17 October 2008
Buying Alliances are a new phenomenon in the European retail markets. They have antitrust implications and define themselves as being a pro-competitive and pro-efficiency development.
According to their proponents, Buying Alliances not only reduce transactional costs and enhance economies of scale for the benefit of their members, but also work for the benefit of suppliers by expanding and opening up new markets to them. In contrast, officious market sources2 present a very different view in which suppliers would be systematically abused. Some have even described Buying Alliances as creating a state of fear in the market resulting from an ever rising structural imbalance in the supply chain between buyers and suppliers.
Before beginning an antitrust analysis of Buying Alliances, and in order to provide for a sound assessment of this market development from a EU antitrust perspective, it is useful to first answer two basic questions: (i) are buying alliances a behavioural or a structural phenomenon?; and (ii) are buying alliances consumers’ agents?
(i) Buying Alliances are often presented by their members as co-operative entities. However, irrespective of their legal form, they can be considered as constituting a structural event, given their effects in the rebalancing of the market forces between suppliers and buyers, their duration and the delegation by the members of some critical aspects of their market strategy to the group. The declared objectives of Buying Alliances, such as the reduction of transactional costs, could be reached through various legal forms. However, these objectives cannot be attained without their members losing a significant part of independence over critical aspects of market behaviour and without sharing key communication channels between them. In other words, the members of a Buying Alliance, individually, enter a different market game with their suppliers when joining these Buying Alliances, which in turn are capable as a group of changing the market structure.
(ii) If Buying Alliances were considered as a proxy of consumers’ interests — i.e., if Buying Alliances were consumer agents providing consumers with reduced prices for consumer goods and services — then, in general terms, the competition enforcers would understandably be reticent to actively enforce competition rules against them. This would explain a certain perceived tolerance by competition enforcers on some buyers’ behaviour, such as price squeezing, which, under certain circumstances, would blatantly enter the categories of “non-normal commercial behaviour” in the EU antitrust meaning. However, the latter approach would limit competition policy to short term price effects, ignoring consumers’ effects on volume,3 quality, choice, etc. Moreover, most of these Buying Alliances, including their individual members, are not indifferent agents given the enormous importance that their private labels have in their market strategy.
In light of the above, we can outline some considerations with regard to Articles 81 and 82 of the EC Treaty and the ECMR.
Article 81 of the EC Treaty
As set out above, some will see Buying Alliances as a pro-competitive development. Any alleged restriction under the first paragraph of Article 81, e.g., exchanges of information among competitors, would be justified by all the consumer benefits and efficiencies set out in the third paragraph of the same Article. However, others will consider these alliances as constituting de facto unhidden joint buying cartels, at least in their effects.4 In this latter point of view the emphasis is put on the situation where previously independent undertakings in the negotiation process will now pull together their market information and set new common price and output benchmarks while remaining actual or potential competitors.
In addition, attention should be given under Article 81 of the EC Treaty to the membership rules including conditions of access, fees and multiple memberships that potentially exacerbate market power issues. Interestingly, Buying Alliances will have an interest, from an antitrust compliance point of view, to have their organisations as open as possible to purchasers of all kinds. However, the economic interest of their members, and of the group itself, is to keep the alliance restricted to members of the same size or market interest in order to preserve the stability of the alliance and to effectively manage the negotiation process with the buyers.
The vertical aspects of the agreements or practices between buyers and suppliers will have to be reviewed under the 2010 updated Vertical EU rules and guidelines.5
Also, suppliers should be careful not to fall into the temptation of closing de facto exclusivity agreements with some powerful buying groups as a defensive move to countervail the buyers’ market power, as this could have antitrust implications given the actual or potential exclusionary effects on other suppliers.
