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


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



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)



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


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



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



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


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, …



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



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

Vertical restraints – an economic perspective Patrick Rey

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