust or otherwise, or conspiracy, in


restraint of trade or commerce among the several States, or with foreign nations, is
declared to be illegal…18

while §2 Sherman Act stresses on the monopolization:

Every person who shall monopolize, or attempt to monopolize, or combine or


conspire with any other person or persons, to monopolize any part of the trade or
commerce among the several States, or with foreign nations, shall be deemed guilty
of a felony…19

In addition §3 Clayton Act provides:

It shall be unlawful … to lease or make a sale or contract for sale of goods, wares,
merchandise, machinery, supplies, or other commodities … on the condition,
agreement, or understanding that the lessee or purchaser thereof shall not use or deal
in the goods, wares, merchandise, machinery, supplies, or other commodities of a
competitor or competitors of the lessor or seller, where the effect … may be to
substantially lessen competition or tend to create a monopoly in any line of
commerce20.

17
Amended by the Robinson-Patman Act (1936) and the Celler-Kefauver Act (1950).
18
15 USC §1.
19
15 USC §2.
20
15 USC §14.

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2.1.2. Guidelines on Vertical Restraints

In the framework of these three provisions, several vertical restraints cases were

brought before the courts, and in 1985, the Department of Justice issued guidelines

on the vertical restraints. These Guidelines were withdrawn in August 1993.

Alternatively, National Association of Attorneys Generals (NAAG) issued guidelines

on vertical restraints in 1985 and revised them in 1995. Since the Department of

Justice withdrew its guidelines on vertical restraints, the remaining soft rules lie in

the NAAG Guidelines.

NAAG Guidelines cover three categories of vertical restraints, namely RPM, non-

price vertical restraints and tying, and state that RPM is illegal per se. They list

potential anticompetitive effects –like elimination of intrabrand competition,

facilitation of collusion, exclusion of competitors, allocative inefficiency from retail

promotion induced by vertical restraints, and reinforcement of oligopolistic

behaviour21. Intrabrand competition effects, product differentiation, existence of

multiple exclusive distributorships, dealer involvement in the imposition of a

restraint, the requirement and performance of additional services under vertical

restraints, natural and contractual longevity of restraints, concentration and coverage

of the markets, indicia of tacit collusion or conscious parallelism, entry barriers and

effect on consumer choice are referred to be the main criteria for analysing the

effects of vertical restraints22. In Section 5, it is stated that the Supreme Court held a

tying arrangement unlawful per se if it (1) the tying and tied products (services) are

distinct; and (2) the arrangement forecloses a "substantial volume of commerce" or

there is a "substantial potential" of such impact on competition, and (3) the firm tying

the products has sufficient "market power" in the tying product to make

anticompetitive "forcing ... probable."

21
NAAG-GVR, §§ 3.2-3.3.
22
NAAG-GVR, §4.

21
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2.2. Leading Cases in the US

The US case law presents a great deal of cases regarding foreclosure. Even though

the Sherman Act was almost dormant regarding vertical restraints, after the adoption

of Clayton Act parties brought foreclosure cases under both of the statutes.

Supreme Court ruled on the exclusivity clauses leading foreclosure first in Standard

Fashion23 in 1922, and Sinclair Refining Co.24 in 1923. Succeeding cases were

Standard Stations25, Tampa Electric26, Beltone 27


, Ryko28, Omega Environmental 29

and 3M v. Appleton 30.

Another group involves less controversial cases like Alcoa31 and Loraine Journal32:

Alcoa, the aluminium manufacturer agreed with the electricity suppliers not to

supply electricity to rival aluminium manufacturers. Since Alcoa did not buy any

electricity but just the exclusivity, this kind of input foreclosure is called “naked

exclusion”. Likewise, Loraine Journal required its advertisers (customers) not to deal

with the competing radio station, creating costumer foreclosure.

2.2.1. Standard Fashion

In Standard Fashion, the Supreme Court held Standard Fashion and two other

pattern companies were “controlling two-fifths of some 52,000 pattern agencies”,

and therefore Standard Fashion‟s agreements that prevented retailers from selling

competing patterns “…substantially lessened competition and tended to create

monopoly”. Therefore, the Court found the contracts infringing §3 Clayton Act.

23
Standard Fashion Company v. Magrane-Houston Company, 258 US 346 (1922).
24
FTC v Sinclair Refining Co., 261 US 463 (1923).
25
Standard Oil Company of California et al. v. United States, 337 US 293 (1949).
26
Tampa Electric Co. v. Nashville Coal Co. et al., 365 US. 320 (1961).
27
Beltone Electronics Corporation, 100 FTC 68, 204 (1982).
28
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987).
29
Omega Environmental, Inc. v. Gilbarco, Inc., 127 F3d 1157 (1997).
30
Minnesota Mining & Mfg. Co. and Imation Corp. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138
(1999).
31
United States v. Aluminium Co. of Am., 148 F.2d. 416 (2dCir.1945).
32
Loraine Journal v. United States, 324 US 143 (1951).

22
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2.2.2. Standard Stations

Standard Oil Company (“Standard”) was the largest gasoline seller with 23% share

of the total gasoline sold in the "Western area". Retail sales through its own outlets

constituted 6.8% of the total sales in the market where 6.7% of the sales in the

market made under its exclusive supply contracts with the independent dealers in

petroleum products. The 16% of the total retail gasoline outlets in the area signed

exclusive purchasing contracts with Standard. The duration of most contracts was

one year with an early termination. Standard‟s six leading competitors had also

absorbed 42.5% of the total volume of the retail sales in the market through such

kind of exclusive dealing agreements, where the remaining sales were divided among

more than seventy small companies.

The Supreme Court stated that even including the sales through its own stations,

Standard's share [13,5%] of the retail market for gasoline was “hardly large enough”

to conclude that it occupied a “dominant position”33. But in the absence of showing

that the supplier dominated the market, the practical effect of the contracts was

important, and Standard's requirements contracts affected 6.7% of the total business

in the area “supporting the inference that competition has been or probably will be

substantially lessened”34. Therefore,

… Standard was a major competitor when the present system was adopted, and it is
possible that its position would have deteriorated but for the adoption of that system.
When it is remembered that all the other major suppliers have also been using
requirements contracts, and when it is noted that the relative share of the business
which fell to each has remained about the same during the period of their use, it
would not be farfetched to infer that their effect has been to enable the established
suppliers individually to maintain their own standing and at the same time
collectively, even though not collusively, to prevent a late arrival from wresting
away more than an insignificant portion of the market. If, indeed, this were a result
of the system, it would seem unimportant that a short-run by-product of stability
may have been greater efficiency and lower costs, for it is the theory of the antitrust

33
337 US 302.
34
337 US 304-305.

23
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laws that the long-run advantage of the community depends upon the removal of
restraints upon competition…35

Regarding the efficiency claims, the Court argued that the service stations could

continue to supply all their requirements from only one company if they found it

efficient, and hence there was no need to bind them to refrain from looking

elsewhere36.

Posner (2001:229) criticises the case arguing that since Standard had only 23%

market share, and there were already many large oil companies there was “plenty of

competition already” and constructing new gasoline stations would not be a “big-

ticket item” for the entrants.

2.2.3. Tampa Electric

Tampa Electric Company (“Tampa”), a public utility that produced electricity, made

an agreement with Nashville Coal Company to meet all of its expected coal

requirements over a 20-year period. The District Court and the Court of Appeals

ruled the agreements violated §3 Clayton Act.

However, the Supreme Court reversed the case after introducing a three-part test for

determining whether a lessening of competition was „substantial‟, in the light of

earlier decisions: First, the line of commerce involved, and second, the area of

effective competition “ …in which the seller operates, and to which the purchaser

can practicably turn for supplies” were to be determined, and third, “…the

competition foreclosed by the contract [had to] be found to constitute a substantial

share of the relevant market” 37. “A mere showing that the contract itself involves[d]

a substantial number of dollars [was] ordinarily of little consequence”38.

35
337 US 309.
36
337 US 313-314.
37
365 US 327-328.
38
365 US 329.

24
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The Court expressed that a single contract between single traders might fall within §3

Clayton Act, and the contract could foreclose less than 0.77% of the market (in

volumes). However, the Court did not state that “such a trivial foreclosure was too

small to violate the law, but pointed out that there was no seller with a dominant

position in the market, nor any industry-wide practice of exclusive contracts…” and

that lead to a suspicion that even this small amount of foreclosure might be illegal

(Bork,1978:302).

2.2.4. Beltone

Beltone Electronics Corporation (“Beltone”), hearing aids manufacturer, was the

market leader with a market share declined from 21% to 16% from 1972 to 1977.

According to the Federal Trade Commission (“FTC”),

…the foreclosure in this case affects only about 7 or 8% of the dealers, or about 16%
of sales, which actually overstates the exclusivity, since other manufacturers'
products have accounted for at least 6 or 7% of Beltone dealers' sales. Moreover,
Beltone's dealership contracts are terminable by either party on 30-days written
notice. … this escape valve dilutes somewhat the limitation on other manufacturers'
access to Beltone dealers39.

The FTC also stated that relying on static foreclosure effects (and percentages) might

trigger liability compared to Standard Stations and Tampa decisions, but looking at

the dynamics of affected market was required. Therefore, it had to be assessed

whether the barriers to entry effectively rose by the foreclosure, or the competitors

effectively inhibited from pursuing other distribution channels, or rivals have been

driven from the market or their costs of reaching potential customers increased as a

result of Beltone's practices. Therefore, “other firms [had] recently entered the

market or grown vigorously, in part at the expense of the older firms” and they

experienced little difficulty in finding distributors. Beltone‟s restraints did not seem

39
100 FTC 68, 270-271.

