The Treatment of Horizontal Agreements Aimed at Solving Incentive Problems

Abstract

If a group of horizontal rivals gets together to agree on a way to structure efficient production, are they violating competition law? The issue could arise where a group of producers of agricultural products gets together to form a cooperative or even where professionals in the same field get together in a partnership. On the face of it, each supply agreement between the producer and the cooperative or partnership is vertical, but the design of the collective rules, which govern for all, involves horizontal coordination. This article takes as the starting point the example of dairy cooperatives as they emerged in the later part of the nineteenth century as a solution to a challenge offered by new technology. We use the landmark contract law case of McEllistrim v. Ballymacelligott Cooperative to illustrate the ways in which competition law could be engaged when cooperatives are formed. Comparisons of Ireland and Denmark in the period leading up to the decision suggest that not only might the restraint be ancillary, but if not, it reduced costs, increased quality, and was welcomed by consumers (though these were in England rather than in Denmark or Ireland). The restraint also appears essential in some form, suggesting that either ancillarity or the application of Art. 101(3) Treaty on the Functioning of the European Union would have allowed the restraint to be used.