| In what 3 ways are vertical integration limited? | There are mainly 3 ways that is not exactly legal:
1. RPM - resale price maintenance
2. Tying and bundling (quantity dependent pricing)
3. Refusal to supply (foreclosure) |
| What is Resale price maintenance (RPM), and why is it anti-competitive? | An arrangement whereby an upstream firm retains the right to control the price at which a product is sold by a downstream firm by imposing a price floor or price ceiling.
RPM can be anticompetitive:
• Retailer collusion - RPM can facilitate collusion among retailers by eliminating the inherent instability of collusive aggreements due to the price discipline
• Producer collusion – elimination of price variations among retailers facilitates collusion at the wholesale level (i.e. producers care about wholesale price and collude on that one)
However, RPM is not necessarily bad due to the service hypothesis:
• A fixed higher price can be justified by additional service
• If retailers provide more pre-sale services, demand curve shifts outward
• Assumption: Demand depends not only on price but also on (pre-sale) services, like convenient location, short waiting times, etc. |
| What is bundlings, and why is it anti-competitive? | Bundling is when products, goods or services can only be purchased together, even though it would be natural or usual to trade them separately.
1. Product type determines whether the separate sale is natural
2. Trade practices determine whether separate sales is usual
Bundling in practice:
• Sales bundling: When the selling company that bundles its products.
• Buying bundling: When the buyer will only purchase a single package.
• Direct bundling (pure bundling), bundling in LWG's terminology: The purchase of a product conditional on the purchase of second and vice versa - a total package.
• Tying: asymmetric variant of direct bundling: The purchase of a product conditional on the purchase of another; but not vice versa.
• Indirect bundling: When the bundled give a discount is so high that no / or only choose to purchase separately.
Bundling is a violation to Competition Act, §11 and § 6 |
| What is motivations for bundling? | Motives for bundling:
1. Profit maximization: namely market power but also cost advantages. Cost advantages are perhaps less prevalent.
2. Strategic tool: Marketing (Separate sales vs bundling with discount), price discrimination and entry barriers. |
| What is tying and why is it anti competitive? | Buyer agrees to buy certain but different products as part of one trade, e.g
• Airplanes - replacement parts
• Fax, copiers - color catridges
• Cars- car parts
Buyers can void the tied product by not buying the main product (such as the airplane); but not vice versa.
Motives for tying:
› Price evasion, for example, by regulating prices -> The company can make profits on the
tied product
• Protection of goodwill -> For example, flight safety, copiers that always work
• "Economics of distribution"
• Possibility of price discrimination (low cost of binding product, high price on the tied product ... printer / cartridges)
• Increased market power in the tied product
• Increase competitors' sunk costs (entry barriers)
• Possibility for market sharing by cartels |
| What are some other forms of vertical restraints? (Other than bundling, tying and resale price maintenance) | Foreclosure (refusal to supply - see later) - Chicago school has a clear view on this.
• "Territorial exclusivity" - is the market segmentation or illegal influence the market
• "Slotting" - have you thought about what items are in the queue in the various supermarkets?
• "Quantity-dependent pricing" - Refusal to supply, non-linear pricing, two part tariff (fixed price plus volume dependent part), bundling, and tying. |
| Bundling, tying and resale price maintenance are generally prohibited by the competition act. What is the block exemption for certain vertical agreements? | • Exempts companies if their market share is less than 30% (both buyer and seller share) who take part in the bundling/RPM/Tying.
• The rationale is that vertical agreements between non dominant companies meet the requirement § 8 paragraph 1
• A block exemption is a general exemption for similar categories of agreements, |
| Why might a firm be interested in not supplying an item to some firms in the value chain? | Foreclosure: 'Upstream‘ firm refuses to provide essential items to (some) firms 'downstream'
Motives for the refusal to supply:
• (More) market power in the downstream market
• Signal quality by sales from a few retailers
• Less intra-brand and perhaps inter-brand competition for the company's product
• Achieve higher prices
• Increasing costs for competitors in the downstream market
• If the product can not easily be replaced, the dealers pay extra to obtain
• substitute products |
| Why does Chicago school consider foreclosure irrelevant? | Chicago school has argued that foreclosure or vertical integration is of little effect if downstream market is competitive.
Refusal to supply or vertical integration does not change the overall monopoly rent for the producer or the combined firm.
Recall the case Monopoly producer – competitive retailer when we talked about double mark-ups |