25
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to confer upon it any „significant market power‟ and it had shown no ability or

inclination to use its restraints strategically to injure its rivals40.

2.2.5. Ryko

In Ryoko, The Circuit Court ruled the requirement of dealing only in the supplier‟s

goods would violate §3 Clayton Act, if its performance foreclosed competition in

substantial part of the market. They “…no longer evaluate foreclosure under the

purely quantitative test of earlier decisions”. Therefore,

. . . where the degree of foreclosure caused by the exclusivity provisions is so great


that it invariably indicates that the supplier imposing the provisions has substantial
market power, we may rely on the foreclosure rate alone to establish the violation.
However, where, as here, the foreclosure rate is neither substantial nor even
apparent, the plaintiff must demonstrate that other factors in the market exacerbate
the detrimental effect of the challenged restraints41.

According to the Court, Eden could not produce any evidence that Ryko‟s exclusive

dealing provisions had prevented its rivals from finding effective distributors or other

means for selling their products, and “where the exclusive dealing restraint operated

at the distributor level, rather than at the consumer level, a higher standard of proof

of „substantial foreclosure‟ was required, because it was less clear that a restraint

involving a distributor would have a corresponding impact on the level of

competition in the consumer market”42.

2.2.6. Omega Environmental

Gilbarco was the largest of five petroleum dispensing equipment manufacturers, with a

domestic market share of 55%. It was selling two-thirds of its products to the

independent gasoline retail outlets through its distributors, and one-third directly to the

major oil companies and national convenience store chains.

40
100 FTC 68, 270-272.
41
Citing Beltone Electronics Corp. 100 F.T.C. 68, 204, 209-10 (1982).
42
823 F.2d 1236.

26
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Omega, without having a manufacturing capacity in the industry, introduced a "one-stop

shopping" network to consumers of petroleum dispensers, engaging in consolidated

purchasing from manufacturers. Therefore, it challenged Gilbarco‟s policy of doing

“business with service station equipment distributors who sell only the Gilbarco line of

retail dispensers”.

According to the Court of Appeals “the foreclosure effect, if any, depended on the

market share involved” and “the relevant market for this purpose included the full range

of selling opportunities reasonably open to rivals”. Therefore, Gilbarco foreclosed

roughly 38% of the relevant market for sales, since it made 70% of its sales through the

distributors and its market share was 55%. The foreclosure rate seemed significant but

also overstated the likely anticompetitive effect for two reasons: “First, exclusive dealing

arrangements imposed on distributors rather than end-users [were] generally less cause

for anticompetitive concern” because rivals could reach consumers through existing or

potential alternative channels, and in this case, “…competitors [were] free to sell

directly, to develop alternative distributors, or to compete for the services of the existing

distributors”. Second, the agreements had no potential to foreclose competition because

they were of short duration and easily terminable. The Court also rejected Omega‟s

claim regarding “…no distributor would abandon the Gilbarco line for an untested

product with no reputation”, stressing that success enjoyed in the market by a proven

product and strong reputation was the essence of competition43.

2.2.7. 3M v. Appleton

Appleton was the market leader in carbonless paper sheets that are used for business

forms and credit card charges, with an increasing market share from 50% to 67% in

last ten years. There were only three other firms in the market including Minnesota

Mining (3M). During the same period, 3M‟s market share declined from 26% to

13%, and 3M brought a case against Appleton, claiming that Appleton infringed §3

43
127 F3d 1162-63.

27
© Barış Ekdi, 2003

Clayton Act and §§1-2 Sherman Act, by foreclosing the market through its exclusive

dealing agreements with fine paper merchants.

Carbonless paper, sold in rolls to mass-volume business from manufacturers

constituted 87% of the overall market, and in sheets to fine paper merchants for

resale accounted for 13%. The District Court stated that the market characteristics of

these two vary significantly in terms of pricing, customers, distribution, uses, and

manufacture44. Assessing the facts the Court pointed out that the exclusive

arrangements with the fine-paper merchants led to significant foreclosure because of

the “…nearly precise correlation between distribution coverage/share and

manufacturer/brand market share”, and concluded

…3M has produced substantial evidence that the market for carbonless sheets is
vulnerable to foreclosure. First, 3M has shown that because of one-stop convenience
and special credit arrangements, most printers remain loyal to their distributors and
do not comparison shop. Second, 3M has demonstrated that because of a strong
trend toward consolidation at the merchant level, entry barriers at the distribution
level are likely to be high. Third, 3M has created a fact issue as to whether there are
practicable alternative methods of distribution for carbonless sheets beside paper
merchants. Fourth, it is virtually undisputed that: (1) consumer demand for
carbonless sheets is declining, (2) the possibility of future entry by other suppliers is
low, and (3) Appleton's market share is rapidly on the rise45.

Another aspect of the case is, although Appleton argued that since the agreements

with the merchants were terminable at any time its rival‟s could convert the

merchants, the Court insisted on the “…practical effect of tying up of the paper sheet

inventory of a merchant over a period of several years” relying on the evidence of

significant switching costs and Appleton's incentives46.

In this case, although the Court made a distinction between rolls and sheets, and

stated that the sheets constituted only 13% of the total sales in the market, Appleton‟s

market share in sheets and the percentage of the foreclosure were not expressed.

44
35 F.Supp. 2d 1140.
45
35 F.Supp. 2d 1144-45.
46
35 F.Supp. 2d 1144.

28
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2.3. Evaluating the US Practices

Jacobson (2002), who evaluates several US cases related to foreclosure and indicates

major shifts in US practices, argues that exclusive dealing enjoyed laissez-faire in the

area between the adoption of the Sherman Act and the Clayton Act. The latter act

resulted in successful challenges to exclusive dealing arrangements, and gave rise to

the foreclosure doctrine.

Standard Fashion was the first case, which reached the Supreme Court, and the

Court emphasized the Standard‟s 40% market share in assessing foreclosure. In

Standard Stations the Court “quantitative substantiality” stating that “ …the

qualifying clause of §3 [Clayton Act was] satisfied by proof that competition [had]

been foreclosed in a substantial share of the line of commerce affected”, since more

than 45% of the retail market was covered by exclusive agreements.

In 1961, in Tampa Electric the Supreme Court demanded the product market and

geographic market be defined in order to assess the substantiality of the foreclosure

and then suggested a comprehensive analysis involving relative strength of the

parties, proportionate volume of commerce effected and probable immediate and

future anticompetitive effects. Therefore, Standard Fashion‟s emphasis on the

market share and Standard Station‟s strict focus on the percentage of the foreclosure

left their place to a broader economic analysis in Tampa Electric decision.

Beltone in 1982 is another corner stone in foreclosure doctrine, reflecting Chicago

School approach, since the FTC carried out a detailed analysis on the dynamic

effects in the market and assessed the trade of between foreclosure effects and

efficiency effects. In addition, the FTC emphasized the market power requirement

for foreclosure and in the Eighth Circuit's 1987 decision in the Ryko, foreclosure and

market power are held together. Meanwhile, raising rivals‟ costs is being considered

29
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in analysing foreclosure and §1 Sherman Act and §3 Clayton Act are somehow

converged (Jacobson 2002).

In Omega Environmental having 55% market share and foreclosing 38% of the

market were not enough to condemn the vertical agreements, because the rivals had

alternative channels, the exclusivity was imposed on distributors rather than end-

users. In contrast, in a declining industry without any potential entrants, 67% market

share and “correlation between distribution coverage/share and manufacturer/brand

market share” were enough to condemn Appleton in Minnesota Mining (3M) v

Appleton.

Jacobson (2002) concludes that the analysis of exclusive dealings shifted to the

effects of the conduct that may harm consumers and probability of gaining power

over the price, irrespective of the percentage of the market foreclosed.

30
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CHAPTER THREE

THE EUROPEAN COMMUNITIES PRACTICE

3.1. The Legal Framework

3.1.1. The EC Treaty Provisions on Competition

According to Article 3(g) of the EC Treaty, one of the aims of the EC is “the

establishment of a system ensuring that competition in the internal market is not

distorted”. In order to achieve this aim, the Treaty lays down several provisions

regarding the activities of undertakings and activities of governments, as well as the

procedural rules (Albors-Llorens, 2002:2-3).

Concerning the activities of undertakings, Article 81(1) EC prohibits

…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 common market…
and Article 81(2) EC provides them “automatically void”.

Article 81 does not expressly distinguish between horizontal and vertical agreements.

So, application of this article to the vertical agreements questioned once –in Consten

and Grundig v. Commission47 – before the European Court of Justice (ECJ), where

the parties defended their agreement was not in the scope of this article, since they

were not competitors to each other. The Court stated (a) agreements those restrict

competition between one of the parties and third parties can restrict the competition

as well, and (b) the Community market may be divided along national lines because

of these vertical agreements (Albors-Llorens, 2002:21-22).

47
Joined Cases 56 and 58/64 [1966] ECR 299, [1996] CMLR 418.

31
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Given that some agreements that restrict competition may also improve customer

welfare, Article 81(3) introduces four cumulative conditions to exempt them from

the application of Article 81(1). Therefore, any agreement

….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.

will be exempted.

Simultaneously, Article 82 EC, the other major provision of the EC Treaty related to

competition law aimed at preventing abusive conduct of dominant undertakings:

Any abuse by one or more undertakings of a dominant position within the common
market or in a substantial part of it shall be prohibited as incompatible with the
common market insofar as it may affect trade between Member States.

Since a dominant firm can use vertical agreements to foreclose the market, both of

these provisions and secondary legislations concerning their application play an

important role.

