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Resale Price Maintenance

Thibaud Vergé(Autorité de la Concurrence and CREST-LEI)

ENSAE – April 2, 2010

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Resale Price Maintenance

Retail price no longer fully determined by theretailers, but set by the supplier.

Minimum RPM (price floors)

Maximum RPM (price ceiling)

Fixed RPM (Minimum = Maximum)

“Recommended” Retail Price

• Sometimes advertised by the supplier or even printedon the packaging.

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Resale Price MaintenanceLegal approach

Minimum RPM is per se prohibited by national law: «retail prices must be freely determined by unharmedcompetition. »

Under European law, Minimum RPM is not, in theory,per se illegal; But it is treated as such.

• Hardcore restriction, block exemption on verticalagreements does not apply, nor does de minimisnotice.

• See Commission’s (draft) guidelines on individualexemption .

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Draft Guidelines (§47):

• “Including such a hardcore restriction in anagreement gives rise to the presumption that theagreement falls within Article 101(1). It also gives riseto the presumption that the agreement is unlikely tofulfil the conditions of Article 101(3).”

• “However, it is a rebuttable presumption whichleaves open the possibility for undertakings to pleadefficiency defence under Article 101(3) in an individualcase.”

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• “RPM may facilitate collusion between suppliers byenhancing price transparency in the market, therebymaking it easier to detect whether a supplier deviatesfrom the collusive equilibrium by cutting its price.”

• “By eliminating intra-brand competition, RPM may alsofacilitate collusion between buyers.”

• “RPM may more [generally] soften competition betweenmanufacturers and/or retailers, in particular whenmanufacturers use the same distributors to distribute theirproducts and RPM is applied by all or many of them.”

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• “The immediate effect of RPM will be that all orcertain distributors are prevented from lowering theirsales price for that particular brand.”

• “The manufacturer may prefer to agree to RPM, so asto reduce the pressure on its own margin and to helpit commit not to lower the price to subsequentdistributors.”

• “RPM may prevent new retailers from entering themarket with low prices.”

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• “RPM may also lead sometimes to efficiencies.”

• “Where a manufacturer introduces a new brand orenters a new market, RPM may be helpful to inducedistributors to better take into account themanufacturer’s interest of developing demand for theproduct.”

• “Fixed resale prices (…) may be necessary to organisein a franchise system (…) a coordinated short term lowprice campaign.”

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Economic Analysis of RPM

Motta, M. (2004), Competition Policy: Theory andPractice, MIT Press. [Chapter 6]

Rey, P. and T. Vergé (2008), “The Economics ofVertical Restraints”, in Handbook of AntitrustEconomics, P. Buccirossi Ed., MIT Press.

Many other references (most cited in Rey and Vergé)

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Solving the double marginalisation problem• Lead to lower prices for consumers.

• However, maximum RPM rather than minimum RPM.

Retailers incentives for service (i.e., solving theservice free-riding problem).

• Minimum RPM.

• However, effect on consumers is ambiguous High quality / high prices vs. Low quality / low prices.

Marginal vs. Average consumer.

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Retailer’s incentives to order (higher) inventory.

• Leading to lower average prices (pro-competitive).

• Krishnan and Winter, American Economic Review, 2007.

Solving the producer’s commitment problem.

• O’Brien and Shaffer, Rand Journal of Economics, 1992.

• Rey and Vergé, Rand Journal of Economics, 2004.

• Industry-wide minimum RPM or maximum RPM.

• Anti-competitive (higher prices).

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Eliminating intra-brand coordination to soften inter-brand coordination.

• Competiting Vertical Structures

Rey and Stiglitz, Rand Journal of Economics, 1995.

Vertical restraints can be used to soften competitionbetween the suppliers but requires a (credible) commitmentno to act aggressively on the downstream market.

Exclusive territories, but not RPM.

• Interlocking Relationships.

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Economic Analysis of RPMInterlocking Relationships

Rey, P. and T. Vergé, “Resale Price Maintenance and InterlockingRelationships”, forthcoming in Journal of Industrial Economics.

No Retail bottlenecks:• Without RPM: “competitive” prices.• With RPM: many equilibria including one with monopoly

prices (Pareto-dominant, most robus).

Retail bottleneck:• More complicated.• Equilibria with RPM and monopoly prices.• But is not the producers’ preferred equilibrium.• Not obvious that it is worse that without RPM.

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Jullien, B. and P. Rey (2007), “Resale Price Maintenance andCollusion” , Rand Journal of Economics.

RPM as a facilitating practice.

• RPM helps manufacturer to observe deviations from thecollusive equilibrium.

• Leads to higher average prices.

• However, rigid prices are not optimal (for the firms) whenthere are shocks on local demand and/or retail costs.

• But, possible anticompetitive effects, especially whenupstream market is concentrated.

