Distribution agreements and purchase prices - DOs and DON’Ts

Distribution agreements are a common tool in trade relations. Usually, they are concluded between a manufacturer and a distributor, a wholesaler and a retailer and others. In essence, a distribution agreement governs the trade relations between undertakings that operate at different levels of the production or distribution chain as per the contractual arrangements between them. Due to the different hierarchical position of the parties in the purchase process of the good or product in the supply chain, these relations have the characteristics of vertical agreements within the meaning of Article 15 of the Protection of Competition Act ("PCA").   

The Prohibition   

Pursuant to Article 15, Para. 1 of the PCA, there is a prohibition on “all kinds of agreements between undertakings, decisions of associations of undertakings as well as concerted practices of two or more undertakings, which have the purpose or result of preventing, restricting or distorting the competition on the relevant market by means of: 

1. Direct or indirect determination of prices or other commercial terms

2. Allocation of markets or sources of supply

3. Restriction or control of the production, trade, technical development or investments

4. Implementation of dissimilar conditions for identical agreements with respect to particular commercial entities thus placing them at a competitive disadvantage

5. Conditionality of the conclusion of agreements on the acceptance of supplementary obligations of the other party or of the conclusion of additional agreements which in their essence or as per trade custom are not related to the subject of the main agreement or its execution”      

Why is it important?    

One of the main aims of the prohibition under Article 15, para 1 of the PCA is to guarantee the economic freedom of businesses in their market behaviour. Effective competition on each respective market depends on the presence of decision-making autonomy with respect to the specific market behaviour.   

In case of an agreed pricing policy between distributors, the price competition is eliminated and the end-selling price for the individual consumer is indirectly and significantly influenced. In this way, the distributors focus their efforts mainly on established sales goals and the achievement of volumes in order to obtain the discounts agreed with the suppliers. On the other hand, they have no incentive to pass on downwards in the distribution chain the benefits of achieving higher volumes and the savings made as a result of the discounts, ultimately depriving the consumer of the opportunity to take advantage of possible lower prices, which are the result of the optimisation of the distribution network.  

The fixing of which prices is permissible?   

Fixing a maximum retail price or a recommended retail price is permissible provided that the prices are not reduced to a fixed or minimum retail price as a result of pressure exerted by one of the parties to the agreement or of incentives proposed by it.   

The fixing of which prices is prohibited?   

Hardcore vertical restrictions of competition are agreements or concerted practices which have as their object, directly or indirectly, the establishment of a fixed or minimum retail price or a fixed or minimum price level to be observed by the buyer.

Setting recommended and/or maximum prices can also be a hardcore restriction of competition when these prices actually act as a fixed or minimum retail price.

The potential risk posed by maximum and recommended prices is that they serve as a focal point for resellers and can be respected by most or all of them, and/or that maximum or recommended prices may reduce competition or facilitate collusion between suppliers (1).

Restriction of competition could be the result of the provision of additional incentives (financial, marketing) or the imposition of sanctions (delayed deliveries, termination of agreements) from the supplier to the buyers. Sometimes these tools are combined with control measures to detect distributors that reduce prices, impose an obligation to report traders that deviate from the standard price level or introduce other practices aiming to limit the buyer's incentive to reduce the retail price and compete on the basis of price.

Indications for the potential existence of such an agreement    

In its practice, the Bulgarian Commission on Protection of Competition (CPC) has established the existence of uniform price behaviour according to the following criteria:   

► high degree of identity in the retail prices of the inspected retailers - in this type of market situation, price is crucial and final consumption will be directed to the product with a lower price, whereas competing products (those with a higher price) would not be attractive to consumers (2)

► identical periods and the amount of the discounts in the cases of promotional sales

(1) Decision №898 of 17 March 2013 of the CPC;
(2) Decision №447 of 19 April 2019 of the CPC;