3.1.2. Block Exemptions

To avoid enormous workload created by exemption notifications, the Commission

introduced a number of block exemption regulations regarding vertical restraints:

Regulation 1983/84 on “exclusive distribution agreements”48, Regulation 1984/84 on

“exclusive purchasing agreements”49, Regulation 4087/88 on “franchise

agreements”50, Regulation 1475/95 on “motor vehicle distribution and service

48
OJ [1984] L173/1; amended by Regulation 1582/97 (OJ [1997] L214/2).
49
OJ [1984] L173/5; amended by Regulation 1582/97 (OJ [1997] L214/2).
50
OJ [1988] L359/46.

32
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agreements”51, and Regulation 240/96 on “technology transfer agreements”52

(Albors-Llorens, 2002:50-51).

Nevertheless, these block exemptions were not enough to ease the Commission‟s

work, because the agreements were required to fit squarely within the scope of the

regulation. Thereby, the Commission adopted a new umbrella block exemption

regulation, Regulation 2790/9953, and issued the Guidelines on Vertical Restraints54

(“Guidelines”) regarding the application of this regulation (Albors-Llorens, 2002:53-

54)55.

Regulation 2790/99 introduces a 30% market share cap for the supplier56 to benefit

from the exemption and two main provisions for “parallel networks of similar

vertical restraints”:

Article 6 provides, where “the cumulative effect of parallel networks of similar

vertical restraints (implemented by competing suppliers or buyers) enjoying

exemption pursuant to the regulation” restricts access to the relevant market or

competition therein, the Commission may withdraw the benefits of the Regulation.

Likewise, Article 8 gives the power to the Commission to refuse the application of

the Regulation for specific restraints, if the parallel networks of them cover more

than 50% of a relevant market.

Therefore, relaying on Article 6, the Commission can withdraw individual

undertakings‟ agreements that significantly contribute foreclosure, simply by

adopting a decision. Furthermore, according to Article 8, the Commission can

51
OJ [1995] L145/25.
52
OJ [1996] L31/2.
53
OJ [1999] L336/21, [2000] 4 CMLR 398.
54
OJ [2001] C291/1, [2000] 5 CMLR 1074.
55
See Goyder (2000), Korah and O‟Sullivan (2002) and Taylor (1999) for the application of
Regulation 2790/99 and the Guidelines in detail.
56
Or for the buyer in case of exclusive supply agreements. See Article 3(2) of Regulation 2790/99.

33
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exclude all the undertakings‟ specific restraints from exemption in a given market –

without addressing a specific undertaking - by adopting a regulation57.

In parallel, the Guidelines stress the Regulation is also applicable to intermediate and

final goods and services, and to all levels of trade as well as to the distribution of

goods58. They emphasise the market integration as “an additional goal of EC

competition policy” besides protection of competition59.

The Guidelines present a methodology for analysing vertical restraints: Defining the

relevant market, and finding out the market share are essential steps. For the

agreements of the firms with less than 30% market share, checking the accordance

with the conditions of the regulation will be enough. But if the market share of the

firm exceeds this threshold, the Commission will make a “full competition analysis”.

This analysis involves assessing (a) market position of the supplier, (b) market

position of competitors, (c) market position of the buyer, (d) entry barriers, (e)

maturity of the market, (f) level of trade, (g) nature of the product, (h) other factors60.

The Guidelines examine eight types of vertical restraints61 in detail, pointing out their

anticompetitive effects. Regarding foreclosure, single branding, exclusive

distribution (if combined with single branding), selective distribution, exclusive

supply (if the buyer has market power) and tying agreements are found to have the

capacity of foreclosing market if the other conditions, such as high market shares of

the parties, long durations for the contracts, existence of entry barriers and lack of

adequate alternative channels of distribution are met62. However, franchising and

57
Also see Guidelines, para.71-87.
58
Guidelines, para.2 and 24.
59
Guidelines, para.7.
60
Guidelines, para.120-136.
61
In four broad categories: “single branding group”, “limited distribution group”, “resale price
maintenance group” and “market partitioning group”. See Guidelines, para.106-108, 109-110, 111-
112, 113-114 respectively.
62
Guidelines, para.141-160, 165-171, 185-194, 204-210 and 217, respectively.

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recommended and maximum resale prices are not found “liable” to create

foreclosure63. In contrast, Taylor (2000:56) argues that exclusive customer allocation

can foreclose buyers or suppliers in some cases, where the Guidelines remain

silent64. Therefore, foreclosure effects of some vertical restraints can be summarized

in the table below:

Table 2 – Foreclosure Effects of Some Vertical Restraints65

Single
Non-compete Foreclosure of other suppliers, if the supplier has
Branding
obligation market power.
Group
a. Foreclosure of other suppliers, if non-compete
obligation imposed on the distributors.
Exclusive
b. Foreclosure of other buyers, if the distributor
distribution
with strong buying power (i.e. supermarket
chains) imposes exclusivity on the suppliers.
a. Foreclosure of other suppliers, if non-compete
restrictions are imposed on the buyer.
Exclusive customer b. Foreclosure of other buyers, if there is only one
Limited Distribution Group

allocation distributor or the distributor has market power


other suppliers may not be able to make a
sufficient number of appointments.
a. Foreclosure of other suppliers: The ones outside
the selective distribution network who need to
develop brand image still may face difficulties,
even though selective distribution cannot be
combined with non-compete obligation.
Selective distribution
b. Foreclosure of other buyers is more accentuated
than in exclusive distribution, depending on the
selection criteria of the suppliers. (If the buyer
has market power and can impose selection
criteria to the suppliers).
Franchising -
Foreclosure of other buyers if the buyer has market
Exclusive supply
power.
Retail Price Maintenance Group -
Market Partitioning Group -

63
Guidelines, para.199-201 and 225-228.
64
Guidelines, para.178-183.
65
This table is derived from the Guidelines (para.138-228) and Taylor (2000:52-61).

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3.2. Leading Cases in the EC

Two types of cases regarding foreclosure can be identified in EC case law: The first

set involves foreclosure cases through a network of similar vertical restraints of non-

dominant firms. Beer cases, Braserie de Haecht v. Wilkin66 and Delimitis v.

Henninger Bräu67 (“Delimitis”), and ice-cream cases Langnese-Iglo v. Comission68

(“Langnese-Iglo”) and Schöller v. Commission69 are the examples.

The second set covers foreclosure by exclusivity agreements (or other restraints with

the same effect) of dominant firms although the word “foreclosure” is not always

explicit: Hoffmann–La Roche v. Commission70 (“Hoffman-La Roche”), BPB

Industries v Commission71 (“BPB Industries”) and Masterfoods v. HB Ice Cream72

(“Masterfoods“) are some of them. Hoffmann –La Roche and BPB Industries differ

from the first set of cases because they involve dominant firms and they are related to

the different level of trade (supply of intermediate goods for producers).

Nevertheless, foreclosure is not analysed in these cases since “denying market access

through exclusivity” was found enough to condemn them under Article 82.

Hence, Delimitis case, in which the Court suggested a test for foreclosure, will be the

embarking point.

3.2.1. Delimitis

The first case regarding horizontal effects of network of agreements in EC

jurisdiction is Braserie de Haecht v. Wilkin, but Delimitis is more significant since

the ECJ laid down a two-step test for the applicability of Article 81(1). Facts are as

follows:
66
Case 23/67 [1967] ECR 407, [1968] CMLR 26.
67
Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210.
68
Case T-7/93 [1995] ECR II-1663, 5 CMLR 602.
69
Case T-9/93 [1995] ECR II-1663, 5 CMLR 602.
70
Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211.
71
Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32.
72
Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 449.

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Henninger Bräu AG (“Henninger”) licensed a public house to Mr. Delimitis,

requiring him to supply all the beer from it, and soft drinks from its subsidiaries.

Henninger also imposed a minimum quantity requirement supported by a penalty

provision. Delimits challenged these clauses before the German courts, under Article

81(2) EC. On appeal, the higher court sought a preliminary ruling from the ECJ.

According to the referring court 60% (on a numeric and weighted basis) of outlets in

the relevant market were subject to exclusive purchasing agreements. In the

Commission‟s view, 27 large brewers accounted for 50%, while 100 brewers

accounted for 86%, of beer production in the market, and Henninger was part of the

second largest group with 6.4% share in the production. Draught beer constituted

0.3% of Henninger‟s sales and 1.1% of the tied market (Pheasant and Weston,

1997:326).

In reply, the ECJ defined the relevant market as “national market for the distribution

of beer in premises for the sale and consumption of drinks” 73 and introduced a two-

stage test for analysing foreclosure effects of vertical restraints:

The first stage is related to evaluating the effect of the agreements on market access.

The ECJ stated several relevant factors to analyse74:

(i) The number of the outlets tied in relation to the outlets that are not tied,

(ii) The duration of the agreements, and quantities sold under these

agreements, compared to the quantities sold by free distributors.

(iii) Other possibilities of penetration (According to the ECJ, even though the

bundle of similar contracts had negative effects on market access, it would

not be enough to declare that the market was inaccessible without

73
Delimitis, para.15-18.
74
Delimitis, para.19-22.

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considering the other opportunities of penetration, such as acquiring a

brewery with its network of sales outlets, or opening new outlets, or

making use of the other wholesalers‟ that are not tied to producers‟

distribution network).

(iv) Market structure, the number and size of the producers.

(v) Degree of saturation of the market, and customer loyalty, since it would be

more difficult to penetrate a saturated market in which customers are loyal

to a small number of large producers.

If this step shows the bundle of the agreements do not deny market access, Article

81(1) will not be applicable. In contrast, where the examination reveals that it is

difficult to access the market,

… responsibility for such an effect of closing off the market must be attributed to the
breweries which make an appreciable contribution thereto. Beer supply agreements
entered into by breweries whose contribution to the cumulative effect is insignificant
do not therefore fall under the prohibition under Article 85(1) 75.

