Irish Competition Authority Decisions

1. This decision relates to arrangements between Musgrave Ltd. (Musgraves) and a number of independent toy-retailers which were notified to the Competition Authority on 30 April 1992. Under the terms of the agreement the retailers agree to purchase certain toys exclusively from suppliers nominated by Musgraves. The retailers also distribute a catalogue which includes details of prices of a selected range of products.

2. The Authority had discussions with Musgraves which set out its concerns with certain aspects of the arrangements. As these discussions failed to resolve the Authority's concerns, it issued a statement of objections on 15 February 1993, indicating its intention to refuse a certificate or licence. An oral hearing was held on 22 October 1993. Musgraves subsequently indicated their intention to make specific amendments to the arrangements and an amended agreement was completed on 13 April 1994.

3. Notice of intention to grant a certificate was published in the Irish Times on 11 February 1994. No submissions were received.

4. The agreement involves an arrangement between Musgrave Ltd. (Musgraves) and a number of independent toy-retailers. Musgraves operates a central billing system for toys purchased by the retailers and retains a fee from the Long Term Allowance rebate as a payment for the service. There is an obligation on the retailers to purchase a range of toys from certain suppliers.

5. The parties to the agreement are Musgraves Ltd. and a number of independent toy retailers trading under the name of SuperToys. The principal activity of the Musgrave Group is the wholesale supply of groceries to retailers. Musgrave Ltd., the holding company, operates the trade in the State while Musgrave Distribution Ltd., a wholly-owned subsidiary of Musgrave Ltd., carries on the business in Northern Ireland. Since 1979, the Musgrave Group has operated exclusive-purchasing agreements with a number of independent retailers trading under the Musgraves owned SuperValu/Centra names. Musgraves have been involved in the toy industry since 1982.

6. The SuperToys trade name is used as a symbol by a number of independent toy retailers who have undertaken to purchase a certain range of toys from suppliers nominated by Musgraves with most of the retailers trading under their own name. SuperToys commenced its operation in 1985 with 11 members. This had increased to 32 at the time of the notification, although a small number of members left subsequently. SuperToys is a wholly-owned division of SuperValu and Centra Distribution Ltd. which is itself a wholly-owned division of Musgrave Ltd.

7. Supertoys outlets are in the business of selling toys to the consumer on a 12 month basis. Consequently the market concerned is that for childrens' toys. The parties have stated that there are no independent market research figures available to assess the value of the toy market. It was estimated by the parties at the time of the notification to be in the region of £70m at retail prices including value added tax. There are no definitive figures on market share. The parties estimated the market shares of the major competitors in the market as follows: [1]

%

Dunnes Stores [ ]

Quinnsworth [ ]

SuperToys [ ]

Toymaster [ ]

Roches Stores [ ]

Arnotts [ ]

All others [ ]

8. At the time of the notification, Supertoys claimed to be the third largest seller of toys in the State. They believed that the two largest supermarket multiples were the two largest toy retailers. SuperToys substantial share of the market was mainly due to increases in the number of SuperToys outlets. Other parties in the market include independent newsagents who sell what are known as "pocket money" toys, i.e. toys which children would purchase themselves as opposed to larger toys which would normally be bought by adults for children. Musgraves subsequently indicated that SuperToys market share had fallen significantly due to some retailers leaving and increased competition by one of the multiples during the Christmas 1992 period.

9. The toy market is one which, because of its nature and developments in technology, is subject to constant change. As trends are constantly changing it is relatively easy for new suppliers to enter the market. Sales to the retailers are principally carried out at toy fairs, at which new suppliers are a common feature. No one supplier appears to enjoy a significant percentage of the market. Musgraves claimed that Hasbro Bradley UK, considered the biggest toy supplier to the Irish market, supplied only a small proportion of the total business of SuperToys.

10. Under the terms of the agreement, Musgraves permit the retailers to operate as SuperToys outlets and undertake to negotiate with suppliers on their behalf for the provision of a range of toys. They also supervise the twice-yearly production of SuperToys catalogues and other advertising material. In return, the retailers undertake to display the SuperToys fascia sign in a prominent position on the premises. They also agree to purchase a range of toys from the nominated suppliers and to distribute locally the advertising catalogue. The use of SuperToys marketing materials (carrier bags, etc.) is also an obligation as is a contribution from the retailers towards the marketing costs of SuperToys. Each new application for membership is considered by the existing members who decide whether or not the application should be accepted or rejected. Members are free to terminate their agreement at any time without penalty. There is no time limit involved in the agreement. Musgraves are paid by way of a percentage of the LTA (long term allowance) offered by the suppliers, i.e. a percentage of the discount offered by the supplier in return for a bulk purchase.

11. Apart from a relatively small budget for television advertising, SuperToys only advertising is in the form of a catalogue distributed locally by each of the retail outlets. This catalogue takes the form of a display of many of the items on sale in all of the stores, accompanied by a prominent price display. The notification stated that the prices quoted were decided on by an elected council of SuperToys retailers and approved at a meeting of all of the members.

12. The relevant extracts of the agreement are as follows:

´2. The Wholesaler agrees as follows:

(a) To permit the Retailer to operate as a "SuperToys" outlet.

(b) To provide to the Retailer a range of toy and associated merchandise at the terms negotiated by the wholesaler on behalf of "SuperToys", from such suppliers nominated from time to time by the wholesaler.

(c) To supervise the production of annual "SuperToys" catalogues, and other marketing material.

(d) To arrange for national media advertising on behalf of the "SuperToys" group.

