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- Herausgeber: GRIN Verlag
- Sprache: Englisch
Seminar paper from the year 2004 in the subject Economics - Industrial Economics, grade: 1.0, Otto Beisheim School of Management Vallendar (Institute for Industrial Organization), course: Strategic Competition and European Competition Policy, language: English, abstract: The present paper discusses the new legal framework for the automotive distribution, which has been set by regulation 1400/2002 of the European Commission, and clarifies the underlying rationale of this so-called block exemption. To this end, the relevant market has been analysed along the structure conduct performance paradigm. Additionally, the existing trends, e. g. the changing consumer preferences, the changing technological standards, and an increasing number of independent service chains, were investigated to integrate the dynamics into the model. In this context the meaning and the impact of the regulation have been detailed with respect to consumer welfare.The analyses have shown that the new regulation complies with the guiding principles of competition policy and thus fosters competition in the industry. This stands in contrast to its predecessors, which were influenced by lobbying of the car industry and had thus laid the foundation for a heavily regulated business. As shown in this paper, a leap towards increased consumer welfare has been made by weakening the market power of the industry. Among others, the separation of sales and services, the permission of multi-brand outlets and the ban of price discrimination can be named as examples for reforms brought forward in the regulation. Furthermore, the so-called location clause will be abolished as of October 2005, which means that dealerships are allowed to open new outlets anywhere in the common market without the consent of the manufacturer. However, in the course of disallowing vertical restraints, of which some had previously helped to secure efficiencies in the value chain, a relative welfare loss has also developed. For instance, the increased free-riding issues could inspire a development to the detriment of the consumer and the convergence of prices at a high level could be disadvantageous to consumers in low income member states. Although the regulation has already come a far way, the critique that is voiced at the end of this paper, shows that there is significant room for improvement, once the regulation expires in 2010. Key points are the price convergence towards the level of the high price countries, some inconsistencies in the regulation and a possible loss of intangible consumer welfare. In the end whether the additional welfare surplus outweighs the new welfare loss has to be decided on a per country basis.
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Veröffentlichungsjahr: 2005
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The New Legal Framework for Car Distribution
5.2.6 Exemption from the Regulation: de Minimis Rule .......................................... 42
6 Conclusion........................................................................................................................ 43 7 Appendix .......................................................................................................................... 44 7.1 Welfare Analysis of Price Harmonization with Taxes ............................................. 44 7.2 Market Shares........................................................................................................... 46 7.3 Full Results of Price Analysis .................................................................................. 47 7.4 Price Levels 2002 ..................................................................................................... 48 7.5 Price Levels 2004 ..................................................................................................... 52 Bibliography............................................................................................................................. 56
We are grateful to having had the opportunity to conduct expert interviews with
Matthias Brück, Dealer Network Development, Dr. Ing h. c. F. Porsche AG Konrad Schumm, principal officer, DG competition, European Commission
who valuably contributed to the present paper.
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The New Legal Framework for Car Distribution
List of Figures
Figure 2-1:Distribution in the Automotive Industry.............................................................3Figure 2-2:Value Chain in the Automotive Industry.............................................................4Figure 2-3:Market Volume....................................................................................................5Figure 2-4:Contracted New Vehicle Dealers........................................................................6Figure 2-5:Service Outlets in Western Europe..................................................................... 6Figure 4-1:Double Marginalization................................................................................... 23Figure 4-2:Horizontal Externalities................................................................................... 25Figure 5-1:Price conversion 2002-2004............................................................................ 39
Abbreviations
ACEA European Automobile Manufacturers Association AG Aktiengesellschaft (German Stock Corporation) Art. Article B2B business to business B2C business to consumer BATEX barriers to entry and exit bn. billion CAGR compounded average growth rate DG Directorate General e. g. exempli gratia (for instance) EC European Commission ECU European Currency Unit EU European Union EUR Euro HHI Herfindahl-Hirschman-Index i. a. inter alia i. e. id est (that is) Ibid. Ibidem (at the same place) mn. million MRP manufacturer’s recommended price
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The New Legal Framework for Car Distribution
N.V. Naamloze Vennootschap (Dutch Stock Corporation) OEM original equipment manufacturer R&D research and development RPM Resale price maintenance SCP structure conduct performance SEM single European market
Symbols
A, B, Carbitrary equilibrium pointsDdemandD’after-tax demandDWLdeadweight lossMCmarginal costMRmarginal revenueppriceSsupplyumark-upu’cross-subsidypprofit
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The New Legal Framework for Car Distribution
Executive Summary
The present paper discusses the new legal framework for the automotive distribution, which has been set by regulation 1400/2002 of the European Commission, and clarifies the underlying rationale of this so-called block exemption.1To this end, the relevant market has been analysed along the structure conduct performance paradigm. Additionally, the existing trends, e. g. the changing consumer preferences, the changing technological standards, and an increasing number of independent service chains, were investigated to integrate the dynamics into the model. In this context the meaning and the impact of the regulation have been detailed with respect to consumer welfare.
