Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, October 15, 2008

Vertical Restraints and the Law: Evidence from Automobile Franchising

Posted by D. Daniel Sokol

Giorgio Zanarone, Colegio Universitario de Estudios Financieros has a piece in the Journal of Law and Economics on Vertical Restraints and the Law: Evidence from Automobile Franchising.

ABSTRACT: This paper shows that, after a 2002 European regulation prohibited the use of dealer exclusive territories, automobile franchise contracts in Italy introduced price ceilings and standards on verifiable marketing and service inputs, such as advertising and salespeople. The contracts also imposed quantity floors, a practice already in use before the regulatory change. The introduction of standards suggests that, consistent with a view of vertical restraints as coordination mechanisms, manufacturers used exclusive territories to induce desired dealer services and, once prohibited, switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests car manufacturers tried to prevent some dealers from "gaming" the quantity floors by selling to other dealers' customers, while charging monopolistic prices at their own location.

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