the case of automobile distribution University of Trento, Italy Evolutionary economics: an alternative approach to competition policy - the case of automobile distribution Simonetta Vezzoso University of Trento, Italy

evolutionary approaches to competition additional arguments for anti-competitive effects of vertical restraints? evolutionary approaches to competition additional arguments for positive effects of vertical restraints?

ABOUT THE NOTION OF VERTICAL ARRANGEMENTS AND RESTRAINTS limited number of dealers sale only approved dealers PRODUCERS sale price CONDITIONS competiting products buying actual sources of supply purchase price DEALERS price territory resale customers sale to other dealers etc.

THEORETICAL ANALYSIS OF VERTICAL RESTRAINTS „MODERN“ ECONOMIC ANALYSIS „OLD“ HARVARD SCHOOL CHICAGO SCHOOL efficiencies Chicago „MODERN“ ECONOMIC ANALYSIS TCE Agency market power „new“ Harvard

„economic approach“ aim of enhancing consumer welfare efficient allocation of resources GUIDELINES recognition of efficiencies of vertical restraints vertical restraints possibly anticompetitive only if market power BER 2790/1999 exemption up to 30% market share core restrictions not exempted

MOTOR VEHICLE SECTOR Report BER 1400/2002 BER 123/85 BER 1475/95 cars less of a „special good“ Report closing-off of new distribution techniques differences among sale prices in member States BER 1400/2002

BER 1400/2002 exemption depending on market share threshold core restrictions stricter than BER 2790/1999 no cumulation of exclusive and selective distribution link between sales and service broken reinforcement of multi-branding more protection of dealers‘ economic independence

evolutionary theories of competition neoclassical theories of competition evolutionary theories of competition APPRAISAL OF THE NEW POLICY INNOVATION OF DISTRIBUTION FORMATS - innovation and learning hardly taken into account innovation and learning occupy a central position - focus on competition as a discovery, innovation process - focus on price competition and the efficient allocation of resources SUITABLE THEORETICAL FRAMEWORK ? ADDITIONAL ARGUMENTS? NEED FOR A DIFFERENT THEORETICAL FRAMEWORK ?

evolutionary approaches to competition Schumpeter/ Neo-Schumpeterian competition new products Hayekian and Austrian new services motor of economic development new technologies Resource literature changes new organizations from within the economic system unexpected, unforeseable market imperfections as part of competition market processes evolutionary processes of variation and selection importance of variation biological evolution theories influences behaviouralist organization theory

subjective Schumpeter/ Neo-Schumpeterian knowledge dispersed (local) Hayekian and Austrian difficult to communicate Resource literature individual knowledge problem system competition as discovery procedure

key insights about competition competition as a process evolution of the economic system depending (also) on competition key insights about competition creativity and heterogeneity of economic agents as a key to diversity subjectivity and dispersion of knowledge trial, error and discovery for knowledge‘s growth

GENERAL PERSPECTIVE ON MARKET PROCESSES OVER SEVERAL MARKET STAGES evolutionary variation and selection processes in vertically linked markets P P P P selection variation h1 h4 h2 h3 gatekeeper D D D D selection Consumers

P P P P D D D D variation h1 h2 h3 h4 selection Consumers

P P P P h2 h3 h1 h4 selection variation D D D D Consumers

P P P P matter of discovery division of labour D D D D organizational innovations Consumers

P P P P D D D D Consumers

evolutionary theoretical framework New perspective vertical restraints are part of these very complex and mutually interdependent processes of experimentation on different markets in the vertical chain

firms as bundles of resources complementarities among resources decisive for competitive advantage Schumpeter/ Neo-Schumpeterian Hayekian and Austrian competition strategies Resource literature - resource diversification - resources combinations resources protection imitation of successful resources firm‘s growth depending on its own capabilities

Subjectivism, Heterogeneity, and Local Knowledge EVOLUTIONARY ARGUMENTS FOR ASSESSING VERTICAL RESTRAINTS/1 Subjectivism, Heterogeneity, and Local Knowledge All firms within the vertical chain have subjective, fallible, and often local or tacit knowledge this is neglected in neoclassical analyses of vertical restraints Heterogeneous and local knowledge: retailers might have superior knowledge compared to manufacturers vertical restraints (e.g., selective distribution systems) may restrict retailer's freedom to make its own decisions on the basis of its specific knowledge Consequence, e.g.: "Protection of the freedom" of the dealers can lead to a more efficient distribution

