Lear - Laboratorio di economia, antitrust, regolamentazione
Price Relativities Agreements
Theories of harm and economic justifications
Paolo Buccirossi
ACE - Paris, 26 October 2012
Lear - Laboratorio di economia, antitrust, regolamentazione
Index
1. A definition of Price Relativities Agreement
2. A comparison with Across-Sellers PRAs and RPM
3. Theories of harm
4. Economic justifications
5. Conclusions
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Lear - Laboratorio di economia, antitrust, regolamentazione
Price Relativities Agreements
Manufacturer B
Manufacturer A
Parties to the PRA
Subject that pays
the price
regulated by the
agreement
Retailer
A’s retail price is a
function of B’s retail price
pA = f(pB)
pB
Buyer
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Lear - Laboratorio di economia, antitrust, regolamentazione
Across-Sellers PRAs
Seller A
(pA)
Seller B
(pB)
pA* (pA,pB, pC)
Parties to the
agreement
(pC)
Seller C
(pC)
(pB)
Buyer
A’s price is a function of its
competitors price
Subject that pays
the price
regulated by the
agreement
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Resale Price Maintenance
Manufacturer B
Manufacturer A
Parties to the PRA
Subject that pays
the price
regulated by the
agreement
Retailer
A’s retail price is NOT a
function of B’s retail price
pA = f(p*A)
pB
Buyer
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Theory of harm for Across-Sellers PRAs/1
1. Softening competition (Hay, 1982; Salop, 1986; Corts, 1995; Hviid and
Shaffer, 1999 …)
How: Reduce competitors’ demand price elasticity when they undercut
Is this theory of harm appropriate also to Pricing Relativities Agreement?
YES
How: Reduce rival manufacturer’s (indirect) demand price elasticity when it
undercuts wholesale price
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Theory of harm for Across-Sellers PRAs/2
2. Entry foreclosure (Salop, 1986; Arbatskaya, 2001)
How: (Same as above) Reduce potential competitors’ demand price elasticity
when they undercut
Is this theory of harm appropriate also to Pricing Relativities Agreement?
YES, if price relativities are set with respect to the retail price of entrants
(unlikely)
How: Reduce potential rival (indirect) demand price elasticity when it enters
with a lower wholesale price
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Theory of harm for RPM
1. Facilitating collusion (Mathewson and Winter, 1998; Julien and Rey, 2007)
How: Retail prices are less responsive to change in retail costs -> wholesale
prices can be inferred by observing retail prices -> increased transparency
Is this theory of harm appropriate also to Pricing Relativities Agreement?
YES
How: Retail prices are less responsive to change in retail costs, etc.
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Lear - Laboratorio di economia, antitrust, regolamentazione
Economic justifications Across-Sellers PRAs
1. Signalling low cost/price (Winter, 2001; Moorthy and Winter, 2006; Hviid,
2010)
Necessary condition: Buyers have imperfect information on prices but can
easily observe the pricing policy
Is this economic justification appropriate also to Pricing Relativities
Agreement?
NO
Why: End consumers do not observe the pricing policy
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Economic justifications RPM
1. Double marginalization (or other vertical coordination problem) (Telser,
1960; Mathewson and Winter, 1998)
How: Retail price is delegated to the manufacturer and “specializes” in
maximizing vertically integrated profits; wholesale price becomes a “profit
distribution” variable
Is this economic justification appropriate also to Pricing Relativities
Agreement?
YES (if unilateral)
Why: If unilateral, the retail price is delegated to the manufacturer who can
set the price differential so as to maximize vertically integrated profits;
wholesale price “mainly” used to distribute profits between the
manufacturer and the retailer
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Lear - Laboratorio di economia, antitrust, regolamentazione
Conclusions
• “Object infringement” inappropriate
• A full fledged analysis of the possible theories of harm
and efficiency justifications is recommended
• “Some” research desperately needed
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Lear - Laboratorio di economia, antitrust, regolamentazione
Lear – Laboratorio di economia, antitrust,
regolamentazione
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