lear - laboratorio di economia, antitrust, regolamentazione price relativities agreements theories...

Lear - Laboratorio di economia, antitrust, regolamentazione

Price Relativities Agreements

Theories of harm and economic justifications

Paolo Buccirossi

ACE - Paris, 26 October 2012

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1. A definition of Price Relativities Agreement

2. A comparison with Across-Sellers PRAs and RPM

3. Theories of harm

4. Economic justifications

5. Conclusions

Index

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Price Relativities Agreements

pA = f(pB) pB

Manufacturer A

Retailer

Buyer

Parties to the PRA

Manufacturer B

Subject that pays the price regulated by the agreement

A’s retail price is a function of B’s retail price

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Across-Sellers PRAs

Seller A (pA)

Seller B (pB)

Seller C (pC)

Buyer

pA* (pA,pB, pC)

(pC)

(pB)

Parties to the agreement

Subject that pays the price regulated by the agreementA’s price is a function of

its competitors price

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Resale Price Maintenance

p A = f ( p * A ) p B

Manufacturer B Manufacturer A

Retailer

Buyer

Parties to the PRA

Subject that pays the price regulated by the agreement

A’s retail price is NOT a function of B’s retail price

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Theory of harm for Across-Sellers PRAs/1

1. Softening competition (Hay, 1982; Salop, 1986; Corts, 1995; Hviid and Shaffer, 1999 …)

How: Reduce competitors’ demand price elasticity when they undercut

Is this theory of harm appropriate also to Pricing Relativities Agreement?

YES

How: Reduce rival manufacturer’s (indirect) demand price elasticity when it undercuts wholesale price

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Theory of harm for Across-Sellers PRAs/2

2. Entry foreclosure (Salop, 1986; Arbatskaya, 2001)

How: (Same as above) Reduce potential competitors’ demand price elasticity when they undercut


YES, if price relativities are set with respect to the retail price of entrants (unlikely)

How: Reduce potential rival (indirect) demand price elasticity when it enters with a lower wholesale price

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Theory of harm for RPM

1. Facilitating collusion (Mathewson and Winter, 1998; Julien and Rey, 2007)

How: Retail prices are less responsive to change in retail costs -> wholesale prices can be inferred by observing retail prices -> increased transparency


YES

How: Retail prices are less responsive to change in retail costs, etc.

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Economic justifications Across-Sellers PRAs

1. Signalling low cost/price (Winter, 2001; Moorthy and Winter, 2006; Hviid, 2010)

Necessary condition: Buyers have imperfect information on prices but can easily observe the pricing policy

Is this economic justification appropriate also to Pricing Relativities Agreement?

NO

Why: End consumers do not observe the pricing policy

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Economic justifications RPM

1. Double marginalization (or other vertical coordination problem) (Telser, 1960; Mathewson and Winter, 1998)

How: Retail price is delegated to the manufacturer and “specializes” in maximizing vertically integrated profits; wholesale price becomes a “profit distribution” variable

Is this economic justification appropriate also to Pricing Relativities Agreement?

YES (if unilateral)

Why: If unilateral, the retail price is delegated to the manufacturer who can set the price differential so as to maximize vertically integrated profits; wholesale price “mainly” used to distribute profits between the manufacturer and the retailer

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Conclusions

• “Object infringement” inappropriate

• A full fledged analysis of the possible theories of harm and efficiency justifications is recommended

• “Some” research desperately needed

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lear - laboratorio di economia, antitrust, regolamentazione price relativities agreements theories...

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