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

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 2 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 3

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

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

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

7. Different approaches in different countries 7 Per se illegal Rebuttable presumption of illegality Rule of reason Legal 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…

8. 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. Different approaches in different countries 8 Per se illegal Rebuttable presumption of illegality Rule of reason Legal

9. Different approaches in different countries A note on the EU Vertical Agreement Block Exemption Regulation Re-adopted 20 th 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 9

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

11. RPM can be efficiency enhancing Need to distinguish between intra-brand competition and inter-brand competition 11 M M RRR 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) 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. 12

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

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

15. Theory 2: Facilitating downstream collusion Downstream firms force upstream firm to impose RPM to co-ordinate and facilitate downstream collusion 15 M RR Needs downstream firms to have sufficient market power Often not in the upstream firms interest 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. 16 But they then have an incentive to contract with another, at a lower price The retailers know this, so dont commit RPM resolves this problem M RR Hart, Tirole (1990), OBrien, Shaffer (1992), Rey, Verge (2004)

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

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 18 M M RRR Doesnt need to be instigated by anyone Doesnt need high market shares Can significantly increase prices Dobbson, Waterson (2007), Forrest, Kind, Schaffer (2007wp)

19. Summary of theories of harm TheoryInstigatorMarket power required Harm caused 1: Upstream collusion UpstreamUpstream market power Increased upstream collusion 2: Downstream collusion DownstreamVery high downstream power Increased downstream collusion 3: Upstream commitment Co- operative? Upstream? Upstream, may create downstream Greater extraction of upstream monopoly rents 4: Downstream entry deterrence Downstream Less downstream entry 5: Softening system competition None required Decreased competition pressure across market 19

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

21. 1.Facilitate upstream collusion 2.Facilitate downstream collusion 3.Protect upstream monopoly rents 4.Protect downstream monopoly rents 5.Dampen system competition ? + Efficiency arguments overstated Note: ticks signal consistency of case with theory, no more Net Book Agreement

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

23. 1.Facilitate upstream collusion 2.Protect upstream monopoly rents 3.Facilitate downstream collusion 4.Protect downstream monopoly rents 5.Dampen system competition ? Note: ticks signal consistency of case with theory, no more Childrens Toys (2003)

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

25. 1.Facilitate upstream collusion 2.Facilitate downstream collusion 3.Protect upstream monopoly rents 4.Protect downstream monopoly rents 5.Dampen system competition Note: ticks signal consistency of case with theory, no more Football Shirts

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 26

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

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] 28 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 29

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 30

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 31

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? 32

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 33