(e) To arrange regular Council and General meetings as may be required.

(f) To supply at cost to the Retailer a "SuperToys" fascia sign, which cost is defrayed by a non- refundable entry fee, less any subsidy as may be applied from time to time.

3. The Retailer agrees as follows:

(a) To display the authorised "SuperToys" fascia sign in a prominent position on the premises.

(b) To support and to purchase a range of toys and associated merchandise from those suppliers with whom terms have been negotiated by the Wholesaler on behalf of "SuperToys".

(c) To support the "SuperToys" Group promotional programme including the following:

(i) To distribute the "SuperToys" catalogue throughout his trading area.

(ii) To use the "SuperToys" marketing materials including carrier bags, point of sale cards, and hanging signs.

(iii) To contribute towards "SuperToys" marketing costs.

(d) To pay the Wholesalers account by Direct Debit within the credit periods stipulated. This is currently 28th of the month following the month in which the Musgrave invoice is issued.

(e) To maintain adequate insurance cover under normal Commercial Policies, especially to protect stock supplied through "SuperToys", but not yet paid for.

(f) To support training programmes for management and staff provided by the Wholesaler from time to time.

(g) To observe and uphold the standard and quality required of a "SuperToys" retailer.

(h) To treat as private and confidential all information divulged by the Wholesaler in relation to the operation of "SuperToys" and the sale or purchase of products, and not to communicate or disclose whether by his servants, agents or howsoever otherwise any of such confidential information to any person at any time without the prior written consent of the wholesaler.

(i) To provide all audited accounts and requirements as required by the Wholesaler.'

13. Musgraves argued that the restrictions contained in the agreement did not have the effect of preventing, restricting or distorting competition in any goods or services in the State or part of the State, and that because the agreements were pro-competitive in their effects, were caught by Section 4 of the Act only in a technical sense.

14. Musgraves submitted that the agreement resulted in greater cost-effectiveness among SuperToys suppliers as a reduced number of accounts meant more efficient administration for suppliers. The reduced costs which they are then in a position to offer, allows SuperToys' individual toy retailers to survive in competition with the multiple grocery retailers who would otherwise have a virtual dominance of the toy market. It was submitted that as a result of the agreement, the consumer had the benefit of lower prices, particularly in non-urban areas. It also ensured the survival of the independent toy-retailers, thus providing the consumer with a year round professional toy service which would otherwise be unavailable.

15. In support of the contention that toy prices had fallen because of the emergence of such groups , Musgraves submitted a letter from one of its retailers claiming that the average mark-up on toys was now 40% plus VAT compared with 50% in the early 1980s.

16. Musgrave submitted that the agreement contained only two restrictions both of which were indispensable to the attainment of the objective of improving the distribution of goods. The first of these was a purchasing restriction, whereby retailers who wished to purchase from certain listed suppliers were obliged to do so through SuperToys (Musgraves) which earned its income by retaining a fee from the Long Term Allowance rebate. The combined purchasing power of the individual retailers enabled the best possible prices to be obtained from the suppliers, thus increasing the retailers ability to compete. If any individual retailer does not support the voluntary group arrangement, the group is weakened and the viability of all may be impaired. Musgraves further submitted that retailers would not in any event be able to negotiate more favourable terms as individuals and that compliance with the agreement therefore was in their best interest. Acceptance of the arrangements also allowed them to devote more time to achieving sales and providing adequate service to customers.

17. The agreement also contained a sales price restriction in relation to items advertised in a nationally distributed catalogue. The catalogue advertises a number of items which have been chosen by a council of retailers for national promotion. The annex stated that once items had been selected for inclusion in the catalogue, the council of retailers agreed upon the price at which the advertised item was to be sold, this was then agreed by all of the retailers and was included in the catalogue. All of the SuperToys retailers were prohibited by the agreement from selling at prices in excess of those displayed, but were allowed to sell at a lower price provided it was within the retailer's own area and not advertised nationally. In practice, the majority sold the items at the agreed price according to the annex.

18. This aspect of the arrangements was described in the annex to the notification as follows:

´A significant part of the SuperToys promotional activity is concerned with the production of two catalogues annually, for Summer and for Christmas. The production of this catalogue involves the agreement by the Council of the retailers of SuperToys of prices for about 80 products in Summer and 150 at Christmas. These prices, and therefore the margins, are decided on by the Council and then are submitted to a general meeting of all retailers for approval. The inclusion of these items in the catalogue means that these are the promoted items. (para 3.8)

It is understood by the retailers that they can reduce their prices below the catalogue levels in response to local pressure but they cannot advertise their reduction nationally. (para 3.9)

The retailers have freedom on selling prices for non catalogue items. The price restriction only applies to the promoted items. For the vast majority of items there is, therefore, no agreement on price. The agreement on price for the catalogue items is indispensable to the arrangements for the reasons below:

.....In practice, the majority of retailers sell them at the recommended prices. SuperToys has no objection of any kind to the retailer selling the products at less than the recommended price to meet competition, provided it is within the retailers area and is not advertised nationally.

....If the price is to be included in the catalogue then prices have to be agreed between the members of the voluntary group.

....Similarly if the products are to be advertised nationally it is essential that price should be quoted in the advertisement. For this to be done, prices have to be agreed and, in general, adhered to.' (para 5.8)

19. It was argued that such an arrangement was necessary if the concept of a nationally distributed catalogue was to work. The inclusion of prices enabled consumers to assess the products in relation to their ability to spend. As the catalogue was distributed nationwide, it was considered essential that the prices be adhered to. It was further submitted that such price advertising was, in fact, pro-competitive. Given SuperToys market share, it was argued that the existence of the agreement has not had the effect of eliminating competition. All SuperToys outlets, regardless of location, were subject to some form of competition.

