The image theory: RPM and the allure of high prices.
One of the most overwritten topics in antitrust law is resale price maintenance (RPM), the practice whereby a manufacturer sets pricing rules for retailers. A century of debates over the economic motivations and consequences of RPM has yielded hundreds of academic works that develop around a handful of theories. Lawyers and economists seem to exhaust the topic at least until new and meaningful empirical findings become available.' This article, however, argues that the extensive literature and case law have largely ignored a critical explanation that manufacturers have been frequently using to defend the practice: high prices may function as a product feature that provides consumers with exclusivity.
The image theory that this article formulates is straightforward: Some manufacturers are interested in uniform retail prices for their products to maintain the image of their brands. Specifically, a subset of manufacturers in this group believes that high prices are likely to lure consumers and increase sales volume. This explanation is almost as old as the RPM practice/yet it has not been examined systematically until very recently. (3) If the theory appears familiar, it is because of its intuitive nature, not because of any thorough examination in the RPM literature.
From the consumer's end, the image theory does not suggest that the consumer would like to pay more, if she can pay less. The opposite is always true. The consumer always prefers the lowest possible price. However, the appeal of certain products is in the exclusive status that their high prices confer. Exclusivity of status goods is a defined product feature, just like reliability to news, age to red wine, and accuracy to clocks. Some consumers are willing to pay for this feature, some are unwilling to pay for it, and some may even ridicule such willingness to pay. But as the saying goes: de gustibus non est disputandum--there is no accounting for tastes.
The article continues as follows. Part II briefly surveys the emergence of the RPM practice with the rise of branding and legal protection for branding through trademark law. Part III is the core segment of this article. It presents the intuition and the theoretical foundations behind the image theory. Part III also distinguishes the image theory from related popular pricing theories (the price as a quality signal and the free riding explanation for RPM) and examines implications of the image theory for the legality of RPM under the rule of reason. Part IV examines pending legislation that seeks to ban RPM. Part V concludes.
II. ON THE EMERGENCE OF RPM
In 1913, three years before being appointed to the Supreme Court, Louis Brandeis published in Harper's Weekly a short essay, titled Cutthroat Prices, in which he criticized a set of Supreme Court decisions that banned RPM. (4) Brandeis focused his criticism on the importance of RPM for trademarks.
Brandeis observed that the protection of trademarks motivated manufacturers to invest in product quality. He believed that manufacturers of trademarked goods engaged in RPM principally to prevent retailers from using their products as loss leaders, which he labeled "mis-leaders." (5) The loss leader practice, he argued, "tends to make the public believe that either the manufacturer's or the dealer's profits are ordinarily exorbitant [, and therefore a loss leader price] cut necessarily impairs the reputation of the article and, by impairing reputation, lessens the demand." (6)
Brandeis's starting point for the link between trademark protection and product quality shaped his conclusion: "[T]he public generally is the loser.... [T]he manufacturer.., is tempted to deteriorate the article in order to preserve his own profit." (7) He further emphasized that RPM stimulates interbrand competition and therefore should not be regarded as price fixing. (8)
RPM indeed emerged as a common business practice together with growth branding, product differentiation, advertising, (9) and federal statutory protection for trademarks during the last three decades of the nineteenth century. (10)
Contrary to Brandeis's intuition that RPM was used to protect product quality, the industry that perfected the practice in the United States was the patent medicine industry, which specialized in deception and fraud. During the late nineteenth century, the patent medicine industry offered mostly products of questionable curing power with water, alcohol, and cocaine as common ingredients." The industry relied on branding and advertising to deliver false promises and employed aggressive RPM practices. Quality, in the traditional curing sense, did not really exist in this industry.
