Printer Friendly

RPM myths that muddy the discussion.

The reversal of the longstanding per se rule against minimum resale price maintenance (RPM), in favor of a rule of reason standard, has generated considerable controversy. This article discusses some of the statements sometimes seen in the discussion of RPM's effects that do not have a solid economic foundation. The article also highlights the value of empirical evidence on the uses of RPM and other vertical restraints to help guide the courts in their efforts to develop truncated approaches to rule of reason analysis for assessing the practice.

I. INTRODUCTION

The recent reversal by the Supreme Court of the longstanding per se rule against minimum resale price maintenance agreements (RPM), (1) in favor of a rule of reason analysis, has generated considerable controversy. Much has been written and presented describing the Leegin (2) case and the economic and legal controversies underlying the change it represents. (3) Some remain quite concerned that this legal change will reduce consumer welfare. In this article I discuss in simple terms statements opposing the change sometimes seen in these discussions that do not have a solid economic foundation--economic myths that muddy understanding and slow progress toward a well-founded economic approach to RPM policy. (4)

In adopting this rhetorical device, I should first make clear that economists who have studied vertical practices do not hold these "mythical" positions, and there is widespread and growing recognition among antitrust practitioners and scholars, (5) federal agencies, (6) and the courts (7) that these statements do not have theoretical or empirical support. But many who were interested in retaining the per se prohibition of minimum RPM, who now support legislative reinstatements of the ban, (8) or who recommend a rigid "inherently suspect" approach for the post-Leegin courts, (9) base their recommendations on some or all of these presumptions. In highlighting the theoretical and empirical reasons why economists find the positions unconvincing, I hope at least to lay out the issues clearly for further exploration.

As will also be clear, there is limited evidence to convince skeptics on either side of the debate on particular issues. As a result, I also hope to highlight the value of better evidence on the importance of the many theories of RPM, both beneficial and anticompetitive. Because most forms of RPM have been illegal in the United States and Europe for many years, the empirical evidence on RPM's uses and effects is limited. (10) Moreover, much of the available empirical evidence comes from coordinated or strong forms of RPM, which should not be generalized to reflect RPM used by individual firms without coordinated adoption or enforcement. (11 Better empirical evidence would help us gauge the various theories of RPM and other vertical restraints.

The change in the legal rule governing RPM may provide an important opportunity to gather this evidence as firms begin to experiment more broadly with RPM, alone or in place of other vertical practices or pricing formulas. Detailed case studies, systematic statistical evidence, and in-depth legal investigations are all potentially important contributors to a clearer understanding of the uses of the practice. Better empirical evidence is also important for implementing the legal standard for RPM and particularly important to any effort to develop truncated approaches to rule of reason analysis to guide the courts and the antitrust agencies.

II. RPM MYTHS

A. Myth no. 1--consumer prices will go up under minimum RPM, so it is almost surely contrary to consumer interests

First, it is not necessarily true that retail prices will rise under minimum RPM adopted by individual firms. (12) Resale margins will be protected--minimum RPM is designed to affect resale margins--but consumer prices could fall, especially in the longer run. If RPM induces retailers to promote or improve the product, allowing the manufacturer to cut back on other activities that were substitutes for those dealer efforts, then wholesale prices could fall enough to offset the higher resale margin. Or RPM could substitute for nonlinear pricing (13) or nonprice vertical restraints, such as exclusive territories or limited distribution, that could have led to even higher prices and margins in the effort to align producer and retailer interests. If RPM is a more efficient way to get the desired distribution services, then consumer prices could fall or remain relatively steady with the use of RPM in place of these other approaches. (14)

The argument that prices will necessarily rise with RPM is reminiscent of the arguments made to justify advertising restrictions for professionals in the 1970s--it was assumed that costly advertising would inevitably lead to higher consumer prices. But studies of states with and without bans on professional advertising showed that advertising led to lower consumer prices, presumably because advertising reduced search costs, strengthened competition, or facilitated more efficient retail distribution methods. (15)

But even if retail prices go up with RPM, this does not distinguish RPM from many other vertical restraints or other business decisions that can have an effect on price, and in isolation, it does not imply reduced consumer welfare or even a high likelihood of such a reduction. Every time a manufacturer improves the quality of the product, adds features, includes or improves a warranty, contractually requires costly actions by distributors, limits or expands distribution, or makes other decisions that affect the product or its distribution, price could rise, especially in the short run. Normally, if there is sufficient competition at the producer and retailer levels, markets will be pushed toward the mix of price, quality, availability, service, and other characteristics that approximate consumer preferences. And where competition is more limited, a more thorough analysis is needed to assess welfare effects--price changes alone do not provide a reliable guide. (16)

