Question 1

What vertical restraint may be put into contracts between firm in a vertical relationship?

Accepted Answer

Linear tariffs: manufacturer charges a fixed unit price per unit of the good (average cost of the good is the same no matter the number of units bought) Non-linear contracts: manufacturer charges price per unit and a fixed fee (average price will fall the more the retailer buys) Resale Price Maintenance (RPM): manufacturer sets the price of the retailers --\> normally gives them a range to choose from retailers wanting to maximise profits with high prices but manufacturers want lower price to sell more goods Different incentives --\> contract helps them bring them closer together Exclusive territory: retailer can only sell in a certain area/to certain buyers Can help eliminate intraband competition --\> anti-competitive Can be pro-competitive as it may lead a retailer to invest more in the quality of the services they are providing Exclusive dealing: retailer can sell only the manufacturer’s brand Can eliminate Interbrand competition by stopping a store from selling any of their competitor's products e.g. Only 1 car dealer in an area can sell BMWs Selective distribution: manufacturer only allows certain retailers to sell its product Have certain criteria to meet, e.g. designer brand don't sell to supermarkets as they need the retailer to charge a high price to signal quality ● (Integration: manufacturer merges with retailer) substitute to vertical restraints --\> firm can just merge Policy Article 101 (Europe chapter 1): prohibits agreements between firms, unless they are welfare-enhancing Typically not per-se illegal (need to check if they will be anti-competitive or not) and a safe harbour if suppliers market share\<30%. RPM is black listed in Europe and UK (with a few exceptions e.g. the book industry). Being allowed in the US as they see it may have welfare-enhancing effects --\> may come over to here eventually

Question 2

Vertical Restraints: UK impluse ice cream case?

Accepted Answer

1979-2000: four Monopolies and Mergers Commission investigations ● Manufacturers: Bird’s Eye Walls, Mars, Nestlé (CR3 impulse =72%, wrapped = 86%) Looked at the market for wrapped (in store) and the broad impulse ice cream (its a hot day let's get an ice-cream - corner shop, ice cream) ● Retailers: small independent shops, such as newsagents, kiosks… Need to preserve the cold chain from manufacture to sale Two areas of concern were: ● Outlet exclusivity: “… (BEW, Mars and Nestlé) have entered into agreements with some retailers to stock only their respective products, which has adversely affected competition between manufacturers…” believe this would lead to limited choice and interbrand competition banned this but said retailers could write to MMC to do this --\> didn't work as market power was upstream and the manufacturers just put pressure on the retailers to write these letters ● Freezer exclusivity: “…the practice of freezer exclusivity particularly by BEW but also by Mars and Nestlé restricts competition between manufacturers…” Can only supply our ice cream in a freezer without any of our competitors ice cream this just became outlet exclusivity for small retailers and newsagents who probably only had one or two freezers anyways The MMC found no issue because because manufacturers we actually supply retailers with more freezer space at next to zero cost, basically increase the supply anyways But later decided this is a problem Remedy: Prohibit BEW from entering agreement over freezer space “unless 50% of the display space and all of the storage space of the freezer is permitted to be used for other manufacturers' products

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L10 - Vertical Relationships Flashcards

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