Competition Policy
Vertical restraints – Interbrand
Competition
Strategic effects
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Vertical restraints with imperfect competition
Insight from principal-agents models
Two firms would like to keep prices high, but
Betrand Competition lead to undercutting
One firms hires a manager and delegates
price deicisions → give him a premium if
prices are kept higher
If the contract is observable by the rival, it is
credible and the rival will be lead to keep prices
higher too
Strategic effects
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The manufacturer (P) wants the retailer (A) to be a
softer competitor-->to achieve higher prices and retailer
profits-->the benefit of higher prices will be recovered
by the manufacturer via a franchise fee
One vertical restraints is a two parts tariff (franchise
fee+variable price):
The manufacturer sells through an exclusive dealer--> a
higher wholesale price is chosen so as to make to retailer
increase final prices-->rival retailers willing to raise their
prices → the tariff is used to appropriate the retailer
profit
Final effect: higher profits in the vertical chain and lower
welfare
Strategic effects
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Another VR is exclusive territories
A manufacturer sells with a number of retailers-->
one gets the exclusivity and become a monopolist in
selling the brand--> retail prices are raised and rival
retailers follow with parallel increase
Exclusive territories are visible and not easily
renegotiated
RPM cannot be used as a vertical restraint to soften
competition-->prices decision are not delegated but
it is the manufacturer that sets prices
Strategic effects of VR can dampen competition if
the firm adopting them has some market power
Vertical Restraints as Collusive
Devices
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VR can then facilitate collusion--> two more
cases 1) RPM 2) Commom Agency
RPM can fcilitate collusion to the extent that it
increases price-observability
Without RPM if there are shocks in the retail market
final prices will change, with a difficulty to
distinguish price reductions due change in retail
conditions and cheating on the cartel
Common agency: two manufacturer or more sell
their goods in the final market via a common
retailer-->joint profit maximisation by the retailer
Anti-competitive effects: leverage
and foreclosure
• Debate on the use of anticompetitive practices to
reinforce market power in one market or to extend it to
other markets
• Ex. By exclusive dealing a firm with a dominant
position may deter entry in a market by foreclosing a
crucial input (distribution network) or making it more
expensive for an entrant to get such an input
• A vertical merger may have similar effects: an upstream firm with a dominant position takes over a
downstream firm and stop supplying the competitors of
its downstream subsidiary (or supply them at higher
prices)
Anti-competitive effects:
exclusive dealing
• Chicago school skeptical about the anti-competitive
effects of exclusive dealing
• The argument: a rational buyer should benefit from
exclusive dealing with an up-stream seller he will not
sign such a contract if one more efficient entrant
up.steam can offer lower wholesale prices
• The incumbent might offer a compensation to the buyer
to let him accept exclusivity: but it can offer just the
monopoly profit while the buyer looses the increase of
consumer surplus that he will potentially get by buying at
lower prices from the entrant
• The implication is not to exclude exclusivity: if
exclusive contracts are signed they must have efficiency
gains both for firms and consumers no antitrust
intervention
Anti-competitive effects:
exclusive dealing-Post-Chicago
• Recent
contributions
offer
examples
of
anticompetive effects due to exclusive contracts
• Ex. the incumbent by excluding the entrant may
not only increase the profit in this market but
also in other markets, because he enjoys
scope-economies not enjoyed by the potential
entrant
• The incumbent by excluding the entrant can get
an additional profit and can make an offer
high enough to let the buyer accept the
exclusive deal
Vertical mergers: exclusionary effects
• Vertical mergers may have positive effects by getting rid
of double marginalization…
• But are V.M. anti-competitive? An input supplier by
integrating downstream can deny access to the input to
all its downstream rivals and gain market power
downstream
• Chicago school: VM are efficient model with an upstream monopolist selling to perfectly competitive firms
(no double marginalization) the monopolist is able to
extract all the profits from the market a VM does not
increase market power if it takes place it is because
some efficiencies are created
Vertical mergers: exclusionary
effects
• The Chicago school also pointed out that if an
integrated firm refused to supply inputs to rivals
input foreclosure would not necessarily result
• 1) other suppliers might increase their share
of the market
• 2) the fact that the integrated firm does not buy
in the input market reduce the demand of
inputs and equilibrium prices decrease after the
VM
Vertical mergers: exclusionary
effects
• Only recently economists have shown that VM
might result in foreclosure and anticompetitive
outcome
• We have seen they solve the commitment
problem to keep high prices
• Cases in which there are many upstream and
downstream firms and a VM can create
foreclosure
• What is the effect of the VM on the price paid
by independent downstream firms and by
consumers?
Vertical mergers: exclusionary
effects
1. If independent downstream firms serve a
partially different market, than the
integrated downstream firm stopping to supply
them would entail a loss of profits
2. If other upstream firm are competitive
enough, raising input prices may not be
wothwhile
3. To understand the incentive of the
integrated firm to raise the price of inputs
one should check for: 1) the price elasticity
of input demand 2) the excess capacity of
upstream rivals 3) the existence of potential
entrants 4) the ease of entry…
Vertical mergers: exclusionary
effects
Even if the integrated firm stops to supply inputs
it does not follow that the cost of inputs will
increase:
1)other upstream firm may increase their supply
2)the lower demand for the input (due to the
affiliate not buying in the market) may decrease
input prices check than if inputs sold by other
up-stream firm are close substitutes and if
these firms are not capacity constrained