1. 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

2. 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?

3. 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.

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

5. „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

6. 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

7. 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

8. 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 ?

9. 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

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

11. 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

12. 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

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

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

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

16. P P P P D D D D
Consumers

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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?

24. 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

25. 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 ?

26. 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

27. 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

28. 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

29. 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.)

30. 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?