Vertical restraints – an economic perspective Patrick Rey
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Transcript of Vertical restraints – an economic perspective Patrick Rey
Vertical restraintsVertical restraints
– – an economic perspectivean economic perspective
Patrick Rey
9th Competition Day, Fiscalia Nacional EconómicaSantiago, 27 October 2011
Patrick Rey Vertical restraints - an economic perspective 22
Outline
Economic impact of vertical restraintsEconomic impact of vertical restraints Vertical coordination
Impact on competition in the short-term
Impact on competition in the long-term
Policy implications: the case of RPMPolicy implications: the case of RPM Efficiency benefits
Anti-competitive harm
Key factors
Patrick Rey Vertical restraints - an economic perspective 33
Economic impact of vertical restraints
Vertical coordinationVertical coordination Prices: double marginalization
o multiplication of margins results in excessive prices o solving double marginalization – via RPM, minimal quotas, non-linear (two-part) tariffs– is good for the firms and for consumers
Non-price dimensions o upstream: quality, national advertising, ... o downstream: retail services, local advertising, ...o more ambiguous welfare implications– price vs services tradeoff– less ambiguous if strong inter-brand competition or free-riding
Patrick Rey Vertical restraints - an economic perspective 44
Economic impact of vertical restraints
Impact on competition in the short-termImpact on competition in the short-term Sham dealer cartels (downstream collusion)
Facilitating practices (upstream collusion)
Competition-dampening (softening interbrand competition through strategic delegation)
Commitment problems (restoring exercise of market power)
Interlocking relationships (e.g., national brands in supermarkets)
Patrick Rey Vertical restraints - an economic perspective 55
Economic impact of vertical restraints
Impact on competition in the long-termImpact on competition in the long-term Pro-competitive effects of the above effects
o enhancing future profit fosters entry, innovation, investment, …
o e.g., launching a new product, entering a new market, ...
Vertical foreclosure o input foreclosureo customer foreclosure– exclusive dealing– fidelity rebates– vertical integration
Patrick Rey Vertical restraints - an economic perspective 66
Resale Price Maintenance
Efficiency benefitsEfficiency benefits Eliminating double marginalization
o price capso purely bilateral: no need for industry-wide
arrangement
Alleviating free-riding and encouraging retail serviceso price floorso purely bilateral if market is sufficiently transparent
Patrick Rey Vertical restraints - an economic perspective 77
Resale Price Maintenance
Anti-competitive harmAnti-competitive harm No competition-dampening effects
Facilitating collusion o dealer cartelo enhanced transparency in case of upstream collusion
Restoring the exercise of upstream market power o solves manufacturer’s commitment problemo requires retail network – wide arrangement
Patrick Rey Vertical restraints - an economic perspective 88
Resale Price Maintenance
Anti-competitive harm (cont’d)Anti-competitive harm (cont’d) Interlocking relationships (Rey-Vergé JIE 2011)
o eliminates interbrand as well as intrabrand competition – retailers as “common agents” (alleviates interbrand
competition)– RPM eliminates competition among these agents
o French experience: the 1996 Galland Act– reselling below cost is forbidden– “cost”? invoice price vs backroom margins
o Empirical validation– price of national brands in supermarkets: France vs EU– Bonnet-Dubois Rand 2011: panel data– Biscourp, Boutin and Vergé: correlation margins/concentration
Patrick Rey Vertical restraints - an economic perspective 99
Key factors
Industry structureIndustry structure “Franchising" mode versus interlocking
relationshipso more serious concern in latter caseo in case of “franchising”, market power of “franchisor”
Tight oligopolies vs competitive industry (risk of collusion)o entry barriers, small number of competitors, frequent
interactiono market transparency with / without RPMo symmetry, …
Patrick Rey Vertical restraints - an economic perspective 1010
Resale Price Maintenance
Bilateral contracts versus industry-wide Bilateral contracts versus industry-wide practicespractices Bilateral contracts achieve most of efficiency gains
o double marginalizationo free-riding
Industry-wide practice gives rise to potential harmo facilitating practices and cartel deviceso interlocking relationships
Patrick Rey Vertical restraints - an economic perspective 1111
Resale Price Maintenance
Temporary versus permanent programsTemporary versus permanent programs temporary programs suffice for some efficiency
benefitso launching a new producto entering a new marketo …
more permanent programs can give rise to potential harmo collusion / cartel devices o interlocking relationships