Competition in car retail

Charles Farrugia writes: In spite of the many car brands being sold in Malta, a look behind the scenes reveals that in fact there are only a handful of importers of brand new cars. What does the EU say about the possibility of price-fixing and cartels? Is it likely that there will be a more open market in the EU spirit?

This questions seems to imply that car prices in Malta are high because car importers are fixing prices. I disagree. Although I am not privy to the dealings of car importers, I feel safe in claiming that, on the contrary, local car importers appear to be facing very stiff competition, not least from second-hand cars. And there is little evidence to suggest that they may be colluding on prices. Or, indeed, that they may have any reason to do so.

It is common knowledge that car registration taxes are notoriously high in Malta and this, more than price-fixing, has a major impact on the final selling price.

Having said that, it is clear that price fixing would be illegal under EU law. Moreover, EU law specifically regulates this sector, notably the agreements entered into between car manufacturers and car importers. These rules are intended to expose the car retail sector to more competition.

Car importers normally sign up to an agreement, known as a distribution agreement, to enable them to import certain brands on an exclusive basis. At face value this sounds anti-competitive. However, it has long been accepted that the pro-competitive effects of such agreements outweigh their negative ones. For this reason, they are normally exempted from the general competition rules as long as they do not contain clauses which seriously undermine competition. The exemption is known as a block exemption because it is granted en bloc to all agreements which fall within this category.

Traditionally, this block exemption has been considered as rather lop-sided in favour of industry, rather than consumers. This imbalance was, to some extent, redressed in 2002 when a new block exemption on car distribution agreements entered into force. The new exemption now seeks to force more competition into the system of car sales by allowing more flexibility.

For example, if a dealer has been assigned an exclusive sales territory, because he is operating under an exclusive distribution agreement, he must be allowed to sell actively to independent resellers within his exclusive territory (even to supermarkets, internet resellers and so on) and in turn, these resellers can sell anywhere in the EU.

Moreover, he must be allowed to sell passively (that is, if approached) throughout the EU to consumers and independent resellers. In other words, he can sell actively in his sales territory and passively beyond his territorial limits.

These active sales inside the territory and unsolicited sales outside the territory are intended to create the conditions for better price competition across the EU. Under the old regime, all active sales outside the territory, as well as sales to independent operators, could be prohibited by car manufacturers.

If, on the other hand, a dealer is not assigned a geographical territory (selective agreement) then he must be allowed to sell actively throughout the EU. He may place adverts and address mail shots and personalised e-mails to consumers located anywhere in the EU. And from this October, he must also be allowed to open other showrooms and delivery points at other locations within the EU.

These are important steps forward towards more competition in this area "in the EU spirit", as the reader puts it.

The new law also allows retailers a more genuine choice to sell more than one brand of cars. Under the old law, car manufacturers could impose on dealers a number of conditions such as separate premises, separate legal entities and separate management. This often made multi-branding economically unfeasible for most dealers. Instead, now, carmakers may only impose the requirement to display their cars in brand specific areas within the showroom.

This means that consumers may get a direct choice of different brands under the same roof.

Sounds complicated, I know. But car pricing has always been a tough nut to crack and that is why pre-tax prices have historically varied widely between one EU country and another - despite the fact that we are talking about one single market.

Yet, in its latest report on car prices, published in March this year, the European Commission claimed that new car prices are converging across the EU, including in new member states.

Cars are less expensive on average in the new member states, with Estonia being the cheapest country in which to buy a car.

So the answer to the question must be that the new EU rules are starting to leave their mark, at least on an EU level. But I hasten to add, as I said at the start, that in Malta the price of cars remains disproportionately influenced by the impact of the car registration tax - a tax that is not directly regulated by the EU but by national authorities.

Readers who would like to raise issues or ask a question are invited to send an e-mail to Dr Busuttil, making reference to this column, to contact@simonbusuttil.com