loughborough university topic 6 vertical relationships essay plans to all topic 6 exam questions with extra textbook notes included
loughborough university topic 6 vertical relationships essay pl
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Industrial Economics
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Essay Plans:
1. Should resale price maintenance be banned in vertically related markets?
> Define retail price maintenance (RPM) and vertical markets
- Vertically related markets are markets between the firms at different stages of the production
process and consumers, one example could be a retail good such as cheese.
- RPM: Is when the upstream manufacturer sets the price of retailers. This was most commonly used
for pharmaceuticals, jewellery, clothing etc.
- Article 101 prohibits agreements between firms in the EU unless they are welfare improving
- RPM clauses are currently illegal in many countries e.g. the EU – debatable whether this should be
the case.
> Use points from ‘Slide 10 -> Double Marginalisation’ but use figure 2 diagram
> Then use ‘Slide 17 -> Efficiency of RPM/ vertical restraints’ point
- RPM can reduce market inefficiency- arguably it should not be blacklisted
- Relate to European car sector example -> put ‘Double marginalisation problem’ point next -> Will
need to cut some overlapping parts
> Other reasons why it should not be banned: (This is all in my own words to use it word for word)
RPM can provide some benefits to consumers since they do not need to spent time searching for the
best price instead consumers will know that no matter where they buy from they will always get the
best deal.
Also RPM will ensure that firms that provide a high quality service will be rewarded through higher
sales than firms which do not offer this. Hence this will prevent other sellers freeriding on the
services provided by other firms. Whereas without RPM a consumer can use the free advice
provided by a shop with a good service like Vodaphone and then buy the product from a cheaper
seller online. Therefore, RPM can resolve this problem and arguably should not be banned.
RPM will also ensure firms that promote the manufacturers products through advertising will be
rewarded through increased sales. Whereas without RPM they will not gain these sales.
Moreover if RPM can be used by manufacturers it will ensure they are willing to supply high-quality
products. Since RPM can be used by manufacturers to ensure that retailers do not reduce the price
of their product. Since a lower price may not reflect the true quality of a product and could lead to
consumers perceiving the lower price as reflecting a low-quality product. Resulting in retailers being
less willing to pay the price the manufacturer would want to charge them. This could then lead to
high-quality manufacturers reducing the quality of their goods. Hence by using RPM a manufacturer
can ensure they maintain a good reputation for high quality products. This will then ensure
consumers are willing to pay a price which reflects this quality and will ensure high-quality products
are supplied.
Another reason that RPM should not be banned is that it can help small retailers stay in business
since they are usually unable to bulk buy. For example, without RPM on books many small
businesses would go bankrupt due to losing sales to large firms like Amazon which can exploit
economies of scale. And ultimately if these smaller businesses go out of business this can reduce
consumer choice and enhance the market power of larger firms which can be detrimental to
, consumer welfare.
> Possible consequences of RPM (RPM may reduce inter-brand and intra-brand competition)
> Explain RPM can sustain a cartel of manufacturers (From Textbook notes)
- Inter-brand competition may be harmed
- RPM might favour collusion among manufacturers as it increases price observability and is likely to
eliminate the retail price variation. Hence the monopoly outcome is more likely to be sustained
using trigger strategies.
> Explain RPM can sustain a retail cartel (From Textbook notes)
- Inter-brand competition and intra-brand competition may be harmed
- Vertical restraints can be used strategically as to relax competition between retailers and between
manufacturers. They may favour collusive agreements.
- E.g. we know increased price transparency increases the chances of collusion- concrete market
case in Denmark (T4 Notes)
- So arguable legal prohibition of RPM increases welfare because it prevent collusion- leads to lower
prices and greater competition upstream and downstream
> Another point of the internet (this is in my own words to copy it word for word)
Also RPM could lead to prices being set at inefficiently high levels that may reduce the incentives for
inefficient manufacturers to cut costs and remain efficient. Since the manufacturers will know even
if they do not cut costs they will still remain profitable. For example, in the 1960s British camera
manufacturers relied on RPM to remain profitable. Hence when Dixon's started to import cheaper
cameras from Hong Kong and sold them at lower prices than the British manufacturers, many of
them were unable to compete. Hence many of the British manufacturers went out of business since
they relied so heavily on RPM. This demonstrates that banning RPM can ensure firms have a
incentive to remain competitive in both domestic and international markets. This will in turn benefit
consumers through increased consumer welfare, since the prices will be more competitive than a
situation in which RPM is allowed.
> Conclusion:
- RPM may not always harm competition or consumers to justify their invalidation/ban
- RPM can have effects very beneficial for consumers and the market outcome
- Potential harm created by RPM decreases with the presence of competitors- collusion less likely to
occur
- Hence no need to monitor RPM which involve firms with little market power/shares- they should
be exempt
- For RPM involving firms with significant market power a rule of reason should be adopted-
balancing the possible efficiency effect with possible anti-competitive effects
Anticompetitive harm is understood by today’s antitrust authorities as a situation where consumer
are hurt- meaning consumer surplus is reduced.
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