20. Musgraves submitted that the obligation on the retailers to maintain insurance cover was because, in many cases, stock might not yet be paid for. It was essential that Musgraves be assured that adequate insurance was held by the retailer. It was also submitted that rather than being in competition with each other, the SuperToys retailers operate collectively in opposition to all other toy retailers, including the multiples.

21. Reference was made to the EC Block Exemption Regulations for Exclusive Distribution [2], Exclusive Purchasing [3], Know-how Licensing [4], and Franchising agreements in support of the application. The Know-how Licensing Regulation came into force on 1 April 1989 and applies until 31 December 1999. Know-how, for the purpose of this regulation, is defined as "a body of technical information that is secret, substantial and identified in any appropriate form." The regulation has the effect of exempting agreements involving the transfer of know-how from the provisions of Article 85(1).

22. The regulation lists obligations of a restrictive nature that benefit from automatic exemption pursuant to Article 85(3) of the Treaty. A know-how licensing agreement to which only two undertakings are party and which contains one or more of these obligations is exempt from the provisions of Article 85(1). Among them is an obligation on the licensee to limit his production of a licensed product to the quantities he requires in manufacturing his own products, provided that such quantities are freely determined by the licensee. Other obligations included are requirements that the licensee does not divulge the know-how to third parties, grant sub-licenses, assign the license or exploit the know-how where it remains secret after the termination of the agreement.

23. EEC regulation number 4087/88 of 30 November 1988 [5] is a block exemption regulation which applies Article 85(3) of the Treaty of Rome to categories of franchising agreements. It came into force on 1 February 1989 and remains in force until 31 December 1999. Franchising agreements essentially consist of licences of industrial or intellectual property rights (trademarks or names or know-how) to be exploited for the purpose of selling goods or providing services to end-users in premises of uniform appearance and with the same business methods.

24. The Regulation applies to agreements which contain at least one of a number of specified restrictions including that of territorial protection granted by the franchisor and the obligation on the franchisee not to deal in goods competing with those manufactured by the franchisor or bearing its trademark. The regulation also contains a list of restrictions which, if present in an agreement, prevent the application of the exemption. This applies in particular to market sharing between competing manufacturers, clauses unduly restricting the franchisees choice of suppliers or customers and to cases where the franchisee is restricted in determining its prices.

25. After the Authority expressed its concern regarding the setting of catalogue prices it was indicated that, contrary to what was stated in the annex, the prices contained in the twice-yearly catalogue were, in fact, proposed by Musgraves. They were then submitted to the Council of SuperToys retailers and, in the vast majority of cases, accepted. Musgraves therefore proposed at a meeting on 12 October 1992 to amend Section 3.8 of their initial submission to read as follows:

"3.8 A significant part of the SuperToys promotional activity is concerned with the production of two catalogues annually, for Summer and for Christmas.

The items for inclusion in the catalogue which are 80 in the Summer and 150 at Christmas, are pre-selected by Musgrave, and the final product list is agreed with the membership. Prices are decided upon by Musgrave and are recommended prices."

26. In a subsequent letter dated 19 October 1992, Musgraves restated their proposal to amend para 3.8 of their annex and indicated that they proposed to drop para 3.9 which stated that SuperToys retailers were prohibited from advertising nationally if they sold toys for less than the catalogue price. The Authority considered that the proposed amendments did not satisfy its concerns. A Statement of Objections was issued to the parties on 15 February 1993 indicating that the Authority intended to refuse a certificate or licence for the notified arrangements. An oral hearing was held on 22 October 1993 at which Musgraves responded to the Statement of Objections.

27. Musgraves argued that the arrangements did not constitute a price-fixing agreement. They argued that the catalogue prices were merely recommendations. They also stated that the catalogue prices were very competitive to begin with and that in the period from 8 December to Christmas the multiples tended to reduce their prices and SuperToys retailers were forced to do likewise. Musgraves argued that wholesalers should be able to recommend prices. They restated their view that the retailers were in fact competing with other outlets including the multiples, rather than with each other. In addition they claimed that the pricing arrangements allowed smaller retailers to compete with the multiples. They argued that, as only a small proportion of all of the toys sold by SuperToys outlets were included in the catalogue, the arrangements had a negligible effect on competition. They argued that a catalogue without prices would be useless. It was neither practical nor effective for individual retailers to either include their own price list with the catalogue or to have different catalogues printed with the prices of each retailer. They also claimed that the prices included were merely maximum prices and that the setting of maximum prices was not anti-competitive.

28. Musgraves subsequently indicated their intention to make specific amendments to the notified arrangements. In a letter dated 14 November 1993 Musgraves informed the Authority that they were prepared to amend section 3(c)(i) of the SuperToys agreement to provide that the retailer would undertake:

´To distribute the above catalogue throughout his trading area, noting that the retailer is free to sell at prices different from those listed in the catalogue. The retailer is, however, recommended by the wholesaler not to sell at higher prices than those included in the catalogue or in any other advertising or promotion.'

In a subsequent letter, dated 13 December 1993, SuperToys indicated that future catalogues would indicate, on the cover, that the prices were recommended prices.

29. Section 4(1) of the Competition Act states that ´all agreements between undertakings, decisions by associations of undertakings and concerted practices which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State are prohibited and void'.

