Vertical relations in automotive distribution : consequences of the Motor vehicle block exemption regualtion (EC) no 1400/2002

• Main Author: Hansen, Ole Asheim
• Other Authors: Christian Riis
• Format: Master Thesis
• Language: English
• Published: 2007
• Subjects: VDP::210; Norway; Iceland
• Online Access: http://hdl.handle.net/10852/17373; http://urn.nb.no/URN:NBN:no-14621

The idea of this thesis is to analyze the consequences of the new laws regulating vertical relations in automotive retailing. The automotive industry has its own set of competition laws regulating vertical relations, called the Motor Vehicle Block Exemption. The name meaning that the distribution of motor vehicles is exempted as a block from the general European competition policy. The regulation covers the European Economic Area, i.e. The European Union, Norway, Liechtenstein and Iceland . The automotive industry is a large and important industry in Europe. The top manufacturers are some of the largest firms in the world and of high importance to the domestic industries. Certain aspects have for a long time characterized the distribution of cars in Norway and more generally Europe. The up-stream market is more concentrated and relative stronger than the down-stream market. A large majority of the dealers is independent retailers, i.e. not owned by the manufacturers. The brand aspects of the industry are strong; there are distinct differentiated brands with names, logos and attributes well known to most consumers. Cars are some of the most complex and important consumer products available. Many consumers are dependent on cars and if they malfunction it may have disastrous consequences. Because of the importance of the industry; The European Commission has for a long time recognized that the automotive industry requires its own set of competition rules. The Commission changed the Block Exemption in 2002 because they were of the opinion that the old Block Exemption from 1995 was outdated. The 1995 regulation had for example no rules regulating sales on the Internet . The scope for the thesis is hence to first discuss the new Block Exemption compared to the old, determine the effects and then analyzing them. The Block Exemption also regulates the supply of spare parts and after sale services, but my focus will entirely be on the distribution of new passenger cars. I will first discuss the main effects in a general context and then build a model to analyze them in a vertical framework. I will try to give some answers to the following questions: · Why do we have economic regulation in general and why does motor vehicle distribution have its own regulation? · Which vertical restraints were affected by changes made in the regulation with the new Block Exemption? · What are the effects normally associated with these vertical restraints? · How are the vertical relations between suppliers and dealers in the automotive industry affected by the regulatory changes? In Chapter 2 I will give a brief characterization of the industry. The focus will be on the main aspects, such as market concentration and demand. I will also see if the Norwegian market has any special attributes compared to the rest of Europe. Chapter 3 consists of three parts. In the first part I discuss theories explaining the existence of competition policy. The motivation for this is that it is also important to have in mind why a set of regulation exists when discussing its consequences. I will discuss vertical relations generally in the second part. The Block Exemption concerns vertical relations and a general discussion of this felt necessary before discussing the Block Exemption in detail. The main part of the chapter will be a detailed discussion of the important changes in the new Block Exemption compared to the old and which forms of vertical restraints that are affected. I will give a discussion of the two important vertical restraints found in Chapter 3, exclusive dealing and exclusive territories, in Chapter 4. I will discuss the important aspects that are normally associated with these vertical restraints and how different settings affect the effects of them. The main model will be found in Chapter 5. The model consists of two producers selling close substitutes and competing in prices. The idea is to observe how the possibility to use different vertical restraints affects the producers’ incentives to use independent retailers. The model is based on several existing papers analyzing vertical relations. I will show that the possibility to use two-part tariffs is necessary for vertical separation to be a dominant strategy. If franchise-fee is possible then nonexclusive dealing will remove the gain that the producers get from using independent retailers, but will not alone give the producers incentives to integrate vertically. I will also show that nonexclusive dealing only leads to lower prices if the producers may use franchise-fees. The conclusion is found in Chapter 6. Here I will sum up the effects the new Block Exemption has and give some remarks on possible developments in the Norwegian market.