Interbrand Competition Research Articles

Insights from practice: is dealer protection good for consumers?

Most new cars in Europe are sold and serviced in a dealership operating under a franchise agreement from the car manufacturer. This system requires an exemption from EU competition rules and has been granted a Block Exemption 1400/02 which runs until 2010. The Block Exemption provides for various measures of dealer protection to be included in all franchise contracts, for example, a minimum notice period for termination. This is in contrast to the General Block Exemption applying to all other sectors, which makes no such provision. This paper examines the possible benefits to consumers from different dealer protection measures. It argues that there is no general case for such protection, but that it can be a robust precautionary device against possible defects in interbrand and intrabrand competition.

Are Manufacturers Competing through or with Supermarkets? A Theoretical Investigation

We study a model with product differentiation by manufacturers and spatial differentiation by supermarkets where the customers visit only one shop and the supermarkets carry both goods. Under fixed fee pricing by the manufacturers the intensity of interbrand competition increases with the degree of differentiation between the supermarkets. When the supermarkets are more and more spatially differentiated the struggle between manufacturers and supermarkets dominates the competition between the manufacturers and results in lower wholesale prices and manufacturers profits.

Investigating the competitive assumption of Multinomial Logit models of brand choice by nonparametric modeling

The Multinomial Logit (MNL) model is still the only viable option to study nonlinear responsiveness of utility to covariates nonparametrically. This research investigates whether MNL structure of inter-brand competition is a reasonable assumption, so that when the utility function is estimated nonparametrically, the IIA assumption does not bias the result. For this purpose, the authors compare the performance of two comparable nonparametric choice models that differ in one aspect: one assumes MNL competitive structure and the other infers the pattern of brands’ competition nonparametrically from data.

Endogenous vertical restraints in international trade

This paper examines interbrand competition between a domestic and a foreign manufacturer who market their products through intermediaries. The contracts manufacturers offer these intermediaries are endogenous. In equilibrium contracts may specify exclusive territories (ET), depending on the degree of substitutability between products and the level and degree of transparency of trade barriers. Trade liberalization, through lower or more transparent barriers, may lead manufacturers to use ET, thereby substituting private anti-competitive arrangements for government-imposed barriers. This substitution may decrease competition and welfare, and thus create a role for competition policy in a freer trade environment.

Regulating vertical relations in the presence of retailer differentiation costs

We discuss public policy towards vertical relations, comparing different types of contracts between a manufacturer and a maximum of two retailers. Together with (potential) price competition between the retailers, we study the role of a (sunk) differentiation cost paid by them in order to relax competition in the retail market and broaden the market potential of the distributed product. This non-price competition element in the downstream market is responsible for our conclusion that, unlike in standard policy guidelines and previous theoretical analysis, restrictions in intra-brand competition may deserve a permissive treatment even in the absence of inter-brand competition, if retailer differentiation is costly.

On intrabrand and interbrand competition: The strategic role of fees and royalties

We examine oligopolistic markets with both intrabrand and interbrand competition. We characterize equilibrium contracts involving a royalty (or wholesale price) and a fee when each upstream firm contracts with multiple downstream firms. Royalties control competition between own downstream firms at the expense of making them passive against rivals. When the number of downstream firms is endogenous, each upstream firm chooses to have only one downstream firm. This result is in sharp contrast to previous literature where competitors benefit by having a larger number of independent downstream firms under only fixed fee payments. We discuss why allowing upstream firms to charge per-unit payments in addition to fixed fees dramatically alters their strategic incentives.

