Thursday, September 23, 2010

Aftermarket Theories in Competition Law and an Empirical Analysis of Regulation on Motor Vehicles

Posted by D. Daniel Sokol

Sahin Ardiyok, Bilgi University Law School offers Aftermarket Theories in Competition Law and an Empirical Analysis of Regulation on Motor Vehicles.

ABSTRACT: One of the major assumptions of the perfectly competitive market is the availability of complete information for both buyer and seller. Until 1990’s, after Nobel laureate economist Stigler’s research on information asymmetry in cartels, market failures caused by a failure of the aforementioned assumption to hold was rarely discussed in the practice of competition law. US Supreme Court’s decision in the Kodak Case put the information asymmetry on the agenda again. The adoption of such a decision coincided in a period when courts, policymakers and members of the Chicago School, including Stigler, were convinced regarding the proper functioning of the market mechanism. According to some authors, the Kodak Case points out the need for a more detailed review of the market – that is theoretically supposed to operate properly. This case is considered the beginning of the Post-Chicago School era.

After the Kodak Decision, emanating and transferring information have become extremely easy due to flourished information technologies. Internet has enhanced the worldwide quantity and depth of information accessibility. This development makes accurate information more difficult to obtain and analyze.

In Kodak Case, the problem of information asymmetry was thoroughly discussed in a market with durable goods. The focus was on the after-sale costs of durable goods with respect to competition law. It appeared that in the analysis of after sale activities, we may categorize the market as either with “system theory” or with “market power in after sale market theory”. System theory implies that users of durable goods take into account both the sale price and the possible costs which would be due after the sale. In markets where latter theory is the case, we may expect that the firm can infringe competition rules depending on its market power in after sale products and services.

In our study, we have aimed to design a framework that may help to find which theory is applicable for which types of markets. In this way, we have explored six criteria to be available for this analysis. Unexpected pricing experienced by current customer base, switching costs, potential purchasers in the sales market and reputation, asymmetric information problem, agreements in after-sale markets, and oligopolistic structure of sales market found to be significant parameters to be used in the analysis. In addition we have identified three main defenses, namely intellectual property rights, quality control and protection of brand reputation, price discrimination, for firms having market power based on these six parameters.

After establishing theoretical foundations of our argumentation, we have tried to test it by an empirical study depending on a survey since we believe that general and literal judgments lacking econometrical evidences may lead competition authorities or courts to make Type I error. In this vein, we have planned to take one of six parameters (asymmetric information problem) and test it with real life application.

For this study, we decided to focus on the motor vehicle industry which has a big share in our durable goods expenditure. We handled Turkish Competition Authority’s (TCA) block exemption Regulation on motor vehicles which is a carbon copy of its EU counterpart. As this regulation applies power in the after sale market theory, the purpose of our empirical study was to show whether this normative choice is appropriate or not, at least in term of information asymmetry. And it seems that, our conclusion taken from the outcomes of survey supports this normative choice.

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