B. Myth no. 2--free riding is an infrequent occurrence in today's markets making it an unimportant explanation for RPM

This is an empirical assertion that has little evidentiary support. (17) The statement is often premised on the idea that information is available from so many sources today that an informed sales force, a classic form of free-rideable dealer service, is not as important as it once might have been. This could be true. However, more information is not necessarily better information, and the same technological changes that underlie this presumption are creating free riding problems that did not exist in the past. Internet sellers and effective price search engines, for instance, present a real challenge to manufacturers attempting to maintain display space and active promotion in retail showrooms. Other things equal, lower search costs are a good thing, but these lower costs apply only to some features and not others. If consumers value seeing and touching merchandise before purchase, for instance, but then can buy online at a substantial discount, manufacturers will find it hard to maintain showroom displays and retailer sales effort. Some manufacturers might choose RPM to try to preserve that retail presence and effort; (18) others might try to buy desired services directly; others might vertically integrate into their own showrooms, (19) restrict their dealer network, or limit Internet sales; and others might do none of these. The competition among firms as they decide how best to market their particular goods will determine the mix of promotional strategies.

Similarly, if certain retailers have developed a reputation for selling high quality or fashion goods, they can effectively certify goods for manufacturers. But if consumers can acquire the certification but then purchase more cheaply elsewhere, manufacturers will not be able to get distribution through the certifying retailers. These retailers will favor goods with limited distribution or vertically integrate into production. (20) The Internet makes this free riding easier as well; a visit to the certifying retailers' Web sites may be sufficient to determine which goods are carried by high-reputation outlets.

Whether free-riding has grown or diminished, and whether or not it is a substantial reason producers might use RPM in particular markets, (21) are interesting research questions, but at this point there is little evidence to conclude that free riding is unimportant, or even that it is less important than it once was. And theoretically, the incentives to free ride are strong in many circumstances.

C. Myth no. 3--if free riding is not an issue in a particular market, RPM is not efficient

This argument is heard less frequently than in the past, as commentators become more aware of the many potential uses of RPM, (22) but it is worth highlighting that there are a number of other efficiency theories of RPM that do not involve horizontal free riding. Many of these theories involve activities the manufacturer wants from dealers that affect the quality of the good, its promotion, or its availability. If the retailer is unable to capture all of the profits of additional sales (because, for example, the manufacturer shares in the gains), the retailer will underprovide the desired services--here the externality is vertical rather than horizontal (as it is with classic free riding). Similarly, if dealers provide shoddy service or degrade the quality of the good in some way, consumers may blame the manufacturer as well as the dealer, creating a negative vertical externality for the manufacturer. In such cases, minimum RPM, with the prospect of termination if the producer is not satisfied with dealer effort, can create stronger retailer incentives to provide desired services.

These services can include a wide range of distribution activities, including sales effort, training, advertising, stocking decisions, shelf space or placement, care of the product (e.g., proper temperature control or stock rotation), or other activities that affect the quality of the good, its promotion, or its availability. Even the decision to carry the good at all can be influenced by minimum RPM; this "outlets hypothesis" has some empirical support. (23) The essence of these arguments is that a minimum resale margin ensures a level of retailer profitability on incremental sales, which together with monitoring by the manufacturer and the threat of termination can induce dealers to provide desired services.

D. Myth no. 4--widespread use of RPM means it is anticompetitive

Widespread use of RPM is a necessary condition for either the manufacturer or dealer collusion explanations for RPM and for most other theories under which RPM softens competition. Thus, if RPM is not in widespread use in the relevant market, collusive explanations and most other anticompetitive theories are unlikely to be tenable. But the converse is not true. Absent collusion, if manufacturers are all facing the same problem that could be efficiently resolved by RPM, we could also see RPM in widespread use. Standing alone, widespread use of RPM does not indicate adverse consumer welfare effects; other information would be needed to come to that conclusion. That said, widespread use of RPM is an important indicator of the potential for anticompetitive effects from collusion or coordination.