Article 82 of the EC Treaty
We shall take the legal and economic premise that sellers’ and buyers’ market power should receive the same treatment by the enforcer both in terms of analysis6 and metrics.7 Following on from this, the definition of collective dominance-market power in some procurement markets of consumer goods as a result of Buying Alliances’ market position8 cannot be excluded. Thus, as regards abuses of dominance within the meaning of Article 82 of the Treaty, nothing under standard evidence and burden of proof requirements in EU antitrust law would exclude the finding of well-established anticompetitive categories of behaviour taking the form of predatory buying or bidding, arbitrary termination of orders9 or grossly exploitative abuses such as “wedding gifts.”10
The EU competition enforcer has not hesitated to use its powerful merger control instrument in the name of consumers’ welfare harm12 to curtail some extreme situations that would have resulted from proposed mergers between downstream players, and which would, in turn, have combined their strengths upstream in the procurement markets of the supply chain. These are combinations of monopoly/oligopoly and monopsony/oligopsony market power that the mainstream doctrine has consistently considered harmful from a competition point of view.13 In other circumstances, the framework of analysis and the evaluation outcome is reasonably predictable for merging retailers and buyers that fall under the ECMR thresholds. The markets will naturally be defined as local and, if the case is not referred back to the National Competition Authorities, a package of local divestitures, in the most unfavourable situation, should fix the concerns raised.
The macro-structural market issues both with upstream and downstream effects sketched in this article and increasingly raised in various fora are of a different nature and would demand different remedies.
Buying Alliances are changing the rules of the negotiation game in the supply chain to the detriment of brand manufacturers. This change is being done on a permanent basis with very ambiguous effects in terms of consumers’ welfare — taking into account all relevant competition parameters.
From a competition point of view, the potentially harmful effects of an excessive imbalance in favour of buyers are increasingly visible, and new approaches to the issue could be required from competition enforcers.
A combined use of all antitrust tools in a holistic approach14 plus a more determined use of the ECMR — both in terms of including under its scrutiny de facto structural phenomena that were not considered before15 and through the imposition of new remedies16 — might be initial answers to the matter. The material acknowledgment that both sellers’ and buyers’ market power issues share the same legal and industrial economic foundations and therefore deserve equal attention from competition enforcers is also of the utmost importance.17
1 This paper follows my intervention on 20 May 2008 in an Oxford Conference on Retail and Competition organised by the British Brands Group and other European Brand Owners. This paper is a summary of a more comprehensive article which will be published in a European Legal Journal. I wish to thank Kiran Desai and Lisa Lernborg for their comments.
2 Formal complaints to the antitrust authorities by the alleged victims are extremely rare.
3 The effects of these Buying Alliances on manufacturers’ stocks and the utilization of their fixed assets is certainly interesting in this respect but goes beyond the purposes of this short paper.
4 This kind of legal dichotomy is not new. See in another market sector the never-ending discussions on the legal nature of the European Broadcasting Union where European Public Broadcasters, negotiate, buy and sell together in the market some TV rights.
5 Obviously the present 50 million euro benchmark in the guidelines related to buying groups’ turnover is not materially significant.
6 The theory of harm.
7 Typically the level of market shares or other market power indicators.
8 This would be exacerbated by cross-links between those alliances resulting from multiple memberships and similar strategies.
9 This is particularly controversial when combined with the buyer’s conflict of interest in the protection of theirs and other group members’ own labels.
10 For instance, the demand of excessive, unjustified or non-cost based discounts for the simple reason that the buyers have joined a bigger group or merged.
11 The EU Merger Regulation. Regulation 139/2004.
12 The EU Merger Legal Test is a significant impediment of effective competition.
13 See for instance Kesco/Tuko, Case IV/M.784, Commission decision of 20 November 1996.
14 This will typically be done in the framework and as a result of horizontal market inquiries a way which has been already undertaken by some National Competition Authorities when exploring neighbouring issues such as supermarkets’ market power or anticompetitive behaviours in the food supply chain.
15 See above. Transactions which are presented as non-structural in nature.
16 For instance, the termination of membership in a Buying Alliance or the prohibition of multiple memberships. In addition, an increased vigilance in terms of remedies could also be granted to avoid uncompetitive situations arising from the well-known buyers’ conflict of interest given the promotion and possession of their own labels.
17 See for instance Rewe/Adeg, Case M.5047, Commission decision of 23 June 2008.