Thereby, the second stage of the Delimitis test requires assessing each brewery‟s

contribution to market access, where market position of the contracting parties had to

be taken into account. The ECJ emphasized that market position was not solely

determined by market share, but by the number of outlets tied to the brewery, in

relation to the total number of outlets in the market. The duration of the agreements

was also stressed, since a “brewery with a relatively small market share which ties its

sales outlets for many years may make as significant a contribution to a sealing-off

of the market as a brewery in a relatively strong market position which regularly

releases sales outlets at shorter intervals”76.

75
Delimitis, para.24.
76
Delimitis, para.25-26.

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However, it was unclear whether the Court referred to “a single contract” (between

the brewery and the public house) or to “a single standard-form agreement (all the

agreements, in the same terms) when speaking of ''one beer supply contract” (Lasok,

1991:196-199).

In addition, Korah (1992:172-173) suggests that the assessment of “a minimum

efficient scale of production may be supported by sales partly through each kind of

outlet on the supply side” and criticizes the Court‟s reasoning in acquiring a brewery

to penetrate the market as follows:

I wonder how often it would be possible to market a new brand of beer by buying an
existing brewery when there are few free bars. Part of the assets would be the
brewery itself and its tied outlets might not be able to take both the old and the new
beer in sufficient quantities. The view that new bars might be opened in the absence
of regulation, however, seems likely to be of wide application, except in country
districts when the minimum economic scale for a bar might be large in relation to the
small number of social drinkers in the neighbourhood or in the United Kingdom
where the licensing laws often make it impossible.

The importance of the Delimitis case lies in the wider application of Article 81(1),

which prohibits the agreements that have “the effect” of restraining competition.

Although the object of the agreements was not to restrain competition, their effect

was (Lasok, 1991:196-197).

3.2.2. Langnese-Iglo and Schöller

Subsequent case law involves two ice-cream cases77, where the Commission adopted

two decisions against Langnese78 and Schöller79, applying Article 81(1) to their

agreements and refusing exemption.

77
Langnese-Iglo v. Commission, Case T-7/93, and Schöller v. Commission, Case T-9/93 ([1995] ECR
II-1663, 5 CMLR 602).
78
93/406/EEC, OJ [1993] L183/19.
79
93/405/EEC, OJ [1993] L183/1.

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Rather than applying Delimitis test, the Commission asked three questions in order to

determine the validity of the application of Article 81(1) (Pheasant and Weston,

1997:326-327):

(1) Does the agreement itself have an appreciable effect on competition in the
common market or trade between Member States?
(2) If not, do all the agreements of this kind entered into by the undertaking
concerned have this effect?
(3) If not, do all the agreements of this kind which exist in the relevant market have
this effect?

Answering any of these questions in affirmative would be enough to apply Article

81(1). Since the numeric and volume weighted foreclosure effect of Langnese-Iglo's

and Scöller‟s agreements were more than 25% in total, the Commission prohibited

the agreements without considering the effect of other manufacturers' agreements on

the market. The CFI did not reject the Commission‟s conclusion, but applied

Delimitis test (Pheasant and Weston, 1997:326-327).

According to the CFI, “the networks of exclusive purchasing agreements set up by

the two main producers affect[ed] about more than 30% of the market”, both in
80
number and volume . The large number of freezer cabinets lent by Langnese to

retailers made market access difficult for new competitors, since the entrants had to

persuade the retailer either to exchange Langnese‟s cabinet or install another one.

The first option would fail, if the newcomer was able to offer only a limited range of

products compared to the incumbent supplier, and the second option might fail

particularly because of lack of space in small sales outlets. Economies of scale, and

strength of the brands were also important81. Besides, the agreements subject to tacit

renewal that might endure beyond five years had to be regarded as having been

concluded for an indefinite duration82.

80
Langnese-Iglo, para.104-105.
81
Langnese-Iglo, para.107-110.
82
Langnese-Iglo, para.135-138.

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Like Delimitis, both the Commission and the CFI showed that in order to create a

foreclosure effect in the market, being dominant was not required, underlining the

“strong position” occupied by Langnese83.

In addition, the Commission was not required to indicate “which agreements do not

make a significant contribution to any cumulative effect caused by similar

agreements on the market”, while withdrawing the entire benefit of block exemption,

but to examine the actual impact of the network of agreements on competition84.

Korah (1994:173-174) criticizes the Commission for stressing market shares, since

there might be “ample free outlets to take the output of Mars”, and avoiding

“comparison with the minimum viable scale of distribution, as required by the Court

in Delimitis”.

3.2.3. Hoffmann-La Roche

In 1976, the Commission issued a decision, finding that Hoffmann-la Roche & Co.

Ag (Roche) had abused its dominant position on the markets of certain vitamins, by

concluding exclusive purchasing agreements with 22 purchasers or granting them

fidelity rebates or applying English clause. On appeal, the ECJ stated:

Obligations of this kind to obtain supplies exclusively from a particular undertaking,


whether or not they are in consideration of rebates or of the granting of fidelity
rebates intended to give the purchaser an incentive to obtain his supplies exclusively
from the undertaking in a dominant position, are incompatible with the objective of
undistorted competition within the common market, because - unless there are
exceptional circumstances which may make an agreement between undertakings in
the context of Article 85[81] and in particular of paragraph (3) of that Article,
permissible - they are not based on an economic transaction which justifies this
burden or benefit but are designed to deprive the purchaser of or restrict his possible
choices of sources of supply and to deny other producers access to the market85.

This case can be seen as an example of customer foreclosure, since Roche prevents

rival vitamin suppliers from dealing with customers.


83
Langnese-Iglo, paragraphs 112, 165, 182 and 190.
84
Langnese-Iglo, para.188-196.
85
Hoffmann-La Roche, para90. Emphasis added.

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3.2.4. BPB Industries

BPB Industries was controlling about half the production capacity for plasterboard in

the Community and its wholly owned subsidiary, British Gypsum Ltd (“BG”), had

supplied about 96% of the plasterboard sold in the UK. BG provided loyalty rebates

to the merchants in exchange of exclusive purchasing when two rival companies

importing plasterboard from France and Spain entered into the market. The

Commission decided that BG abused its dominant position and imposed fines.

The CFI affirmed the case considering that these exclusivity clauses amounted an

abuse, since the competition in the market was already restricted because of the

dominant position of an undertaking, and “the conclusion of exclusive supply

contracts in respect of a substantial proportion of purchases constitute[ed] an

unacceptable obstacle to entry to that market”86.

3.2.5. Masterfoods

Masterfoods is another ice-cream case, but this case differs from the previous ice-

cream cases since it involves a dominant firm and application of Article 82, as well

as Article 81. The case is still pending before the CFI, but the Commission‟s

Decision87 and the Opinion of Cosmas AG88 upon a reference from the Supreme

Court of Ireland is quite helpful to examine the case.

Van den Bergh Foods Limited, formerly “HB”, provided freezer cabinets to retailers

to stock its ice-cream products on the basis of cabinet exclusivity” in Ireland, and

prevented Mars Ireland‟s (“Mars”) products from being placed in these cabinets by

obtaining an order from the Irish High Court89.

86
BPB Industries, para.65-68.
87
98/531/EC OJ [1998] L246/1.
88
Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 14.
89
See Murphy (1992) for the comment on this decision.

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Mars applied to the Commission, which adopted a decision in 199890, finding HB

infringing Articles 81-82 EC. The Commission stated that HB‟s cabinet exclusivity

was leading de facto outlet exclusivity and foreclosing “some 40% of all outlets in

the relevant market91, representing some 40% of total impulse ice-cream sales in the

relevant market”92. Therefore, Article 81(1) was applicable but not Article 81(3)

since all the conditions for exemption were not met93.

Regarding Article 82, HB was in a dominant position, because (a) its share in the

relevant market never fell below 70% for many years, (b) it had great economic

strength by virtue of its volume of production and scale of supply, (c) its product

range was superior to its rivals (d) it had other advantages in distribution due to its

parent group. Hence, de facto exclusivity94 constituted an abuse within the meaning

of Article 82, since it made market penetration and expansion more difficult for the

rivals, and limited the freedom of choice of the retailers and consumers95.

Likewise, Cosmas AG applied Delimitis test to the agreements of HB, and agreed

with the conclusions of the Commission regarding Article 81(1) and 81(3) stating,

“competition between brands may not be replaced by competition for access to retail

shops”96.

90
Before adopting the decision, the Commission issued a Statement of Objections against HB in 1993
and requested HB to make certain amendments in its agreements to benefit from exemption under
Article 81(3). McDowell (1995) considers this statement as a compromise, and after comparing ice-
cream distribution markets in US and Ireland he applies Whinston‟s (1989) model to the facts of the
case. He concluded that the freezer exclusivity would not lead to market foreclosure effect described
by Whinston and HB‟s arguments regarding efficiency should have been taken into account.
See also Robertson and Williams (1995) finding Irish Court‟s decision and UK Monopolies and
Mergers Commission‟s decision inappropriate in their respective cases related to freezer exclusivity
and inviting the European Commission act against freezer exclusivity.
91
“single wrapped items of impulse ice cream in Ireland”.
92
98/531/EC, para.142-210.
93
98/531/EC, para.221-247.
94
It is interesting to compare this case with FTC v Sinclair Refining Co. (261 US 463, 1923), where a
similar situation rose: Sinclair had prohibited gasoline stations from using its dispensers for selling
rival companies‟ oil. The Supreme Court ruled that retailers were free to install other companies‟
dispenser, so there was no foreclosure, even though this conduct has resulted in station exclusivity.
95
98/531/EC, para.255-271.
96
Masterfoods, A65-89 and fn:65; A99 and A102.