E. Myth no. 5--if retailers are complaining about low margins, adoption of RPM is likely to be anticompetitive

This argument has received more attention recently, partly because the Leegin decision (rightly) pointed to the source of the pressure for RPM (dealers in this case) as one type of evidence that might suggest a dealer cartel. (24) Certainly, if RPM is used to support retailer collusion, we would expect to see widespread and/or coordinated pressure from dealers, with manufacturers as reluctant participants. Similarly, if dominant retailers were imposing RPM on manufacturers to significantly soften competition, we would expect to find substantial dealer pressure and widespread manufacturer reluctance in adoption and enforcement.

However, if free riding or enhanced dealer service is the reason for manufacturers' adoption of RPM, dealers would often be the first to have information of free riding or quality or service degradation from low-margin dealers. And we would expect dealers to inform manufacturers of any price cutting, because the dealers would not want to continue providing costly services not provided by competitors that were successfully underpricing them. Standing alone, complaints from dealers, especially from individual dealers, would not be sufficient evidence to conclude that the RPM was anticompetitive. We would need to probe more deeply to assess the source of the practice and other indicators of its likely purpose and effect.

F. Myth no. 6--all the efficient services that RPM can induce can be achieved through other means, so prohibiting RPM has little cost

The economic literature is replete with models that demonstrate that RPM, other vertical restraints, and nonlinear pricing policies can often substitute for each other to some extent in different circumstances. (25) However, the various practices raise different costs and tradeoffs depending on market conditions and subtle characteristics of information, observability, and timing. Direct contracting is also an option to procure desired services, but legally specifying service requirements, disciplining cheating dealers, (26) and enforcing contracts through the courts have their own tradeoffs. RPM often provides a simple approach to shaping dealer behavior; the prospect that a manufacturer could terminate a dealer if dissatisfied, and take away a profitable line, is a powerful way to align incentives. Whether RPM is more or less costly or effective than other approaches for getting dealer services will depend on the conditions in particular markets, but at this point there is little theoretical reason or empirical evidence to think that nonprice vertical restraints, nonlinear pricing contracts, or direct service contracts are inherently preferable to RPM in terms of consumer or total welfare. (27) If firms begin to use RPM in some markets, now that the practice is not prohibited per se, careful case studies and other empirical evidence might give us a better foundation on which to assess the desirability of RPM relative to contracting or other nonprice restraints.

G. Myth no. 7--price is special; the antitrust treatment of RPM should be stricter than that of vertical nonprice restraints

A balanced reading of the current economics literature does not support this position. (28) As a matter of theory, some nonprice restraints, such as exclusive territories or restricted distribution, can be more constraining than RPM, because they limit both price and nonprice competition, and thus, have a broader effect on competitive interactions than RPM. More generally, price and nonprice vertical practices can often be used in place of each other or other nonlinear pricing practices, providing little foundation for the special treatment of RPM relative to other vertical practices. (29)

RPM can support collusion or coordination at the retail or manufacturer level as a matter of theory, especially when coordinated use or enforcement is allowed, and the available empirical evidence indicates cases in which this appears to have been the reason for RPM's use. (30) However, the available evidence is also clear that RPM has been used in many cases in which collusion is an unlikely explanation for the practice, as when some firms use the practice but direct competitors do not.

H. Myth no. 8--the empirical evidence after the end of legal RPM in particular industries shows that RPM is anticompetitive

In Europe, most countries prohibit RPM generally, but in some cases, exemptions had been granted in particular industries. In those cases, RPM was either mandated for all firms in the industry, sometimes with state enforcement, or the industry was allowed to collectively adopt or enforce RPM. Some of these RPM rules have been changed in recent years and careful case studies have begun to assess some market effects of mandated or joint RPM. (31)

This evidence has been a useful addition to our understanding of RPM when its use is widespread by industry participants, with joint or state enforcement. But it is important to distinguish this type of mandated/joint RPM from the voluntary use and enforcement of the practice by individual firms that must compete with other firms that are free not to adopt RPM. The adoption or enforcement of RPM jointly by an industry--whether at retail or at the manufacturing level---is precisely the situation that causes the most concern among economists about anticompetitive uses of RPM. The evidence from these European studies supports this concern, and the evidence is consistent with one of the primary findings in the Lafontaine and Slade review (32) of the empirical vertical literature. In their review, the evidence of adverse effects from vertical practices is correlated with restraints imposed by government intervention, and these cases are typically the ones where the entire industry is required to use the practice and enforcement is strong. (33)

This evidence, while valuable, tells us little about the effects of individually adopted RPM not subject to coordination. In assessing the empirical evidence, it is important to determine what type of RPM was at issue in the study, and in particular, whether the practice comes close to collective use or collective enforcement by firms in some relevant antitrust market.