30. The notified arrangements involve Musgrave plc and a number of independent retailers. Musgrave plc is a body corporate engaged in the wholesale distribution of grocery goods mainly to independent grocery retailers. It also provides a central billing service for its grocery customers and for independent toy retailers, whereby suppliers deliver goods directly to the retailer but invoice Musgraves. Musgraves is engaged for gain in the supply of goods and the provision of services and is therefore an undertaking within the meaning of the Act. The other parties to the notified arrangements are independent retailers who are either sole traders or corporate bodies who are also undertakings within the meaning of the Act.

31. The notified agreement involves arrangements for the joint purchasing of toys from suppliers and for the advertising and pricing of these products. This constitutes an agreement between undertakings. As the retailers are located nationwide the arrangements affect the market for toys within the State.

32. There were two key aspects to the notified agreement. Firstly the retailers agree to support and to purchase a range of toys from those suppliers with whom terms have been negotiated by Musgraves on behalf of ´Supertoys retailers. Secondly the retailers agreed to support the Supertoys Group promotional programme. This included distributing the Supertoys catalogue throughout their trading area and agreeing on, and abiding by, the prices quoted in the catalogue. The Authority concluded that the other provisions of the agreement were merely essential to the achievement of its objectives, were not anti-competitive and therefore did not offend against section 4(1).

33. The agreement requires the retailer to support and purchase from those suppliers with whom Musgraves has negotiated a central billing arrangement. The agreement does not apply for a specific period. Although clause 7 provides for certain procedures to be followed upon termination of the agreement, there is no express provision in the agreement setting out the basis on which either party may terminate the agreement. It was stated that the arrangement was somewhat looser than that between Musgraves and retailers in the grocery sector, and that, as a result, a number of issues were not covered by the agreement. It was subsequently indicated that members were free to terminate the agreement at any time without penalty. Since the agreement was notified a small number of retailers had in fact terminated their agreements with Musgraves.

34. Under the agreement the retailer is not permitted to purchase toys covered by the agreement, which includes a wide range of toys, from suppliers other than those who have concluded agreements with Musgraves. The arrangement is not strictly speaking an exclusive purchasing agreement as the retailer is only committed to buy, via the central billing arrangement, the products for which Musgraves have agreements with suppliers, from those suppliers. In a sense they do not have to buy those products and they are free to buy other products from other suppliers. To some extent these other products could be considered substitutes for those products for which Musgraves has agreements with suppliers so that the agreement is not an exclusive purchase agreement. The arrangement is in fact more akin to a group purchase scheme than an exclusive purchase agreement. The object is to enhance the buying power of the retailers by operating together thereby obtaining a significant degree of purchasing power.

35. It has been indicated that the retailers obtain between 50% and 66% of their requirements through Supertoys. It is presumably in Musgraves interest to conclude agreements with as many suppliers as possible and to have the retailers purchase as much as possible of their requirements through them. The high proportion of retailers requirements sourced through Musgraves indicates that Musgraves have been successful in concluding agreements for those toys which are popular. As Musgraves claims that Supertoys accounted for [ ] of the total toy market, this implies that the agreement relates to between [ ] and [ ] of total toy sales.

36. This requirement means that the retailer cannot obtain those products which are the subject of agreements between Musgraves and suppliers from any other source. In addition this restriction applies to a large proportion of the retailers' requirements and restricts access to retail outlets which account for a sizeable share of the total market.

37. The Authority has taken account of EC decisions regarding buying group arrangements. In Intergroup [6] the EC Commission ruled that there were no grounds for action under Article 85(1) in respect of such an arrangement. The Commission decision was based on the fact that (a) the members were free not to use Intergroup's services when making purchases and (b) the arrangements did not have any substantial effect on competition since purchases through Intergroup represented only a small proportion of the members turnover and only a small proportion of turnover in the relevant market within the EC [7]. In contrast, in the Sulphuric Acid case [8], the EC Commission found that a buying agreement offended against Article 85(1), but granted an exemption, where the members were required to obtain a minimum of 25% of their requirements through the buying arrangement. If any member purchased less than 25% of their requirements from the pool, they were deemed to have withdrawn from it. There was no penalty for withdrawal in such circumstances and the member concerned was free to rejoin, commencing on 1 January or 1 July, on giving 12 months notice of their intention to do so. In its decision granting an extension of the exemption, the Commission stated that nearly all members of the pool had continued to purchase all of their requirements through the pool. [9]

38. The agreement contains no provisions for termination. The Authority accepts, however, that in the absence of any specific termination provision, the retailers are free to terminate at any time without any penalty. Consequently they have the right to leave the group at any time if they feel they can obtain toys on better terms from suppliers or from other wholesalers or buying groups. Similarly other suppliers of the products covered by the Musgraves joint purchase agreement are free to seek to recruit those retailers who are members of Supertoys. In practice, however, it would be difficult for an individual supplier who could only offer a limited range of toys to entice a retailer to leave the group.

39. The proportion of the retailers supplies which they obtain through the group buying arrangement and the combined market share of the retailers involved would indicate that the arrangement could not be considered to conform to the situation in the Intergroup case. It is relevant, however, that the retailers are free to quit the group at any time without incurring any penalty and are also free to purchase competing products from other suppliers while remaining members of the group. In effect the retailers are only committed to obtain supplies through the group buying arrangement for so long as it suits them. In such circumstances the Authority believes that, on balance, the group buying agreement per se , does not offend against Section 4(1).