Anecdotal evidence shows that medicine distribution contracts already contained RPM clauses in the first half of the nineteenth century. (12) Industry-wide adoption of RPM, however, appeared only in 1876, when the Western Wholesale Druggists' Association was formed to deal with the problem of "excessive competition" by persuading manufacturers to endorse RPM policies. (13)
In the subsequent years, the patent medicine industry fought relentlessly against discounters and, prominently, against John D. Park & Sons, a "firm [that] arrogate[d] to itself the right to buy and sell proprietary articles as it please[d]." (14) John D. Park & Sons was a defendant in several suits related to its discounting practices and consistently argued that contractual RPM provisions were unreasonable restraints of trade and thus invalid. The first reported case in the fight against John D. Park & Sons was Fowle v. Park. (15) The Supreme Court decided this case in 1889, a year before Congress passed the Sherman Act. The case involved a set of agreements for the distribution of Wistar's Balsam of Wild Cherry, a quack medicine that the case headnotes describe as a medicine of "great and substantial value, for certain complaints and diseases. (16) The Court dismissed John D. Park & Sons' defense argument, because it was "unable to perceive how [RPM agreements[ could be regarded as so unreasonable [restraints of trade[ as to justify the court in declining to enforce them." (17)
John D. Park & Sons, however, continued operating as a discounter and kept arguing against the validity of RPM clauses both as a defendant and a plaintiff. (18) Its persistence paid off and had far reaching implications. In 1911, in Dr. Miles Medical Co. v. John D. Park & Sons Co., the Supreme Court delivered a victory to John D. Park & Sons, condemned the practice of RPM, and held it per se illegal. (19) Over the years, this prohibition evolved into a per se rule against agreements that set minimum resale prices or fixed retail prices. (20)
The patent medicine industry perfected the RPM practice but was hardly the only industry to engage in RPM. Several reported court decisions from the last decade of the nineteenth century document RPM arrangements in alcohol, watch, fabric, and other industries. (21) By 1900, Thomas Edison adopted RPM policies for his phonographs and his competitors followed him. (22) In 1900, the practice also emerged across the publishing industry. (23) In many of these industries, quality was an important product feature.
In his Harper's Weekly article, Brandeis's leading example of the negative impact of "cutthroat prices" was a watch that was sold at such a deep discount that the public did not believe that it was worth its full price; subsequently the manufacturer reduced its quality. (24) Brandeis did not discuss the impact of discounters of quack medicines, although Dr. Miles was all about such products. For example, Dr. Miles advertised that its flagship product, Nervine, had the power to cure "nervousness, sleeplessness, nervous irritability, nervous dyspepsia, nervous headache, and neuralgia." Brandeis, therefore, did not explain why manufactures of products that lacked quality and sold deception fought to protect the RPM practice. The reason was unrelated to product quality.
RPM emerged with the rise of branding as a business strategy protected by trademark law. The prevalence of the strategy in the quack medicine industry for many decades illustrates that the practice was intended to maintain brand image. In some markets, like the phonograph and watch industries, the practice might possibly have signaled quality through pricing. Nevertheless, even if the practice served as a marketing mechanism of quality, it might have also served other functions.
III. THE IMAGE THEORY
The image theory that this article develops states that some brands offer consumers exclusivity and status through high prices that most consumers cannot afford or are unwilling to pay. For these brands, the price is a defined product feature that offers the exclusivity and status that certain consumers desire. RPM stabilizes prices at a uniform level and offers a way to maintain exclusivity and status in the long run.
This section introduces the image theory in six steps. First, part III.A examines the intuitive premise that paying less is always better. The part illustrates that, when consumers care about exclusivity and status, they may be willing to pay high prices. Second, part III.B analyzes consumers' willingness to pay a price for a product above the direct utility that could be derived from its consumption. Third, part III.C explains why RPM for branded goods may be the strategy of choice for certain manufacturers. Fourth, part III.D distinguishes the image theory from two related theories: (1) the price as a quality signal, and (2) the free riding explanation for RPM. Fifth, part III.E contrasts the image theory with conspiracy theories and other anticompetitive arguments that condemn RPM. Sixth, part III.F emphasizes the nonexclusive nature of the image theory: it applies to some, but not all, RPM cases, and where it does apply, there may be other reasons for which a business would adopt RPM.
