Transcript Michelin II: The Treatment of Rebates

Michelin II:
The Treatment of Rebates
Industrial Economics Presentation
by:
Niket Gupta (63017)
Rohit Thakur (63077)
Contents
Introduction
Case Facts
The European Commission’s Findings
An Economist’s Assessment
Conclusion
Test Questions
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Introduction
Michelin Fined
• In 2001, the European Commission fined Michelin
EUR 19.76 million
• It found that Michelin abused its dominant position in
the French markets for new replacement tyres and
retreaded tyres for heavy vehicles – via its various
types of rebates
• Two years later, the Court of First Instance upheld the
Commission’s Decision in its entirety
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Introduction
Peculiarity of the Case
• Example of strict formalistic approach followed in abuse of
dominance cases by the European Commission and the
Community Courts
• The possibility that the abusive practices (exclusionary effects)
could distort competition being enough for infringement of
article 82 of the Treaty
http://ec.europa.eu/competition/antitrust/art82/
• A dominant firm cannot even resort to pure (nonindividualized) quantity discounts
• Economic, effects-based considerations were completely absent
and debated the Article 82 enforcement policy
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Case Facts: The Market
Characteristics
Scope
Products
Trucks and buses replacement tyres
•New
•Retreaded
Market
France
Leadership
World Leaders Michelin and Bridgestone (18-20% )
European Leaders Michelin (31%), Continental (17%)
France Leader Michelin
Production Capacities
11 of 19 plants in France
Specialized Distributors
Michelin owns the largest network
Euromaster, 330 outlets
Michelin’s market share for new tyres in 1995: 55-60%
Its leadership during the period 1991-1998 was stable
though the market share was decreasing…
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Case Facts: Michelin’s Policy
4 elements to Michelin’s commercial policy
1. The general price conditions consisting of a list
price (‘invoicing scale’) plus
2. A system of rebates
3. ‘PRO agreement’
4. ‘Club des amis Michelin’: an agreement on
business cooperation and assistance
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Case Facts: Michelin’s Policy
General price
conditions
Dealer buys tyres according ‘invoicing scale’, pays within 30 days of
the end of accounting month, receives the total rebates at the end of
February of the following year
Rebates
Quantity The percentages deductible from the list price for the entire
discounts turnover achieved represent the main quantity discount scheme
Service bonus an incentive to the specialized dealer ‘to improve his equipment and
after-sales service’; it was necessary a minimum turnover with
Michelin
Progress bonus Rewards for dealers who agree to commit in writing at the
beginning of the year to exceed a certain minimum base of
purchases and manage to exceed it.
Individual Applicable to dealers who reached the maximum amount in the
agreements quantity discounts table, who could then sign a cooperation
agreement with Michelin; Additional benefits were provided
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Case Facts: Michelin’s Policy
PRO
Agreement
•Rebate for each tyre given to Michelin for retreading and in
exchange, the dealer committed to a truck progress bonus and had
•Michelin retread all the Michelin truck tyres that reached the legal
limit for the tread wear.
It contained an element of tying:
•maximum number of bonuses a dealer can achieve is limited by the
number of new Michelin tyres bought during the previous year
•the bonus is conceived not as a cash payment but as a credit
towards buying new Michelin tyres
The Michelin
friends’ club
•Bilateral agreement with a large number of sales outlets.
•Michelin contributes to investment and training of the dealers;
transfer of know-how in many areas; priority access to training
courses; transmission of data on market trends
•In return, members guarantee a certain level of ‘Michelin
temperature’ (i.e., large enough volumes and market share)
•Permit Michelin to carry out analyses of the outlets
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The Commission’s findings
Michelin’s dominance
•
•
•
•
Michelin has a stable leadership with market share above 50%
Technological lead and expertise
Strong reputation
Wide range of products & strength in commercial and technical
services
• Leading position in the French distribution channel
• buyers do not have much power, as specialized dealers “must deal”
with Michelin, else they would lose credibility
• Strong competition amongst dealers
Hence, Michelin is dominant, i.e., it has considerable market power.
It can keep prices well above cost because little demand would switch to rivals and
importers
Michelin’s market share appears to decrease over time, and the Commission itself
indicates that in the last decades, new firms have entered the French market and have
become more competitive …
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The Commission’s findings
The abusive nature of Michelin’s policy
Michelin’s Policy
Commission’s Criticism
Quantity discounts
1. Purchase of additional units lead larger rebate on all units
creating an incentive to buy additional units from Michelin,
determining a loyalty-inducing effect
2. Case law allows discounts which are justified by
transaction-specific savings
3. Scheme unfair: rebates are not paid until February on the
following year creating cash flow problems for buyers that may
operate at a loss until the rebate is paid
4. Market-partitioning effects: rebates are applied only to
purchases from Michelin France, thereby making parallel
imports difficult
Service bonus
1. Unfair: subjective in assigning ‘points’ to buyers, asks
dealers to provide market information that is not in their
interest, subjectivity is inevitably a source of discrimination
2. Loyalty-inducing: reaching a minimum turnover is needed
to qualify and strengthen
links with Michelin
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The Commission’s findings
The abusive nature of Michelin’s policy
Michelin’s Policy
Commission’s Criticism
Progress bonus
1. Loyalty-inducing: by pushing dealers to buy more than
previous years (or meet the target), thus denying sales to rivals
2. Unfair: a) it is discriminatory as two dealers who buy the
same quantity but have different bases get different rebates
Individual
agreements
Gives extra incentives to large dealers, and put pressure on
them to buy only from Michelin to reach the highest rebates.
