Retail price maintenance

1. Personal views of author. Does not represent opinion or position of any institutions to which he is affiliated. Retail price maintenance David Stallibrass (updated March 2011)

2. Main question • “What law and enforcement policy should be adopted that is: • Efficient to enforce and comply with • Is likely to prevent RPM where it is harmful • Is likely to allow RPM where it is beneficial” Based largely on Giovannetti, Stallibrass (2009) and Bennett, Fletcher, Giovannetti, Stallibrass (2010)

3. Contents • Policy options • Global picture • Economics of RPM • Cases and evidence • Possible way forward • Discussion

4. A range of policy options • A range of options for legal test • Further nuanced by: • Blockexemptions based on market share • Prioritisation of competition authourities Rebuttable presumption of illegality Per se illegal Legal “Rule of reason”

5. Contents • Policy options • Global picture • Economics of RPM • Cases and evidence • Possible way forward • Discussion

6. Different approaches in different countries • United States (pre Leegin) • Per se illegal for almost 100 years • No safe harbour of block exemption • Substantial private enforcement • ? A matter of philosophy ? Rebuttable presumption of illegality Per se illegal Legal “Rule of reason”

7. Different approaches in different countries • United States (post Leegin 2007) • RPM.. "is a flawed antitrust doctrine that serves the interests of lawyers – by creating legal distinctions that operate as traps for the unwary – more than the interest of consumers“ • Unsure as to the effect on private enforcement… Rebuttable presumption of illegality Per se illegal Legal “Rule of reason”

8. Different approaches in different countries • European Union & UK • RPM is considered an ‘object’ offence – a rebuttable presumption of illegality • It is not covered by the vertical agreements block exemption • …but it is rarely enforced by DGCOMP or OFT. Rebuttable presumption of illegality Per se illegal Legal “Rule of reason”

9. Different approaches in different countries • A note on the EU Vertical Agreement Block Exemption Regulation • Re-adopted 20th April 2010 • RPM remains “hardcore” and on the “blacklist” – so can not be exempted • But… • The Guidelines that accompany the VBER contain detail on when RPM might be justifiable – supporting the “rebuttable presumption”

10. Contents • Policy options • Global picture • Economics of RPM • Cases and evidence • Possible way forward • Discussion

11. RPM can be efficiency enhancing • Need to distinguish between intra-brand competition and inter-brand competition • If the red firm imposes RPM, it might decrease price competition between retailers of red goods (intra-brand) • But it may increase competition between blue and red goods (inter-brand) M M R R R Giovannetti, Stallibrass (2009) and Peeperkorn (2008)

12. RPM can be efficiency enhancing • Four example ways that RPM can enhance efficiency: • It can decrease free riding on service offered by one store by another, cheaper, store • It can promote competition on service rather than competition on price • It can make the consumer journey simpler • It can be indispensable (or at least, very efficient) • And even if no clear benefit, Chicago School would say one monopoly profit.

13. But (relatively) new theories suggest it can also increase market power • Five possible theories • Facilitates upstreamcollusion • Facilitates downstream collusion • Commitment device to maintain upstream rents • Commitment device to deter downstream entry • Systemically softens competition • All effectively increase market power

14. Theory 1: Upstream collusion • By bringing public downstream price under control of upstream manufacturers, makes detection and enforcement of a cartel easier M M • Wholesale prices are usually private • So hard to detect break of collusion • Retail prices are public • So direct control helps R R R Jullien, Rey (2007)

15. Theory 2: Facilitating downstream collusion • Downstream firms force upstream firm to impose RPM to co-ordinate and facilitate downstream collusion M • Needs downstream firms to have sufficient market power • Often not in the upstream firms interest R R Argos vs. OFT (2006). U.K.C.L.R. 1135