The analyses have shown that the new regulation complies with the guiding principles of competition policy and thus fosters competition in the industry. This stands in contrast to its predecessors, which were influenced by lobbying of the car industry and had thus laid the foundation for a heavily regulated business. As shown in this paper, a leap towards increased consumer welfare has been made by weakening the market power of the industry. Among others, the separation of sales and services, the permission of multi-brand outlets and the ban of price discrimination c an be named as examples for reforms brought forward in the regulation. Furthermore, the so-called location clause will be abolished as of October 2005, which means that dealerships are allowed to open new outlets anywhere in the common market without the consent of the manufacturer. However, in the course of disallowing vertical restraints, of which some had previously helped to secure efficiencies in the value chain, a relative welfare loss has also developed. For instance, the increased free-riding issues could inspire a development to the detriment of the consumer and the convergence of prices at a high level could be disadvantageous to consumers in low income member states. Although the regulation has already come a far way, the critique that is voiced at the end of this paper, shows that there is significant room for improvement, once the regulation expires in 2010. Key points are the price convergence towards the level of the high price countries, some inconsistencies in the regulation and a possible loss of intangible consumer welfare. In the end whether the additional welfare surplus outweighs the new welfare loss has to be decided on a per country basis.
1Compare European Commission (2002a).
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The New Legal Framework for Car Distribution
1 Introduction
The goal of this paper is the economical evaluation of the new legal framework for car distribution in Europe, which has been set by regulation 1400/2002 of the European Commission in 2002.2For that purpose the underlying rationale of this so-called block exemption regulation shall be investigated. Finally, the meaning and the impact of the regulation shall further be evaluated with regard to its impact on consumer welfare. The present analysis begins with a general introduction to car distribution before 2002 further detailed by an analysis of the industry along the structure-conduct-performance paradigm.3Here the industry is defined as the integrated value chain from supplier over manufacturer to distributor. After this static analysis of the market structure, the conduct of the players and the profitability of the industry, the part concludes by an investigation of the trends in the industry to add a dynamic perspective. In this background, the new regulation is put in context with the European competition policy. Thus the EC's general motivation, especially concerning vertical restraints, is discussed, closing with a short overview on the regulatory history of car distribution. The analysis presumes with a presentation and discussion of the most relevant articles of the new regulation 1400/2002 with special regard to its economical implications. Where appropriate economic theory is used to facilitate the understanding. After looking at the status of the implementation, the likely market outcome of the new regulation is described and hypotheses for further developments are deducted. The paper concludes by voicing critique - giving empirical evidence where appropriate - and shading light on various issues that bear conflict potential for the future.
2Compare European Commission (2002a).
3Compare Bain (1959), quoted after Carlton, Perloff (1999), p. 238 et seqq..
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2 The Car Industry Before 2002
2.1 Car Distribution
In the car industry, distribution can be understood as all the activities that take place after the manufactured car leaves the factory.4Thus it includes sales and service. As it interacts with the customer, it has a great importance regarding customer satisfaction and the creation of brand image. Distribution is not necessarily carried out by the manufacturer, but in fact, often independent dealers handle distribution. In general, three distribution channels can be identified, as depicted in Figure 2-1.
Distribution in the Automotive Industry5Figure 2-1:
