The resale price maintenance policy dilemma: reply.

I. Introduction

To some extent, Boudreaux and Ekelund [3] is a criticism of the views that we expressed in Blair and Fesmire [2]. In particular, we have been criticized for being too cautious and not advocating per se legality for resale price maintenance (RPM). Although our critics confess that they "have little quarrel with the formal analysis [we] used," they minimize the policy dilemma that we described. Interestingly, in spite of the fact that their analysis contains neither a theoretical refutation of our work nor any empirical evidence to the contrary, we have come to agree with their conclusion, at least to some extent. Our reasons for this conversion are set out below.

II. Background

Resale price maintenance (RPM) refers to a vertical restraint that is perplexing. A supplier that employs RPM forbids the resale of its product below some specified minimum level. Since lower resale prices would appear to be beneficial to the supplier, this practice has been difficult to understand. As Coase [4, 67] pointed out, when "an economist finds something - a business practice of one sort or other - that he does not understand, he looks for a monopoly explanation." And so it was with RPM. Initially, the practice was seen as a collusive device, which could be used by either colluding resellers or by colluding manufacturers. Under either of these circumstances, welfare losses result and the practice deserves to be per se illegal as the Supreme Court ruled in Dr. Miles.(1)

Noncollusive explanations for RPM began to appear in the economics literature starting with Telser's [6] seminal insight in 1960.(2) These explanations, however, provide empirically ambiguous welfare results. In Blair and Fesmire [2], we presented a simple model in which the use of RPM to induce the provision of product-specific services may have two decidedly different effects on demand. In the example that we constructed, price and quantity increased by exactly the same amount as a result of the different demand shifts. In spite of identical price-quantity results, welfare clearly increases with one demand shift but may decline with the other. In a litigation context, data availability is apt to be confined to the pre-RPM price and quantity and the post-RPM price and quantity. Unfortunately, these data are not sufficient to determine whether welfare has increased or decreased. Thus, we were led to the antitrust policy dilemma that we described earlier.

III. The Policy Options

There are three antitrust policy options for any suspect business practice. First, the courts may engage in a rule of reason analysis to determine if, on balance, the practice should be condemned in a particular instance. Second, the business practice could be deemed per se legal and, therefore, beyond antitrust scrutiny. Finally, the courts could decide that the practice should be per se illegal. We examine each of these options ever so briefly as it pertains to RPM.

Rule of Reason

If a business practice is consistent with the antitrust laws, it is deemed reasonable and is not punished. To determine reasonableness, a court examines the competitive effects of the business practice. As Areeda [1, 363] points out, "we must ask how a challenged practice might restrain or harm competition, how it might benefit the parties and society, and whether some alternative behavior would be preferable." As this inquiry pertains to RPM, it is clear that when RPM is motivated by a manufacturer cartel or a reseller cartel, it will fail the rule of reason test and violate the antitrust laws. The problem we described in our earlier paper, however, involves the non-cartel explanations. In those cases, we pointed out that the welfare effects may be ambiguous - not as a theoretical matter, but as an empirical matter. Of course, one can draw the welfare triangles and make welfare judgments in principle. But, in practice, the necessary data are not apt to be available and, therefore, unambiguous welfare judgments cannot be made. If economists cannot marshall the evidence necessary to answer an economic question, how is a court to proceed? Thus, we found the rule of reason approach to be inadequate.

Per Se Legality

To the extent that RPM can be used as a policing device in horizontal cartels, per se legality is clearly inappropriate. Moreover, we cannot rule out the possibility that welfare losses may result from RPM when it is used to deal with the free rider problem associated with the provision of product-specific services. Thus, we were dubious about per se legality.

Per Se Illegality

As we concluded earlier, per se illegality seems inappropriate because the provision of product-specific services can result in welfare gains. Moreover, it is not entirely obvious that these gains can be realized absent the use of RPM, i.e., there may not be a less restrictive alternative to RPM.

IV. The Case for Per Se Legality

Our critics make what we believe to be an unconvincing case for per se legality of RPM. They do not resolve the theoretical ambiguity of RPM's welfare effects in its noncollusive uses. Nor do they offer any empirical evidence to suggest that one welfare result is more or less likely than the other. Apparently, they have ignored the possibility that RPM may be a collusive device. To be sure, in this event, it is the collusion that offends and not the mechanism. But the easiest way to challenge the collusion may be to challenge the device as it provides evidence of agreement. Wholly apart from the arguments offered by Boudreaux and Ekelund, upon reflection we have come to endorse per se legality provided that there are no credible allegations of cartel activity. The reason for this conversion is libertarian: absent a convincing case that a business practice leads to welfare losses, there is no principled basis for a finding of illegality. Consequently, there is no reason to interfere with the business decisions of those who want to use resale price maintenance.

Roger D. Blair University of Florida Gainesville, Florida 

James M. Fesmire University of Tampa Tampa, Florida 

1. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

2. As Kleit [5] points out, the business community appears to have understood the noncollusive benefits of RPM much earlier.

References

1. Areeda, Phillip E. Antitrust Law, Vol. VII. Boston: Little, Brown and Co., 1986.

2. Blair, Roger D. and James M. Fesmire, "The Resale Price Maintenance Policy Dilemma." Southern Economic Journal, April 1994, 1043-7.

3. Boudreaux, Donald J. and Robert B. Ekelund, Jr., "The Resale Price Maintenance Policy Dilemma: Comment." Southern Economic Journal, April 1996.

4. Coase, R. H. The Firm, the Market, and the Law. Chicago: University of Chicago Press, 1988.

5. Kleit, Andrew N., "Efficiencies without Economists: The Early Years of Resale Price Maintenance." Southern Economic Journal, April 1993, 597-619.

6. Telser, Lester G., "Why Should Manufacturers Want Fair Trade?" Journal of Law & Economics, October 1960, 86-105.