Relevant Market Definition And Tacit Collusion Of Vertically Differentiated Products

Since China’s Anti-Monopoly Law took effect, with the development of enforcement practice, we have achieved demonstrable results. Such as, the anti-monopoly legislation was continuous improvement, the anti-monopoly law enforcement practice continued to drill down, the anti-monopoly research constantly gone deeper, anti-monopoly consciousness of society gradually strengthened. But there are still many problems, these problems manifest as the Anti-monopoly law itself has some intrinsic defects, the relevant supporting system still need further perfect, the anti-monopoly law enforcement system is not reasonable, law enforcement lack of enough transparency, the justice of law enforcement has been questioned, law enforcement lack of professionalism, and antitrust social consciousness remains to be improved. To solve the problem above, perfect the antitrust enforcement, we need to continuously expand and deepen the theoretical and applied research of antitrust economics.The paper based on the Maotai-Wuliangye antitrust case and milk powder companies antitrust case investigated by the National Development and Reform Commission (NDRC) as the research starting point. These two cases have several things in common, the companies investigated usually in the production of high quality products, the market existing increase their goods’price following the others in some period, the upstream enterprise has strong control ability on downstream firms. These involve three important questions that antitrust economics is interested in, which is the market definition and collusion of vertically differentiated products, and vertical restraints. Therefore, this thesis mainly focuse on solving the first two problems, and can be divided into two mainly parts.The first part of the thesis is market definition of vertically differentiated products. The current research of market definition mainly focused on the methods and specific industries, and paid less attention on the market definition of vertically differentiated products, this may lead to the enforcement agencies face some confusion in the law enforcement. The decision in the Maotai-Wuliangye antitrust case made by NDRC was in controversy. The important reason is that the relevant market definition is not clear for the case. After elaborating the research background and reviewing related literature in chapter 1 and chapter 2, this thesis uses price test and natural experiment in chapter 3 and chapter 4 to define the relevant market for the case, and sums up some common conclusion.Chapter 3 uses Chinese liquor brand-city monthly retail price data in January 2010-August 2013, applies price correlation test, granger causality test, cointegration test and stability test, to define the relevant product market and the relevant geographic market in Maotai-Wuliangye antitrust case. The results show that the relevant product market should be the high-end liquor market, and the relevant geographic market should be mainland China. This conclusion supports the decision in the Maotai-Wuliangye antitrust case made by the NDRC, and shows that we should define different markets by quality when the product quality difference reaches a certain degree.Chapter 4 uses the data in chapter 3, based on the idea of natural experiment, take the Prohibition of Alcohol in December 2012 as the shocks, uses the DID to analysis the impact of the Prohibition on brand liquor prices, and equilibrium relationship of brand liquor prices, to validate the relevant market for Maotai-Wuliangye antitrust case. The findings support the conclusion in chapter 3 that high-end liquor and other liquor quality class should defined into different relevant market, and show in further that high-end liquor, sub high-end liquor and other liquor quality class should defined into different relevant market. This fully verified that we should define different markets by quality when the product quality difference reaches a certain level.The second part of the thesis mainly studies whether price leadership facility collusions. The theory of industrial organization is generally thought that the product homogeneity is an important condition of establishing and maintaining the collusion. If the products are heterogeneous, it is harder to coordinate between firms, so that collusion will be difficult to achieve. But there are many collusion cases occurred in the differentiated product markets in the reality. It shows that under the condition of the products heterogeneity, there still exist some factors that could facility collusions, one of the important factors is the price leadership. The existing research is mainly focused on homogeneous products and horizontally differentiated products, and paid less attention on vertically differentiated products.The thesis theoretically and empirically analysis the impact of price leadership on collusions in vertically differentiated products in chapter 5 and chapter 6.Chapter 5 models an extended duopoly indefinitely repeated game model based on the model of product vertical differentiation, to theoretically analysis the impact of price leadership on tacit collusions when the product quality is the same or different. In the condition of the product quality is in different, the thesis firstly calculates the competitive equilibrium profit under price leadership, and secondly using the Nash bargaining solution solves the profit in collusion, and then compares the incentive of maintaining collusion in pricing simultaneously and in pricing by leadership, the results show that under the price leadership, firms have more incentive to maintain collusion. The thesis also shows that under the condition of the product quality is in same, price leadership definitely facility collusions. To achieve collusions, the price leader need to make concessions on profits, but there exist a variety of mechanisms to balance the profit between the leader and the follower, such as chose price leader in random, or in turns. The results also show that price leadership would facility collusions even in the situation of demand change in the same direction for a long time, or change in random if the product quality is the same. Combining with the two situations, it is easy to reach that price leadership could facility tacit collusions. In addition, the study also shows that the price leader will be the firms produced high quality products.Chapter 6 analyzes the price leadership in Chinese liquor market. The chapter firstly uses Chinese liquor market monthly data in 2006-2012, applies Logit model, rare events Logit model and the complementary log-log model to analysis whether there is existing price leadership in Chinese liquor market. Secondly uses ex-factory prices data of Chinese liquor in 2006-2012, applies autoregressive distributed lag model (ARDL) and granger causality test to identify the price leader in Chinese liquor. Lastly, uses quarterly data of listed Chinese liquor companies in 2005-2012, applies fixed effects model and fully feasible generalized least squares model (FGLS) to exam whether the price leadership significantly raises the profit level of Chinese liquor firms. The results show that the Chinese liquor market surely exist price leadership, Guizhou Maotai is the price leader, and the price leadership significantly improves the liquor firms’profits. The conclusion implies that the price increase not only to make the normal response to market conditions change, but also to obtain high profits through pricing by price leadership consciously.Compared with the existing literatures, the thesis has the following contribution.The first contribution is on the relevant market definition of vertically differentiated products. The thesis applies price test and natural experiment to define the relevant market of Chinese liquor market, and finds that high-end liquor market can constitute a relevant market. The result fully shows we should define different markets by quality when the product quality difference reaches a certain degree. The result also supports the decision in the Maotai-Wuliangye antitrust case, and provides useful reference for the market definition with vertically differentiated products in the future for enforcement agencies.The second contribution is on the application of price test and natural experiment. Through the empirical application of price test in Chinese liquor market, the thesis clears the problems that easy to appear when use the price tests to define relevant market, and put forward the corresponding resolves, this make some supplement for the research of relevant market definition. The thesis also tries to use DID when applying natural experiment to define market, this enrich the analysis methods of natural experiment on a certain extent.The third contribution is on theoretical research of price leadership. The thesis discusses the impact of price leadership on collusions based on vertically differentiated products, and reaches that price leadership could facility collusions of vertically differentiated products. At the same time, this paper rethinks the problem under the conditions that demand change in the same direction for a long time, or change in random if the product quality is the same, and finds that even in the cases of demand shift, price leadership also can facility collusions. These two findings through extending the existing theories, enrich the theory of price leadership, enhancement and affirm the mainstream views of industrial organization that price leadership promote collusions.The last contribution is on empirical studies of price leadership. The thesis empirically analysises whether there is existing price leadership in Chinese liquor market, who is the leader, and whether the price leadership significantly raise firms’ profit. The results show that the Chinese liquor market surely exist price leadership, the highest quality product firm is the price leader, and price leadership significantly improves the liquor firms’ profits. The finding not only enriches the empirical study of price leadership, and confirms the theory that high quality products firms will be the leader. The paper also provides reference for enforcement agencies when analysis the collusion problem in Chinese liquor market or similar markets.