retail price maintenance david stallibrass (updated march 2011) personal views of author. does not...
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Retail price maintenance
David Stallibrass
(updated March 2011)
Personal views of author. Does not represent opinion or position of any institutions to which he is affiliated.
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Main question
“What law and enforcement policy should be adopted that is: Efficient to enforce and comply with Is likely to prevent RPM where it is
harmful Is likely to allow RPM where it is
beneficial”
Based largely on Giovannetti, Stallibrass (2009) and Bennett, Fletcher, Giovannetti, Stallibrass (2010)
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Contents
Policy options Global picture Economics of RPM Cases and evidence Possible way forward
Discussion
4
A range of policy options
A range of options for legal test
Further nuanced by: Block exemptions based on market
share Prioritisation of competition
authourities
Per seillegal
Rebuttable presumption of illegality
Legal“Rule of reason”
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Contents
Policy options Global picture Economics of RPM Cases and evidence Possible way forward
Discussion
6
Different approaches in different countries
Per seillegal
Rebuttable presumption of illegality
“Rule of reason”
Legal
United States (pre Leegin)
Per se illegal for almost 100 years No safe harbour of block exemption Substantial private enforcement ? A matter of philosophy ?
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Different approaches in different countries
Per seillegal
Rebuttable presumption of illegality
“Rule of reason”
Legal
United States (post Leegin 2007)
RPM.. "is a flawed antitrust doctrine that serves the interests of lawyers – by creating legal distinctions that operate as traps for the unwary – more than the interest of consumers“
Unsure as to the effect on private enforcement…
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European Union & UK
RPM is considered an ‘object’ offence – a rebuttable presumption of illegality
It is not covered by the vertical agreements block exemption
…but it is rarely enforced by DGCOMP or OFT.
Different approaches in different countries
Per seillegal
Rebuttable presumption of illegality
“Rule of reason”
Legal
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Different approaches in different countries
A note on the EU Vertical Agreement Block Exemption Regulation Re-adopted 20th April 2010 RPM remains “hardcore” and on the
“blacklist” – so can not be exempted But…
The Guidelines that accompany the VBER contain detail on when RPM might be justifiable – supporting the “rebuttable presumption”
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Contents
Policy options Global picture Economics of RPM Cases and evidence Possible way forward
Discussion
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RPM can be efficiency enhancing
Need to distinguish between intra-brand competition and inter-brand competitionM M
R RR
If the red firm imposes RPM, it might decrease price competition between retailers of red goods (intra-brand)
But it may increase competition between blue and red goods (inter-brand)Giovannetti, Stallibrass (2009) and Peeperkorn (2008)
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RPM can be efficiency enhancing
Four example ways that RPM can enhance efficiency: It can decrease free riding on service
offered by one store by another, cheaper, store
It can promote competition on service rather than competition on price
It can make the consumer journey simpler It can be indispensable (or at least, very
efficient) And even if no clear benefit, Chicago
School would say one monopoly profit.
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But (relatively) new theories suggest it can also increase market power Five possible theories
Facilitates upstream collusion Facilitates downstream collusion Commitment device to maintain
upstream rents Commitment device to deter
downstream entry Systemically softens competition
All effectively increase market power
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Theory 1: Upstream collusion
By bringing public downstream price under control of upstream manufacturers, makes detection and enforcement of a cartel easier
M M
R RR
Wholesale prices are usually private
So hard to detect break of collusion
Retail prices are public
So direct control helpsJullien, Rey (2007)
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Theory 2: Facilitating downstream collusion
Downstream firms force upstream firm to impose RPM to co-ordinate and facilitate downstream collusion
M
R R
Needs downstream firms to have sufficient market power
Often not in the upstream firms interest
Argos vs. OFT (2006). U.K.C.L.R. 1135
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Theory 3: Upstream commitment device
Upstream firm can maximise profits in one-shot game by contracting with one retailer. But they then have
an incentive to contract with another, at a lower price
The retailers know this, so don’t commit
RPM resolves this problem
M
R R
Hart, Tirole (1990), O’Brien, Shaffer (1992) , Rey, Verge (2004)
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Theory 4: Deterring downstream entry
Downstream firms can use RPM to prevent low-cost entrants.
