The French Competition Council (Conseil de la concurrence) recently sanctioned five toys manufacturers and three distributors on grounds of collusion on the pricing of toys during the Christmas period between 2001 and 2004.

The Conseil challenged the manufacturers’ setting of toy resale prices of all of the distributors concerned. It argued that the companies had colluded to fix these resale prices. In return, the distributors continued to receive discounts as remuneration for their cooperation in maintaining the prices at the levels desired by the manufacturers.

The Conseil was also able to demonstrate that the toy manufacturers were monitoring distributors’ pricing by placing orders over the telephone. Sometimes, the manufacturers were even exerting direct pressure on them. The distributors themselves also participated in keeping an eye on pricing, and some even went as far as putting in place mechanisms that allowed them to inform the manufacturers on which competitors, if any, were selling at a different price; this mechanism invariably led to the manufacturers forcing low-selling distributors to raise their prices. This was the case with Carrefour for instance, since its operation “Carrefour reimburses ten times the difference” encouraged customers to indicate to the organisation any inferior prices offered by competitors of Carrefour’s. The distributor was then able to forward this information onto the manufacturer concerned, who in turn put in place the necessary measures to ensure that the low-selling distributor raise its retail prices.

The Conseil also succeeded in proving the effectiveness of this anti-competitive practice by revealing that the prices suggested between manufacturers and distributors had in many occasions been applied across the board at the point of sale.

Taking into account all three of the factors mentioned above, the Conseil reached the conclusion that there had existed a vertical cartel between the toy manufacturers and their distributors.

In their defence, the manufacturers and distributors argued that the targeted practices were but a strict application of the French distribution law (as recently modified by the Dutreil law). In particular, manufacturers argued that they were tied by statute which prohibited below cost selling.

French commercial law prohibits distributors from reselling products at a below cost price. A below cost price, as defined under French law, is the net invoice price to which are discounted all the rebates, discounts and other direct or indirect price reductions granted by the supplier, expressed in percentage of the selling price, to which are then added all applicable taxes and transportation costs.

These arguments were rejected by the Conseil, for whom French distribution law does not “necessarily and unavoidably” lead to the behaviours and practices observed. The Conseil asserted that whilst French commercial law does indeed prohibit below-cost selling, it nevertheless authorises suppliers or manufacturers grant effective rebates and discounts to their distributors that the latter should be able to pass on to their customers.

For the Conseil, it was not the law that was causing the price alignment, but rather the companies’ excessively wide interpretation of the concept of commercial cooperation and their presentation of discounts as being conditional when they should in fact have been incorporated into the net invoice price. The artificially inflated threshold for resale at a loss that they were using served to ensure a uniform control by the manufacturers of (high) retail prices.