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

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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

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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