Do Discounts and Gifts Portend a Free-For-All in German Product Markets?
Subject Monopoly and Monopolistic Competition
Topic Product Markets
Key Words Laws, Discounts, Rebates, Sales, Free gifts, Unfair competition, Cooperatives, Competition, Market share, Consumers, Prices
News Story

Since the 1930s, when the Nazis were in power, Germany has had laws that restrict discounts, rebates, and freebies. Discounts are limited to 3% of list price. There are no such things as half-priced drinks during Happy Hours. Clearance sales are permitted only twice a year. Rebates, such as through points redemptions on credit cards, cannot be advertised. Free gifts other than trinkets, are not permissible, even if they are only heavy-duty shopping bags. There is also a ban on unfair competition. The historical reason for the laws is that the Nazis were opposed to consumer-owned cooperatives. Since then courts have continued to enforce the laws to bolster business.

The German government is now about to repeal two of the laws - those governing free gifts and discounts. This has been forced by competition from foreign companies that sell products on the Internet free of any restrictions like those enshrined in German law. Without reform, German companies would lose market share. Consumers may find it harder to compare prices, but they are likely to gain.

(Updated May 1, 2001)

1. German laws restrict competition.
a) State the main assumptions underlying monopoly.
b) Which of these assumptions has been most bolstered by the legal system? Explain why.
2. a) Draw a diagram of a monopoly firm in Germany. Include the demand and marginal revenue curves and the marginal and average total cost curves. Show the equilibrium price and output.
b) Show the effect of foreign competition on the Internet where discounts and free gifts are possible. What happens to the demand and marginal revenue curves of the German firm? What happens to the firm's equilibrium price and output?
c) Suppose that the product market becomes more like monopolistic competition. Why would the firm like to be able to offer price discounts and free gifts?
d) Explain why consumers will be better off in spite of price comparisons being more difficult.
Source David Wessel, "German Shoppers Get Coupons," The Wall Street Journal, April 5, 2001.

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