More on Third-Line Forcing, Economics, and per-se contraventions

On the subject of bundled/OEM software, you could make the argument that suppliers of OEM software are also engaging in 3LF on the basis that they're supplying a service at a particular price (the discounted OEM price) on condition that goods (the computer or other device) are acquired from another person (the hardware supplier).

I think that situation can be distinguished from the iPhone, however.  If you consider a PC with an OEM copy of Microsoft Windows, people buy the PC because they want the PC, and Windows is tacked on.  It's not as though people want to buy Windows, but the only way they can get Windows is if they buy a PC sold by Dell, because Microsoft will only distribute Windows with Dell computers, in return for ongoing secret commissions.

(If Microsoft did cut such a deal, competition law regulators would have them in court in a heartbeat, because they've obviously got substantial market power in the market for PC operating systems, but I digress)

You may well be right and OEM software bundling is technically 3LF.  I don't think that it harms competition, although that of course isn't relevant when considering 3LF.  In My Humble Opinion, iPhone-type deals do harm competition.  Whether it would be a substantial lessening of competition is open to argument.  Professor Gans seems to be of the belief that it doesn't lessen competition, and to the extent that Apple's conduct might contravene the TPA prohibition on 3LF in Australia, the fault lies with the TPA and not with Apple.

This isn't terribly surprising.  At the risk of grossly generalising, most economists are against most per-se prohibitions in competition law.  Prof Gans would probably also argue against the pro-se prohibition of Resale Price Maintenance in the TPA.

Many economists make arguments in support of practices such as 3LF and RPM that I consider to be unrealistic, in that they argue that vague, often non-tangiable benefits which are said to result from those practices will outweigh the harm that is caused.  That harm almost always involves higher prices.

As an example, let's discuss Resale Price Maintenance (RPM) -- it is what it sounds like: a supplier controls or maintains the price at which their goods or services (usually goods) can be resold.  ACCC v Navman Australia Pty Ltd [2007] FCA 2061 is a recent example of this type of conduct.  The facts in brief were:

• Navman produces GPS 'sat-nav' systems;
• Navman sold those products through a network of retailers/dealers;
• Some of those retailers were 'discounting' the sat-nav systems and selling them at prices that were lower than other retailers;
• Some of the retailers who did not engage in 'discounting' complained that their prices were being undercut by the 'discounters';
• Navman threatened to terminate (and in two cases, did terminate) their supply arrangements with the 'discounters' unless they increased their prices;
• Those threats included communications to all Navman dealers that:
• "First off and my biggest gripe within our industry has always been discounting. I just cannot understand the mentality where you have an extremely popular product that is priced under the market with good margin and we still have dealers that discount heavily. There is only one issue that will stop NAVMAN and that's discounting!! I will not allow our great products to be prostituted - take the warning now!"; and
• "It is not acceptable to have dealers discounting heavily with a good product that is already well priced. If you can't sell our products without discounting, then I suggest it's time to sell any of our competitors' products - simple as that!!"

Many economists argue that RPM is not anti-competitive, or is at least not usually/always anti-competitive.  They suggest that the elimination of price-based competition between retailers promotes competition based on service and support, and that enhanced levels of service and support benefit customers.  The guaranteed higher margins on those products also allow retailers to invest in staff training, support facilities, etc.  The elimination of intra-brand price competition is also said to promote inter-brand competition.

These are the benefits which may or may not occur in any given situation.  The retailers could simply choose to pocket their increased profits and provide nothing extra to the customers.  Chicago School economics says that customers will go to the retailers that provide the best service and support, so the other retailers will have to compete on that front to stay competitive.  Reality suggests that customers might not particularly care about sales and support, and because they lack perfect information about the levels of sales and support provided by each retailer, will be unable to properly make that decision in any case.

Here's the harm against which these possible benefits must be weighed: the prices will go up.

Navman, in this case, argued in their defence many of the pro-competitive benefits which are claimed to result from RPM:

Navman believed that maintaining higher retail margins would ensure that retailers remained loyal to the Navman brand rather than selling competitors' products. By its actions in policing its resale price maintenance policy, Navman sought to avoid complaints from some of its larger retailers about the prices of other retailers. Navman sought to protect higher margins for dealers, so that dealers could afford to offer the level of customer service that the complexity of its products demanded.

What are your thoughts on the issue?  Do you think that if RPM were allowed, that dealers would invest their additional guaranteed profits into providing better levels of customer service, or do you think that things would stay the same but the prices would go up?

[Navman and the ACCC agreed on penalties, which the court accepted despite serious misgivings that they were too low.  Navman was fined $1.25M and two executives who were involved were fined $80k and $30k each]