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Applied Approaches to Societal Institutions and Economics pp 71–84Cite as

Fixed Payments in Production Contracts for Private Labels: An Economic Analysis of the Japanese Subcontract Act

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Part of the book series: New Frontiers in Regional Science: Asian Perspectives ((NFRSASIPER,volume 18))

Abstract

Retailers often procure money from their suppliers (subcontractors) in production contracts for their private labels. In Japan, the Subcontract Act prohibits such conduct when suppliers are small firms. In this article, we set up a model reflecting a situation in which the Subcontract Act might be applied: the supplier’s marginal production costs are increasing because they are small firms. Each supply chain is vertically separated. We find that this prohibition increases average costs of each supply chain and raises the equilibrium price of private labels. This is merely transferring wealth from consumers to subcontractors while producing allocative inefficiency.

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Notes

  1. 1.

    For instance, the market size of the Japanese private labels was JPY 3 trillion in 2012.

  2. 2.

    Although almost no subcontractor has its own national products, some suppliers that have their own national products also produce some retailers’ private labels.

  3. 3.

    Wakui and Cheng (2015) present a very useful and insightful survey of the ASBP of the AMA and the Subcontract Act.

  4. 4.

    JFTC (2010) said that “In order for one party to a transaction (Party A) to have superior bargaining position over the other party (Party B), it is construed that Party A does not need to have a market-dominant position nor an absolutely dominant bargaining position equivalent thereto, but only needs to have a relatively superior bargaining position as compared to the other transacting party.”

  5. 5.

    As Wakui and Cheng (2015) pointed out, the concepts “superior bargaining position” and “unjustly” are vague and not defined precisely in the AMA. JFTC (2010) considered that the retailer has superior bargaining position to the supplier when the retailer is fundamentally important for the supplier’s business. This JFTC consideration is based on their idea such that: “(i) if stopping the transaction with the retailer worsens the supplier’s business significantly, then the supplier needs to continue transactions with the retailer; (ii) therefore, the supplier finds it difficult to reject the retailer’s request, although it causes substantial disadvantage to the supplier.”

  6. 6.

    This list includes refusal to accept the commissioned products, late payment, retrospective discounts, return of goods, setting the price substantially lower than that of the equivalent product or the market price, forced purchase or usage, and compelling the subcontractor to provide it with economic benefits such as contribution fees and dispatch of employees. Wakui and Cheng (2015, page 14) describe these points.

  7. 7.

    Only Korea, Taiwan, France, and Germany have notions like the ASBP in their (domestic) competition policy. There is no such notion in the competition policies of the United States and the European Union.

  8. 8.

    On these arguments related to slotting fees, Federal Trade Commission (2003), Klein and Wright (2007), Secrieru (2006), and Rey and Vergé (2008) provide insightful surveys.

  9. 9.

    However, Klein and Wright (2007) pointed out that some small retailers without any bargaining power use slotting contracts and a large retailer, Wal-Mart, does not use it. This fact is inconsistent with Marx and Shaffer’s model. In addition by relaxing Marx and Shaffer’s assumptions, Rey and Whinston (2013) demonstrated that exclusion never occurs in Marx and Shaffer’s model.

  10. 10.

    Although the number of retailers n must be an integer, we assume for simplicity that it can be real number.

  11. 11.

    This assumption reflects the fact that retailers have strong bargaining power in relation to suppliers.

  12. 12.

    We need not use subscripts to distinguish each retailer and the supplier: they are identical.

  13. 13.

    F is predetermined or upfront payments. For the latter case, we should assume that all suppliers have sufficient wealth to pay it.

  14. 14.

    The second-order conditions TS nn < 0 and TS nnTS qq − (TS nq)2 < 0 are satisfied with our assumptions.

  15. 15.

    The amount of fixed payments does not affect the supplier’s decision.

  16. 16.

    However, we think that introducing imperfect competition into our model does not change our conclusion. Even if a retailer is a monopolist, it might still have incentive to minimize the average costs of relations with their subcontractor. When a market is a duopoly, both retailers require fixed payments in Nash equilibrium in a Cournot quantity setting game because such requirements are strategic substitutes.

  17. 17.

    This is only a conventional application. The AMA and the Subcontract Act have no article related to extraterritorial application.

  18. 18.

    Shaffer (1991) analyzed slotting allowances and RPM in a model where producers compete to obtain retailer shelf space for their national brands.

  19. 19.

    Lee and Png (1990), Edlin (1996), Farrell (2001), and Foros et al. (2009) all describe fixed payments.

  20. 20.

    ‘Recommendations to the Japanese Consumers’ Co-operative Union’ (JFTC Press Release, 25 September 2012).

  21. 21.

    For instance, The Nikkei (Nikkei Shimbun) 25 September 2012 (in Japanese).

  22. 22.

    “Recommendations to CGC JAPAN” (JFTC Press Release, 27 September 2016).

  23. 23.

    “Recommendations to Sunlive” (JFTC Press Release, 30 June 2014) and “Recommendations to Marushoku” (JFTC Press Release, 28 August 2014).

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Acknowledgements

The authors thank the participants of the annual meeting of the Japanese Association for Applied Economics (Autumn 2013), 33rd symposium in Economics at Daito Bunka University (Autumn 2013), and seminar at the Department of Economics and Finance of the University of Canterbury, New Zealand (Autumn 2016), for helpful comments and suggestions. The final version of this article was written when one of the authors, Goto, visited the University of Canterbury in 2016–2017 as a visiting fellow. The hospitality of the University of Canterbury is gratefully acknowledged. Nariu was supported by JSPS KAKENHI grants 26285098 and 15K03749 for this work.

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Authors and Affiliations

  1. Nanzan University, Nagoya, Japan

    Takeshi Goto

  2. Kyoto University, Kyoto, Japan

    Tatsuhiko Nariu

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  1. Takeshi Goto
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  2. Tatsuhiko Nariu
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Correspondence to Takeshi Goto .

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Editors and Affiliations

  1. Doshisha University, Kyoto, Japan

    Tohru Naito

  2. Keimyung University, Daegu, Korea (Republic of)

    Woohyung Lee

  3. Department of Economics, Hiroshima University, Higashi-Hiroshima City, Hiroshima, Japan

    Yasunori Ouchida

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Goto, T., Nariu, T. (2017). Fixed Payments in Production Contracts for Private Labels: An Economic Analysis of the Japanese Subcontract Act. In: Naito, T., Lee, W., Ouchida, Y. (eds) Applied Approaches to Societal Institutions and Economics. New Frontiers in Regional Science: Asian Perspectives, vol 18. Springer, Singapore. https://doi.org/10.1007/978-981-10-5663-5_5

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  • DOI: https://doi.org/10.1007/978-981-10-5663-5_5

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