A. High prices as a product feature?
The underlying premise of antitrust law is that, for any given product, consumer welfare is inverse to the product's cost to the consumer, which includes its nominal price, search costs, and other costs. (25) Its intuitive logic provides that, in any transaction, the seller and the buyer split the difference between the cost of the traded good to the seller and the value of that good to the buyer, so that the buyer's welfare increases when she pays less. (26) Put simply, the premise states that paying less is better for consumers as long as quality is not adversely affected and other costs do not go up. (27)
While the premise that "paying less is always better" seems rather straightforward, contradicting market phenomena are widespread and their causes are equally straightforward: Many people are willing to pay a premium for a brand, irrespective of the tangible benefits that they can derive from the product. They may be willing to pay such premium prices to keep up with the Joneses, to signal their wealth in ways others cannot, and for other reasons. (28) Such individuals perceive the status and happiness that are associated with the possession of branded goods as a benefit, for which they pay the premium above the value of the product's tangible utility.
For customers of fashion houses, such as Burberry, Cartier, Hermes, Louis Vuitton, Manolo Blahnik, Miu Miu, and Versace, high prices are part of the product's allure. (29) They confer exclusivity and status: only a tiny fraction of society can afford to join this club of consumers or is willing to pay the membership price tag. (30) Tiffany, the jewelry maker, offers another example of a fashion manufacturer that maintains exclusivity through prices. In the 1990s, Tiffany experimented with an inexpensive silver jewelry line. Despite the financial success of the line, Tiffany's management decided to aggressively raise its prices fearing that middle-class shoppers would alienate Tiffany's lucrative clientele of wealthy customers. (31) The increased affordability of Tiffany's products threatened the status of the brand as a wealth symbol.
Examples of the use of high prices as a marketing tool are not exclusive to the fashion world. Some colleges discovered that they were losing applicants when the tuition was low and attracting more qualified applicants when tuition was high. (32) The digital cameras of Leica and Panasonic offer another example. Since 2002, Leica and Panasonic have released several identical models of digital cameras that differ only in the logos and price tags they carry. The cameras that carry the fancy Leica logo are approximately forty to seventy percent more expensive than their Panasonic identical twins. In addition, the prices of Leica cameras are uniform, while the prices of their Panasonic twins vary substantially across retailers. Noka Chocolate is one of the world's most luxurious chocolate brands, whose stated goal is to return "chocolate to its pure, luxurious state by crafting the finest single-estate darkest chocolate truffles and chocolates." (33) To perfect its luxurious status, Noka matches signature chocolate bites with astronomic prices that are higher than those of comparable products. (34)
The world of collectibles offers yet another illustration of products that certain consumers want less of when prices decline. Collectible manufacturers must market their products in a manner that prevents price depreciation. Low prices that make collectibles appear cheap may undermine their value. To illustrate, consider the case of Edna Hibel Corp., (35) a manufacturer of artwork collectibles. Sheltering behind the Colgate doctrine, (36) Edna Hibel terminated distribution agreements with retailers that sold its products below suggested retail prices.
Through this strategy, Edna Hibel successfully maintained minimum retail prices. Dismissing the suit of a terminated retailer, the court explained the logic of Edna Hibel's interest in high prices:
Hibel had a strong interest in maintaining its suggested retail pricing structure. Its products were collectors' items, and those who purchased them did so in part because over time they appreciated in value. Hibel discouraged all of its dealers from price cutting so as not to downgrade the market for its products. (37)
To summarize, the premise "paying less is always better" is correct in the sense that all individuals prefer to pay for any particular good the lowest possible price available. However, some consumers are willing to pay premium prices for certain branded goods, as long as these premia buy them exclusivity and status. For their own reasons these consumers want to belong to exclusive clubs that most people cannot afford or for which they are unwilling to pay. These consumers will happily purchase branded goods for discounted prices and may even invest in searching for discounts and bargains. However, their interest in a brand will decline (or at least transform) once its low prices are widely available, because the brand loses its exclusivity. Put simply, unless limited discounts are available to a selected group of consumers, the premise that "paying less is always better" may not hold for consumers who seek exclusivity and status. For some consumers, high prices are a product feature that confers exclusivity and status.
