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Vertical restraints – an economic perspective Patrick Rey

Vertical restraints – an economic perspective Patrick Rey. 9 th Competition Day, Fiscalia Nacional Económica Santiago, 27 October 2011. Outline. Economic impact of vertical restraints Vertical coordination Impact on competition in the short-term Impact on competition in the long-term

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Vertical restraints – an economic perspective Patrick Rey

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  1. Vertical restraints – an economic perspective Patrick Rey 9th Competition Day, Fiscalia Nacional Económica Santiago, 27 October 2011

  2. Outline Economic 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 RPM Efficiency benefits Anti-competitive harm Key factors 1 Vertical restraints - an economic perspective

  3. Economic impact of vertical restraints Vertical coordination Prices: double marginalization multiplication of margins results in excessive prices solving double marginalization via RPM, minimal quotas, non-linear (two-part) tariffs is good for the firms and for consumers Non-price dimensions upstream: quality, national advertising, ... downstream: retail services, local advertising, ... more ambiguous welfare implications price vs services tradeoff less ambiguous if strong inter-brand competition or free-riding 2 Vertical restraints - an economic perspective

  4. Economic impact of vertical restraints Impact 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) 3 Vertical restraints - an economic perspective

  5. Economic impact of vertical restraints Impact on competition in the long-term Pro-competitive effects of the above effects enhancing future profit fosters entry, innovation, investment, … e.g., launching a new product, entering a new market, ... Vertical foreclosure input foreclosure customer foreclosure exclusive dealing fidelity rebates vertical integration 4 Vertical restraints - an economic perspective

  6. Resale Price Maintenance Efficiency benefits Eliminating double marginalization price caps purely bilateral: no need for industry-wide arrangement Alleviating free-riding and encouraging retail services price floors purely bilateral if market is sufficiently transparent 5 Vertical restraints - an economic perspective

  7. Resale Price Maintenance Anti-competitive harm No competition-dampening effects Facilitating collusion dealer cartel enhanced transparency in case of upstream collusion Restoring the exercise of upstream market power solves manufacturer’s commitment problem requires retail network – wide arrangement 6 Vertical restraints - an economic perspective

  8. Resale Price Maintenance Anti-competitive harm (cont’d) Interlocking relationships (Rey-VergéJIE 2011) eliminates interbrand as well as intrabrand competition retailers as “common agents” (alleviates interbrand competition) RPM eliminates competition among these agents French experience: the 1996 Galland Act reselling below cost is forbidden “cost”? invoice price vs backroom margins Empirical validation price of national brands in supermarkets: France vs EU Bonnet-Dubois Rand 2011: panel data Biscourp, Boutin and Vergé: correlation margins/concentration 7 Vertical restraints - an economic perspective

  9. Key factors Industry structure “Franchising" mode versus interlocking relationships more serious concern in latter case in case of “franchising”, market power of “franchisor” Tight oligopolies vs competitive industry (risk of collusion) entry barriers, small number of competitors, frequent interaction market transparency with / without RPM symmetry, … 8 Vertical restraints - an economic perspective

  10. Resale Price Maintenance Bilateral contracts versus industry-wide practices Bilateral contracts achieve most of efficiency gains double marginalization free-riding Industry-wide practice gives rise to potential harm facilitating practices and cartel devices interlocking relationships 9 Vertical restraints - an economic perspective

  11. Resale Price Maintenance Temporary versus permanent programs temporary programs suffice for some efficiency benefits launching a new product entering a new market … more permanent programs can give rise to potential harm collusion / cartel devices interlocking relationships 10 Vertical restraints - an economic perspective

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