The New Legal Framework for Car Distribution

von: Philipp Pohlmann, Jens Finke, Jan-Dominik Gunkel

Table of Contents

Abbreviations

Executive Summary  1

1 Introduction 2

2 The Car Industry Before 2002 3

2.1 Car Distribution 3
2.2 IO Analysis of the European Car Industry 4
2.3 Trends in the Car Industry 9

3 EU Competition Policy with Regard to the Car Distribution 12

3.1 General Motivation of Competition Policy 12
3.2 Vertical Restraints and Recommendations from Theory 12
3.3 The Evolution of the Regulatory Framework for Car Distribution 13
3.4 Motivation of the New Regulation 15

4 The Regulation 1400/2002  17

4.1 Process of the Analyses  17
4.2 Definition of the distribution systems  17
4.3 Analyses of Articles  18

4.3.1 Article 2 – Scope 18
4.3.2 Article 3 – General Conditions  19
4.3.3 Article 4 – Hardcore Restrictions  21
4.3.4 Article 5 – Specific Conditions  27
4.3.5 Article 6 – Withdrawal of the Benefit of the Regulation 30

4.4 Status of the Implementation 31

5 Market Outcome and Critique  33

5.1 Market Outcome 33
5.2 Critique  37

5.2.1 Price Convergence 38
5.2.2 Cost Increase  39
5.2.3 Loss of Intangible Consumer Welfare  40
5.2.4 Consumer Preferences towards Car Distribution 41
5.2.5 Inconsistencies in the New Regulation  41
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
 

Abbreviations

ACEA = European Automobile Manufacturers Association
AG = Aktiengesellschaft (German Stock Corporation)
[...]
B2B = business to business
B2C = business to consumer
BATEX = barriers to entry and exit
[...]
CAGR = compounded average growth rate
DG = Directorate General
[...]
EC = European Commission
ECU = European Currency Unit
EU = European Union
EUR = Euro
HHI = Herfindahl-Hirschman-Index
[...]
[...]
[...]
[...]
MRP = manufacturer’s recommended price
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
 

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. 1 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.

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 2002.2 For 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.3 Here 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.

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. 4 Thus 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.

Figure 2-1: Distribution in the Automotive Industry5 [Abbildung in der Downloaddatei vorhanden]

In the first case, the manufacturer directly distributes its products to the customer, for example via wholly-owned dealerships. In the second case, the manufacturer uses marketing agents, which act on behalf of the manufacturer and thus carry no economic risk. In the prevalent case, the manufacturer uses independent authorised dealers to distribute his cars.

2.2 IO Analysis of the European Car Industry

For the understanding of the legal and economic implications of the new regulation 1400/2002, the European car industry should be analysed as of 2002 in a concise manner. Therefore, this section presents the status quo before the new regulation in the industry according to the Structure-Conduct-Performance (SCP) framework. The scope of the SCP analysis is limited to the levels of the value chain which are relevant for the understanding of the EC regulation. Therefore, the analysis focuses on suppliers, manufacturers and dealers as presented in Figure 2-2.

Figure 2-2: Value Chain in the Automotive Industry6 [Abbildung in der Downloaddatei vorhanden]

The main market segments “new vehicle sales” and “after-sales”, i.e. repair and sales of spare parts, are examined separately. Since the new regulation does not affect the sale of pre-owned cars directly, that market segment is not subject to the analysis. The European market for light motor vehicles – trucks etc. are excluded – is sizeable as depicted in Figure 2. With 12 million people employed, the car industry is of overall economic importance.7

[...]

1 Compare European Commission (2002a).

2 Compare European Commission (2002a).

3 Compare Bain (1959), quoted after Carlton, Perloff (1999), p. 238 et seqq..

4 Compare Creutzig (1993), p. 53.

5 Source: self-provided with reference to Becker (1998), p. 528.

6 Source: self-provided.

7 Compare ACEA (2004), p. 32.