B. The willingness to pay above intrinsic value
In his 1899 seminal treatise, The Theory of the Leisure Class, Thorstein Veblen addressed the willingness to invest in conspicuous goods and services to signal social status. (38) Veblen observed that, because of the perceived indirect utility that is associated with wealth signaling, individuals often invest in goods and services beyond the point that generates additional direct utility from consumption. (39)
Fifty years had passed until economists incorporated Veblen's insights into the economics of consumer demand. (40) In his classic 1950 article, Harvey Leibenstein incorporated Veblen's theory into the theory of consumer demand by focusing on "[t]he desire ... to be 'in style,' ... to attain exclusiveness, and the phenomena of 'conspicuous consumption.'" (41)
Leibenstein's analysis relaxed the standard economic assumption that the consumer's choices are independent of others' consumption choices. (42) He specified two consumption preferences that relate to others' choices and may result in a willingness to pay for a product a price greater than the direct utility of its consumption: (1) the desire to keep up with the Joneses and obey social taboos, which Leibenstein labeled "bandwagon effects," (43) and (2) the search for exclusiveness, which he labeled "snob effects." (44) In addition, Leibenstein considered the preference for conspicuous consumption, in which "the utility derived from a unit of a commodity ... depends ... on [its] inherent qualities [and] on the price paid for it." (45) Leibenstein labeled this preference "Veblen effects" as a tribute to Veblen's work. (46)
A consumer with conspicuous consumption preferences considers the real price of a product and its conspicuous price. The real price is money she pays for the product and the conspicuous price is the price other people believe she paid for it. Such a consumer is interested in paying less for the product, but wishes others to think that she can afford to buy costly goods. Some conspicuous consumers would be willing to purchase a product even when its real price is equal to its conspicuous price, while others would be willing to purchase the product only if they can get a bargain or some discount. However, all conspicuous consumers are willing to pay for certain products a price that is higher than their intrinsic value (i.e., the direct utility that is derived from their consumption).
The works of Veblen and Leibenstein revolutionized the treatment of consumer demand, inspiring scholars, businesspersons, and advertisers to think about the implications of the potential difference between the willingness to pay for a product and the product's intrinsic value. (47)
Many scholars have recognized potential legal and policy implications of the human tendency to invest in status goods, as expressed by the divergence between the willingness to pay and the product's intrinsic value. Some scholars pointed out that trademark law has an undesirable effect because it allows manufacturers to take advantage of the pursuit of status. (48) Some suggested regulatory schemes to limit investments in status signals. (49) Yet others pointed out that the taxation of luxury goods does not generate deadweight loss and offers revenues for wealth redistribution. (50) Nevertheless, although manufacturers have always argued that discounts harm brand image, RPM literature has largely ignored the allure of high prices as an explanation for RPM.
C. Why RPM for branded goods?
Assuming that high prices may promote sales of certain goods, RPM is surely not the only viable business strategy to maintain high prices. A manufacturer can price his product sufficiently high to make low prices unprofitable for retailers. This strategy, however, is not as good as RPM because it will still leave price variation across retailers. Price variation may hurt sales by triggering consumers' questioning of price adequacy and bargain searching. In contrast, uniform prices often maintain consumption habits and discourage aggressive price shopping that pushes prices down. (51)
This insight originated in Frank Knight's famous 1921 observation that "[o]ne of our most significant 'wants' is freedom from the bother of calculating things or making close estimates." (52) Several economists have mentioned in passing this insight with a reference to RPM. They argue that fixed, stable prices often sustain consumption by habit. (53) Price variation across retailers, the argument goes, "at least sometimes stimulate[s] questioning of the importance of the impulse or the quality of the product, or possibly even comparison with other products." (54) Such concern about consumers' questions about prices was one of the reasons for which, for several decades, movie exhibitors maintained a peculiar pricing regime of uniform pricing across films and show times. (55)
Louis Brandeis argued that RPM was a mechanism to prevent retailers from using branded goods as loss leaders. (56) He was not the first or the last one to make this argument. (57) The loss leader pricing strategy may indeed create problems for some brands, but for others it just worsens the preexisting problem of price variation, which hurts brand images that build on exclusivity and status for consumers.
To summarize, high wholesale prices are a poor substitute for RPM because they cannot establish the uniform retail prices that are needed to stabilize a product image of exclusivity. Because all individuals, including conspicuous consumers and other types of status consumers, search for discounts and bargains, any nonuniform pricing strategy is likely to result in effective downward pressures on retail prices. Such pressures are likely to undermine markets for status goods that do not exist without high prices.