PRO agreement
•‘Double-tying’ component as:
•Use dominance on the new tyres market to strengthen it in the
retreading market and vice versa.
•Dealers are discouraged from buying rivals’ new tyres
Michelin’s Friends
Club
•Need to achieve a certain ‘temperature’ (i.e., proportion of
sales from Michelin)
•Need to carry a sufficient stock, maintaining dominance with
an effect similar to a ‘fidelity clause’
•‘Excessive’ monitoring of dealers’ control dealers
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An Economist’s Assessment
Four Step Process:
Find out whether the firm is dominant i.e. whether it has considerable market
power
Whether the policy does have any anti-competitive effects
Analyze the possible pro-competitive (efficiency) effects of the practice at hand
Balance the anti- and pro-competitive effects, that is, carry out an assessment of the
net effects on consumer (or total) welfare
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An Economist’s Assessment
Do rebates have anti-competitive effects ?
• Type 1: on increasing purchases
• Type 2: on buying only (or in a sufficiently high percentage) from
the given supplier
• Type 3: on buying over a given amount of units (quantity discounts)
Scheme
Type of Rebate
progress bonus
Type 1
Michelin’s friends club
Type 2
service bonus
Type 2
individual agreements
Type 2
Quantity discounts
Type 3
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An Economist’s Assessment
Do rebates have anti-competitive effects ?
Exclusive dealing allows the incumbent to exclude the
rival
How can an incumbent use non-individualized quantity
discounts so as to exclude a more efficient firm?
• Quantity discount as Implicit price discrimination
More aggressive the pricing scheme, the more
exclusionary potential it has
Dilemma in establishing policy towards rebate
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An Economist’s Assessment
Case linked to theory
Theory admits the possibility that the various types of rebates used
by Michelin could be used for exclusionary purposes
It does not seem that Michelin’s policies have had such strong
effects on its rivals, whose collective market share is increasing over
the years.
Discriminatory strategies might help a dominant firm to exclude by
denying key buyers to the rivals but there is no information about
this point in the case.
Strong competition among buyers
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An Economist’s Assessment
Possible efficiency effects of rebates
Exclusive dealing is welfare beneficial if it helps protect investments made by
the supplier which have the effect of improving the retailer’s productivity in
both selling the supplier’s products and the other suppliers’ products
Quantity discounts to the extent that they do not exclude the rivals are
beneficial to the consumers
Quantity discounts as a form of two part tariff and justified by scale economies
Efficiency effects should have been considered seriously
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Conclusion
The Commission and the Court
• Made no effort in trying to formulate a coherent theory of why
Michelin’s rebate programs had anti-competitive effects
• Not considered the possible efficiency effects
Michelin’s market position has worsened over time
despite the fact that it has used the rebate schemes
Economic approach should have been followed
rather than a form based approach
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Test Questions 1/5
1. Michelin had a dominant position in the
market. This statement is justified by:
A) Michelin had the highest market share
B) Michelin had largest number of production
plants
C) Michelin had largest network of specialized
Distributors
D) All of the above
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Test Questions 2/5
2. What was true for the European Commission’s
decision:
A) The possibility that Michelin’s policy could
distort competition had to be substantiated
with proof for exclusionary effects for a finding
of infringement of article 82 of the Treaty
B) Michelin was not dominant
C) The Commission does not need to prove that
exclusionary effects had indeed taken place
D) None of these
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Test Questions 3/5
3. In this case, for the first time, which of the
following were disallowed by the Courts?
A) Economic effects of the policy
B) Use of pure quantity discounts
C) Tying practice
D) None of these
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Test Questions 4/5
4. Which elements of Michelin’s commercial policy
were considered abusive by Commission?
A) The system of rebates
B) ‘PRO agreement’
C) ‘Club des amis Michelin’
D) All of these
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Test Questions 5/5
5. Economic analysis of Michelin II case suggests
which of the following approach to decide if
infringement of article 82 EC has happened ?
A) Identify possibility of anti-competitive effects and
that’s sufficient to cause infringement
B) Analyze the possible pro-competitive (efficiency)
effects of the practice at hand, if yes, then it does not
infringe
C) Find whether the firm is dominant, identify whether
the practice has possible anti-competitive effects,
analyze the possible pro-competitive (efficiency)
effects of the practice, and balance the anti- and
pro-competitive effects to carry out an assessment
of the net effects on consumer (or total) welfare.
D) Any of these
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Thank You
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Quantity discounts
NOTE:
• Purchasing 10,000 FF tyreswill receive a yearly rebate of 8.5%. Seen from a one-year
window, this effectively amounts to reduce the unit price paid by the buyer
• The effect at the margin is larger in case of unexpected purchases. Eg. if 9000 units
command a discount of 7.5%, buying one additional unit would bring the discount on all
units to 8.5%, the effective marginal cost of buying this extra unit would be 1.5 FF, which
brings the actual discount on this extra unit to 98.5%! [100-(100x8.5%)-(9000x1%)= 1.5]
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Service Bonus
Minimum turnover with Michelin (45,000 FF)
The size of the bonus depends on the dealers’ compliance with commitments
Each commitment gives a number of points; the more the points, higher the bonus
The criteria used to assign points include activities like:
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•
•
•
•
•
•
staff training,
Having certain machinery and know-how
Level of quality of the facilities
Dealer’s behaviour with clients
Supplying customers with new Michelin products
Promoting and advertising them
Providing Michelin with detailed market information
As for retreading, points are achieved by
• Providing roadside assistance for trucks
• Showing knowledge about how to sort casings
• Having Michelin tyres systematically retreaded by Michelin
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