The Impact of Category Management on Retailer Prices and Performance: Theory and Evidence

Category management (CM) is a recent retail management initiative that aims at improving a retailer's overall performance in a product category through more coordinated buying, merchandising, and pricing of the brands in the category than in the past. Despite tremendous retailer and manufacturer interest in the process of CM and its rapid adoption in the industry, much uncertainty exists about the consequences of CM for channel members. The present study focuses on how a shift to CM by a retailer affects its equilibrium prices, sales, and profitability in a competitive retail setting. On the basis of an analysis of a model of two competing national brand manufacturers that supply two competing common retailers, the authors find that one retailer's adoption of CM increases its average unit price of the category and reduces its sales volume and revenues. However, this retailer can still enjoy an increase in its gross margin profits as competing manufacturers’ wholesale prices fall in the process. Also, the CM adopter's profits are greater than those of a symmetric competing retailer that follows the traditional brand-centered management of a product category when the interbrand competition is high but interstore competition is low. Applying the intervention analysis methodology, the authors empirically test several of these analytical findings, employing a unique data set that contains information about a supermarket chain's weekly average unit prices and sales of the laundry detergent category before and after this product category was moved to CM by the retailer. The propositions that adoption of CM will lead to higher retail prices and lower sales are upheld in this empirical study. The authors discuss the implications of these findings for practitioners and researchers, the limitations of the study, and directions for further research.

Analysis of global bifurcations in a market share attraction model

In this paper we demonstrate how the global dynamics of an economic model can be analyzed. In particular, as an application, we consider a market share attraction model widely used in the analysis of interbrand competition in marketing theory. We analyze the local and global dynamic properties of the resulting two-dimensional noninvertible dynamical system in discrete time. The main result of this paper is given by the study of some global bifurcations that change the structure of the attractors and their basins. These bifurcations are investigated by the use of critical curves, a powerful tool for the analysis of the global properties of noninvertible two-dimensional maps.

Vertical Territorial Restrictions and Public Policy: Theories and Industry Evidence

Territorial restrictions long have been the subject of intense policy debate. The central issue in this debate has been whether such distribution arrangements are deployed for efficiency or anticompetitive purposes. The authors add to the debate by broadening the existing conceptualization of business efficiency and providing evidence of the importance of efficiency considerations in the decision to deploy restrictions. In the past, efficiency often has been viewed narrowly, in terms of giving distributors incentives to provide free-rideable services. The authors show that information asymmetry and transaction costs also represent important efficiency-based explanations of territorial restrictions. With regard to anticompetitive concerns, their results show that manufacturers are more likely to use territorial restrictions when they face competition ex ante. Ultimately, this may reduce interbrand competition. From a public policy perspective, their pattern of results supports the current rule of reason treatment of territorial restrictions in the United States. At the same time it questions the current European policy of per se illegality.

Creating Micro-Marketing Pricing Strategies Using Supermarket Scanner Data

Micro-marketing refers to the customization of marketing mix variables to the store-level. This paper shows how prices can be profitably customized at the store-level, rather than adopting a uniform pricing policy across all stores. Historically, there has been a trend by retailers to consolidate independent stores into large national and regional chains. This move toward consolidation has been driven by the economies of scale associated with these larger operations. However, some of these large chains have lost the adaptability of independent neighborhood stores. Micro-marketing represents an interest on the part of managers to combine the advantages of these large operations with the flexibility of independent neighborhood stores. A basis for these customized pricing strategies is the result of differences in interbrand competition across stores. These changes in interbrand competition are measured using weekly store-level scanner data at the product level. Obviously, this presents a huge estimation problem, since we wish to measure substitution between each product at a store-level. For a chain with 100 stores and 10 products in a category we would need to estimate over 100,000 parameters. To reliably estimate these individual store differences we phrase our problem in a hierarchical Bayesian framework. Essentially, each store-level parameter can be thought of as a combination of chain-level and random store-specific effects. The improvement in estimating this model comes from exploiting the common chain-level component. In addition, we relate these store-specific changes to demographic and competitive characteristics of the store's trading area, which helps explain why these differences are present. These estimated differences in price response are in turn used to set store-level prices. To simplify and focus the problem we limit our attention to everyday price changes (i.e., the prices of products that are not advertised). There are many marketing variables that can be adjusted at a storelevel (e.g., promotions and product assortments); the reason we concentrate upon everyday pricing is driven by its importance in the marketing mix, that most profits are earned on products sold at their everyday price, and the amenability of everyday prices to store-level customizations. A limitation of this approach is that it yields only a partial solution to the retailer's global optimization problem. A challenge for the retailer in implementing micro-marketing pricing strategies is to retain a consistent image while altering prices that adapt to neighborhood differences in demand. Our approach is to search for price changes that leave image unchanged. We argue that a sufficient condition for holding the input to store image constant from everyday pricing is to hold average price and revenues at their current levels. We implement this condition by introducing constraints into the profit maximization problem. Future research into store choice may yield more efficient conditions. A benefit of holding the retailer's image constant is that it does not require costly new information about competitors and promotional activity. Instead, retailers are able to derive these store-level customizations based largely upon scanner data. This is very advantageous since this information is already being collected and is readily available. Our results indicate that micro-marketing pricing strategies would be profitable and could increase gross profit margins by 4 percent to 10 percent. When these gross profit gains are considered after administrative and operating costs are taken into account, they could increase operating profit margins by 33 percent to 83 percent. These gains come from encouraging consumers through everyday price changes to switch to more profitable bundles of products, and not through overall price changes at the chain-level. These results show that the information contained in the retailer's store-level scanner data is an under-utilized resource. By exploiting this information using newer and more powerful computational techniques managers can better appreciate its value. The implication is that profits could be increased and gains can be made by using this information as the basis for micro-marketing.

