Section 5 of the Competition Act of 1998 (as amended) (the “Act”) regulates vertical agreements and prohibits restrictive vertical practices. In terms of section 5(1) of the Act, a vertical agreement is prohibited if it has the effect of substantially preventing or lessening competition, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive gain resulting from that agreement outweighs that effect.
In this article a vertical agreement will be used to describe the agreement between the parties in a vertical relationship, for example a manufacturer and a distributor.
Vertical agreements are entered into between parties to regulate their relationship. However, there are vertical agreements, due to certain restrictive conditions contained in the agreement, that may have anti competition effects on one of the parties to the agreement. To analyse the potential anti-competitive effects one will need determine whether the vertical agreement impacts inter-brand or intra-brand competition or possibly even both.
Intra-brand competition refers to competition amongst distributors or retailers of the same branded product or substitutable products. For example, a pair of branded lady’s shoes may be sold at a lower price in a low-end shop as compared to a more upmarket shoe shop.
Inter-brand competition refers to competition between suppliers or resellers of the same brand or companies that have developed brands or labels for their products in order to distinguish them from other brands sold in the same market segment. An example of inter-brand competition will be Coca-Cola versus Pepsi.
If a vertical agreement limits the competition between the competing brands and there is insufficient inter-brand competition, the protection of inter-brand and intra-brand competition suddenly becomes important as this could potentially raise concerns about the exclusion or foreclosure of competitors from the market.
If a vertical agreement on the other hand limits competition between resellers of the same brand and there is reduced intra-brand competition, concerns may be raised about “collusive effects that may lead to the consumers being exploited through higher prices or even in a reduction of choice of products”. An example of this will be when the resellers are only allowed to sell the product in certain areas or when they are told at what price to sell the products for. This will lead to a reduction in the competition between the resellers and could be seen as price collusion.
For the purpose of assessing whether an agreement may restrict inter-brand competition and/or intra-brand competition it needs to be considered how and to what extent the agreement affects or is likely to affect competition on the market.
How significant any loss of intra-brand competition will be on the market as a whole will be determined by how robust inter-brand competition is (namely, between the supplier and non-supplier brands in each particular market). If inter-brand competition is weak, the manufacturer may find it useful to create some degree of market power for its distributors (by having few of these and spread out), so that it is not placed under pressure to discount between them.