D. Related theories distinguished
The image theory is related but not identical to two popular pricing theories: (1) price as a quality signal, and (2) the free riding explanation for RPM. This part emphasizes the distinctions among the theories.
1. THE PRICE AS A QUALITY SIGNAL Many individuals confuse high prices with quality or at least perceive price as a quality signal. Empirical studies show that, at least in the short term, consumers may be willing to pay a price above the intrinsic value of a product because the high price in and of itself convinces them of its quality. (58) Prices sometimes even influence perceptions of quality: scientific evidence shows that increases in wine prices tend to affect positively the perceived pleasantness of flavor of wines. (59) Some studies indicate that, under certain circumstances, consumers who pay discounted prices may derive less actual benefit from consuming the product than consumers who purchase the same product at full price. (60) Along these lines, scientists found that placebo effects could be positively related to the prices of the placebo medications. (61) Publishers and drug manufacturers in the late nineteenth century who used RPM for books and quack medicines may have used this strategy to mislead consumers into believing that their products had qualities they did not have.
Consumers of status and exclusivity, however, do not pay the premium for a perceived quality, although they may demand quality. They pay the high prices for the exclusivity, the inability of others to purchase the same products and services. Such consumers may demand quality for the price they pay, because they realize that they could obtain quality for lower prices. The "quality" that consumers of status and exclusivity purchase is not necessarily attached to a particular product, but rather to their perceived status and general happiness by having something that others do not have.
2. THE FREE RIDING EXPLANATION FOR RPM Popularized by Lester Telser, (62) the free riding explanation for RPM provides that a manufacturer will engage in RPM only when nonprice competition among retailers serves his interests better than price competition. (63) The starting point of the free riding explanation is that ancillary services, such as in-store services, delivery, store credit, repair, advertising, and other promotional activities enhance the demand for certain goods. (64) Such ancillary services, however, are costly and retailers have no guarantee that they would result in sales. A retailer who advertises a product, displays it in his showroom, and employs knowledgeable staff to educate shoppers about the product, cannot prevent shoppers who use these services from purchasing the product for a lower price from a retailer who does not provide similar services. This inability to tie ancillary services to the point of sale is a form of positive externality that motivates at least some retailers to cut costs by free riding on other retailers' ancillary services and use the cost savings to lower prices. In other words, the concern is that "[a]bsent vertical price restraints, the retail services that enhance interbrand competition might be underprovided," (65) because retailers that furnish desirable ancillary services would lose business to discounters.
The prevalence of RPM in the book industry in the early twentieth century supports the free riding explanation for RPM: Publishers wanted to motivate booksellers to promote their books by placing them in storefronts and on desirable shelves and by encouraging shoppers to consider them. (66) Ford Motor Company engaged in RPM arguably to promote prompt and loyal service among dealers when cars were still a technological wonder. (67) Similarly, early phonograph companies engaged in RPM to encourage retailers to explain about another wonder of the era--talking machines. (68)
The free riding explanation for RPM and the image theory may intersect when a manufacturer believes that the image of his brand can be served if its products are sold with particular services. For example, Leegin chose to market its top-of-the-line brand, Brighton, with fixed retail prices (RPM) and standardized, boutique-like services. (69) It believed that both high prices and point-of-sale services could promote the image and positioning of its brand. The free riding explanation for RPM and the image theory, however, do not necessarily intersect or overlap. The free riding explanation may apply to nonstatus products, such as complex machinery and humdrum new products. Correspondingly, the image theory may apply to products that are often sold online for which point-of-sale services have very limited relevance. These are separate explanations for RPM.
E. Conspiracy, high prices, and other evils
The image theory provides a business justification for high prices. Because we tend to think that low prices for goods are desirable, the image theory supposedly suggests that RPM should be illegal. If RPM is an instrument designed to maintain high prices for the sole goal of having a product feature for exclusivity, then traditional arguments may call to ban the practice.
