Price Relationship Agreements (PRAs): Summary of the Lear Report

Transcription

1 Price Relationship Agreements (PRAs): Summary of the Lear Report Sebastian Wismer Department of Economics, University of Wuerzburg Interdisciplinary Research Group Preisbezogene Behinderungsmissbraeuche Wuerzburg, November 6, 2012

2 Outline 1 Denitions and Classication 2 Across-sellers PRAs: LPGs and MCCs 3 Across-customers PRAs: MFCCs 4 Remarks on Empirical and Experimental Evidence 5 Third-Party PRAs in Vertical Structures/Platform Markets 6 Remarks on Existing Case-Law 7 Concluding Remarks Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

3 Denitions and Classication PRAs: Denitions and Classication Price Relationship Agreement: a seller's policy whereby its price to buyers is related to another price promise to buyers or embedded in contractual clause Distinctions: Parties who conclude agreement = parties impacted by price constraint (buyers)? within-parties PRA vs. third-party PRA Reference price: competitor's price for same/similar product (across-sellers PRA), product price charged to other customer (across-customers PRA), price charged for competing product (pricing relativities agreement), product price in another channel (across-platforms parity agreem.). (cf. gure 1.1, p.6) Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

4 Across-sellers PRAs: LPGs and MCCs Across-sellers PRAs: LPGs and MCCs Low price guarantees (LPGs) vs. Meeting competition clauses (MCCs) Distinction: LPGs: granted by retailers to their (nal) customers (in spot markets), price-matching guarantee (PMG) vs. price-beating guarantee (PBG) MCCs: included in long-term B2B contracts, non-release (i.e., match oer) vs. meet-or-release Basic eects caused by across-sellers PRAs: partial delegation of pricing policy to competitor demand becomes less elastic in response to price reductions (competitor also reduces price) Extent of eects depends on prob. of successful activation of policy Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

5 Across-sellers PRAs: LPGs and MCCs Across-sellers PRAs: Potential market eects (1) Foreclosure: Credible commitment to aggressive pricing after market entry Softening competition: Price cutting not protable supra-competitive prices (result seems robust against wide range of changes in assumptions) Collusion: Consumers solve monitoring problem, explicit announcement of punishment Price discrimination: Heterogeneous hassle costs discrimination of uninformed consumers. Prominent argument for negative eect: w/o LPG, searchers exert positive externality on other customers (lower prices), which is eliminated by LPG. (Implication of this explanation: relatively high rate of redemption) Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

6 Across-sellers PRAs: LPGs and MCCs Across-sellers PRAs: Potential market eects (2) LPG as a signaling device: Adopting LPG may only be protable to low-price (low-cost) seller Signal to uninformed fraction of heterogeneous consumers Mitigating incomplete contracting problems (esp. relevant for MCCs in B2B contracts): Uncertainty about future developments/opportunities (e.g. input prices, strength of competitors, demand) may prevent rms from desirable actions (e.g. relationship-specic investments) MCC makes contracts exible (may be interpreted as risk-sharing) Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

7 Across-customers PRAs: MFCCs Across-customers PRAs: MFCCs A.k.a. Most-favoured customer clauses (MFCCs), Non-discrimination clauses Seller oers customer best price oered to any other customer during specic period of time Distinction: contemporaneous vs. retroactive Basic eect caused by across-customer PRAs: Penalty for lowering price Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

8 Across-customers PRAs: MFCCs Across-customers PRAs: Potential market eects (1) Foreclosure: 1 MFCCs create price oor No entry deterrence (upstream) 2 Vertical structure: Upstream rm does not oer low(er) prices if MFCC included in existing contract(s) Limited entry downstream Softening competition: 1 Adopter of a (retroactive) MFCC becomes a Stackelberg leader who imposes higher prices (explains asymmetric adoption) 2 With loyal customers and shoppers, without a MFCC sellers price discriminate and compete ercely for shoppers, while with MFCC competition for shoppers becomes less aggressive Collusion: MFCC aects both incentive to deviate and ability to punish (informal) Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

9 Across-customers PRAs: MFCCs Across-customers PRAs: Potential market eects (2) Preventing or enabling price discrimination: 1 Solution to Coase conjecture ( insurance against discrimination) 2 Allows discrimination if only some consumers activate protection Improving the seller's bargaining position: In a sequential negotiation, seller's reservation price increases over time early buyers gain (anticipating seller's future advantage), late buyers lose Signaling private information (high quality): Price distortion that is necessary to signal high quality smaller under MFCC Mitigating incomplete contract problems: No formal model available, but similar arguments as under MCC may apply Remark: Literature less developed than the one on across-sellers PRAs. Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

10 Remarks on Empirical and Experimental Evidence Remarks on Empirical Results Distinction: Direct approach: Overall eect of adoption of PRA on prices Indirect approach: Comparison of theoretical predictions with observed adoption pattern General impression: Existing literature is limited and provides mixed results no proof of any general theory Tendency of results on across-customers PRAs: no/weak anti-competitive eects Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

