RESALE PRICE MAINTENANCE

[Pages:170]Resale Price Maintenance 1997

The OECD Competition Committee debated the use of resale price maintenance for publications and cultural products in February 1997. This document includes an executive summary, an analytical note by Mr. Gary Hewitt of the OECD and written submissions from Australia, Canada, Finland, the European Commission, France, Germany, Hungary, Ireland, Italy, Japan, Korea, Norway, Sweden, the United States and BIAC, as well as an aidememoire of the discussion.

Resale price maintenance (RPM) specifies the final price that retailers charge consumers. This roundtable focused on the use of RPM for books, newspapers and similar cultural products. RPM, like other vertical restraints, may help resolve problems of co-ordination between upstream and downstream firms and thus may increase their combined profits. Issues in the economics of RPM include eliminating double mark-ups and preventing free-riding and "cream skimming", while guarding against horizontal collusion and prevention of entry. In the legal treatment of RPM for books and cultural products, views of competition authorities and cultural authorities may conflict. At the time of this roundtable (1997), RPM was generally prohibited in almost all OECD countries, but in many an exemption permitted some form of RPM for books, newspapers and some cultural products (and in some, for medicaments). And some countries have a procedure for authorising RPM case by case.

Predatory Foreclosure (2005) Resale Below Cost (2004) Predatory Pricing (1999) Competition Policy and Vertical Restraints: Franchising Arrangements (1994)

Unclassified

OCDE/GD(97)229

RESALE PRICE MAINTENANCE

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Paris

60534

Document complet disponible sur OLIS dans son format d'origine Complete document available on OLIS in its original format

Copyright OECD, 1997 Applications for permission to reproduce or translate all or part of this material should be made to: Head of Publications Service, OECD, 2 rue Andr?-Pascal, 75775 Paris Cedex 16, France.

Copyright OCDE, 1997 Les demandes de reproduction ou de traduction totales ou partielles doivent ?tre adress?es ? : M. le Chef du Service des Publications, OCDE, 2 rue Andr? Pascal, 75775 Paris Cedex 16, France

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FOREWORD

This document comprises proceedings in the original languages of a Roundtable on Resale Price Maintenance which was held by the Committee on Competition Law and Policy in February 1997.

It is published as a general distribution document under the responsibility of the Secretary General of the OECD to bring information on this topic to the attention of a wider audience.

This compilation is one of several published in a series names "Competition Policy Roundtables".

PR?FACE

Ce document rassemble la documentation dans la langue d'origine dans laquelle elle a ?t? soumise, relative ? une table ronde sur les prix de revente impos?s qui s'est tenue en f?vrier 1997 dans le cadre de la r?union du Comit? du droit et de la politique de la concurrence.

Il est mis en diffusion g?n?rale sous la responsabilit? du Secr?taire g?n?ral de l'OCDE afin de porter ? la connaissance d'un large public, les ?l?ments d'information qui ont ?t? r?unis ? cette occasion.

Cette compilation fait partie de la s?rie intitul?e "les tables rondes sur la politique de la concurrence".

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OTHER TITLES SERIES ROUNDTABLES ON COMPETITION POLICY

1.

Competition Policy and Environment

(Roundtable in May 1995, published in 1996)

2.

Failing Firm Defence

(Roundtable in May 1995, published in 1996)

3.

Competition Policy and Film Distribution

(Roundtable in November 1995, published in 1996)

4.

Competition Policy and Efficiency Claims in

Horizontal Agreements

(Roundtable in November 1995, published in 1996)

5.

The Essential Facilities Concept

(Roundtable in February 1996, published in 1996)

6.

Competition in Telecommunications

(Roundtable in November 1995, published in 1996)

7.

The Reform of International Satellite Organisations

(Roundtable in November 1995, published in 1996)

8.

Abuse of Dominance and Monopolisation

(Roundtable in February 1996, published in 1996)

9.

