Assortments tastes and prices also consumers prefer

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Unformatted text preview: fferently craft-trade market almost as big as impulse ice cream (see at craft-trade the beginning of case) the THUS: THUS: if relevant market was differently defined, the two firms would not have had market power!!! Case investigation could have stopped power!!! Recall Recall chapter 6: intervention on vertical agreements should only be done if firms have market power should 53 53 Market Power To investigate the possible foreclosure effects: What is the coverage of the exclusive agreements? Given the market definition employed by EC: Schöller Schöller would sell 10% of total market share through tied distributers, and LI 15% Would Would also be lower with other market definition, and analysis could stop here at the latest, as no market power exists. power 54 54 Foreclosing Effects If If we follow EC definition, we have to check of the vertical agreements have pro-competitive effects or foreclosing effects. effects No easy entry into industrial ice cream fixed sunk costs to establish distribution system create brand reputation (advertising expenditure) large parts of existing outlets are already tied by incumbents. other retailers may not install further freezer cabinets (space other argument) argument) BUT Mars has already reputation and distribution system and sells their chocolade bars and other goods to those outlets 55 55 Foreclosing Effects Mars Mars could provide retailers with small freezers for their products only freezers or retailers could store the Mars in their or own freezers own if if they were not willing, it would mean that there is no demand for these products there then entry would not be beneficial 56 56 Foreclosing Effects nevertheless, nevertheless, EC worries about exclusive contracts contracts Demand for industrial ice cream is fragmented: Demand many small retailers buy small volumes many Recall chapter 6: when buyers are fragmented Recall and cannot coordinate, exclusive contracts may prevent entry even if entrant would be more efficient than incumbent entrant entrant cannot get enough retailers so that entry would be beneficial. would exclusive contracts do not expire at same time, and exclusive that discrimination in the terms made to the retailer could vary foreclosing potential even stronger 57 57 Efficiency effects of exclusive Efficiency agreements agreements Two issues: freezer and outlet exclusivity Two Note: EC did not pay attention to the distinction of the two Note: different vertical practices!!! different Providing freezers is driver of growth in market for Providing industrial ice cream better consumer supply Exclusivity of use may be justified with investment made. Exclusivity Otherwise free-riding would take place no freezers would be installed. strong efficiency rationale strong Foreclosure questionable. Most retail outlets would Foreclosure probably have space to install small freezers in addition if new entrant would appear (and customers would value these products highly) these 58 58 Efficiency effects of exclusive agreements Outlet exclusivity has foreclosing potential firms claimed that this helps to keep distribution cost low iif every store could order from multiple suppliers, efficiency of f transport could not be assured, and profitability could not be maintained maintained BUT: firms have many products; no evidence that BUT: demand is unstable demand Traditional argument: dealer concentrates all efforts in Traditional selling the (exclusive) supplier product. selling yet, no evidence in this market. No after-sales services for icecream, nor skilled sales personnel needed. Exclusivity does not seem to be necessary in this case Assessment of pro- and anti-competitive effects may Assessment justify EC decision (but only if one relys on their relevant market definition). However, freezer exclusivity seems to 59 59 be justified. be...
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