Vertical Relationships Flashcards
What is intrabrand competition?
When there is competition at a downstream level for the same brand i.e. Coca-Cola supplying for Sainsbury’s and Asda
What is interbrand competition?
Competition between brands i.e. if Coca-Cola and Pepsi were both trying to supply through Sainsbury’s
What types of tariff are there?
Linear
Non-Linear
What is a linear contract?
The manufacturer charges a fixed price per unit for the good
What is a non-linear contract?
The manufacturer can charge a per unit price with a fixed fee
NOTE: THE FIXED FEE MAKES THIS DIFFERENT
This is called non-linear because the average cost will fall as the retailer buys more
What types of clauses can be imposed by the manufacturer?
Resale Price Maintenance (RPM)
Exclusive Territory
Exclusive Dealing
Selective Distribution
Integration
What is Retail Price Maintenance? (RPM)
Manufacturer sets the price of the retailers (at the extreme)
A less extreme will give the retailer a range of prices to charge
The reason for this is because retailers want prices to be as high as possible in order to maximise revenue, whereas manufacturers want prices to be low so that they sell more of their product
This is blacklisted in Europe and the UK with a few exceptions (e.g. the book industry)
What is the Exclusive Territory clause?
The manufacturer can ensure that a retailer is the only retailer in a certain territory to supply its product
This is because Exclusive distribution/territory is when a retailer can only sell in a certain area
This allows the retailer to have some market power and potentially become a monopoly in that territory
Anticompetitive effect: That will eliminate intrabrand competition in that region
How can the Exclusive territory deal lead to greater competition (despite it having anticompetitive effects)?
It may well incentivise the retailer to invest in its services, increasing the quality of the purchasing quality for the buyers - benefiting the market
What is the Exclusive Dealing clause?
This is when the manufacturer only allows the retailer to supply its good
Anticompetitive effect: This dampens interbrand competition
What is selective distribution?
When manufacturers only allow certain retailers to sell its product
e.g. designer brands don’t allow supermarkets to sell their products
What policy is there to prevent these anticompetitive vertical effects?
Article 101 in Europe: prohibits agreements between firms, unless they are welfare enhancing (Chapter 1 in the UK)
Typically the vertical agreements are not per-se illegal and a safe harbour if suppliers market share<30%
The Competition commission will have to look into these industries to see if there is an issue
What is the background to UK impulse ice creams?
When was the CMA created?
October 2013 by the coalition government
It was a merger of the Competition Commission and the Office of Fair Trading
When was the Competition Commission formed?
In 1997 by the Labour government
Before that we had the Monopolies and Mergers Commission
What were the exclusivity concerns in the Ice Cream market?
What was the Monopoly and Markets Commission’s actions after its first analysis of the Ice cream market?
They prohibited outlet exclusivity but they provided a clause which allowed retailers to write to the MMC to ask for them to have the outlet exclusivity return
This failed because suppliers generally have more power than retailers, so they were pressuring the retailers to send in these letters and nothing really changed
What was the correction in the second investigation of the ice cream market?
The manufacturers couldn’t impose outlet exclusivity on the retailers
This led to the manufacturers creating a new strategy:
They wrote clauses which only allowed retailers to supply their ice creams in freezers without their rivals’ ice creams
This caused an issue because ice cream vans usually only have one freezer, so if there was freezer exclusivity then there was outlet exclusivity
What was the suggested remedy for the UK impulse ice cream market after the 4th investigation?
What are the assumptions of a double marginalisation market?
Note: ‘A’ is the ‘choke price’ and is the level at which any price above it will result in 0 demand
What is the profit of the monopoly retailer?
Note: p is the retail price
w is the wholesale price
What is the profit of the monopoly manufacturer?
Note: w is the wholesale price
c is the marginal cost
p is the retail price
How do we draw the manufacturer’s derived demand curve?
There are two margins on the final good, hence why it is called double marginalisation
What are the effects on the retailer’s profits if it raises its price?
How do we calculate double marginalisation?
How do we differentiate the retailer’s profits and what is the interpretation of this?
What is the optimal retail price given the manufacturer sets price w?
What are the manufacturer’s optimal price and quantity?
How do we calculate and interpret manufacturer’s profits?
How do we find the equilibrium quantity, price and profit?
Why are vertical mergers often considered procompetitve?
They remove the effects of double marginalisation