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Enonomic Analysis of RPMEmpirical Evidence

Loi Galland (+ non-discrimination rules)

• De facto allowing manufacturers to impose industry-wide minimum price floors.

• Claimed to have led to higher retail prices.

Two recent empirical papers seem to confirm it.

• Biscourp, Boutin and Vergé (2008).

• Bonnet and Dubois (forthcoming Rand Journal ofEconomics).

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French RPM cases

Around 20 RPM cases since 1999.

• In some cases, abusive use of the Loi Galland (falselyconditional rebates).

• By far the most active authority in Europe.

Very little pro-competitive justifications put forwardby the parties.

• Theory of harm thus tend to remain implicit.

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RPM – Standard of Proof

Retail price alignment can result from horizontalagreement, from “natural” parallel behavior, or from aseries of vertical agreements

Concurrence of wills must be demonstrated• Either contractual relationships stipulating measures implying

minimum RPM

• Or body of “serious, precise and converging” evidence establishing:

Retailers have knowledge of manufacturers’ recommended resaleprices.

Implementation of price monitoring to detect deviations.

Significant application by retailers of said recommended prices.

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Luxury Perfumes and Cosmetics(Decision 06-D-04, March 2006)

Ex officio proceedings

Period under scrutiny: 1997-2000

Manufacturers sell through selective distributionsystem

Manufacturers: Dior, Chanel, YSL,…

• Strong brand image

• 20 brands make for 75% of market

Selective distribution system:• Retailers of national chains (50%)

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Luxury Perfumes and CosmeticsConducts objected to

Vertical agreements on prices• Communication of retail prices and implementation of

price monitoring by manufacturers

• Retailers role in monitoring prices

• Actual application of resale prices

Retail price = Wholesale price x Multiplier - rebate

Multiplier is approx. 2 for any manufacturer

Manufacturers limit the possible rebate a retailer canapply

=> minimum resale price (minimum RPM)

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Luxury Perfumes and CosmeticsDemonstrating vertical agreements

Either contract between manufacturer and retailerexplicitly provides for RPM

Or find a body of evidence, which is “serious, preciseand converging”, that proves:

• Retailers have knowledge of recommended prices

• Prices are monitored, and retaliations (or threatsthereof) exist

• There is evidence of significant application ofrecommended prices.

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Luxury Perfumes and CosmeticsEvidence

General observations from investigations• Independent retailers and department stores

declared: Manufacturers impose both multiplier and maximum rebate

(leads to minimum resale price)

If manufacturers become aware of further discounts, they:– Call for price increase

– Delay, or stop, delivery of orders

– Threaten to withdraw benefit of end-of-year rebate

• Price listings in 74 shops, concerning 59 products,show minimum resale prices are indeed widelyimplemented

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Luxury Perfumes and CosmeticsEvidence (cont’d)

Observations specific to each manufacturer

• For each manufacturer, it was demonstrated that theevidence was strong enough to satisfy the three partsof the proof

Most of its retailers were aware of recommended prices

Sales reps visited shops to control prices, or receivedcomplaints from retailers about competitors cutting prices,and then called deviators to order by imposing a priceincrease, under threat of retaliation

Price listings concerning its products indicate wideapplication of RPM

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Luxury Perfumes and CosmeticsEvidence (cont’d)

Observations specific to each retailer

• Knowledge of recommended prices

• Active participation in price monitoring (surveillance,denunciations of competitors cutting prices)

• Actual and significant implementation of RPM.

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Luxury Perfumes and CosmeticsInfringements and fines

Infringement of Article 81 of EC Treaty, andequivalent internal law, established for

• 13 manufacturers

• 3 retailers chains

Fines totaled 45.4 million €

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Luxury Perfumes and CosmeticsCourt of appeal’s confirmation

The Paris court of appeal confirmed the standard ofproof

• As long as it is demonstrated that the manufacturer implemented a system of agreement

retailers’ agreement can be inferred from the context

• Then a vertical agreement between a manufacturer and allits retailers does not require individual proof of agreementbetween this manufacturer and each of its distributors

• No need to prove each retailer’s approval

• Does not imply that each and every retailer is incriminated

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Luxury Perfumes and CosmeticsCourt of appeal’s confirmation

Similarly, all distributors need not be challenged:

• Only those who took an active role in the agreement

• In particular in price monitoring:

Denunciating price-cutting competitors

Asking the manufacturer to intervene

• And in application of RPM

No need for individual proof between a retailer andeach of its suppliers.

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School calculators (Decision 03-D-45, September 2003)

2 Manufacturers (TI, Casio), many retailers

Calculators for junior & senior high school students

RPM:

• mails with resale prices

• Price monitoring: Suppliers called deviating retailers toorder

• Evidence of significant application; Uniformity of pricesacross retailers.