40. Clause 3(c) of the agreement required the retail members of SuperToys to support the Supertoys promotional programme. This included an obligation to distribute the Supertoys catalogue which was produced twice yearly throughout their trading area. It also required, although it was not explicitly stated in the actual agreement, that retailers agree to abide by the prices specified in the catalogue.

41. It was stated in the annex to the notification that the production of the catalogue ´involves the agreement by the Council of the retailers of Supertoys of prices for about 80 products in Summer and 150 at Christmas. These prices, and therefore the margins, are decided on by the Council and then are submitted to a general meeting of all retailers for approval'. Retailers were allowed to sell the products included in the catalogue at prices below those quoted therein, ´in response to local pressure', but they could not advertise their reduction nationally. The parties confirmed this arrangement at a meeting on 16 June 1992. Following a letter indicating the Authority's concern about the manner in which prices for a range of toys were set, the parties indicated, (at a meeting on 12 October 1992), that Musgraves proposed a list of prices to be included in the catalogue to the Council. Once these were agreed by the Council they were then put to a full meeting of the members and agreed. It was stated that Musgraves proposed prices were accepted in the vast majority of cases. Musgraves argued that the catalogue prices were, in effect, recommended prices and that, in some cases, retailers sold items listed in the catalogue below the catalogue price.

42. The notification indicated that the retailers agreed the prices of the items which were to be included in the promotional catalogue and they agreed to abide by those prices. The retailers were allowed to reduce their prices in response to local competition but they could not advertise such price reductions nationally. The arrangements described involved an agreement between retailers, who were competitors, on the prices which they proposed to apply to a range of products and an understanding that none of the retailers would depart from such agreed prices except in response to local competition. In the Authority's opinion, such an arrangement amounts to an agreement to fix the retail selling prices of such goods. The fact that the agreed prices were suggested to the Council of Supertoys and the members by Musgraves indicates that the agreement also includes some element of vertical price fixing or resale price maintenance. Agreements to fix selling prices are expressly cited in Section 4(1) of the Competition Act as an example of the type of agreement which is prohibited under that Section.

43. The parties subsequently argued that the arrangements did not constitute a price-fixing agreement. The fact is that prices were suggested to the Council of the retailers by Musgraves and, following approval by the Council, were then put to a meeting of all of the retailers before their inclusion in the catalogue. The annex describing the agreement submitted with the notification specifically stated inter alia that:

´The production of this catalogue involves the agreement by the Council of the retailers of SuperToys of prices for about 80 products in Summer and 150 at Christmas. These prices, and therefore the margins, are decided on by the Council and then are submitted to a general meeting of all retailers for approval....

It is understood by the retailers that they can reduce their prices below the catalogue levels in response to local pressure but they cannot advertise their reduction nationally.

The retailers have freedom on selling prices for non catalogue items. The price restriction only applies to the promoted items. For the vast majority of items there is, therefore, no agreement on price. The agreement on price for the catalogue items is indispensable to the arrangements for the reasons below:

In practice, the majority of retailers sell them at the recommended prices. SuperToys has no objection of any kind to the retailer selling the products at less than the recommended price to meet competition, provided it is within the retailers area and is not advertised nationally. If the price is to be included in the catalogue then prices have to be agreed between the members of the voluntary group.

Similarly if the products are to be advertised nationally it is essential that price should be quoted in the advertisement. For this to be done, prices have to be agreed and, in general, adhered to.' (Emphasis added)

44. Musgraves suggested prices for inclusion in the catalogue and all the prices to be included were considered and approved by the retailers. The arrangement is described in the annex as an agreement on prices and it is stated that the prices had not only to be agreed but, ´in general, adhered to'.

45. Price fixing agreements have been consistently regarded as in breach of Article 85(1) of the Treaty of Rome. Bellamy and Child point out that:

´Since price is the main instrument of competition, Article 85(1)(a) expressly prohibits agreements, which "directly or indirectly fix purchase or selling prices or any other trading conditions." An agreement to fix prices by its very nature constitutes a restriction on competition within the meaning of Article 85(1) [10].'

46. They go on to state that:

´Article 85(1) is infringed by an explicit agreement between suppliers to fix prices, and also by a concerted practice to restrict price competition, for example informal concertation on the dates and amounts of price increases or the exchange of price information. Similarly the prohibition of Article 85(1) covers not only "prices" in the narrow sense but also discounts, margins, rebates and credit terms. Other agreements which directly or indirectly restrict price competition include agreements not to submit quotations without prior consultation, not to deviate from published prices, not to make public any deviations from published prices, not to quote other than delivered prices, not to give other than cost related rebates, and not to sell "below cost".' [11]

47. Van Bael and Bellis point out that:

´Although there exist no per se rules in EEC competition law, horizontal price fixing arrangements have always been held incompatible with Article 85(1) and have generally been denied an exemption'. [12]

In the US horizontal price fixing agreements, agreements by competitors to exchange price information and vertical price restrictions involving resale price maintenance have generally been regarded by the courts as a per se violation of the antitrust statutes.