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3.3. Evaluating the EC Practice

In the EU experience, the concept of “foreclosure” attached to the cumulative effect

of vertical restraints in a market. Therefore, if certain conditions are met, the network

of the agreements that contributes significantly to this effect is to be condemned

under Article 81, not because of its “object” but because of its “effect”.

However, foreclosure potential of vertical agreements are taken into consideration

under Article 82 before Delimitis. For example, in Hofman-La Roche, Roche was

condemned for practices that deny market access to the rivals (in other words,

customer foreclosure). But, unlike Delimitis, detailed analysis of foreclosure was not

required, perhaps given the dominant position of Roche and the level of trade.

Nevertheless, in Masterfoods, the Commission applied Article 81 and 82, as well as

Delimitis test.

Another issue is that, Langnese-Iglo and Schöller introduced a new concept called

“strong position”, which referred to the strength below dominance. This concept is

taken to the Guidelines as “market power”. Therefore, the vertical agreements of the

firms, which do not have market power, were exempted automatically, where the

agreements of the firms with market power were found able to create foreclosure

effect and analysed in detail under 81(1) and 81(3). On the other hand, dominant

firms‟ agreements are evaluated under 81 and mostly 82. This issue will be discussed

in the last chapter.

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CHAPTER FOUR

THE TURKISH PRACTICE

4.1. Legal Framework

4.1.1. The Act

The Act on the Protection of Competition (“APC”)97 came into force in December

1994, as a result of the liberalization process and the adoption of acquis

communautaire. The Competition Authority started functioning in November 1997.

Substance of Articles 81-82 EC is almost identically reflected in Articles 4-6 APC,

save that 81(1)EC and 81(2)EC are embodied in Article 4 APC whereas exemption

provisions take place in Article 5 APC. Therefore, Article 4 APC reads as follows:

Agreements and concerted practices of the enterprises and decisions and practices of
the associations of enterprises the object or effect or the possible impact of which is,
directly or indirectly, to prevent, distort or restrict competition in a certain market for
goods and services, are unlawful and prohibited.

There are two minor differences between the examples listed in Article 4(a-e) APC

and Article 81(1)(a-e) EC, but since these lists are not delimited, the differences are

of no importance in practice.

Two positive and two negative conditions –like the ones provided in Article 81(3)

EC– for granting exemption, and the capacity of issuing communiqués are set in

Article 5 APC.

Article 6 APC deals with abuse of dominance in line with Article 82 EC:

Any abuse, by one or more enterprises acting alone or by means of agreements or


practices, of a dominant position in a market for goods and services within the whole
or part of the territory of the State, is unlawful and prohibited.
Again, there are a few minor differences between the examples listed in Article 4(a-

e) APC and Article 82(a-d) EC.

97
The Act on the Protection of Competition and communiqués can be found in English on the
Competition Authority‟s website: www.rekabet.gov.tr

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4.1.2. The Communiqués

The details of and changes in the European competition law are reflected in the

communiqués, which are essentially secondary legislations to the APC.

From 1997 to 2001, vertical restraints were regulated by block exemption

communiqués on “the exclusive distribution agreements”98, “the exclusive

purchasing agreements”99, “distribution and servicing agreements in relation to

motor vehicles”100, “franchise agreements”101, which were parallel to those of the

European Commission.

In 2002, pursuing Commission Regulation 2790/1999 (“ECRVR”), the Block

Exemption Communiqué on Vertical Agreements102 (“BECVR”) is introduced and all

the regulations cited above are abolished.

The main provisions of these two regulations (i.e. „black clauses‟) are in line with

each other, except for the market share threshold requirement and some provisions

related to the duration of the agreements and withdrawal103.

According to Article 6 BECVR, the Competition Board may withdraw the benefit of

the Communiqué from an agreement that is incompatible with the principles laid

down in Article 5 APC, after hearing the parties. The Board can also withdraw the

block exemption –by issuing another communiqué – from an entire market if the

parallel networks of vertical agreements foreclose a substantial part of it.

The most important difference is the lack of thresholds. All the undertakings can

benefit from that regulation regardless of their market shares, unlike the ECRVR.

98
Communiqué 1997/3 RG [1997] 23100, corresponding Regulation 1983/83 EEC.
99
Communiqué 1997/4 RG [1997] 23105, corresponding Regulation 1984/83 EEC.
100
Communiqué 1997/4 RG [1997] 23105, corresponding Regulation 1475/95 EEC.
101
Communiqué 1998/7 RG [1998] 23555, corresponding Regulation 4087/88 EEC
102
Communiqué 2002/2 RG [2002] 24815.
103
Compare Article 5 ECRVR to Article 5 BECVR.

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Besides, although the power to declare the regulation inapplicable for certain markets

is given to the Authority, no thresholds for market coverage is stated unlike Article 8

ECRVR104.

4.2. Leading Decisions in Turkey

Given the six years history of competition law in Turkey, there are only two

decisions regarding market foreclosure. It is required to bear in mind that these

decisions are administrative decisions –like those of the Commission – and although

some of the decisions of the Authority are pending before the Court d‟État for

appeal, almost no judgement has been given yet.

4.1.1. BİRYAY Decision105

In May 1996, YAYSAT and BBD, newspaper distribution companies of two leading

media groups, established a joint venture called BİRYAY. They ended all of their

existing contracts with the third party publishers and drove them to BİRYAY as the

sole distributor of third party materials106. Therefore, duopolistic structure of the

market transferred into a monopolistic structure. At the same time, BİRYAY raised

commission rates for these publishers, and BBD and YAYSAT started using their de

facto exclusive sales points reciprocally.

A few months later, a newspaper publisher parted from BİRYAY and established a

rival newspaper distribution company, DBD, which tried to access sales points. BBD

and YAYSAT forced these sales points to “make a choice” and signed exclusive

104
Comparing that in ECRVR, withdrawal provisions take place in three different articles: Article 6
gives power to the Commission to withdraw the benefit of the regulation from an agreement,
Article 7 gives that kind of power to the national authorities on certain conditions, and Article 8
provides that the “Commission may by regulation declare that, where parallel networks of similar
vertical restraints cover more than 50 % of a relevant market, this Regulation shall not apply to
vertical agreements containing specific restraints relating to that market.”
105
Decision No:00-26/292-162, [2001] RG 24384. (“BIRYAY”)
106
Hereinafter, the world “materials” will be used to refer to newspapers and magazines.

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contracts. Upon being prevented from accessing the sales points, DBD‟s distribution

was limited to a few magazines until it ceased its services in September 1997107.

Following a complaint the Board carried out an investigation and made a decision in

2000, imposing fines on BBD, BİRYAY and YAYSAT for the breach of Articles 4

and 6 APC, dismissing the exemption request for BİRYAY, annulling exclusivity

clauses in the relevant market and introducing certain obligation for some outlets.

The relevant market was countrywide “market for the distribution of newspapers and

journals”, including the processes of taking materials form the publishers, shipping

them -through regional offices and designated wholesalers- to the sales points for

display and sale. Hence, all these services were integrated and they had to be

assessed as a whole, while noting that regional offices were the natural extensions of

these distribution companies whereas the designated distributors and sales points

were contractive parties.

The market share of BBD fluctuated between 30-40%, whereas YAYSAT‟s market

share was 70-60% during the last six years. Besides enjoying 100% of the market

together, their parent groups had more than 70% market share on newspaper

publishing market, and several broadcasting stations. There was no entry to the

relevant market during the last six years, and BBD and YAYSAT had managed to

raise the prices more than 50% on one day via BİRYAY. Conversely, BBD or

YAYSAT could not raise the price to such an extent without the other‟s consent.

Therefore, BBD and YAYSAT were jointly dominant.

Due to the buying patterns of the customers, geographical features of the country and

inefficiencies in postal services, there was no subscription or delivery service which

could substitute this distribution network. All the publishers of periodical materials

107
Two months later, in November 1997, The Competition Authority completed its organization and
started functioning.

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had to use distribution companies (which had to deal with the sales points) to reach

the readers.

The Board divided the outlets into two categories: Groceries, supermarkets and all

the outlets alike (non-kiosk outlets) were brought into the first category, while kiosks

were held in the second. There were three main differences between them108:

- The main affair of non-kiosk outlets was to sell other goods rather than

newspapers and magazines, and they sold only a limited range –enough to attract

customers–, and the revenue generated by these materials was not important in

contributing to their turnover. On the other hand, kiosks‟ business was limited to

selling newspapers and magazines, and they were usually banned from selling

other goods by administrative regulations. Thereby, their turnovers were solely

generated by these sales.

- Kiosks were installed in public squares or along avenues, under the

administrative authorities of the municipalities. They were limited in number and

hired via bidding process. The installation of numerous kiosks alongside one

another in a given area was not possible and municipalities were not able to offer

a place for every distribution company. Thus, there was no close substitute for

kiosks.

- Compared to non-kiosk outlets, kiosks were more important for the distribution

companies, because although they were limited in number, their aggregate sales

volume was higher than those of non-kiosk outlets.

Three kinds of vertical agreements, (a) between BİRYAY and the publishers, (b)

between distribution companies and their designated wholesalers, (c) between

distribution companies and sales points, were mentioned in the decision.

108
BİRYAY, §K.4.

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The experts carrying out the investigation reported that the agreements between

BİRYAY and the publishers infringed the law, as they were restricting competition

and were not in the scope of block exemption regulations109, but the Board declared

that these agreements enjoyed the block exemptions regulations, without reasoning

its argument110. Besides, agreements between distribution companies and their

designated wholesalers enjoyed block exemption on exclusive dealing.