By imposing RPM, entrants can not grow market share through low prices
Helps retain inefficient / high service business models
M
R R
Schaffer (1991)
R
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Theory 5: Softening system competition
By limiting the ability of wholesalers and retailers to compete on price, it decreases their incentive to bid down manufacturer price
M M
R RR
Doesn’t need to be “instigated” by anyone
Doesn’t need high market shares
Can significantly increase prices
Dobbson, Waterson (2007), Forrest, Kind, Schaffer (2007wp)
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Summary of theories of harm
Theory Instigator
Market power required
Harm caused
1: Upstream collusion
Upstream Upstream market power
Increased upstream collusion
2: Downstream collusion
Downstream
Very high downstream power
Increased downstream collusion
3: Upstream commitment
Co-operative? Upstream?
Upstream, may create downstream
Greater extraction of upstream monopoly rents
4: Downstream entry deterrence
Downstream
Downstream Less downstream entry
5: Softening system competition
None required
None required Decreased competition pressure across market
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Contents
Policy options Global picture Economics of RPM Cases and evidence Possible way forward
Discussion
1.Facilitate upstream collusion2.Facilitate downstream collusion3.Protect upstream monopoly rents4.Protect downstream monopoly
rents 5.Dampen system competition ?
+ Efficiency arguments overstated
Note: ticks signal consistency of case with theory, no more
Net Book Agreement
Two bilateral RPM agreements plus single trilateral agreement Argos a ‘price-
leader’ downstream Littlewoods and
Argos leading catalogue producers
Initiative driven by retailers
Childrens Toys (2003)
1.Facilitate upstream collusion 2.Protect upstream monopoly rents3.Facilitate downstream collusion 4.Protect downstream monopoly
rents5.Dampen system competition ?
Note: ticks signal consistency of case with theory, no more
Childrens Toys (2003)
NOTE: Simplified structure. Not all parties involved represented.
Upstream: Licence holders
ManufacturersLicense to
Sell to retailers
Sell back to club
Run ownshops
Football Shirts
1.Facilitate upstream collusion 2.Facilitate downstream collusion 3.Protect upstream monopoly rents 4.Protect downstream monopoly
rents 5.Dampen system competition
Note: ticks signal consistency of case with theory, no more
Football Shirts
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There is very little empirical evidence
OFT experience Case of RPM as device for downstream
collusion Case study on minimal benefits of RPM in
books Lafontaine and Slade (2008)
Survey of evidence RPM imposed by firms broadly beneficial RPM imposed by governments broadly
harmful …but a limited datset
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Contents
Policy options Global picture Economics of RPM Cases and evidence Possible way forward
Discussion
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Objective
In competition law and economics, the objective is to use economics to design a law that maximises welfare, while minimising enforcement and compliance costs: MIN [ Type 1 error + Type II error + enforcement cost + compliance cost]
Almost impossible to measure!
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Objective
Requires accuracy Close mapping of economics and
empirical evidence of harm and benefit Requires effectiveness
Self assessment by firms Predictability of courts and
administrative bodies Proportionate punishment
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With RPM, what can we say?
100% legal will almost certainly allow some anti-competitive practices
100% illegal will almost certainly prevent some beneficial practices
Complicated issue, so unstructured “rule of reason” likely to have high enforcement and compliance costs
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Propose “structured” rule of reason
Presumption of illegality Harm likely to be hidden, benefits
should be clear Clear ability to rebut the presumption
If can show evidence of benefits Need to show RPM is indispensable? Or
just efficient? A little like DGCOMP under new
guidelines
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Issue of block exemptions is particularly difficult
Appears that RPM is more likely to be harmful if there are large market shares
So perhaps make legal (or reverse presumption) if market shares below a threshold
Problem is, RPM can be very harmful with multiple small agreements…
…and can a contract be said to be illegal depending on other, unknown contracts?
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In administrative systems, prioritisation may resolve
Administration can monitor markets, receiving complaints
Can decide to take action if they see multiple small RPM infringements in a market
Though still imperfect due to possible private enforcement against small companies
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