Freedom to Experiment and Variety EVOLUTIONARY ARGUMENTS FOR ASSESSING VERTICAL RESTRAINTS/2 Freedom to Experiment and Variety Vertical restraints can restrict the freedom to experiment and reduce the amount of variety that is being generated and tested Vertical restraints reduce the independent sources of innovation Independent variation and selection processes on the producer and retailer level may lead to more generation of knowledge than in the case of (partial) vertical integration several independent variation and selection processes within the vertical chain might improve the quality of the experimentation process smaller bundles of hypotheses that are tested in the market improve the quality of the selection process Consequences, e.g.: intrabrand competition as an experimental process can be important, even if interbrand competition is effective less vertical restraints might lead to positive innovation effects, and might also alleviate market entry

Communication Costs Communication costs can be very high: EVOLUTIONARY ARGUMENTS FOR ASSESSING VERTICAL RESTRAINTS/3 Communication Costs Communication costs can be very high: knowledge difficult to articulate and communicate limited capability to absorb Advantages of vertical restraints: e.g., long-term exclusivities, may help establishing a climate supportive to a fruitful communication (reduces cognitive distance) leading to improved division of labor between firms contributing heterogeneous knowledge-bases

Complementarity and Vertical Leadership EVOLUTIONARY ARGUMENTS FOR ASSESSING VERTICAL RESTRAINTS/4 Complementarity and Vertical Leadership Interdependencies / complementarities between activities and competences can justify vertical restraints aiming at ex-ante qualitative coordination vertical arrangements as means for discovering new complementarities and synergies Systemic character of innovations can justify vertical restraints innovation of complex products might require simultaneous innovations of many components necessary: system (or vertical) leadership for the coordination of innovations vertical restraints as a means by which the "hub“ exercises its coordinating role alternative option: modularization through defining of interfaces ("interconnection knowledge"), within which independent experimentation is possible Competition for vertical leadership vertical restraints should not allow the vertical leader to perpetuate its power by unduly restricting the other party‘s freedom to experiment making entry more difficult ensuring that competition for vertical leadership remains possible

positive effects of the evolutionary competition? competition as evolutionary variation and selection processes in vertically linked markets evolutionary perspective firms as a bundles of resources (capabilities, heterogeneous knowledge) evolutionary arguments concerning vertical restraints new policy in the car sector positive effects of the newer rules on evolutionary competition?

retailers heterogeneous in regard to their knowledge and skills unbundling of sale and repair services retailers heterogeneous in regard to their knowledge and skills better if they found by themselves if outsourcing is an efficient choice also because of similarities of knowledge and skills vertical rivarly between dealers and retailers lowering of entry barriers into the retail market new firms need not offer simultaneously distribution and repair services

more protection of dealers‘ economic independence step to a long-term development ? really independent dealers of emerge that can develop their own innovative distribution formats and test them on the market ?

sufficient to break up the traditional distribution structures? Is the new policy sufficient to break up the traditional distribution structures? OPEN QUESTIONS MORE e.g. no cumulation of exclusive and selective distribution should selective distribution be prohibited ? retailers free to sell the products the way they think more appropriate ? important for the producer to choose whom to sell his items also because of possible synergies between resources/ competences important that other, independent dealers emerge

Evolutionary arguments against vertical restraints Evolutionary arguments in favour of vertical restraints: improved communication between firms with heterogeneous knowledge-bases ex-ante qualitative coordination of interdependent / complementary activities and resources better coordination of innovations in the case of systemic innovations limitation of the freedom to decide on one's subjective, local knowledge freedom to experiment restricted less variety generated and tested restriction of competition for vertical leadership

Knowledge problems of competition authorities: Problems of Regulating Vertical Restraints from an Evolutionary Perspective Knowledge problems of competition authorities: lack of specific information and foreseeability of market processes very difficult to decide correctly in single competition cases consequence: "per-se rules" are better than a "rule of reason", but which increasingly is the tendency in EU competition law Knowledge problems of firms in regard to vertical restraints: positive efficiency effects of new vertical restraints due to organizational innovations cannot be predicted ex-ante rule of reason under Art. 81 (3) is difficult to apply But: 30% market share as "safe harbour" in Block Exemption Regulation allows for free experimentation no need to substantiate efficiency benefits ex-ante or ex-post

CONCLUSIONS evolutionary theories should complement neoclassical competition theories possible to identify additional arguments in favour of vertical restraints from an evolutionary perspective possible to identify additional arguments against vertical restraints from an evolutionary perspective more research needs to be done! also, better understanding of how evolutionary competition works (i.e. conditions, etc.)

EXAMPLES OF POSSIBLE RESEARCH TOPICS how much diversity/heterogeneity among actors do we need for evolutionary competition to work? is the „relevant market“ notion still important in an evolutionary context? does resale price maintenance negatively affect evolutionary competition at the retail level? how important is price flexibility to provide retailers with innovation incentives? do vertical restraints distort vertical competition? how do we combine the governance (efficiency) and the competence perspectives on vertical arrangements for the purposes of competition policy?