It is shown that BBD and YAYSAT concluded almost identical agreements with

sales points111. Each of them prohibited outlets dealing with the materials supplied by

competing firms, without written consent. However, BBD and YAYSAT did not

recall this non-compete obligation reciprocally against each other‟s materials, but for

the entrants‟.

The impact of these restraints on access to the market was widely discussed. The

importance of the outlets and the problem of product range/capacity were stressed at

first:

In order to access to the newspaper and magazine distribution services market and
survive there, two elements are of critical importance:
a) Accessing to/establishing sufficient number of retailers that will sell the
materials to the readers.
112
b) Supplying these retailers with adequate range and volume of materials .

The parent groups of BBD and YAYSAT were also jointly dominant in the upstream

market, and they had the advantage of supplying the sales points with adequate range

and volume of the materials. Then, it was examined whether these exclusive sales

point networks created an entry barrier, and whether they were essential for market

access.

109
BİRYAY, §H.
110
BİRYAY, §L.1.
111
BİRYAY, § I.3.1.3.
112
BİRYAY, §K.4.

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Lack of objectivity in the exclusivity clauses and reciprocity practices were also

criticized. According to the Board, all these vertical agreements and the reciprocity

practice could also be assessed as „a horizontal agreement‟ against newcomers.

The features of newspapers and magazines and buying patterns of the readers were

studied: The prices of these products were relatively low compared to most goods

(i.e. they were not luxury, specific services were not required for sale, they “expired”

on the same day etc.), the buying decisions of the consumers were prompt, and

readers used to switch to other papers according to price changes and promotion

campaigns, and if a reader could not find the paper that he was looking for in a given

sales point, he would likely substitute it with a similar one, instead of searching

further113.

Newspaper and magazine publishers (customers of the distribution companies) aimed

to deliver their materials to as many readers as possible, providing they were

displayed and sold in consistency with their image, without facing physical damage.

Therefore the Board stated:

… it is not plausible to think that any given publisher would like to contract with a
distribution company, which have the publisher‟s newspapers and magazines
displayed and sold in butcheries, greengrocers, millineries, draperies or on the
benches laid on the pavements, parted from the rivals‟ materials[114]. Then the natural
outcome is, the new distribution companies trying to enter the market, without
managing access to sales points, will not be able to make any agreements with the
publishers and therefore will be driven out in a short period of time115.

When the sales points were forced to make a choice between the materials of BBD-

YAYSAT and newcomers, they would tend to choose the distribution companies that

carry the largest product range, since they had no alternatives to obtain them from

elsewhere.

113
BİRYAY, §K.4.
114
That was actually what DBD had to do during nine moths before it was driven out of the market.
115
BİRYAY, §K.4.(Emphasize original)

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The Board concluded that demanding that each entrant establish more than ten

thousand new sales points was an entry barrier, considering existing sales points

were not easily substitutable, and doing that was not economically rational. This

barrier was the outcome of incumbent firms‟ vertical restraints on sales points. After

annulling exclusivity obligation, all the distribution companies would have the

chance to use the same sales points, providing them with a greater product range, and

stimulating the competition in the publishing market.

The total impact of all the vertical agreements in the market is also assessed:

In this case, the impact of all the agreements concluded between the distributors and
sales points should be assessed as a whole, rather than being assessed as individual
agreements. Since the BBD and YAYSAT are the major supplier of the sales points,
and the companies that distribute only limited kind of products cannot offer similar
conditions to these points, the sales points purchase all their requirements from BBD
and YAYSAT, making it difficult for the suppliers to penetrate. This exclusivity also
harms the sales points and readers by limiting their freedom of choice, as well as the
potential entrants. Vertical agreements that bear exclusivity clauses can be exempted
in several markets, but not in the relevant market where the competition is already
weakened (…)116.

The Board stressed, “even if these vertical restraints were under the scope of block

exemption regulations, it was to be decided that these regulations would not be

applicable to the agreements in the relevant market due to the structure of the

market”.

As a result, the Board prohibited all the existing and future distribution companies

from applying exclusivity clauses (or any clause that has a similar effect) on the sales

points in the relevant market. In addition, new regulations were introduced for the

kiosks allocated by the municipalities, due to their different characteristics from

other sales points –such as difficulties in substituting them and their sales capacities.

116
BİRYAY, §K.4.

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BİRYAY DECISION

(Decision of The Turkish Competition Authority)


Structure of the Market

Before After
1 June 1996

NEWSPAPER &
DOGAN All Other SABAH DOGAN All Other SABAH
(Leader) Publishers (2nd Biggest) MAGAZINE (Leader) Publishers (2nd Biggest) X
PUBLISHING
MARKET
BİRYAY
BBD BBD NEW
YAYSAT YAYSAT
ENTRANT
NEWSPAPER &
MAGAZINE
Designated S. Designated S. DISTRIBUTION Designated S. Designated S. Designated S.
YAYSAT BBD YAYSAT YAYSAT & BBD BBD
X
MARKET

Sales point Y Sales point B Sales point Y Sales point Y&B Sales point B

READERS READERS

X Access to inputs/ retailers prevented.


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4.1.2. Turkcell Decision117

Telsim, a Turkish GSM operator, charged its rival, Turkcell, for abusing its dominant

position by tying handset distributors exclusively and foreclosing handsets market to

Telsim lines.

The Board defined the relevant market as “Turkish GSM services”, including GSM-

900 and GSM-1800 bands, and “Turkish GSM handsets market” was found

“ancillary” to that. In addition, Turkcell was found in a dominant position in the

relevant market.

The Board explained the de facto exclusivity between Turkcell and mobile phone

distributors, stating that Turkcell organized campaigns with the distributors of

handset brands preventing them dealing with rival operators during the campaign,

and surprisingly the campaigns lasted ever, constituting the 98% of the total handset

sales with Turkcell line. The Board also showed aggregate market share of four

handset distributors that took part in these campaigns was about 60%118.

Turkcell and Telsim used to give SIM cards to distributors and parallel importers of

handsets, who matched these cards with the handsets and sold them to retailers.

Therefore, the [handset] distributors are unavoidable partners for the operators.
Engagement of these distributors by the dominant undertaking in GSM services
market and foreclosing them to rival operators distorts competition in GSM services
market119.

Meanwhile, Turkcell had made exclusive agreements with 610 outlets called

“TAM”s. They were entitled to conclude “mobile service contracts” besides giving

other services, and undertook “not to sell or activate the handsets of Turkcell‟s rivals120.

117
Decision No: 01-35/347-95 on 20.07.2001, (“Turkcell”), not published yet.
118
Turkcell, §H.3.1.1.2.
119
Turkcell, §H.4.1.3.
120
Emphasis added.

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Apart from the TAMs, there were about 6500 “independent” handset retailers that

used to sell different handset brands, regardless of GSM operators. In 2000, 4381 of

them were “attached” to TAMs and called TANs, on which Turkcell established de

facto exclusivity by indirect financial supports. Therefore, they started selling

“Turkcell handsets” only, among the ones supplied by the distributors.

Simultaneously, Turkcell ceased to support the handset retailers in case they sold

“Telsim handsets” or lines.

The exclusivity regarding TAMs and TANs resulted in almost all the handsets

displayed and sold in the retailers being “Turkcell handsets”. The crucial point was

that, through these agreements, the distributors lost their ability to sell “Telsim

handsets” to their own retailers –even if they did not have an exclusive campaign

with Turkcell - since the retailers undertook not to sell or to activate the handsets of

Turkcell‟s competitors.

As a result, the rival operators had to supply handsets through parallel imports, and

provide outlets for their sale. Since the distributors refused to give service to parallel-

imported handsets, the operators had to pay the service and maintenance costs of

these handsets and subsidize them more than they would “the Turkcell handsets” in

order to attract customers. Parallel imports also lacked regular shipment of handsets,

and supply of well-known brands, causing extra costs for the rival operators121.

The Board took the view that; the case exclusivity creating market foreclosure can be

regarded as an abuse:

Exclusivity clauses of a dominant undertaking either put on its suppliers or


customers, force them to refuse to deal with all the undertakings but the dominant
one. This kind of exclusivity can constitute an abuse, provided that it leads

121
On the other hand, although the distributors also used to sell handsets without SIM-lock, the
customers did not prefer them, because they were relatively expansive since they were not
subsidized and it was required to pay extra for the line.

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“foreclosure” or “exclusion” of the rivals of the dominant undertaking from the


market.

... Accepting exclusivity as an abuse depends on the foreclosure of the substantial


part of the market, therefore lessening competition in the market 122.

It is also shown that the integration of the independent retailers to Turkcell would

create an entry barrier for future operators, as well as hardening the activities of

Telsim. The Board estimated that, newcomers would not be able to deal with

“formerly independent” handset retailers, and would have to bear extra costs that

would not emerge in normal conditions. Consumers‟ choice was limited as they were

deprived of matching the handsets with the lines according to their wishes.

Therefore, the Board imposed fines on Turkcell for concluding vertical agreements

contrary to Article 4 APC, and for abusing its dominant position (a) by maintaining

de facto exclusivity on handset distributors through promotion campaigns and

preventing them from supplying handsets that are suitable for use with rival

operators‟ lines, (b) by hardening the activities of the rivals unlawfully, through

converting the handset distributors‟ retailers into Turkcell customer points, and

thereby, binding them exclusively in this overlapping structure, (c) by discriminating

the handset distributors in favour of its own subsidiary, or the distributors that

exclusively deal with Turkcell.

In addition to imposing fines, the Board also ordered that Turkcell cease preventing

distributors from making campaigns with rival operators, and annulled the

exclusivity clauses on the TAMs and TANs in cases they were retailers of mobile

phone distributors at the same time.