Pricing Decisions Under Demand Uncertainty: A Bayesian Mixture Model Approach

The advent of optical scanning devices and decreases in the cost of computing power have made it possible to assemble databases with sales and marketing mix information in an accurate and timely manner. These databases enable the estimation of demand functions and pricing/promotion decisions in “real” time. Commercial suppliers of marketing research like A. C. Nielsen and IRI are embedding estimated demand functions in promotion planning and pricing tools for brand managers and retailers. This explosion in the estimation and use of demand functions makes it timely and appropriate to re-examine several fundamental issues. In particular, demand functions are latent theoretical constructs whose exact parametric form is unknown. Estimates of price elasticities, profit maximizing prices, inter-brand competition and other policy implications are conditional on the parametric form assumed in estimation. In practice, many forms may be found that are not only theoretically plausible but also consistent with the data. The different forms could suggest different profit maximizing prices leaving it unclear as to what is the appropriate pricing action. Specification tests may lack the power to resolve this uncertainty, particularly for non-nested comparisons. Also, the structure of these tests does not permit seamless integration of estimation, specification analysis and optimal pricing into a unified framework. As an alternative to the existing approaches, I propose a Bayesian mixture model (BMM) that draws on Bayesian estimation, inference, and decision theory, thereby providing a unified framework. The BMM approach consists of input, estimation, diagnostic and optimal pricing modules. In the input module, alternate parametric models of demand are specified along with priors. Utility structures representing the decision maker's attitude towards risk can be explicitly specified. In the estimation module, the inputs are combined with data to compute parameter estimates and posterior probabilities for the models. The diagnostic module involves testing the statistical assumptions underlying the models. In the optimal pricing module the estimates and posterior probabilities are combined with the utility structure to arrive at optimal pricing decisions. Formalizing demand uncertainty in this manner has many important payoffs. While the classical approaches emphasize choosing a demand specification, the BMM approach emphasizes constructing an objective function that represents a mixture of the specifications. Hence, pricing decisions can be arrived at even when there is no consensus among the different parametric specifications. The pricing decisions will reflect parametric demand uncertainty, and hence be more robust than those based on a single demand model. The BMM approach was empirically evaluated using store level scanner data. The decision context was the determination of equilibrium wholesale prices in a noncooperative game between several leading national brands. Retail demand was parametrized as semilog and doublelog with diffuse priors for the models and the parameters. Wholesale demand functions were derived by incorporating the retailers' pricing behavior in the retail demand function. Utility functions reflecting risk averse and risk neutral decision makers were specified. The diagnostic module confirms that face validity measures, residual analysis, classical tests or holdout predictions were unable to resolve the uncertainty about the parametric form and by implication the uncertainty with regard to pricing decisions. In contrast, the posterior probabilities were more conclusive and favored the specification that predicted better in a holdout analysis. However, across the brands, they lacked a systematic pattern of updating towards any one specification. Also, none of the priors updated to zero or one, and there was considerable residual uncertainty about the parametric specification. Despite the residual uncertainty, the BMM approach was able to determine the equilibrium wholesale prices. As expected, specifications influence the BMM pricing solutions in accordance with their posterior probabilities which act as weights. In addition, differing attitudes towards risk lead to considerable divergence in the pricing actions of the risk averse and the risk neutral decision maker. Finally, results from a Monte Carlo experiment suggest that the BMM approach performs well in terms of recovering potential improvements in profits.