Application of Competition Policy to High Tech Markets

(Roundtable in April 1996, published in 1997)

10. General Cartel Bans: Criteria for Exemption for Small and Medium-Sized Enterprises (Roundtable in April 1996, published in 1997)

11. Competition Issues related to Sports (Roundtable in October 1996, published in 1997

12. Application of Competition Policy to the Electricity Sector (Roundtable in October 1996, published in 1997)

13. Judicial Enforcement of Competition Law Mise en Oeuvre Judiciaire du Droit de la Concurrence (Roundtable in October 1996, published in 1997)

OCDE/GD(96)22 OCDE/GD(96)23 OCDE/GD(96)60

OCDE/GD(96)65 OCDE/GD(96)113 OCDE/GD(96)114 OCDE/GD(96)123 OCDE/GD(96)131

OCDE/GD(97)44

OCDE/GD(97)53 OCDE/GD(97)128

OCDE/GD(97)132

OCDE/GD(97)200

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TABLE OF CONTENTS

BACKGROUND NOTE .....................................................................................................................7 NOTE DE REFERENCE..................................................................................................................13

NATIONAL CONTRIBUTIONS Australia ............................................................................................................................19 Canada ...............................................................................................................................33 Espagne .............................................................................................................................41 Finland...............................................................................................................................49 France ...............................................................................................................................59 Germany ............................................................................................................................65 Hungary .............................................................................................................................71 Ireland ...............................................................................................................................73 Italy ...............................................................................................................................79 Japan ...............................................................................................................................83 Norway ..............................................................................................................................89 Sweden ..............................................................................................................................97 United States....................................................................................................................101 European Commission .....................................................................................................109 Commission europ?enne ..................................................................................................115

CONTRIBUTIONS FROM BIAC I. Briefing Paper by Calvin S. GOLDMAN, Q.C. and Crystal Witterick Partners Davies, Ward & Beck.................................................................................................123 II. Outline on Retail Price Maintenance in the Netherlands and Germany by M.P.J.A. MUIJSER, Director of the Dutch Member of IVE...................................127

AIDE-MEMOIRE OF THE DISCUSSION.....................................................................................129 AIDE-MEMOIRE DE LA DISCUSSION .......................................................................................149

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BACKGROUND NOTE

Introduction

The purpose of this note is to give some background information focusing on the arguments for and against the practice of allowing resale price maintenance (RPM) for books, newspapers and similar cultural products. (RPM specifies the final price that retailers charges consumers. Variants of this restriction include specifying only a price ceiling or a price floor. Practices that encourage the maintenance of resale prices but that do permit price competition, e.g., non-binding "recommendations" for a retail price or a price floor, and recommended prices advertised by the upstream firm, are generally not considered to be RPM.)

Economic Arguments1

RPM, like other types of vertical restraints, may help solve problems of co-ordination between upstream and downstream firms and increase the combined profits available to those firms.2 Co-ordination problems may exist, for example, over pricing and the provision of retail services. In the case of prices, if both the upstream3 and downstream4 firm have market power and do not co-ordinate their pricing, there is the possibility that each firm's pricing decision will result in a final price that is "too high", i.e., higher than the profit maximising price for the vertical chain as a whole.5 In the case of services,6 there is the possibility that each downstream firm's decisions about the provision of services will be sub-optimal for the vertical chain as a whole.7 These arguments are developed in more detail below.

Eliminating double mark-up problems

When both the upstream and downstream firms have discretion over price - that is when both have some horizontal market power - their pricing decisions provide an example of how a vertical externality can harm both profits and social efficiency. The problem arises when both the upstream and downstream firms independently set simple uniform prices: the upstream firm chooses the wholesale price and the downstream firm chooses the retail price.

Each firm chooses a price higher than marginal cost in order to maximise its own profit. The size of each mark-up, and thus of the overall "double mark-up", depends on the elasticity of demand faced by each firm, which in turn depends on the extent of interbrand and intrabrand competition. This "double mark-up" results in a retail price set above the level that would maximise the aggregate profits of the upstream and downstream firms together. This happens because each firm's decisions generates a vertical externality, affecting the profits of the other firm as well as its own profits, but each firm ignores this "spillover". The downstream firm makes any increase in the retail prices that increases his own profits, ignoring the fact that those increases, because they decrease the quantity sold to consumers, also decrease the upstream firm's profits (by an amount roughly equal to the reduction in wholesale volume multiplied by the wholesale mark-up). The retailer marks up the wholesale price considering only the effect on his own profit, and not on the upstream firm's.

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