Eu Competition Policy Vertical Restraints And Innovation

The EU competition policy leads to ignore innovations in keeping the vertical restrains, that are based on neoclassical efficiency-oriented reasonings. Both the original intention of antitrust laws and economic efficiency was the pursuit only of consumer welfare, the protection of competition rather than competitors. Never the less these theories will be more effective if they improve assessment of vertical restraints in competition policy.
During our lectures we tried to understand the Vertical Restraints, Competition Policy from this neoclassical point of view. But also according to the paper (Kerber,Vezzoso, 2004) we have to look from the point of evolutionary theories of competition and innovation economics. There are three groups of evolutionary approaches that were applied in this paper:
1) Neo-Schumpeterian approaches to competition and innovation economics;
2) Hayekian (or Austrian) market process theories;
3) knowledge-based theories of the firm.

Three evolutionary theories:
1)Neo-Schumpeterian approaches
The evolutionary or Neo-Schumpeterian theories deal primarily with competition, the normative implications to competition policy and antitrust concerns. As we saw before the neoclassical analysis of competition in vertically linked markets is based on mostly game-theoretic traditional microeconomic equilibrium theory. It was said: “Neo-Schumpeterian competition and innovation economics encompasses dynamic theories of competition and modern evolutionary innovation economics. Important insights from this perspective are the endogeneity of technical progress, the wide scope of innovations, the importance of dynamic efficiency in comparison to (static) efficiency, the dynamic process character of competition” (Kerber,Vezzoso, 2004). So, this term economists mean something very specific, that competitive and free markets deliver allocative, productive and dynamic efficiency. Dynamic efficiency brings to us the idea that business which constantly competes must research, create and innovate in order to keep its share of consumers.
2)Hayekian (or Austrian)Market Process Theories
The Austrian economist Friedrich Hayek is describing the market as a dynamic process challenges mainstream assumptions about the market as a imagined static equilibrium and states of “perfect competition.” Furthermore, free-market competition enables producers and consumers to discover the optimal prices and the optimal costs for products.
“From this perspective, competition can be seen as a process of trial and error, in which firms create and test conjectures or hypotheses about preferences, products, and technologies, and where the market provides a feedback mechanism, which of these hypotheses are superior and should be selected by imitation (market test)” (Kerber,Vezzoso, 2004).
3)knowledge-based theories of the firm
This theory looks at the knowledge as the most strategically significant resource of a firm. This knowledge is inserted and carried through multiple entities including organizational culture and identity, policies, routines, documents, systems, and employees.
The most important characteristic of the occurrence and the frontier of firms can be found in the differential knowledge-bases of firms. Especially, these theories will help to understand the role for transfer knowledge and development of innovations between firms of the vertical agreements (Kerber,Vezzoso, 2004).

Vertically Linked Markets
Now we will talk about the industry with firms, producing good to consumers, and retailers, who buy these products and sell them to the consumers. This is the downstream market. At the same time there are three different horizontal processes, that are included competition in each level. Each process can be defined as a process of variation and selection in experimental way:
1) There is a competition on the producer level - the inter-brand competition – with there products and innovations. The producers should care about there products in order to satisfy all the consumer’s needs and also consider preferences in the consumers choice. The distributor can also have an impact on selection products, but they don’t know exactly preferences of the consumers, so can make mistaken decisions.
2) On the second level, the distributors compete with their services that they provide to the consumers. On this stage this is called Intra-brand competition. The retailers try to find the best prices, category of products, services and locations for the customers. This is also a competition process of experimentations in which innovations are very important and leading to new format of distribution such as supermarkets, shops and so on.
3) The retailers become a rather interesting way for the producers to distribute there products among the consumers. So, it’s very important to innovate a new distribution format, in order to set lower costs for the producers and according to this they can reach their target group of potential customers. For retailers it means that they can improve their performance to distribute different products. And from the new point of view they become generator of variations and producers become the selectors.

