Tuesday, May 5, 2009
Posted by D. Daniel Sokol
A team from Sidley (Stephen Kinsella, Hanne Melin and Simon Schropp) recently published a piece in the European Competition Journal titled Comments on the CRA Paper Entitled “An Economic Analysis of the Use of Selective Distribution by Luxury Goods Suppliers”. This article responds to a CRA submission An Economic Analysis of the Use of Selective Distribution by Luxury Goods Suppliers for a Commission roundtable on Opportunities in online goods and services.
ABSTRACT: In this paper, we bring together the views of lawyers and economists in an effort to formulate a practical approach to a real problem. The assertions made by the CRA paper are remarkable. The CRA paper, part of an exercise conducted on behalf of the LVMH Group, purports to discuss the “economic foundations of competition policy towards vertical restraints on distribution, as applied to the selective distribution of luxury goods” The paper is not a market study; it is a discussion based on selected literature and an interpretation of economic theory. Nevertheless, the paper asserts that regulators should assume that unspecified and largely speculative consumer benefits from “brand image” outweigh the well-recognised consumer welfare flowing from effective market competition. Basically, the proposition is that regulators should trust that supplier-imposed vertical restraints always and inevitably serve the consumer interest. In order to make their point, the CRA authors find themselves arguing that resale price maintenance by a monopolist can be presumed beneficial to consumers. The reality, however, is that vertical restraints can easily be imposed to geographically segment markets, raise barriers to entry for competitors and reduce competition between suppliers upstream, resulting in higher prices and less choice—to the unambiguous detriment of consumers. This response looks at the CRA paper’s arguments regarding vertical restraints and finds that its conclusions should not be attributed to mainstream economics. In contrast to the CRA paper, this comment also looks at what is happening in the real world. It questions the blanket justification for vertical restraints in general and online restrictions in particular.