III. CONCLUSION

RPM was per se illegal in the United States (34) for many years. RPM is still essentially illegal in Europe. (35) As a result antitrust authorities and the courts have little experience judging the reasons firms use the practice and its likely effects in particular circumstances. A per se rule--either per se legal or per se illegal--is a simple rule that is relatively easy to enforce. Moreover, such rules create little uncertainty for firms. In contrast, a full rule of reason analysis can be an expensive undertaking in some cases, and one that is potentially demanding for the parties and the courts, with corresponding uncertainty for firms. A truncated rule of reason process, in which presumptions are established based on a preliminary analysis of key features of the market, has obvious administrative appeal. (36) As the agencies and courts get experience analyzing RPM cases, they will be better positioned to develop guidance that does a reasonable job of separating anticompetitive uses from competitive uses of RPM at a lower total administrative cost than full rule of reason analysis would require. Even screens that would quickly rule out cases where anticompetitive effects are unlikely--reserving the full rule of reason for a smaller set of cases--would be an advance. Better empirical evidence on RPM's uses and effects, and especially, better evidence on where RPM has anticompetitive effects, would be an important contribution to that development.

Calling for better empirical evidence is, of course, easy; finding meaningful opportunities for informative studies is much harder. But with the change in the law, and assuming the risk of state enforcement on a per se basis eases, some firms may change their methods of distribution. Detailed case studies of firms' dealer arrangements before and after the change, including data on sales, prices, other vertical contract terms, the structure of manufacturer pricing, and other marketing expenditures, would provide important insights into the effects and substitutability of RPM and other practices. Detailed assessment of contract terms in an industry before and after the change (even without market pricing and quantity data) could also provide interesting insights. (37) If some states follow Maryland's lead in reinstating the per se ban on RPM, but other states clarify that they will not enforce a ban, studies of prices, quantities, and contract terms over time in both types of states would be particularly instructive.

Many would like simple, clear guidance on how RPM will be assessed in the post-Leegin era. Certainly, other things equal, firms considering their marketing strategies would have reason to prefer less legal uncertainty. But experience and evidence take time to develop, as the Leegin decision recognizes quite clearly in its instructions to the lower courts:
   As courts gain experience considering the effects of these
   restraints by applying the rule of reason over the course of
   decisions, they can establish the litigation structure to ensure
   the rule operates to eliminate anti-competitive restraints from
   the market and to provide more guidance to businesses. Courts can,
   for example, devise rules over time for offering proof, or even
   presumptions where justified, to make the rule of reason a fair and
   efficient way to prohibit anticompetitive restraints and to
   promote procompetitive ones. (38)


AUTHOR'S NOTE: The views expressed in this article are mine and do not necessarily represent the views of the Federal Trade Commission. I would like to thank Daniel O'Brien, Michael Vita, Paul Pautler, and two reviewers for helpful comments.

(1) I focus on minimum resale price maintenance, under which a manufacturer requires that retail prices be above some minimum level, though much of the discussion would also apply to fixed RPM, under which the manufacturer sets the retail price.

(2) Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

(3) See, e.g., Richard M. Brunell, Overruling Dr. Miles: The Supreme Trade Commission in Action, 52 ANTITRUST BULL. 475 (2007); Thomas B. Leary & Erica S. Mintzer, The Future of Resale Price Maintenance, Now that Dr. Miles is Dead, 4 N.Y.U.J.L. & Bus. 303 (2007-2008); Howard P. Marvel, Resale Price Maintenance and the Rule of Reason, ANTITRUST SOURCE 7 (June 2008), http://www.abanet.org/antitrust/at-source/08/06/Jun08-Marve16=26f.pdf; Luc Peeperkorn, Resale Price Maintenance and its Alleged Efficiencies, 4 EUR. COMPETITION J. 201 (June 2008), and presentations at the recent FTC workshop on RPM, http://www.ftc.gov/opp/workshops/rpm/.