48. In IFTRA [13] the EC Commission found that an agreement between producers of virgin aluminium not to sell below their published prices was in breach of Article 85(1). The Commission found that the arrangements ´provide the parties with means of shelter from competition to the extent that price stability is increased and that the parties are enabled to predict each other's price policy with a reasonable degree of certainty.' [14]

It went on to state that:

´..every producer should have complete discretion to establish his own policy in these matters without risking the accusation that he is violating the spirit of an agreement. The contractual organisation of a system requiring adherence to various existing prices and whereby price stability is encouraged by the recommendations which are made to the parties to use and adhere to price lists.....constitutes a major restriction of competition, both in its object and its effect.' [15]

49. In Cementhandelaren the European Court of Justice ruled that:

´The fixing of a price, even one which merely constitutes a target, affects competition, because it enables all the participants to predict with a reasonable degree of certainty what the pricing policy pursued by their competitors will be.' [16]

The Court upheld the Commission's decision that such an agreement was in breach of Article 85(1) despite evidence that competition from other suppliers meant that the parties to the agreement did not necessarily abide by the agreed target prices. The Commission had argued that:

´The possible malfunctioning of a cartel cannot serve as a criterion for deciding whether or not it falls within Article 85(1).' [17]

50. In Papiers peints de Belgique the Court of Justice upheld a Commission decision that an agreement between wallpaper manufacturers, which required retailers to display the lists of prices fixed jointly by the manufacturers, and not to make any public announcement of rebates on these prices, while allowing them to grant rebates in particular cases on a regular basis, was in breach of Article 85(1) [18]. In Hasselblad the Court upheld the Commission decision that measures designed to restrict price advertising were in breach of Article 85(1) [19]. In Vimpoltu the EC Commission found that recommended retail prices fixed independently by importers and arrangements for the exchange of price lists between importers could restrict competition and these arrangements were found to be in breach of Article 85(1). [20]

51. The Court of Justice decision in Pronuptia indicates that the communication by the supplier to the retailer of recommended prices does not contravene Article 85(1) ´provided that there is no agreement or concerted practice that the distributor observe those prices.' [21] The exclusive distribution and purchase block exemptions provide that the distributor or reseller must be free to determine prices and terms of resale [22]. Similarly the franchise block exemption allows the franchisor to recommend prices but provides that the franchisee must be free to determine prices. In the Intergroup case the retailers set their own selling prices.

52. The Authority accepts that not all toys sold by the retailers were included in the brochure. The parties indicated that about 80 items were included in the Summer brochure and 150 in the Christmas brochure. It was argued that a large number of toys were not covered by the agreement. The Authority does not consider the fact that the arrangements only extended to a particular number of products is particularly relevant. The toy market is one where tastes change rapidly from year to year. As a result there tends to be a particularly strong demand for a limited range of toys at any given time. If, as is the case, the products are chosen as part of a national advertising campaign, then it is reasonable to conclude that they will include the more popular products accounting for a high proportion of total sales. The fact, therefore, that not all toys sold by the retailers were covered by the price agreement does not alter the fact that such an agreement on prices restricts competition.

53. The Authority has already indicated in Esso [23] that it would regard the mere communication in advance of information regarding price changes or pricing intentions to competitors as offending against Section 4(1) because, as in Esso and Cementhandelaren, such behaviour reduces uncertainty regarding competitors' pricing intentions which is an essential element of competition. The Authority considers the fact that prices for the catalogue were discussed and approved by the retailers in advance went far beyond the mere exchange of price information involved in Esso. As in Cementhandelaren the fact that the retailers involved might, on occasion, have been forced to reduce prices in response to competition does not negate the restriction on competition involved in the arrangement. Similarly as in Papiers peints de Belgique and Hasselblad, the requirement that retailers do not make known any reductions they may make on the catalogue price through advertising nationally also represents a restriction of competition.

54. The fact that the catalogue prices in this instance were agreed by all the retailers meant that they could not simply be regarded as recommended prices. As in IFTRA, any retailer deviating from the catalogue prices which had been agreed by all of the retailers, risked the accusation that he was violating the spirit of the agreement. It was suggested to the Authority that if member retailers were free to sell below the catalogue prices generally the discipline necessary for the promotion and development of the group would break down. Indeed the annex states that it was essential, if the group was to advertise prices that those prices be agreed and generally adhered to. The notified arrangement also fails the requirement set by the Court of Justice in Pronuptia which allowed suppliers to recommend prices ´provided that there is no agreement or concerted practice that the distributor observe those prices.'

55. Musgraves put forward a number of arguments to justify their pricing arrangements. These were:

- that Supertoys retailers ought not to be regarded as competitors because of their location;

- that they were not in competition with one another but rather were competing with multiple supermarket outlets;

- that they could not compete in the market unless they were allowed advertise by way of a catalogue which included prices, since this was how some of their competitors advertised;

- that their share of the market meant that the arrangements did not restrict competition.

Each of these points is now considered.

56. The retailers involved are independent undertakings, although, because of their geographical location, not all of the retailers will be in direct competition with one another. All of the retail outlets involved traded under their own name while displaying the ´Supertoys' logo. The fact that they participated in a joint purchasing arrangement which allowed them to obtain the benefits of purchasing from suppliers in large quantities does not alter the fact that they are prohibited by Section 4(1) of the Competition Act from entering into agreements not to compete with one another. Nor does the Authority accept the argument that, because of their location, the stores could not be considered to be in competition with one another. In a number of cases the stores concerned were located reasonably close to one another and their customers would come from the same catchment area. [24] The Authority does not therefore accept the argument that the location of the stores precludes their being regarded as competitors. In the Authority's view it is not necessary that every party to an horizontal agreement should be in direct competition with every other party to it. Musgraves had argued that the departure of certain members meant that the incidence of SuperToys stores being located in the same catchment area had been reduced.