122
Turkcell, §H.4.2.3.

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4.3. Evaluating the Turkish Practice

In BİRYAY, the agreements with the retailers were already void, since they do not

meet the requirements of the block exemption communiqués. But it is worth noting

that the Authority emphasized, “even they enjoyed exemption, the exemption would

be withdrawn due to their horizontal effects.” Besides, other factors like minimum

viable scale of penetration, and switching costs of the readers and outlets were also

studied in the decision. On that account, the decision traces the Commission‟s

decision against HB Ice Creams123.

However there are still two points to be made: First, it is surprising that the Authority

remained silent regarding foreclosure effects of the vertical agreements concluded

with the publishers, despite pointing out the requirement of supplying the retailers

with (and therefore access to) an adequate range and volume of materials.

Secondly, the Authority withdrew the benefit of the block exemptions not only from

the agreements of BBD and YAYSAT, but also from the entire market. The decision

is remarkable on these grounds, except the way it is done from the point of view of

law: In principle, the Authority should have issued another communiqué concerning

the market to revoke the benefits granted by previous communiqués, instead of being

satisfied with addressing the parties.

123
98/531/EC OJ [1998] L246/1. See Section 3.3.2 of this work. It also seems that the Authority
followed the reasoning of Jacobs AG in Oscar Bronner v Media Print Case (C-7/97 [1998] ECR I-
7791). but reached a different conclusion because of the facts of the case: DBD was trying to enter a
distribution market whilst Bronner was trying to enter the newspaper market, and in Turkey, there was
no alternative than to deal with the outlets for a distribution company. Therefore, besides finding
access to outlets vital, the Authority went further and obliged kiosks to deal with all the distributors on
equal terms, but without expressing “essential facilities”. By doing so, the Authority also rejected the
defence of “competition for exclusivity” regarding kiosks, since they were significantly important for
reaching a viable scale of consumers.

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In Turkcell, the Authority took vertical restraints with handset dealers, as well as the

handset distributors. The de facto exclusivity on distributors of handsets is not

vertical in nature, since the handsets are regarded as complementary products to

GSM services. But the Authority pointed out Turkcell‟s attempt to foreclose the

market by tying the retailers of handsets exclusively.

The last criticism is related to the new regulation on vertical restraints: It is quite

surprising that after these two decisions, the Authority did not see the need to

introduce any thresholds while replacing the previous straightjacket regulations with

a broader one, which is more prone to abusive practices.

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CHAPTER FIVE

COMPARISON AND CONCLUSION

5.1. The Theory of Foreclosure

The theory of foreclosure, with the Krattenmaker & Salop‟s theory of “raising rivals‟

costs”, suggests that a firm can use vertical restraints (mainly, exclusivity contracts

such as exclusive purchasing or single branding, or equivalent restraints like quantity

forcing) in order to foreclose the customers or the efficient suppliers. The potential

rivals are either denied access to the market or forced to operate relatively high costs.

The latter risk is also valid for extant rivals as well as the potential ones. These high

costs may arise because the rivals have to either use less efficient suppliers‟ products

that are rather expensive or of inferior quality, or because of the collusive conduct of

remaining suppliers. Therefore, the firm using vertical restraints may achieve the

power to raise the price of the product (or prevent it from falling), due to its rivals‟

high costs, even though they are not driven out.

Input foreclosure occurs where the rivals are prevented from dealing with efficient

suppliers, while customer foreclosure exists where the rivals are deprived of reaching

a sufficient number of customers. A firm can also foreclose both inputs and

customers forcing the competitors to enter into both levels of the market. The

foreclosure strategy is credible if the foreclosed input is of high importance for the

rivals or the rivals cannot reach a viable scale as a result.

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Competition for exclusive rights and contestable markets theory are sometimes put

forward as defence for offsetting the effects of foreclosure, but the theory also shows

that their application is limited.

Apart from exclusive dealing, a firm can also foreclose a market through another

type of vertical restraint: tying. In this case, the rivals are deprived of reaching a

viable scale in the tied-goods market.

Nevertheless, in theory, keeping the rivals out by foreclosing the market does not

result automatically in diminishing consumer welfare. Therefore, at the second stage,

actual or potential harm to consumers must be proven in addition to the foreclosure.

The way to do is to prove that the firm employing vertical restraints to create the

foreclosure will have enough power on prices –thereby harm consumers– as a result.

Otherwise the injury will be limited to rivals. But, this requirement varies in practice

among different jurisdictions, since Lever and Neubauer (2000:15) suggest, “…in

both welfare economics and the application of competition law, it is the factual facts

that matter and rule of thumb cannot provide a complete substitute for a detailed

investigation of the facts”.

5.2. Elements to be assessed in identifying foreclosure

The US, the EC and the Turkish practices take into consideration similar elements in

assessing foreclosure: definition of the relevant product and geographic markets and

the level of trade; availability of alternative sources; the power of the parties; the

object and the effect of the vertical restraints; features of the market; nature of the

products and duration of the agreements.

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Like most competition cases, definition of the market is crucial in the assessment of

the effects of the agreements in question and in the evaluation of the power of the

parties. Customer side substitution is an important element in defining the relevant

market. This can be seen in most foreclosure cases:

In beer and ice-cream cases in the EU and in Standard Stations124 and 3M v.

Appleton125 in the US, the markets are defined narrowly compared to the supply side.

For example in Delimitis126, the relevant market is limited to “the distribution of beer

in premises for the sale and consumption of drinks”, although the breweries could

supply beers thorough supermarkets, off-licence shops etc. Likewise in those cases

involving ice-cream, despite the fact that the producers provide bulk ice-cream for

the catering industry and restaurants, and sell multipacks in supermarkets, the

relevant market is confined to “single wrapped items of impulse ice cream”. In

Standard Stations, the retail level was taken into account whilst most of the

production of the firms sold to industrial consumers.

Therefore, the level of trade is important in defining the relevant market and

assessing the effects of foreclosure. For example in Ryko127, “where the exclusive

dealing restraint operated at the distributor level, rather than at the consumer level, a

higher standard of proof of „substantial foreclosure‟ was required”. Parallel to this,

in EC the Commission states that “foreclosure is less likely in case of an intermediate

product”, “for final products, foreclosure is in general more likely to occur at the

retail level, given the significant entry barriers for most manufacturers to start retail

outlets just for their own products” 128.

124
Standard Oil Company of California et al. v. United States, 337 US 293 (1949).
125
Minnesota Mining & Mfg. Co. and Imation Corp. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138 (D.
Minn.1999).
126
Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210.
127
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987).
128
Guidelines, para.146, 148, 209.

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In addition, all the cases mentioned above point to the importance of defining

coverage, or to the trade effected under vertical restraints. Therefore, merely

calculating the number of outlets tied exclusively in relation to the number of “free”

outlets is not enough to be able to reach a satisfactory conclusion. The volume of

trade affected should be identified, and must be substantial for foreclosure (i.e.

preventing rivals from reaching a viable scale).

Besides this, other opportunities, such as the availability of alternative distribution

channels, suppliers and substitutable products should be considered129. Likewise, the

number and the size of the producers (concentration), the degree of saturation of the

market, and customer loyalty should be taken into account.

Regarding the products in question, the following criteria could be helpful: Firstly,

since the brands play an important role in meeting the demand of final consumers,

retailers may face more difficulties compared to the manufacturers that can substitute

inputs (intermediate products) easily. Secondly, the substitution of homogeneous

products can be easier than those of heterogeneous ones130. In addition, product

range, the buying patterns of customers and their switching costs play important roles

at retail level. For example, in Masterfoods and BİRYAY it is seen that on equal

grounds outlets tend to choose the firm with the widest product range.

Finally, the duration of the agreements should be taken into account. Long term

agreements increase potential rivals‟ cost of entry, while short-term agreements may

provide ground for competition for exclusive agreements, depending on the other

features of the market. In addition, the effective duration of the contracts rather than

“nominal” duration must be analysed.

129
See Korah (1992) for limits to penetration possibilities.
130
Guidelines, para. 209. However, this assumption also has certain limits, since in the US, Alcoa
managed to foreclose a homogenous, intermediate product: electricity. See United States v. Aluminium
Co. of Am., 148 F.2d. 416 (2d Cir.1945).

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5.3. Differences between the US, the EC and Turkish practices

In the US, §1 Sherman Act adopted to prohibit agreements, or conspiracies that have

the “aim” of restraining trade, and §2 Sherman Act condemns “monopolisation”,

requiring a “certain degree of power” and “intention to monopolize”. In addition, §3

Clayton Act is designed to capture the vertical agreements that have the “effect” of

reducing competition and creating monopoly. Since the US do not have an

“exemption system”, some agreements (mostly horizontal hardcore restraints and

RPM in vertical agreements) are regarded as illegal per se, while others, especially

vertical restraints, are assessed under the rule of reason test, which requires the

comparison of anticompetitive effects with the overall consumer welfare. Therefore,

§3 Clayton Act provides a fertile ground for alleging foreclosure, focusing on

vertical agreements, and stressing the “effect” and “substantial lessening of

competition”.

The US case law evolved from requiring straightforward market share and

foreclosure rate figures to demanding detailed analysis of market power and

anticompetitive effects on consumer welfare, in the light of the theory. Therefore, it

is required to demonstrate the “substantial market power” of the firm. Besides, the

“object” and “the effect” of the vertical restraints are somehow amalgamated, since

the “intention” and the “capacity” of the firms (to harm consumers) gained

importance in the evaluation of foreclosure. It is also accepted that, even in the case

where foreclosure is identified, firms will not be condemned unless it is also proven

that this foreclosure will harm consumers.