(4) Since a number of papers provide systematic reviews of the economics literature, I will not repeat that here. See, e.g., Daniel P. O'Brien, The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems, in THE PROS AND CONS OF VERTICAL RESTRAINTS (Swedish Competition Authority 2008), available at http://www.konkurrensverket.se/upload/File/Trycksaker /Rapporter/Pros&Cons/rap_pros_and_cons_vertical_restraints.pdf); Kenneth G. Elzinga & David E. Mills, The Economics of Resale Price Maintenance, in ISSUES IN COMPETITION LAW AND POLICY (Wayne D. Collins ed., 2008); Pauline M. Ippolito, Resale Price Maintenance: Empirical Evidence from Litigation, 34 J.L. ECON. (1991); and Oana Secrieru, The Economic Theory of Vertical Restraints, 20 J. ECON. SURVEYS (2006).

(5) See, e.g., Letter from Joseph Angland, Chair, American Bar Association Section of Antitrust Law, to Hon. Henry C. Johnson, Chairman, Subcommittee on Courts and Competition Policy, Committee on the Judiciary, U.S. House of Representatives and Hon. Howard Coble, Ranking Member, Subcommittee on Courts and Competition Policy, Committee on the Judiciary, U.S. House of Representatives (Feb. 2007), available at http://www.abanet.org/poladv/letters/antitrust/ 2009may6_leegincaseh_l.pdf.

(6) For recent federal discussions of RPM issues, see, for example, Organisation for Economic Co-operation and Development, Roundtable on Resale Price Maintenance--Note by the United States 213 (Oct. 2008), available at http://www.oecd.org/dataoecd/39/63/43835526.pdf, or Brief for the United States as Amicus Curiae Supporting Petitioner, Leegin, 551 U.S. 877, available at http://www.ftc.gov/os/2007/01/070122Leegin06-480amicusPDC.pdf.

(7) The decision in Leegin is, of course, the prime example of a court shifting positions, but judicial recognition of potential efficiencies from vertical practices has been growing since the 1977 Sylvania decision, which made nonprice restraints subject to a rule of reason standard. Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

(8) Such legislation has been introduced at the federal level (Discount Consumer Protection Act, S. 148, 111th Cong. 2009) and in some states, and has actually been passed in the state of Maryland (Maryland Senate Bill 239, passed Apr. 14, 2009.)

(9) In this approach, RPM's potential to raise prices is seen as a sufficient basis to shift the burden to the firm to prove that the practice is efficient and not achievable by some less restrictive alternative, such as contracting. See, e.g., Amended States' Comments Urging Denial of Nine West's Petition, In re Nine West Group Inc., FTC No. C-3937 (Jan. 17, 2008), available at http://www.ftc.gov/os/comments/ninewestgrp/ 080117statesamendedcomments.pdf.

(10) See James Cooper, Luke M. Froeb, Dan O'Brien & Michael G. Vita, Vertical Antitrust Policy as a Problem of Inference, 23 INT'L J. INDUS. ORG. (2005) and Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in HANDBOOK OF ANTITRUST ECONOMICS (Paolo Buccirossi ed., 2008) for recent reviews of the published economic empirical evidence on RPM and other vertical restraints. See also THOMAS R. OVERSTREET JR., RESALE PRICE MAINTENANCE: ECONOMIC THEORIES AND EMPIRICAL EVIDENCE (Bureau of Economics Report to the FTC, 1983) for a review of the older literature.

(11) In the Fair Trade period, for instance, some dealer associations were strong proponents of laws that allowed resale price maintenance, and especially, laws that included nonsigner clauses. With nonsigner clauses, RPM could be enforced against all dealers in the state whether or not they had signed an agreement. Moreover, RPM could be enforced by any party harmed by the discounting, including competing dealers. The evidence available from the period suggests that prices were higher when nonsigner clauses were allowed. See OVERSTREET, supra note 10, at 146.

(12) For recent arguments holding that RPM raises prices and thus is contrary to consumer welfare, see, for example, Brief of Amicus Curiae Consumer Federation of America in Support of Respondent at 10, Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) and Brief for the State of New York et al. as Amici Curiae Supporting Respondent at 6, Leegin, 551 U.S. 877.

(13) Nonlinear pricing includes, for instance, slotting fees, reversed fixed payments, and quantity discounts.