Investigating the effects of marketing variables and unobserved heterogeneity in a multinomial probit model

The authors investigate the effects of marketing variables and household heterogeneity in a multinomial probit model of brand choice. The household specific vector of intrinsic brand preferences and price sensitivity is assumed to be distributed across households following some underlying probability distribution. This unknown underlying distribution is approximated by a discrete distribution with a finite number of supports in the estimation. The method of simulated moments is used in the estimation of the model parameters. The empirical application of the methodology using scanner panel data on the purchases of saltine crackers enables one to (a) study the effects of marketing variables on brand choice probabilities while allowing for similarities across choice alternatives, (b) recover differential patterns of competition across brands, (c) decompose the pattern of inter-brand competition into a component due to perceived similarities across choice alternatives and a component due to heterogeneity, and (d) determine the extent of variation in price sensitivity across households for the product category under investigation.

The Role of Exclusive Territories in Producers' Competition

The central objective of this paper is to show how vertical restraints, which affect intra-brand competition, can and will be used as an effective mechanism for reducing inter-brand competition and increasing producer profits. We show how exclusive territories alter the perceived demand curve, making each producer believe he faces a less elastic demand curve, thereby inducing an increase of the equilibrium price. The use of exclusive territories may increase producers' profits, even if the producers cannot charge franchise fees, and so cannot recapture, from the retailers, the monopoly rents they earn from their exclusive territory: we show that 'double marginalization' effects can be overcome by the strategic effect on producers' competition. We provide a model in which we can clearly specify the full range of feasible contracts between producers and retailers, and show that it is always a dominant strategy for firms to use exclusive territories (so that exclusive territories are used in equilibrium) and that the best situation from the producers' viewpoint may or may not entail franchise fees. In all cases, exclusive territories hurt consumer surplus and reduce total welfare, which yields a different light on vertical restraints from a competition policy perspective.

高度成長期における流通系列化の形成

In this study I shall examine the forward integration of distribution (in the perspective of wholesaler-hansha-) focusing on Matsushita Electric corporation during the high growth period in Japan. In the foregoing chapters I have examined selected aspects of intrabrand competition and interbrand competition. In the second section, I discuss the establishment of the first stage of hansha and examine the principle of operation. In the third section. I look at the first stage of hansha to the process of the expansion of the hansha system. In the fourth section, I analyse the relationship between Matsushita and hansha (including existing wholesalers) from the point of view of capital and manager. In the fifth section, I examine the changing functions of the sales offices. Throughout this study it has been clearly observed that (1) Hansha refers to an exclusive dealer who sells certain maker's goods only in certain territories. The former can exclude the competition of multiple makers in the existing dealer system (interbrand competition). The later can remove the intrabrand competition of a certain maker in the same area. Matsushita owns the wholesale channels, most of which came into existence through the use of separation of top level dealers with a long history and accumulated capability to operate. I studied changes that have taken place within the hansha system, the first stage of the development of hansha, and the second stage of the spreading of hansha nation-wide, to the third stage of the restructing of hansha. In particular, in 1961, the second stage of the expansion of hansha can be seen as the turning point. (2) In 1951, Matsushita announced regulation of the hansha, whereby Matsushita was to invest over 50% of capital and to send managers to the hansha. Until 1974, they were unable to reach that goal. (3) Prior to the hansha system, Matsushita was in contact with wholesalers through the sales offices. After the hansha system was instituted, however the sales offices' functions changed, as they attmpted to encourage the hansha, and increase their strength through exclusive dealing and Keiretsu of the dealer shop.