Regarding the EC, there are two main competition law provisions for dealing with

vertical restraints and foreclosure: Articles 81 and 82 EC. Article 81 differs from §1

Sherman Act, since it stresses the “effect” as well as the “object”, and it is in this

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way that vertical restraints between two undertakings are captured. However, in

some cases, where the individual agreements do not have an appreciable effect on

lessening competition, but where all the vertical restraints alike create a foreclosing

effect cumulatively, a broader interpretation of Article 81 is required. This step is

taken in Delimitis.

The test applied in Delimitis by the ECJ is substantially different to that employed in

the US: First it demands proof that all the similar vertical restraints in the market

prevent or harden access to the market. Then, the network that contributes to that

effect needs to be identified and prohibited under Article 81(1), while leaving the

other networks valid under Article 81(3) –if the other conditions are met.

The first step of this test is of crucial importance, because the CFI did not credit the

Commission‟s approach in Langense-Iglo131 and Schöller132 decisions. In these

decisions, the Commission emphasized the “strong position” of the firms in the

market and found their agreements capable of creating foreclosure, without

employing the first step of the Delimitis test133. This means, the vertical restraints of

firms cannot be condemned for their “potentials” of foreclosure, even though the

firms occupy a strong position in the market.

This approach is also reflected in the relevant EC regulation and guidelines, giving

the Commission, and the Member States the power to withdraw the benefit of the

block exemption from an undertaking‟s agreements, if similar vertical restraints

foreclose a given market. In addition, the Commission can withdraw all the benefits

of the regulation from the entire market if the parallel networks of vertical

agreements cover more than 50% of the market.

131
93/406/EEC, OJ [1993] L 183/19.
132
93/405/EEC, OJ [1993] L 183/1.
133
Langnese-Iglo v. Commission, Case T-7/93 [1995] ECR II-1663, 5 CMLR 602, and Schöller v.
Commission, Case T-9/93 [1995] ECR II-1611, 5 CMLR 602.

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In addition, the approach of the ECJ in Delimitis and of the CFI in Langese-Iglo

essentially deviate from the theoretical US approach by focusing on market access

but ignoring countervailing consumer welfare effects of vertical restraints. In the US,

it is required to prove that not only rivals but also the consumers will be injured as

the result of foreclosure. However in the EC consumer harm is found inherent in

foreclosure. This approach, as also reflected in the EC Treaty, bears the risk of

overriding benefits of vertical restraints in favour of market integration, in the

following ways.

First, it is generally accepted in theory that there is a direct and positive link between

the number of actors in a market and competition. Therefore, consumer welfare is

maintained intrinsically by providing “freedom of access to a market”. Nevertheless,

the theory also suggests that consumers may benefit from vertical restraints even

though they limit competition to a certain extent.

On these grounds, Hawk (1995:977-981) argues that the EC approach is highly

affected by “the Freiburg School notion of restriction on economic freedom” and

highlights the weak points of it, such as the failure to provide an analytical

framework, the distance from microeconomics, the tendency to favour competitors

over consumers and consumer welfare and very broad application of Article 81(1).

Secondly, the goal of the competition policy is not limited to improving consumer

welfare in the EC. Another goal, of at least equal importance, is market integration,

and the competition policy is one of the most important tools for that. This aspect is

also reflected in vertical restraints regulations. The fear is that the undertakings can

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create “private” national barriers by vertical restraints and hinder market integration.

Therefore, providing access to the Member States‟ markets is of high importance134.

Thus, there is no tolerance of any restraints that may harden market access, even

though there is “sufficient” competition in the market, since vertical restraints create

efficiency and they are not the result of strategic conduct but a mere outcome of a

competitive process. A good example of this argument can be the Delimitis case

involving 27 large brewers who accounted for 50% (and 100 brewers for 86%) of

total production.

Hawk (1995:977-981) draws attention to the conflict between these two goals stating

that market integration requires more sophisticated economic analysis to reconcile

the consumer welfare considerations, while the economic freedom notion eliminates

economics.

The Turkish legal framework is almost identical to those of the EC. Therefore,

Article 4 APC prohibits the agreements that have the “object” or “effect” of

restraining competition. Vertical restraints are assessed under this article, and

secondary legislation gives the Competition Authority the right to withdraw the

benefits of block exemption either from a network or from the entire market.

However, there is no practice regarding such kind of withdrawal, since all the

vertical restraints condemned for foreclosure so far were already out of the scope of

these regulations. Therefore the response of the Competition Authority and the courts

regarding vertical restraints of non-dominant firms that create foreclosure is eagerly

awaited.

134
Green Paper on Vertical Restraints ([1997] 4 CMLR 519), para. 82-84. Also see Bishop and
Ridyard (2002) referring “market partitioning as the case of Commission‟s schizophrenia which may
conflict with the promotion of competition”, and Peeperkorn‟s (2002) reply to them.

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5.4. Does being dominant make a difference?

Being dominant makes a difference both on economic and legal grounds: It is stated

that, the vertical restraints of non-dominant firms can create market foreclosure. This

kind of foreclosure should be separated from the foreclosure resulting from the

vertical agreements of dominant firms, since it refers to cumulative effect in the

market, rather than the strategic conduct to keep the rivals out135. The theory, unlike

the practices, focuses on foreclosure as a “strategy” which also refers to “intention”.

From the perspective of law in the EC, there is no doubt that the dominant firms

cannot benefit from Regulation 2790/99, unlike Communiqué 2002/2 in Turkey. In

addition, according to the EC Guidelines on Vertical Restraints, dominant firms are

almost deprived of individual exemption, since they are required to justify these

restraints within the context of Article 82, in addition to Article 81(3)136.

Article 82 (EC) and Article 6 APC (Turkey) prohibit any unilateral action by

dominant firms that restricts competition. Therefore, if a dominant firm uses vertical

restraint strategically to prevent market access, this constitutes an abuse and relevant

articles are therefore applicable. In the EC, Hoffman-La Roche and BPB Industries

were penalized because they were trying to prevent market access by foreclosing the

costumers. In Turkey, BİRYAY foreclosed both inputs and customers, and Turkcell

foreclosed complementary products. The crucial point in these cases is that the firms

were condemned because of their aims at concluding these agreements, rather than

the outcome of the agreements. So, is it enough for the authorities to show the

“intention” of the dominant firms without applying the Delimitis test?

135
If non-dominant firms agree or collude to employ vertical restraints as a strategy to prevent market
access, this can also be assessed as an horizontal agreement under Article 81.
136
See Guidelines, para.135, 141, 146 and 211.

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The Commission and the ECJ were satisfied with the demonstration of “intention” in

Hoffman-La Roche137 and BPB Industires138, whereas the Commission chose to show

the detailed analysis of foreclosure in Masterfoods139. So, is this the beginning of a

new era –as Korah (1992) mentioned right after Delimitis- in which the Commission

will condemn vertical agreements of firms (including the dominant ones) only if it is

proven that they create foreclosure? Or, will the application of Delimits only be

limited to retail level?

The answer to the first question is probably “no”, since the Guidelines show a degree

of “prejudice” towards dominant firms, and as for the second question, only future

case law will answer that one.

137
Hoffmann-La Roche v. Commission, C-85/76 [1979] ECR 461, [1979] 3 CMLR 211.
138
BPB v. Commission, Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32.
139
98/531/EC OJ [1998] L246/1.

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TABLE OF CASES & DECISIONS

United States

US Supreme Court
FTC v Sinclair Refining Co., 261 US 463 (1923).
Loraine Journal v. United States, 324 US 143 (1951).
Standard Fashion Company v. Magrane-Houston Company, 258 US 346 (1922).
Standard Oil Company of California et al. v. United States (Standard Stations), 337
US 293 (1949).
Tampa Electric Co. v. Nashville Coal Co. et al., 365 US. 320 (1961).

Other Courts
Minnesota Mining & Mfg. Co. v. Appleton Papers, Inc. 35 F. Supp. 2d 1138 (1999).
Omega Environmental, Inc. v. Gilbarco, Inc., 127 F3d 1157 (1997).
Ryko Manufacturing Co. v. Eden Services, 823 F.2d 1215 (1987).
United States v. Aluminium Co. of Am., 148 F.2d. 416 (2dCir.1945).

Federal Trade Commission Decision


Beltone Electronics Corporation, 100 FTC 68, 204 (1982).

European Communities

European Court of Justice


Braserie de Haecht v. Wilkin, Case 23/67 [1967] ECR 407, [1968] CMLR 26.
Delimitis v. Henninger Bräu, Case 234/89 [1991] ECR I-935, [1992] 5 CMLR 210.
Hoffmann–La Roche v. Commission, Case 85/76 [1979] ECR 461, [1979] 3 CMLR 211.
Masterfoods v. HB Ice Cream, Case C-344/98 [2000] ECR I-11369, [2001] 4 CMLR 449.
Oscar Bronner v Media Print, Case C-7/97 [1998] ECR I-7791, [1999] 4 CMLR 112.

Court of First Instance


BPB Industries v Commission, Case T-65/89 [1993] ECR II-389, [1993] 5 CMLR 32.
Langnese-Iglo v. Commission, Case T-7/93 [1995] ECR II-1663, 5 CMLR 602
Schöller v. Commission, Case T-9/93 [1995] ECR II-1611, 5 CMLR 602.

EC Commission Decisions
93/405/EEC (Schöller), OJ [1993] L 183/1.
93/406/EEC (Langnese-Iglo), OJ [1993] L 183/19.
98/531/EC (Masterfoods ) OJ [1998] L 246/1.

Turkey

Competition Board Decisions


BIRYAY, Decision No:00-26/292-162, [2001] RG 24384.
Turkcell, Decision No:01-35/347-95 (2001) not yet published.

69
© Barış Ekdi, 2003

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