Vertical Relationships

Question 1

What is intrabrand competition?

Answer 1

When there is competition at a downstream level for the same brand i.e. Coca-Cola supplying for Sainsbury’s and Asda

Question 2

What is interbrand competition?

Answer 2

Competition between brands i.e. if Coca-Cola and Pepsi were both trying to supply through Sainsbury’s

Question 3

What types of tariff are there?

Answer 3

Linear

Non-Linear

Question 4

What is a linear contract?

Answer 4

The manufacturer charges a fixed price per unit for the good

Question 5

What is a non-linear contract?

Answer 5

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

Question 6

What types of clauses can be imposed by the manufacturer?

Answer 6

Resale Price Maintenance (RPM)

Exclusive Territory

Exclusive Dealing

Selective Distribution

Integration

Question 7

What is Retail Price Maintenance? (RPM)

Answer 7

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)

Question 8

What is the Exclusive Territory clause?

Answer 8

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

Question 9

How can the Exclusive territory deal lead to greater competition (despite it having anticompetitive effects)?

Answer 9

It may well incentivise the retailer to invest in its services, increasing the quality of the purchasing quality for the buyers - benefiting the market

Question 10

What is the Exclusive Dealing clause?

Answer 10

This is when the manufacturer only allows the retailer to supply its good

Anticompetitive effect: This dampens interbrand competition

Question 11

What is selective distribution?

Answer 11

When manufacturers only allow certain retailers to sell its product

e.g. designer brands don’t allow supermarkets to sell their products

Question 12

What policy is there to prevent these anticompetitive vertical effects?

Answer 12

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

Question 13

What is the background to UK impulse ice creams?

Answer 13

Question 14

When was the CMA created?

Answer 14

October 2013 by the coalition government

It was a merger of the Competition Commission and the Office of Fair Trading

Question 15

When was the Competition Commission formed?

Answer 15

In 1997 by the Labour government

Before that we had the Monopolies and Mergers Commission

Question 16

What were the exclusivity concerns in the Ice Cream market?

Answer 16

Question 17

What was the Monopoly and Markets Commission’s actions after its first analysis of the Ice cream market?

Answer 17

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

Question 18

What was the correction in the second investigation of the ice cream market?

Answer 18

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

Question 19

What was the suggested remedy for the UK impulse ice cream market after the 4th investigation?

Answer 19

Question 20

What are the assumptions of a double marginalisation market?

Answer 20

Note: ‘A’ is the ‘choke price’ and is the level at which any price above it will result in 0 demand

Question 21

What is the profit of the monopoly retailer?

Answer 21

Note: p is the retail price

w is the wholesale price

Question 22

What is the profit of the monopoly manufacturer?

Answer 22

Note: w is the wholesale price

c is the marginal cost

p is the retail price

Question 23

How do we draw the manufacturer’s derived demand curve?

Answer 23

There are two margins on the final good, hence why it is called double marginalisation

Question 24

What are the effects on the retailer’s profits if it raises its price?

Answer 24

Question 25

How do we calculate double marginalisation?

Answer 25

Question 26

How do we differentiate the retailer’s profits and what is the interpretation of this?

Answer 26

Question 27

What is the optimal retail price given the manufacturer sets price w?

Answer 27

Question 28

What are the manufacturer’s optimal price and quantity?

Answer 28

Question 29

How do we calculate and interpret manufacturer’s profits?

Answer 29

Question 30

How do we find the equilibrium quantity, price and profit?

Answer 30

Question 31

Why are vertical mergers often considered procompetitve?

Answer 31

They remove the effects of double marginalisation