(by Andreas Stephan) Vertical agreements in the car industry continue to be treated more restrictively by EU competition law, than agreements falling under the general verticals block exemption. My experience of buying a new car has been an education in why the car industry should continue to be treated differently.
Competiton policy for the car industry is a bit peculiar. On the one hand, EU competition law imposes an industry specific block exemption regulation (Reg. 1400/2002) which is more restrictive than the general block exemption regulation on vertical agreements (Reg. 2790/99). On the other, there is a remarkable reluctance to let car companies go bankrupt, despite endemic overcapacity in the industry. When the current economic crisis hit, the importance of keeping the car industry afloat came second only to saving the banks. In justifying state aid and scrappage schemes, governments have identified car manufacturers as somehow of central importance to the wider economy. Lord Mandelson, the UK’s Business Secretary, claimed that over one million jobs were at stake in the UK, that the industry was worth £10b to the UK economy alone, and that vital skills and technology would be lost if car companies folded.
My partner wanted to buy a new car. She had her heart set on a particular model from a manufacturer with a very strong brand image in the UK. Discounts for this model are notoriously difficult to get and there is little (if any) supply through internet brokers or car supermarkets. The thousands of combinations of customised extras (a relatively recent innovation) means that only a franchised dealer can get you the exact car you want. They lock you into franchised after sales servicing through pre-paid service packages and scare stories about how independent servicing can adversely affect resale values or invalidate the warranty. When it came to talking money, I had terrible trouble getting any dealer to put a quote down in writing. Several said, “we don’t want to get into a Dutch auction”; essentially they knew I would take a written quotation to a different dealer and ask them to beat it. Tacit collusion? Well it certainly shows a good understanding of the interdependence between dealers and the effect (at least) is surely to restrict intra-brand competition. Once I had prised a written quotation from one dealer, I was insulted by offers of £50-100 discounts off a list price of around £13-14k. When I asked one dealer why they would not give a larger discount, I was told “the manufacturer audits our sales and can refuse to supply us cars if we give discounts which are too generous”. My response, that this was actually illegal (essentially minimum resale price maintenance), was met with some coughs and splutters. About half an hour later I received a phone call from the manager, offering an apology, stressing that the information given to me by the salesperson was incorrect and offering me a £1,000 discount on the car, plus a free service package.
The motivation behind a more restrictive treatment of vertical agreements in the European automotive industry can be found in its slow development within the single market. There were long-standing concerns about methods of distribution which stifled intra-brand competition; for example, franchised dealers were once given exclusive supply and servicing know how. There have also long been concerns about price differentials and de facto export bans which have the effect of segmenting car markets along national lines. This is complicated by the fact that four member states require right hand drive cars (UK, Ireland, Cyprus, Malta). Regulation 1400/2002 applies the same market share thresholds as the general block exemption. However, the former is more restrictive in a number of respects; in particular car manufacturers can choose exclusive distribution or selective distribution, but not both. This was to strengthen intra-brand competition and facilitate competition from car supermarkets and internet car suppliers. The regulation also requires that independent garages be given access to technical information and equipment, to prevent franchised dealers having a stranglehold on after sales servicing.
Purchasing and maintaining a car is the second largest expenditure a consumer is ever likely to make, after buying a house. The fact is that franchised dealers are here to stay and there will always be ways of frustrating intra-brand competition. In my mind this justifies continued special treatment of the car industry; but only more restrictive treatment in terms of vertical agreements. State aid provided by governments, support car companies who are producing too many cars that nobody wants. Car supermarkets and internet brokers have emerged on the back of this. They sell hugely discounted cars which would otherwise be sitting unsold in airfields. This gives the illusion of competition, when taxpayers are ultimately subsidising these discounts through government support for the industry.
Well done, Andreas! Could’ve been titled “Chutzpah Rewarded.” Of course, I use that possibly unfamiliar import in its contemporary meaning (see http://en.wikipedia.org/wiki/Chutzpah).
Unfortunately of no use to us Americans, for whom salespeople are all too eager to offer discounts.
Very interesting post! but I do not know why competition law should bother about intrabrand competition if the car maker has no dominant position. If the price you get is not satisfactory, just choose another brand. Besides, I got written quotes from every dealer I asked for in Spain and got a 1.500 € discount at the second one. Every dealer knows that the manufacturer will not be happy if he becomes a hard discounter but this not amount to RPM.
The special regulation of car distribution has only been used by the european incumbents (german and french manufacturers and dealers) to create barriers to entry to the european market impeding japanese and korean manufacturers to drive down prices in Europe and improve warranties.