Vertical restraints
– an economic perspective
Patrick Rey
9th 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
 Policy implications: the case of RPM

Efficiency benefits

Anti-competitive harm

Key factors
Patrick Rey
Vertical restraints - an economic perspective
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Economic impact of vertical restraints
 Vertical 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
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Vertical restraints - an economic perspective
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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)
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Vertical restraints - an economic perspective
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Economic impact of vertical restraints
 Impact 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 foreclosure
o customer foreclosure
– exclusive dealing
– fidelity rebates
– vertical integration
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Vertical restraints - an economic perspective
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Resale Price Maintenance
 Efficiency benefits

Eliminating double marginalization
o price caps
o purely bilateral: no need for industry-wide arrangement

Alleviating free-riding and encouraging retail services
o price floors
o purely bilateral if market is sufficiently transparent
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Vertical restraints - an economic perspective
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Resale Price Maintenance
 Anti-competitive harm

No competition-dampening effects

Facilitating collusion
o dealer cartel
o enhanced transparency in case of upstream collusion

Restoring the exercise of upstream market power
o solves manufacturer’s commitment problem
o requires retail network – wide arrangement
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Vertical restraints - an economic perspective
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Resale Price Maintenance
 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
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Key factors
 Industry structure

“Franchising" mode versus interlocking relationships
o more serious concern in latter case
o in case of “franchising”, market power of “franchisor”

Tight oligopolies vs competitive industry (risk of collusion)
o entry barriers, small number of competitors, frequent
interaction
o market transparency with / without RPM
o symmetry, …
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Vertical restraints - an economic perspective
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Resale Price Maintenance
 Bilateral contracts versus industry-wide practices

Bilateral contracts achieve most of efficiency gains
o double marginalization
o free-riding

Industry-wide practice gives rise to potential harm
o facilitating practices and cartel devices
o interlocking relationships
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Vertical restraints - an economic perspective
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Resale Price Maintenance
 Temporary versus permanent programs

temporary programs suffice for some efficiency benefits
o launching a new product
o entering a new market
o …

more permanent programs can give rise to potential harm
o collusion / cartel devices
o interlocking relationships
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