Monday, July 23, 2007
Posted by D. Daniel Sokol
Should we rethink some of the presumptions on the use of market share thresholds in vertical merger anlysis? In cases of RPM, possibly according to new research by Øystein Foros of the Norwegian School of Economics and Business Administration (NHH) - Department of Economics, Hans J. Kind of the Norwegian School of Economics and Business Administration (NHH) - Department of Economics, and Greg Shaffer of the University of Rochester - Simon School in their new working paper Resale Price Maintenance and Restrictions on Dominant Firm and Industry-Wide Adoption.
ABSTRACT: This paper examines the use of market-share thresholds (safe harbors) in evaluating whether a given vertical practice should be challenged. Such thresholds are typically found in vertical restraints guidelines (e.g., the 2000 Guidelines for the European Commission and the 1985 Guidelines for the U.S. Department of Justice). We consider a model of resale price maintenance (RPM) in which firms employ RPM to dampen downstream price competition. In this model, we find that restrictions on the use of RPM by a dominant firm can be welfare improving, but restrictions on the extent of the market that can be covered by RPM (i.e., the pervasiveness of the practice among firms in the industry) may lead to lower welfare and higher consumer prices than under a laissez-faire policy. Our results thus call into question the indiscriminate use of market-share thresholds in vertical cases.