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Archive for July 13th, 2015

Le Tour de France and vertical integration: did you know?

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Tour de France

These are happy days for cycling fans. We are a week into the Tour de France, and the best is yet to come. The race will resume tomorrow with the mountain stages in the Pyrenees, including one featuring the mighty Col du Tourmalet on Wednesday. I follow the event with genuine interest every year. The nerd in me, alas, cannot avoid seeing the (valuable) economic lessons that can be drawn from it.

The Tour de France was not set up by public authorities. It was not an initiative of cycling fans, either. It is instead a creature of competition and vertical integration. More precisely, it was part of a strategy put in place to increase the sales of a newspaper, L’Auto. Its fiercest and more successful competitor, Le Vélo, already organised some cycling events at the time (early 20th century), but the editor of the struggling L’Auto decided to go ahead with the idea of setting up the greatest ever race of the kind. L’Auto disappeared long ago, but the Tour de France has now reached its 102nd edition and remains the most important and spectacular cycling event in the world.

This story, I think, provides a good illustration of the relationship between vertical integration (and vertical restraints) and efficiency, which is sometimes seen with suspicion. Efficiency sounds like very abstract concept – almost like an excuse – when relied upon to explain the rationale for some arrangements between firms. It is only by using concrete examples that one can understand why and how new or improved products that may never have appeared can be offered when different activities are coordinated. What these examples reveal, moreover, is that such efficiency gains are difficult to anticipate or to quantify in advance. They may never materialise, or they may exceed everybody’s expectations (and I am sure the editor of L’Auto did not anticipate that the Tour de France would be such an enormous success).

The story is also a valuable warning against the inclination on the part of competition and regulatory authorities to impose neutrality rules across the board. Alfonso and I have discussed many examples showing that access and non-discrimination obligations have become the flavour of the day. The idea underlying this trend is that strict neutrality principles will preserve competition and firms’ incentives to innovate. Supply obligations are being imposed on vertically-integrated firms even (and this is the most worrying part of the trend) absent convincing evidence of indispensability.

As the example of L’Auto and the Tour de France shows, competition is first and foremost about distinguishing oneself from rivals, not about subsidising them. L’Auto intended to sell more than its rivals and be the most interesting sports newspaper in France, not to make all sports newspapers equally interesting (even though that was an inevitable side-effect). And there was nothing wrong with that. On the contrary.

[The picture captures the defining moment of the 1991 Tour de France. Greg LeMond, who had won the previous two editions, is unable to keep pace with les hommes forts on the way up to the Col du Tourmalet. Dominance is not forever! Claudio Chiappucci would win the stage on that day and Miguel Indurain would wear the first of his many yellow jerseys.]

Written by Pablo Ibanez Colomo

13 July 2015 at 4:57 pm

Posted in Uncategorized