Information exchange between the two suppliers

• On retail prices and intentions (commercial strategy)

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School Calculators

Two facilitating practices: RPM, information exchanges

Theory of harm: Collusion between manufacturers

Defendants did not provide efficiency justifications for RPM

Calculators prescribed by teachers atomistic captive demand

Observed effects: prices of school calculators increased, while pricesof non-school calculators decreased.

This case illustrates Jullien and Rey (Rand, 2007)

• Insist on the novelty of their analysis

• Very cautious about the policy implications of their results

• Standard of proof very different from what we have for informationexchanges (small number of firms, high entry barriers, etc.)

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Toys(Decision 07-D-50, December 2007)

Ministerial referral

Dawn raids in 2004, in the premises of

• Carrefour (large grocery retailer)

• Manufacturers: Chicco, Lego, MegaBlocks,Ravensburger, Goliath

Further inquiries

• Manufacturers: + Mattel, Hasbro, …

• Other large grocery retailers

• Specialized toys retailers

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ToysRegulation background

Land planning regulation prevents setting up newsupermarkets• High concentration in many catchment areas

Price discrimination is prohibited

“General terms of trade” are observable• Wholesales prices are publicly observed

Ban on below-cost pricing (Galland Act 1997) Below-cost threshold = invoiced price – rebates at actual

delivery time;

Below-cost threshold = industry-wide price floor

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ToysRegulation consequences

Deductible rebates have disappeared• Retail price = legal below-cost threshold

= wholesale price + VAT

Non deductible rebates have flourished• “Backward margins” – Fix transfers from

manufacturers to retailers, supposed to pay for pointof sales’ services (pre-sale advice, advertising, …)

Overall,• Retailers have strong bargaining power

• Regulation-induced price uniformity

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ToysThe facts

Christmas season: toys are lead products.

Large grocery retailers and specialized retailers sell atidentical below-cost threshold (observed in catalogs)

From 2001 to 2004, Carrefour implemented “price-beating guarantee”:• It would reimburse 10 times the difference in price

observed between one of its stores and acompetitor’s.

• Through investigations, evidence found thatinformation about price was used to actively monitorprices

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ToysEvidence

Terms of trade between manufacturers and retailers

• Lego did not agree to pay high backward margins. Itasked retailers to set downstream margins at arecommended level

• Other manufacturers granted “backward margins” toall large grocery retailers; They agreed on furtherrebates for specialized stores

Prices could have been lower at specialized stores (becauseof deductible rebates), but were not.

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ToysEvidence (cont’d)

Communication about recommended prices

Some manufacturers do not grant any deductible rebates Below-cost threshold is identical for all retailers, and serves as a

minimum resale price. No need for further evidence oncommunication

Some manufacturers grant deductible rebates tospecialized retailers

Evidence was found of explicit communication of recommendedresale prices

Lego: pieces of evidence that Lego explicitlyrecommended resale prices to its retailers

declarations, written agreements, internal reports of meetings,…

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Price monitoring – Role of manufacturers

Pieces of evidence showing interventions of Chicco,Goliath, Hasbro, Lego and MegaBrands with theirretailers to require price increases.

On their own accord following observations of price cuts

In response of a retailer’s request, report or denunciation

E.g.: Chicco asks retailer PickWick to increase price on a specific toy, at Carrefour’srequest; then let Carrefour know that PickWick has complied, with copy ofpublished “erratum”

Evidence that on many occasions, Lego acted directly with retailers to ask for priceincreases

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Price monitoring – Role of retailers

The Conseil challenged retailers who took an active partin the implementation of price monitoring

Role of Carrefour and its price-beating guarantee• Information about a price-cutting competitor was used:

To ask the manufacturer to have the rival retailer raise its price

To renegotiate a lower wholesale price

• If the manufacturer did not comply or succeed, Carrefour delisted orwithdrew the concerned product from shelves.

• Evidence: many internal documents, an internal letter called “SantaClaus information”

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Role of Maxi Toys

• Buys at lower wholesale prices from Benelux, andcould resale at lower retail prices

• Many manufacturers intervened to ask for priceincreases

On their own accord, or at the request of rival retailers

• Maxi Toys complied with these requests, “in order notto disturb the French market”

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Role of JouéClub

• Requested a manufacturer (Goliath) to intervene withMaxi Toys to increase prices

• Is kept informed of MegaBrands’ actions to increaseprices at MaxiToys

• On several occasion, has complied withmanufacturers’ requests to increase its own prices

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ToysConclusion

Infringement of Art. 81 EC, and equivalent internal law,established for• 5 toys manufacturers

• 3 retailers

Stricter standard of proof than in Perfumes, especially indemonstrating involvement in price monitoring

Total fines amounted to 37 million €

Decision was confirmed by Paris court of appeal

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