11 Remarks on Empirical and Experimental Evidence Remarks on Experimental Results Two strands of literature (mainly) on LPGs: 1 Why do sellers adopt LPGs? Softening competition? [economics] PMGs lead to high prices, PBGs not (both under strong assumptions) Heterogeneity (across sellers or programmed buyers) mitigates anti-competitive potential 2 How do consumers react to LPGs? [marketing] LPGs are understood as a signal for low prices but also seen as a discrimination device (prices actually not low) when consumers perceive market as characterized by low search or high price dispersion Decrease in pre-purchase search, increase in post-purchase search Consumers consider sellers' reputational concerns (image), but not anti-competitive/collusive potential Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

12 Third-Party PRAs in Vertical Structures/Platform Markets Third-Party PRAs in Vertical Structures/Platform Markets Agreement betw. seller (downstream) & platform/manufacturer (upstream) regarding price charged to buyer (who is not involved, but aected). Classical vertical chains: Pricing relativities agreements (retail price of manufacturer's product + x prices of competitors' products) Platform markets: Across-platform parity agreements (no better sales conditions in other sales channels/on competing platforms) Paragraph 6.3: We have not found any economic literature that specically studies the possible competition eects of third-party PRAs. Paragraph 6.43: [T]o date this literature [on two-sided markets] does not study the competitive eects of across-platforms parity agreements. Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

13 Third-Party PRAs in Vertical Structures/Platform Markets Potential Eects of Pricing Relativities Agreements Basic logic from RPM agreements and across-sellers PRAs Facilitating collusion in upstream market (improved price transparency due to limited inuence of non-observable retailing costs [?]) Softening competition in upstream market (price-cuts not protable reduced demand elasticity through delegation) Foreclosure (upstream; commitment to aggressive pricing) Softening intra-brand competition (price cuts apply to all products) Mitigating double marginalization (cf. RPM [?]; however, under weaker relativities agreement cross-subsidizing may arise) Provision of (service) incentives/mitigating free-riding problems Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

14 Third-Party PRAs in Vertical Structures/Platform Markets Potential Eects of Across-Platforms Parity Agreements Logic: RPM agreements, across-sellers PRAs, and across-customers PRAs Foreclosing entry of other platforms (in particular if introductory oers of entrant would be only way to achieve a critical mass); Softening competition between platforms (weaker incentives to reduce fees under subsidies/spread of costs on multiple platforms) Facilitating collusion between platforms (deviation not protable: cutting fees results in a decrease of nal prices on all platforms) Signaling information about platforms' costs (if agreement is observed by buyers, it may signal low costs/low prices specic assumptions) Protecting platforms' investments (prevent platforms from free-riding; reaction on external eects of sellers' pricing, e.g. on price image) Facilitating collusion between sellers (sellers do not price discriminate, i.e., less price variety and easier monitoring) Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

15 Remarks on Existing Case-Law Remarks on Existing Case-Law Contrasts between economic literature and cases: Prominence of PRAs: Cases: MFCCs (US, EU) and MCCs (EU) Economic literature: Wider variety of clauses and mechanisms, in particular LPGs Theory of harm: Cases in the US: Foreclosure and softening competition/collusion due to MFCCs Cases in the EU: Foreclosure due to MCCs and MFCCs Economic Literature: Emphasis on softening competition Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

16 Concluding Remarks Concluding Remarks Not addressed: Consumer protection issues (design of PRAs) Traditional instruments (articles 101, 102 TFEU) may not bite Formal results only derived for across-sellers & across-customers PRAs Ambiguous total welfare eect for assessment, consider market characteristics: Concentration, heterogeneity, entry barriers, types of contracts, characteristics of adopting sellers: Market power, price level, number, characteristics of PRAs/contracts: renegotiation, use of similar instruments, hassle costs, frequency of redemption, meet vs. beat, relevant price of competitor, release opportunity, time period, nature of buyers (B2B vs. B2C role of behavioral biases?), which side proposes PRA? (but: conicting interests/potential prisoner's dilemma) Screening devices (questionnaires) & summaries of 20 cases Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17

17 Concluding Remarks References Aguzzoni, Buccirossi et al. (Lear, 2012): Can `Fair' Prices Be Unfair? A Review of Price Relationship Agreements Jung (OFT, 2012): Price Relationship Agreements in the UK and EU: A Retail-MFN Enforcement Gap? OFT (2012): Investigation into the Hotel Online Booking Sector online-booking/ BKartA (2012): Bundeskartellamt Examines HRS Best Price Clause _PR_HRS_E.pdf Wismer (2012): Intermediated vs. Direct Sales and a No-Discrimination Rule Sebastian Wismer (Univ. Wuerzburg) Price Relationship Agreements November 6, / 17