(14) Evidence shows negligible price effects of RPM in some cases. See, e.g., Anthony P. Hourihan & Jesse W. Markham, The Effects of Fair Trade Repeal: The Case of Rhode Island, MARKETING SCI. INST. (1974). This study of nine housewares and hardware product lines following the repeal of the Rhode Island's Fair Trade Laws in 1970 found that prices did not fall for five of the nine firms that had previously used RPM under the Fair Trade Laws. The 1945 FFC price survey also found no price increases with RPM for some grocery products, increases for others in some types of outlets, but decreases in other types of outlets. But prices are higher under RPM in many cases in the Fair Trade evidence, especially when nonsigner clauses were allowed and an active retailer organization was promoting RPM, though the amounts vary considerably. See OWRSTREET, supra note 10, at 111 for a summary of the available price evidence from the period.

(15) See, e.g., Lee Benham & Alexandra Benham, Regulating Through the Professions: A Perspective on Information Control, 18 J.L. & ECON. 421 (1975), and Ronald S. Bond et al., Effects of Restrictions on Advertising and Commercial Practices in the Professions: The Case of Optometry, Staff Report to the Federal Trade Commission, Washington, DC (1980).

(16) Of course, if RPM is used to support dealer or manufacturer coordination or otherwise to soften competition, prices would be expected to rise, and this rise would be an important component of the evidence needed to establish such a case. In these cases, we would also expect quantity for the colluding parties to fall. Quantity may be a better proxy for welfare effects, at least after an adjustment period. While there are special cases in which RPM could be efficient but cause a price increase and a (brand) quantity decrease (as when costly services are bundled with RPM to serve a niche market), this is not the usual case.

(17) See, e.g., Marina Lao, Free Riding: An Overstated, and Unconvincing, Explanation for Resale Price Maintenance, in How THE CHICAGO SCHOOL OVERSHOT THE MARK: THE EFFECT OF CONSERVATIVE ECONOMIC ANALYSIS ON U. S. ANTITRUST 196 (Robert Pitofsky ed., 2008) and Mark D. Bauer, Whither Dr. Miles?, 20 LOY. CONSUMER L. REV. 1 (2007-2008) for skeptical discussions of the importance of free riding in markets.

(18) See Dennis W. Carlton & Judith A. Chevalier, Free Riding and Sales Strategies for the Internet, 49 J. INDUS. ECON. 441 (2001), for empirical evidence from the Internet on this point; and Judith A. Chevalier, Free Riding and Internet Retailing (comments at FTC Public Workshop, Possible Anticompetitive Efforts to Restrict Competition on the Internet, Oct. 2002) available at http://www.ftc.gov/opp/ecommerce/anticompetitive/panel/chevalier.pdf.

(19) For instance, Coach, Inc. is reported to now sell approximately eighty percent of its goods through its own outlets. John Karonis & Madison Riley, Why Retailing Will Never Be the Same Again, FORBES, May 13, 2009, available at http://www.forbes.com/2009/05/13/ retail-industry-change-leadershipmanaging-revolution.html.

(20) In the United States, store brands are a growing phenomenon. For instance, Macy's has a number of its own brands, which, together with brands that are exclusive to Macy's or in limited distribution, accounted for thirty-five percent of sales in 2007, and J.C. Penney generated over fifty percent of its 2007 sales from private labels. Whitney Beckett, Playing Exclusives Game: Results Can Be Win-Win But Brands Face Pitfalls, 195 WOMEN'S WEAR DAILY, Apr. 23, 2008, at 1. Other retailers, such as Gap, Banana Republic, Chico's, Crate and Barrel, and J. Crew, sell primarily their own brands, with control over design and pricing.

(21) See Sebastian Van Baal & Christian Dach, Free Riding and Customer Retention Across Retailers, 19 J. INTERACTIVE MARKETING 75 (2005) for evidence that twenty-five percent of German consumers free-rode on bricks-and-mortar stores in their last online purchase and that twenty percent of offline purchasers collected information on the Internet before purchase. See also Jesse W. J. Weltevreden, Substitution or Complementarity? How the Internet Changes City Centre Shopping, 14 J. RETAILING & CONSUMER SERVICES 192 (2007) for evidence that the extent to which consumers shop at city center stores prior to online purchase varies greatly by category and is substantial in some categories.

(22) But see Peeperkorn, supra note 3, and Brunell, supra note 3, for recent examples of skeptical views of this category of efficiency argument.

