Case Study on Horizontal Agreements

UNCTAD Division on International Trade in Good and Services, and Commodities Competition and Consumer Policies Branch Short course for Geneva-based delegates 23rd July 2007

CASE STUDY ON HORIZONTAL AGREEMENTS

Facilitated by Matfobhi Riba

Merloni is a manufacturer of a wide variety of electrical appliances and has an outstanding reputation for the manufacture of refrigerators. Merloni, along with three other producers, Electroplus Plc, Chillor Ltd and Gèlent SA, account for around 90% of the Arcadian refrigerator market (Arcadia is an African country with a population of about 10 million people). The market is relatively mature since a high number of households and businesses now own refrigerators. The industrial customers of such refrigerators vary in their economic size and number, while household consumers tend to be quite fragmented and price sensitive. Over the last four years, the number of refrigerators sold has remained relatively stable, though the value of those sales has declined markedly. In 2003, however, all of the producers overestimated the level of demand and suffered heavy losses. The large refrigerator producers are aware of the risks inherent in deciding how much to produce, especially after the difficulties encountered in 2003, and know that matching capacity to demand is crucial to profitability.

Merloni Corp, Electroplus Plc, Chillor Ltd and Gèlent SA are all members of Cool Breeze, a trade association which meets bi-annually to discuss the problems that they are facing and the prospects for the industry. At the latest Cool Breeze meeting, there were intense discussions about the possibility of ceasing to produce some older models of refrigerator, which are thought to be inefficient and environmentally unfriendly. The minutes of the meeting reveal that a list has now been agreed of those refrigerator models that will be withdrawn from the market with effect from 30 June 2007. The models that will remain on the market will all be more environmentally friendly, but also more expensive than those withdrawn. The Minister for the Environment in Arcadia has endorsed this proposal as a bold and necessary initiative by Cool Breeze and its members.

Electricity is essential for the operation of refrigerators; it accounts for 80% of the operating costs of a refrigerator during its lifetime (8 years on average in Arcadia). Arcadian consumer protection law requires an energy label to be affixed to all refrigerators that enables consumers to assess the relative energy efficiency of different models when deciding which one to buy. The members of Cool Breeze have agreed to cease production of refrigerators which do not satisfy the energy label rating of 0.3 kilowatt-hours. This standard will be monitored by Cool Breeze which will report on compliance twice a year to its members. Following the implementation of the agreement, it is estimated that the number of machines that would be withdrawn would account for 15% of the overall Arcadian market; reaching 40% in less affluent areas that depend on older models for refrigeration. It is also estimated that the agreement will reduce energy consumption by at least 15%, in comparison with the levels in 2005, as well as lower the pollution produced by electricity generation. Micron, a sorbet producer which uses the cheaper and older models of refrigerator, is concerned that the Cool Breeze agreement could raise its costs of production, and has sued Merloni Corp. and the other members of Cool Breeze for having infringed competition law.

UNCTAD Division on International Trade in Good and Services, and Commodities Competition and Consumer Policies Branch Short course for Geneva-based delegates 23rd July 2007

You are asked to decide:

1. Does the agreement have as its object or effect the restriction of competition?

2. If yes, should the agreement be permitted on non-competition grounds and in particular because of the expected savings in energy consumption?

3. If yes, explain how you would decide to weigh up the competition concerns which the agreement may give rise to on the one hand and the environmental benefits on the other?