57. The Authority does not accept the view that the retailers cannot be regarded as competing with one another because they are in competition with the multiple supermarket groups. The multiple supermarket groups undoubtedly sell a very wide range of goods extending beyond the range of food and other household necessaries normally regarded as grocery goods and they do compete with Supertoys outlets. Undoubtedly the large size of the two major multiple groups gives them some advantages over smaller competitors. The Authority could not, however, accept the argument that small undertakings should be excused from having to compete with one another solely because there were some undertakings competing in the market who happened to have a large share of that market. Section 4(1) prohibits anti-competitive agreements between undertakings regardless of their size.

58. Musgraves claimed that because some other undertakings competing in the toy market produce a catalogue illustrating their products and prices, SuperToys retailers could not compete unless they were able to produce their own catalogue including prices. In essence they were arguing that unless they have a catalogue with a common set of prices they could not compete. Again the Authority does not accept such arguments.

59. All of the retailers could do their own advertising illustrating their prices. They could do this in any way they wish, via the national media, in local newspapers, in freesheets, on local radio, by delivering fliers to households within the area or by their own shop displays. It is relevant in this context that, where individual retailers offered lower prices, they were prevented from advertising them nationally. This restriction implies both that the retailers could undertake their own advertising at a national level, and that such advertising would have a competitive effect on other members.

60. It is relevant that in making their case Musgraves claimed that they had to compete with catalogue shops which are located outside of the State. Such stores offer a vast range of goods in outlets which are effectively large warehouses, with a relatively small reception area where consumers can examine the catalogues. They have developed this particular form of operation because it appears to allow them to sell at keen prices and they attract customers in this way. The Authority does not accept the argument that the existence of such stores can justify the present arrangements. The fact that the parties cited these outlets as competitors indicates to the Authority that, in this market, competition is not a localised phenomenon, that consumers are prepared to travel considerable distances in order to avail of lower prices, and this serves to undermine their earlier argument that, because of their location, Supertoys retailers should not be regarded as competitors.

61. Multiple store groups can obviously charge uniform prices in all of their outlets if they so wish, and advertise such prices in whatever way they wish because the group is under common ownership. The Authority again cannot accept an argument which essentially states that, because undertakings with multiple outlets can advertise uniform prices, independent retail outlets should be allowed agree uniform prices.

62. The Authority does not accept the proposition advanced by the parties that their share of the market meant that the pricing arrangements did not prevent, restrict or distort competition. Musgraves claimed that their retailers had a combined market share of [ ]. An arrangement to apply uniform prices between undertakings with such a market share cannot be regarded as having no significant effect on competition. It is relevant in this context that the former Fair Trade Commission, while favouring a ´de-minimis' provision in the Competition Act, recommended that such ´provisions should not apply to price fixing agreements.' [25] In addition under EC law ´de minimis' provisions only apply in respect of agreements between undertakings with an aggregate market share of less than 5%.

63. There are a number of other factors which should be taken into account. Musgraves have claimed that the two multiple supermarket groups between them have over [ ] of the toy market. They have also submitted, while claiming that margins have fallen, that the average gross mark-up of one of their members on toys was 40%. The Authority does not consider that a mark-up of this order of magnitude is necessarily consistent with a market in which there is intense competition. The present agreement represents, in the Authority's view, a significant restriction on competition between a number of retailers who between them account for a significant share of the market. Such a restriction cannot be justified on the grounds that other undertakings have a larger market share especially when the difference in market share is small.

64. The arrangements involved some restriction of intra-brand competition. The Authority agrees with the views of the European Court of Justice which stressed the importance of intra-brand competition in the Grundig case.

´The principle of freedom of competition concerns the various stages and manifestations of competition. Although competition between producers is generally more noticeable than that between distributors of products of the same make, it does not thereby follow that an agreement tending to restrict the latter kind of competition should escape the prohibition of Article 85(1) merely because it might increase the former.' [26]

65. In the Authority's view, toy purchases, particularly at Christmas, represent major outlays for most consumers. In such circumstances the Authority believes that consumers do shop around and compare prices between outlets. It also believes that they will be prepared to travel significant distances in order to benefit from lower prices. This view is supported by the parties claim that outlets located outside the State are competitors, and the experience of the mid 1980s, when trips by consumers to Northern Ireland to avail of lower prices, particularly in the pre-Christmas period, occurred on a large scale. The tradition of consumers travelling to Dublin from many rural areas on 8th December to do their Christmas shopping also indicates that competition in this market is not a localised phenomenon. This further undermines the parties claim that the Supertoys outlets are not in competition with one another.

66. The Authority believes therefore that the pricing arrangements, as notified, which were both between the retailers and Musgraves and between the retailers themselves had the effect of restricting price competition and therefore offended against Section 4(1). The Authority also believes that the requirement not to deviate from such prices, except in response to local competitive pressures and not to advertise any such price deviations at national level also had the effect of restricting competition and offended against Section 4(1). The Authority considers therefore that the notified agreement had the object and the effect of preventing price competition on a significant range of goods within the State. It also had the effect of restricting or distorting competition in the supply of such goods within the State. For these reasons it offended against Section 4(1) of the Competition Act, 1991.

