5. Vertical Restrictions

Manufacturers and retailers are observed as a principal agent relationship. When a product is produced and to be sold at a downstream distribution level, the manufacturer may choose either vertically integrate with the dealer (vertical integration), or choose an independent distributor from the market (market transaction). Vertical restrictive contracts are largely used to reduce the coordination problem in the principal-agent relationship, to prevent free-riding and locked-in, and thus to maximize the joint benefits. While restrictive provisions such as resale price maintenance (RPM), and restrictions on sales quantity and territory (exclusive dealing), restrictions on the type of purchased goods (tying) could reduce coordination problems and promote efficiency, they may have anti-competitive effects that harm inter-brand and intra-brand competition. Since the late 1960s, the per se illegal rules for vertical restraints have been challenged by Chicago school scholars and modern industrial organization economists, who provided economic arguments to prove the pro-competitive efficiency gains of vertical agreements. In 1977, efficiency considerations were taken into account by the Supreme Court in Continental T.V., Inc. versus GTE Sylvania, Inc. In June 2007, the Leegin case reversed the per se rule by rule of reason. Article 14 of the AML in China deals with vertical restrains and the first two provisions refer to RPM and the third provision refers to other types of non-price restrictions. In case decisions, both administrative agencies and courts tend to put emphasis on the anti-competitive effects of RPM and the pro-competitive effects were considered to be ‘irrelevant’ and cannot be taken to exempt the party from monetary penalties. The Ruibang/Johnson & Johnson case ruled by the Shanghai Higher People’s Court provided the most detailed analysis on the economic effects of RPM.