16. Theory 3: Upstream commitment device • Upstream firm can maximise profits in one-shot game by contracting with one retailer. • But they then have an incentive to contract with another, at a lower price • The retailers know this, so don’t commit • RPM resolves this problem M R R Hart, Tirole (1990), O’Brien, Shaffer (1992) , Rey, Verge (2004)

17. Theory 4: Deterring downstream entry • Downstream firms can use RPM to prevent low-cost entrants. • By imposing RPM, entrants can not grow market share through low prices • Helps retain inefficient / high service business models M R R R Schaffer (1991)

18. Theory 5: Softening system competition • By limiting the ability of wholesalers and retailers to compete on price, it decreases their incentive to bid down manufacturer price M • Doesn’t need to be “instigated” by anyone • Doesn’t need high market shares • Can significantly increase prices M R R R Dobbson, Waterson (2007), Forrest, Kind, Schaffer (2007wp)

19. Summary of theories of harm

20. Contents • Policy options • Global picture • Economics of RPM • Cases and evidence • Possible way forward • Discussion

21. Net Book Agreement • Facilitate upstream collusion • Facilitate downstream collusion • Protect upstream monopoly rents • Protect downstream monopoly rents  • Dampen system competition ? + Efficiency arguments overstated Note: ticks signal consistency of case with theory, no more

22. Childrens Toys (2003) • Two bilateral RPM agreements plus single trilateral agreement • Argos a ‘price-leader’ downstream • Littlewoods and Argos leading catalogue producers • Initiative driven by retailers

23. Childrens Toys (2003) • Facilitate upstream collusion • Protect upstream monopoly rents • Facilitate downstream collusion  • Protect downstream monopoly rents • Dampen system competition ? Note: ticks signal consistency of case with theory, no more

24. Football Shirts Upstream: Licence holders Sell back to club License to Manufacturers Run own shops Sell to retailers NOTE: Simplified structure. Not all parties involved represented.

25. Football Shirts • Facilitate upstream collusion  • Facilitate downstream collusion  • Protect upstream monopoly rents  • Protect downstream monopoly rents  • Dampen system competition  Note: ticks signal consistency of case with theory, no more

26. There is very little empirical evidence • OFT experience • Case of RPM as device for downstream collusion • Case study on minimal benefits of RPM in books • Lafontaine and Slade (2008) • Survey of evidence • RPM imposed by firms broadly beneficial • RPM imposed by governments broadly harmful • …but a limited datset

27. Contents • Policy options • Global picture • Economics of RPM • Cases and evidence • Possible way forward • Discussion

28. Objective • In competition law and economics, the objective is to use economics to design a law that maximises welfare, while minimising enforcement and compliance costs: • MIN [ • Type 1 error + • Type II error + • enforcement cost + • compliance cost] Almost impossible to measure!

29. Objective • Requires accuracy • Close mapping of economics and empirical evidence of harm and benefit • Requires effectiveness • Self assessment by firms • Predictability of courts and administrative bodies • Proportionate punishment

30. With RPM, what can we say? • 100% legal will almost certainly allow some anti-competitive practices • 100% illegal will almost certainly prevent some beneficial practices • Complicated issue, so unstructured “rule of reason” likely to have high enforcement and compliance costs

31. Propose “structured” rule of reason • Presumption of illegality • Harm likely to be hidden, benefits should be clear • Clear ability to rebut the presumption • If can show evidence of benefits • Need to show RPM is indispensable? Or just efficient? • A little like DGCOMP under new guidelines

32. Issue of block exemptions is particularly difficult • Appears that RPM is more likely to be harmful if there are large market shares • So perhaps make legal (or reverse presumption) if market shares below a threshold • Problem is, RPM can be very harmful with multiple small agreements… • …and can a contract be said to be illegal depending on other, unknown contracts?

33. In administrative systems, prioritisation may resolve • Administration can monitor markets, receiving complaints • Can decide to take action if they see multiple small RPM infringements in a market • Though still imperfect due to possible private enforcement against small companies