67. The parties responded to the Authority's expressed concern regarding the pricing arrangements by proposing that Musgraves would in future decide upon the prices to be included in the catalogue and that these would be ´recommended prices'. As pointed out, EU cases indicate that suppliers are allowed recommend prices, but that retailers must be free to set prices independently. In particular the Pronuptia case makes clear that recommended prices are only allowed ´provided that there is no agreement or concerted practice that the distributor observe those prices.' The Authority was not satisfied that the proposed amendments would in fact overcome the restriction on competition inherent in the arrangement. It merely removed the requirement that the retailers formally agree to the catalogue before publication. In particular the Authority was concerned that:

- a concerted practice to adhere strictly to the catalogue prices would simply be maintained;

- there would be a strong incentive for retailers to adhere to these prices as, given the existing arrangement, any retailer deviating from the catalogue price would risk the

accusation that he was violating the spirit of the Supertoys arrangement;

- past behaviour would lead retailers to conclude that other members would abide by the prices thereby greatly reducing uncertainty.

68. The position in this instance was quite different to that in Esso. In that case the Authority was satisfied that the exchange of price information between Esso and independent solus dealers was a practice that had developed in order to ensure that maximum prices orders were not breached. In addition the fact that the arrangement involved several hundred resellers, there was no indication that it had been part of a concerted practice and there were hundreds of other competing resellers, all indicated that requiring Esso to stop informing its solus dealers in advance of planned retail prices in company owned stations would be sufficient to overcome any restriction on price competition in that instance. For the reasons given above, the Authority was not satisfied that the amendments originally proposed by the parties in this case would be adequate to bring to an end the agreement to have uniform prices between the Supertoys retailers.

69. Musgraves indicated, in a letter dated 14 November 1993, that they would amend section 3(c)(i) of the SuperToys agreement to provide that SuperToys retailers undertake:

´To distribute the above catalogue throughout his trading area, noting that the retailer is free to sell at prices different from those listed in the catalogue. The retailer is, however, recommended by the wholesaler not to sell at higher prices than those included in the catalogue or in any other advertising or promotion.'

In a subsequent letter dated 13 December SuperToys indicated that future catalogues would indicate, on the cover, that the prices were recommended prices.

70. Clause 3(c)(i) as amended makes clear that retailers are free to set their own prices. In addition they are merely recommended not to exceed the prices included in the catalogue. This latter point is in accord with amendments which the EC Commission accepted in Pronuptia. It is relevant that SuperToys is not a toy wholesaler and that the notified arrangements involve some elements of franchising. The Authority believes that Musgraves should be entitled to include prices in their catalogue, provided it is clear that such prices are only recommended and that retailers are free to set prices themselves. This allows SuperToys to compete in the toy market. The inclusion on the cover of the catalogue of the fact that the prices included in it are merely recommendations clarifies the true nature of the prices which are quoted therein. The agreement as amended by the addition to section 3(c)(i) and, given the indication on the catalogue cover that the prices contained therein are recommended, no longer offends against section 4(1).

71. The pricing arrangements which were part of the originally notified agreement did not satisfy the criteria set out in Section 4(2) of the Act for a licence, in the Authority's view. The Authority's reasons for this conclusion are set out here in order to clarify its position on such arrangements.

72. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which offend against Section 4(1) but which, ´having regard to all relevant market conditions, contributes to improving the production of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

73. The Authority does not believe that the agreement on prices contributed to improving the distribution of goods or provision of services or to promoting technical or economic progress. Given that the Authority does not consider that the price-fixing arrangement led to any efficiency benefits, consumers, by definition, did not benefit from such gains. In fact orthodox economic theory indicates that price-fixing agreements are detrimental rather than beneficial to consumer interests.

´Economists are almost unanimous in their condemnation of cartels, especially those engaged in price fixing, because no expert has satisfactorily established that consumers will benefit from price fixing. On the contrary economic analysis can show that cartels are inefficient and lessen consumer welfare. It is, therefore, not surprising that antitrusters have the closest meeting of minds on the baleful influence of cartels.' [27]

74. It was claimed that the inclusion of prices in the catalogue saved consumers time in phone calls and visits to retail outlets. The Authority does not believe that such arrangements could be accepted on the grounds that they saved consumers the bother of having to shop around. As all four elements of section 4(2) must be satisfied before a licence may be granted the notified arrangements did not meet the requirements for a licence.

75. In coming to the conclusion that the pricing arrangements did not satisfy the criteria for a licence the Authority took account of the fact that over a period of 30 years the EC Commission has virtually never exempted price-fixing arrangements from the prohibition contained in Article 85(1) [28]. It could see no reason for departing from well established EC precedents in the present case. It is relevant that price-fixing is generally prohibited under the competition laws of most developed economies.

76. Musgraves and the independent retailers involved in the Supertoys agreement are undertakings within the meaning of the Competition Act and the arrangements constitute an agreement between undertakings within the State. The joint purchasing element of the agreement does not offend against section 4(1). The effect of the agreement on prices, which was an integral part of the promotion arrangements, was to restrict competition within the State and it therefore offended against Section 4(1) of the Competition Act. The agreement as notified did not satisfy the requirements specified for the grant of a licence in Section 4(2) as it did not contribute to improving the production or distribution of goods or to promoting technical progress and consequently conferred no benefit on consumers. As the amendments to the agreement provide that Musgraves may recommend prices but that the retailers are free to set their own prices and, as future catalogues will indicate that the prices contained therein are recommended, the agreement, as amended, no longer offends against section 4(1).

77. The Competition Authority has issued the following certificate:

The Competition Authority certifies that in its opinion, on the basis of the facts in its possession, the SuperToys agreement between Musgraves and independent toy retailers, (notification no. CA/20/92E), notified on 30 April 1992, under Section 7, as amended by the agreement of 13 April 1994, does not offend against Section 4(1) of the Competition Act, 1991.

For the Competition Authority

Patrick Massey

Member

21 April 1994