VERTICAL INTEGRATION AND VERTICAL RESTRAINTS

This paper surveys the field of vertical integration and vertical restraints, with particular reference to implications for competition policy. It outlines the existing legal framework, then discusses some particular U.K. examples involving vertical restraints. The theoretical discussion includes analyses of technological economies, transactions costs, contractual rights, monopoly effects, verticle restraints as externalities, interbrand versus intrabrand competition, the strategic effects of vertical separation, and agency issues. Some policy implications are drawn, amongst these being the points that vertical linkages can have strong anticompetitive effects, that there is little support for separate treatment of resale price maintenance, that policy should focus on economic effects rather than legal form, that the case for the block exemption of franchising in the EC is unclear and that the law has failed to take the implications of the vertical separation literature into account. Copyright 1993 by Oxford University Press.

Vertical Restrictions and the Number of Franchises

Products for which a trademark is important are frequently sold through franchised distributors. Often with the franchise go exclusive rights to a specified geographic market, and distributors pay a franchise fee for the right to sell in this market.' Franchises are common, for example, in the distribution of newspapers, motor vehicles, apparel, gasoline, and fast foods. This paper explores how an upstream monopoly decides to set a franchise fee to downstream distributors or retailers when the number of such outlets is endogenous. When the monopoly authorizes a franchise, the retailer buys an input from the monopoly that is used to produce a product at the point of sale. For simplicity of exposition there is only one product sold to the retailer and it is assumed there is a one-to-one correspondence between this product and the units sold by the distributor. It will come as no surprise that the franchise fee is a tool by which to extract rents from distributors, but it is shown that a franchise fee is inherently tied to the product price set by the monopolist. The model set forth below proves that the monopolist will set the wholesale price below its marginal cost in order to maximize profits through the franchise fee. Caves and Murphy cite a survey in which at least 25 percent of the fast-food franchises surveyed thought that the franchisor's wholesale prices were below the perceived market price [4, 572-86]. If the market price is competitively established this paper explains why the monopoly sets lower prices. It is also the case that franchise fees and the monopolist's incentive to set a downstream retail price, a practice commonly known as resale price maintenance (RPM), are closely related. Resale price maintenance per se restricts intrabrand competition, but with a franchise fee the upstream monopoly has the incentive to open more franchises. This may have the counter-effect of increasing intrabrand competition over nonprice product attributes e.g., service, while also increasing interbrand competition and reducing buyer transportation costs. Any rents distributors

Territorial Restraints and Inter-Brand Competition in the EEC

Territorial Restraints and Inter-Brand Competition in the EEC

Vertical Restraints as Contract Enforcement Mechanisms

IT is now generally recognized that there are many cases of vertical restraints that do not fit the standard "consumer free riding on special services" theory.1 For example, the widespread use of resale price maintenance in the marketing of brand name clothing cannot be explained as inducing retailers to supply services such as dressing rooms. It is unlikely that consumers must be prevented from trying on clothing free of charge at a full-service retailer before purchasing the clothing at a discount from retailers who do not supply dressing rooms. A number of authors recently have attempted to correct this deficiency in the standard theory by expanding the type of services that vertical restraints may induce retailers to supply and the corresponding retailer free-riding problems.2 The standard economic analysis of how vertical restraints operate to induce desired retailer behavior has remained essentially unchanged, however. The standard analysis assumes that when it is not feasible for a manufacturer to write explicit, court-enforceable contracts with retailers for the supply of particular services, the only alternative mechanism manufacturers can use to induce the supply of desired services is to increase the direct return retailers receive from consumers when those

Advertising and Interbrand competition: A New Zealand replication of a western European study

Advertising and Interbrand competition: A New Zealand replication of a western European study

Franchising and Interbrand Competition

In many markets with product differentiation, franchisors distribute their products through geographically dispersed franchisees. The main body of the literature on franchising focuses on conflicts of interest in the franchise contract [2; 9; 16] and on whether a franchise is closer to the standard commercial transaction or the standard employment relationship [13]. The rest of the literature confronts more specific problems like resale price maintenance [5; 15], territorial and customer restriction [10; 12], or the determination of the franchise fee and royalty rate [1; 8; 10]. The common model pertains to a single monopolistic franchisor bent on extracting the most profit from its franchisees by various contractual restrictions.