Question 1

NCM: The Market?

Accepted Answer

Product market: new cars (so excludes used cars) After-sales services are often included with the new car Geographic market: national sub-markets across Europe Significant transportation costs exist between these sub-markets Each tends to be characterised by a leading national brand (Need for right-hand drive specification in the UK) Costly to transport a car from one country to another so buyers tend to buy from their national market Vertical relations: Manufacturers supply franchised dealers who sell to the public UK: Ford (15%), Vauxhall/Opel (13%), Renault (7%), Peugeot (7%) and VW (7%) Manufacturers are moderately concentrated (data - 2003) The dealer sector is highly fragmented The dealers have plush show rooms, with well trained salespeople, offering important services e.g. test drives

Question 2

NCM: Regulation in the market?

Accepted Answer

Prior to 1985 Article 81(1)( now 101(1) in the Europe chapter 1 in UK ) prohibited agreements, but 81(3) allowed exemptions car manufacturers needed individual exemptions for vertical agreements for each dealer they had this was a huge burden on the manufacturers and the competition agency that had to check everyone of these 1985 Block exemption for car sector introduced under Reg 123/1985--\> set of agreement that were said to be okay by the European Commission Presumed the benefits of these agreements would outweigh the anti-competitive effects All manufacturers could impose criteria on its dealers (selective distribution) --\> raise quality of the dealers and the service they provide They could appoint a single dealer in a territory (exclusive distribution) --\> market power (remove intraband) They could prohibit dealers from selling other brands (exclusive dealing) --\> (removing Interbrand) Some agreements were never legal though, namely RPM (also called black clauses) Quite unregulated at this point --\> no investigation is needed under these bloc exemptions 2002 New stricter reforms introduced under Reg 1400/2002 Manufacturers cannot combine selective & exclusive distribution Most opted for selective distribution The conditions on exclusive dealing are much stricter dealers could sell up to 3 different brands of car in their dealership Also these exemption didn't apply to a firm who had a market share over a certain threshold --\> had to apply for an individual exemption like before

Question 3

NCM: what was debated about the Chicago school theory as our understanding of exclusive dealings and foreclosures increased?

Accepted Answer

As our understanding of exclusive dealings and foreclosure increase there was a problem found with the Chicagos schools analysis --\> consumer would not sign up to exclusive deals and that could lead to anti-competitive effects the manufacturer may not only sell to one dealer supposing the dealers are symmetric it can generate multiple times over the profit it would make from the singular case Can compensate some of the buyers for signing up Thereby the time the new entrant has grown to a sufficient scale to supply a sufficient number of the buyer in the market They might not be able to if the manufacturer has compensated enough of the buyers for signing up to the exclusive dealing contract So would charge the monopoly price to all buyers only compensating some of them for signing up while other would be harmed as a result of this exclusive dealing

Question 4

THSC: What is in it for the Hub?

Accepted Answer

A simple theory of vertically related markets suggests the manufacturer should prefer competition! Suppose homogeneous Bertrand downstream, so p=w Manufacturers (monopolists) will set w\ at a monopoly mark-up over its costs It obtains the one monopoly profit Facilitating collusion downstream by raising the price of w and the retail price p? ● fall in demand of final consumers ● reduction in manufacturer’s profits Why does the hub want to go ahead if this is the case then? probably because the assumption of the theoretical model don't match that of reality Downstream collusion causes double marginalisation! monopoly mark up from the manufacturer and mark up from the retailer

Question 5

THSC: The Market?

Accepted Answer

Product market: Toys (in UK around 2000) Manufacturers: Hasbro, Mattel, Fisher-Price Hasbro was leading toy manufacturer with brands of Action Man and Monopoly Firms: toys and games were sold through a variety of outlets Specialists (Toys R Us), mixed retailers (Woolworths) Catalogue retailers (Argos and Littlewoods) Hasbro supplied large toy retailers directly and smaller ones through distributors Competition --\> before internet shop : Catalogue retailers were price leaders Catalogues published twice a year Spring/Summer (S/S) & Autumn/Winter (A/W) These were the only time they could change their prices Rivals could change their prices more frequently but chose to match their price to what ever was put out in the catalogue The A/W catalogue was most important due to high demand at Christmas

Question 6

THSC: Key Features of the Cartel? Formation

Accepted Answer

Retailers were “unhappy with the margins … on Hasbro’s branded products” Price competition at the retail level was very intense Hasbro concerned product would be delisted Unlike theory Hasbro isn't a monopoly and can to compete with other toy manufacturers : ​Didnt bother lower wholesale price to improve margins as it can be assumed competition was so fierce p=MC and the margins wouldn't change Developed the “pricing initiative” was for retailers to charge the RRP “Argos and Littlewoods were key … since they were the market leaders” Hasbro engaged in bilateral communications with Argos and Littlewoods

Question 7

THSC: Key Features of the Cartel? Coordination

Accepted Answer

“no evidence that Argos and Littlewoods spoke directly” “confidential information was exchanged between them with Hasbro acting as the fixer or middleman.” Retailers informed Hasbro which products would be at RRP and which wouldn't be ; Hasbro passed it on

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L11 - Vertical Relationships Case Studies Flashcards

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