(23) One of the traditional arguments made for using minimum RPM was that RPM encouraged more outlets to carry the good and that this broader distribution increased sales. See Pauline M. Ippolito & Thomas R. Overstreet, Jr., Resale Price Maintenance: An Economic Assessment of the Federal Trade Commission's Case Against the Corning Glass Works, 39 J.L. & ECON. 285 (1996) for a detailed case study in which this hypothesis was raised, and Harish Krishnan & Ralph A. Winter, Vertical Control of Price and Inventory, 97 AM. ECON. REV. 1840 (2007), for a theoretical treatment and a summary of other supportive evidence in the literature from the Fair Trade period.

(24) See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 897 (2007).

(25) See O'Brien, supra note 4, at table 1, for a comprehensive review of the theoretical literature and the substitutability and complementarity of various practices.

(26) For instance, paid contracted services, such as advertising, are often externally verifiable services, which helps to limit cheating.

(27) But see Brunell, supra note 3.

(28) For a recent articulation of this position, see Brief for the State of New York et al. as Amici Curiae Supporting Respondent at 4, Leegin, 551 U.S. 877.

(29) See O'Brien, supra note 4, for a compilation of many of the papers in the literature.

(30) See, for example, OVERSTREET, supra note 10, for a summary of the empirical evidence from the Fair Trade period, especially when nonsigner clauses were allowed, and the discussion in section I.H below on recent European evidence of legally supported strong forms of RPM, where coordinated effects seem more likely.

(31) See, for example, Pierre Biscourp et al., The Effects of Retail Regulations on Prices: Evidence from the Loi Galland (INSEE Working Paper G2008/02) (examining the French law that effectively made the invoice price the minimum resale price); and Catherine Ball et al., An Evaluation of the Impact Upon Productivity of Ending Resale Price Maintenance on Books (Centre for Competition Policy, Univ. East Anglia, 2008); and Michael Utton, Books Are Not Different After All: Observations on the Formal Ending of the Net Book Agreement in the UK, 7 INT'L J. ECON. BUS. 115 (2000) (examining the Net Book Agreement in the UK, which allowed publishers to agree to enforce RPM jointly for books).

(32) Lafontaine & Slade, supra note 10.

(33) This evidence is also consistent with the areas of greatest concern in the U.S. Fair Trade evidence, where RPM was essentially per se legal, and in some states that allowed nonsigner clauses, enforceable by dealers themselves or by the state at their behest. See OVERSTREET, supra note 10.

(34) The Colgate exception allowed limited RPM that was unilaterally imposed by manufacturers, but this is often difficult to apply in practice. United States v. Colgate & Co., 250 U.S. 300 (1919).

(35) Under EU rules, RPM is anticompetitive by "object" and thus illegal, though at least in theory, this presumption is rebuttable if compelling evidence is adduced that the agreement could not have been expected to have an anticompetitive effect and the RPM is indispensable to achieving the claimed efficiency.

(36) See, e.g., Order Granting in Part Petition to Reopen and Modify Order Issued Apr. 11, 2000, In re Nine West Group Inc. (FTC Docket No. C-3937), available at http://www.ftc.gov/os/caselist/9810386/080506order.pdf.

(37) See, for example, Giorgio Zanarone, Vertical Restraints and the Law: Evidence from Automobile Franchising, 52 J.L. & ECON. 691 (2009), for a study of auto franchise contracts before and after the European Union prohibited the use of exclusive territories in 2002. The data show that firms amended a number of contract terms in addition to changing exclusive territory clauses, including adding minimum quantity requirements, pricing limits, quality-assurance measurements, and which level (producer or retailer) controlled advertising funds. These findings suggest that exclusive territories were at least in part adopted to shape dealer marketing activities and provision of customer service.

(38) Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 898 (2007).

BY PAULINE M. IPPOLITO, Deputy Director, Bureau of Economics, Federal Trade Commission.
COPYRIGHT 2010 Sage Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2010 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:resale price maintenance
Author:Ippolito, Pauline M.
Publication:Antitrust Bulletin
Date:Mar 22, 2010
Words:5617
Previous Article:A dynamic analysis of resale price maintenance: inefficient brand promotion, higher margins, distorted choices, and retarded retailer innovation.
Next Article:A decision-theoretic rule of reason for minimum resale price maintenance.
Topics:

Terms of use | Privacy policy | Copyright © 2019 Farlex, Inc. | Feedback | For webmasters