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6. Vertical price restrictions

What are vertical price restrictions?

They are restrictions imposed or recommended by an undertaking which affect the prices at which another undertaking operating at a different level of the production or distribution chain sells its products.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.69]

 

The following are common forms of vertical price restrictions:

 

a. Resale price maintenance

b. Recommended or maximum prices

 

a. Resale price maintenance

What is resale price maintenance (RPM)?

The most common example of a vertical price restriction is resale price maintenance. It occurs when a supplier establishes a fixed or minimum resale price for the distributors, for example retailers, to follow when they resell the product.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.71]

 

RPM may be considered as having the object of harming competition if:

 

  1. a supplier implemented the RPM in response to pressure from a distributor (e.g. retailer) seeking to limit competition from competitors of the distributor (e.g. other retailers) at the resale level; or
  2. the RPM is implemented by a supplier solely to foreclose competing suppliers.

Where RPM does not have the object of harming competition, it will be assessed based on its effects including any possibile efficiencies.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.75-6.76]

 

Hypothetical example

HomeStore is the owner of a wide number of household goods shops across Hong Kong. HomeStore is a significant customer of CleanUpCo for a number of daily use products which are widely available in supermarkets, convenience stores, specialist stores and smaller shops.

 

HomeStore is concerned that its competitors, including other large chain stores and smaller independent stores, are offering CleanUpCo’s products at a lower price than HomeStore. HomeStore is concerned that its competitors’ pricing decisions will impact on the profitability of a number of important business lines in its stores. HomeStore therefore pressures CleanUpCo to require its customers to sell CleanUpCo products across Hong Kong at a fixed retail price determined by CleanUpCo. As HomeStore is a significant customer of CleanUpCo, CleanUpCo implements the RPM policy.

 

The Commission would view this arrangement as having the object of harming competition. HomeStore’s insistence on CleanUpCo introducing a fixed retail price across Hong Kong has an inherent ability to harm competition. In this scenario, the purpose of the arrangement is merely to protect HomeStore from the competitive pricing of its competitors. In addition, there would be unlikely to be sufficient justifications for the RPM practice to satisfy the terms of the general exclusion for agreements enhancing overall economic efficiency in section 1 of Schedule 1 to the Ordinance.

 

The Commission would also consider the RPM in the example to be Serious AntiCompetitive Conduct under the Ordinance.

 

[Source: Commission’s Guideline on the First Conduct Rule Example 16]

 

b. Recommended or maximum prices

Recommended or maximum resale price agreements may give rise to a concern where they serve to establish a “focal point” for distributor pricing (that is, where the distributors generally follow the recommended or maximum price), and/or where they soften competition between suppliers or otherwise facilitate coordination between suppliers. An agreement which entails recommended or maximum resale prices will be subject to an analysis of its competitive effects. The more market power the supplier has, the more likely would such agreements have the effect of harming market competition.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.79-6.80]

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