A Journal for Western Man

 

 

 

The Banning of Vertical Agreements in Europe:

An Anti-Competitive Policy

Molinari Economic Institute

Issue LXVIII- July 29, 2006

 

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Principal Index

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Old Superstructure

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Old Master Index

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Contributors

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The Rational Business Journal

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Forum

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Gallery of Rational Art

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Henry Ford Award

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CMFF: Fight Death

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Eden against the Colossus

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A Rational Cosmology

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Links

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Submit/Contact

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Statement of Policy

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The European Commission has wide powers to make sure businesses and governments stick to European Union competition rules. As one can read on the Commission’s website, " Large firms may not, for example, impose conditions on suppliers which hamper their freedom to do business with other companies. The Commission can (and does) fine companies for all these practices.” In the area of "vertical agreements", namely, agreements between companies working on various consecutive stages of a good’s production, the first landmark judgment took place in 1964. It is the Grundig-Consten case, which has been used as a precedent in order to prohibit exclusive distribution agreements and "restrictive" contracts.

According to the latest report of the Institut Economique Molinari published today, The banning of vertical agreements in Europe: an anti-competitive policy, this case - involving an agreement between these two companies that was declared illegal in 1964 -, reveals the flawed notion of competition that the Commission has adopted. Far from protecting consumers, the banning of vertical agreements harms competition and the consumers.

For the authors of the Economic Note, one must realize that vertical agreements can contribute to better consumer satisfaction: " Exclusive agreements are first and foremost a means for companies to make themselves known and build their reputations. Accordingly, the benefit of the required investment in advertising conducted by the distributors must not be diverted to the advantage of competing distributors that are not taking part in this promotional effort. Without exclusive agreements, investments would not take place and consumers would miss out on the information provided to them by advertising. To the extent that they would choose these products based on the promotional effort, the banning of exclusive agreements harms them.”

Admittedly, "It may be true that companies collude without this bringing any advantage to consumers, as might have applied in the Grundig case. However, even in this situation, there was no need for Community authorities to intervene. Consumers could simply turn to competing brands, requiring Grundig and Consten to reconsider their mode of organization or to disappear. It is competition that enables consumers to decide on the form of company organization that serves them best. By prohibiting vertical agreements, the Commission prevents consumers from leading the free play of competition between various business models and ends up harming them. In actual fact, interventionist policy is what proves to be anti-competitive."

The economic note is available on the IEM website:
French version:
http://www.institutmolinari.org/pubs/note20065fr.pdf
English version: http://www.institutmolinari.org/pubs/note20065.pdf

Contact : Cécile Philippe +33 (0)1 40 95 01 59
                Xavier Méra +32 (0) 2/506 40 04

Institut Economique Molinari               www.institutmolinari.org
Rue du Luxembourg, 23, bte 1            1000 Bruxelles Belgique

This TRA feature has been edited in accordance with TRA’s Statement of Policy.

Click here to return to TRA's Issue LXVIII Index.

Learn about Mr. Stolyarov's novel, Eden against the Colossus, here.

Read Mr. Stolyarov's new comprehensive treatise, A Rational Cosmology, explicating such terms as the universe, matter, space, time, sound, light, life, consciousness, and volition, at http://www.geocities.com/rational_argumentator/rc.html.

 

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