Territorial Supply Constraints: Impact on Consumer Welfare
The aim of our study is to provide an economic analysis of the question how territorial supply constraints (TSCs) imposed by powerful brand manufacturers on retailers affect market outcomes in retail markets, in particular from a consumer point of view. TSCs are illegitimate restrictions imposed by suppliers of “must-have” products to restrict retailers’ and wholesalers’ ability to source centrally or in the country of their choice. TSCs are not justified on grounds of different consumer taste/preferences and/or national standards and regulations and constitute a cross-border trade barrier. This implies, “(…) that a retailer, based in one Member State and dealing with a multinational supplier is not given the choice to decide from which national entity of the supplier he would preferably source the desired products and is instead referred to a specific national subsidiary.” (European Commission, 2018b, p. 91). TSCs force retailers to source products domestically and/or prevent them from “parallel trading” products from another Member State. Thus, TSCs – besides to being economically undesirable – are basically illegitimate practices, as they infringe the Single Market rules by strongly limiting retailers’ freedom to choose their suppliers.
We focus on the food value chain but most of our analysis also applies to many non-food markets. In line with the Commission’s findings in its 2013-Green Paper, we show that TSCs segment markets to enable brand manufacturers to price discriminate between different countries. TSCs constitute a cross-border trade barrier for retailers resulting in different prices for the same products within the European Union. Our analysis of more sophisticated theories (of monopolistic and oligopolistic price discrimination and new product innovations, for instance) largely confirms that TSCs imposed by powerful manufacturers harm both market efficiency and final consumers. Our study includes a critical assessment of the RBB Economics study entitled “Territorial supply constraints: the economic arguments” published in April 2013 (in short: RBB study). The RBB study concludes that cross-country price differentials due to TSCs do not negatively affect consumers but – rather to the opposite – “reflect the efficient functioning of markets” (RBB, 2013, p. 2). As we will show, such a conclusion is not valid under a reasonable and fair interpretation of the relevant economic theory and taking available empirical evidence about patterns of price differentials of branded goods in Europe into account.