Here we can see the horizontal competition on each level, in addition there is also the vertical competition between firms on the production and retailing level, because retailers can promote one or other brand, or another side that producers can implement classical functions of retailing. So, in this case, the evolutionary approach include itself the neoclassical framework. In order to analyze the vertical restrains, we can see that they are deeply developed and include the neoclassical equilibrium framework, but also it need to be added with the evolutionary insights.

Possible implications and arguments for theories.
The old theory told us that vertical restraints bring to us negative and anti-competitive effects, such as deprivation by raising barriers to entry, reduction of inter-brand and intra-brand competition, and creation difficulties to market integration. From the evolutionary point of view it leads to some positive aspects. First is that are necessary for organizational innovations, like new activities and transactions. There is a negative aspect in new theory, it is that “the vertical restraints restrict the freedom of firms to act independently from others, but from another way, if the firms on the two levels are entirely independent, i.e. there are no vertical restraints between producers and retailers, the firms on both levels can experiment and select independently from each other” (Kerber,Vezzoso, 2004).
From an new perspective, we can belief that there is a heterogeneity of knowledge between incumbents and entrants, and from neoclassical perspective it can be easier or more difficult to make entry. So, it was a problem for those, who wanted to try out a new product needs, to find a retailers and to distribute among them. That’s why, a “higher number of firms on the downstream market may be helpful for the innovator, given the substantial "dynamic transaction costs" of finding somebody willing to experiment with something new” (Kerber,Vezzoso, 2004).
The competition evaluation should enclose itself a request about the impact on learning and communication processes, both negative and positive impacts on innovations and knowledge transfer. In order to do work more effective it should be the stimulating task for competition policy such as try to combine insights from the knowledge-based and the governance approaches.
The complementarities between resources and activities can restrict a firm's ability to innovate independently, because if we make a one change of component in a complex (technical) system that it could lead to modifying of other components. So, it should be a coordinating mechanism for the innovation processes in the vertical restraints. These restraints cancel the positive effects of market experimentation within the vertical chain, because this effect at the same time limits the freedom of the firms and it will be very difficult for them to innovate independently in the vertical restrains. The solution can be find - the modularization of activities, this brings a dynamic competition with innovations at each level of a vertical chain, from the evolutionary point of view.
A new problem arise: How these Vertical Restrains can be regulated? There is one difficult problem: on one side, if some new regulations applied in the vertical chain, it brings to the limited numbers of experimentation, whereas, on the other side, vertical restraints can also blocked market experimentation. It is very complicated to recognize is this vertical restrains lead to the estimated efficiency benefit or not. The old block of exemptions established in much more detail what kinds of vertical restraints could be allowed and which were prohibited, though from an evolutionary perspective, it was a big progress of the reform of the policy in abidance vertical restraints.

Changes in Motor Vehicle Sector
The old distribution system in the car industry canceled the innovations and exclusive territories on the retailer level. That’s why the distributors were not motivated to do innovation on the motor vehicle retail market, so the main aim was to stimulate this innovation. Besides that rules for motor vehicle sector are more strict that others for vertical restraints. The main idea of the reform was to demand an unbundling of activities and reinforcement the independence of retailers. The positive sides of reform were stimulation of innovations, retailers can find out themselves by outsourcing the repair services, the barriers to entry became lower, because new firms don’t need to offer at the same time distribution and repair services, dealer’s independence became stronger and this is a step for long-term development. The negative aspect of the vertical dis-integration is that the cars have to have a network of closer-cooperating partners, what is Commission assumes.

To make an experiment with new developed vertical restraints can be important for organizational innovations, vertical restraints can also lead to block innovative experimentation, leading to a reduction of the measure the knowledge creation in competition. The main task is to make the model work properly and to find the trade-off between static and dynamic efficiencies. As it was shown the vertical restraints both can lead to anti-competitive and competitive effects, so, the evolutionary arguments should be analyzed in much more detail before to be applied. If the rules and regulations are not clear, or the nature of competition is misunderstood, the innovations will suffer.

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