This part addresses such traditional arguments in two separate dimensions. Part III.E.1 examines the image theory in light of the traditional conspiracy theories that may offer legitimate grounds for prohibiting RPM. Part III.E.2 then asks whether at the abstract level the image theory raises antitrust concerns.
1. CONSPIRACY THEORIES Conspiracy theories view RPM as a means of facilitating a retailers' or manufacturers' cartel. The original conspiracy theory provides that RPM is a product of retailers' organized pressure on manufacturers to enforce a retailer cartel, thereby functioning as horizontal price fixing. (70) Under such circumstances, RPM serves the interests of retailers, not those of the manufacturer or consumers. In Dr. Miles, the Supreme Court endorsed this conspiracy theory. (71) Dr. Miles involved "over four hundred jobbers and wholesalers and twenty-five thousand retail dealers" (72) nationwide, figures that rarely support collusion hypotheses. Nevertheless, the record before the Court, additional judicial decisions, (73) and industry publications (74) suggest that the wholesale druggists indeed colluded to use manufacturers, such as Dr. Miles, as cartel enforcers through RPM. (75)
A second line of conspiracy theories presents RPM as a device to facilitate cartels among manufacturers. Under this theory, RPM eliminates manufacturers' incentives to cut prices to retailers, because such price cutting results in greater profits for retailers and lower profits for the price-cutting manufacturer. (76) For example, the market for enameled ironware in the early twentieth century supports this theory: the Association of Sanitary Enameled Ware Manufacturers, which consisted of approximately eighty-five percent of American manufacturers of enameled ironware, set retail prices for generic products. (77)
A third line of conspiracy theories warns that powerful retailers may unilaterally squeeze RPM from manufacturers to forestall innovation in distribution channels or simply to protect profits. For example, a brick-and-mortar retailer may demand RPM to prevent efficient online retailers from engaging in price competition. (78) In their treatise, Phillip Areeda and Herbert Hovenkamp argue that "manufacturers have often restrained intrabrand competition ... through resale price maintenance ... to appease dealer interests in excess profits or the quiet life." (79) They dismiss the argument that dealer power is rare in reality and assert that the exercise of dealer power to coerce manufacturers to endorse RPM policies explains many observed RPM practices. (80)
The fourth line of conspiracy theories suggests that manufacturers use RPM as a means to exclude competitors from the market. Under this theory, RPM offers retailers high markup as a "payment" for their willingness not to deal with competing manufacturers. (81)
Conspiracy theorists point out that, in addition to the standard social costs associated with price fixing, RPM could stimulate wasteful nonprice competition in which redundant ancillary services and benefits substitute for low prices.
The outcomes of the image theory and conspiracy theories share at least one feature: high prices. This common feature does not mean, however, that a manufacturer's choice to use prices for marketing purposes is an illegitimate conspiracy. Unilateral decisions to establish RPM for image purposes do not appear consistent with the traditional conspiracy theories that led to the prohibitions against RPM.
2. IMAGE, HIGH PRICES, AND ANTITRUST CONCERNS The fundamental question, therefore, is whether the use of RPM to maintain high prices in order to maintain brand image should be regarded as a legitimate business strategy under antitrust law. Four major reasons explain why RPM as a marketing strategy that focuses on high prices should not be regarded as anticompetitive under antitrust law.
First and foremost, "status" is a product that offers some utility to certain consumers and its legality is still unquestionable. Thus, arguments against the validity of the image theory as a justification for RPM undermine some mechanisms of perfectly legal markets.
Second, status goods will exist even without RPM: It is always possible to add features to a product or to alter features to justify high prices that establish the exclusivity characteristic of status goods. RPM may offer a relatively inexpensive production technique for status goods because it requires a smaller investment in physical product features. As such, RPM may be superior to alternative methods of status-good production. Bans on RPM may divert the market to less efficient methods of status-good production that are less socially desirable.
Third, the pursuit of status can transform itself from the consumption of status goods to the consumption of large quantities of "ordinary goods." For example, during the antebellum era, before the rise of brands, in some social circles, people signaled wealth through the number of slaves they owned. (82) Accumulation of ordinary goods is likely to be socially more costly than the possession of status goods because the former also involves higher stocking costs, a waste of a larger volume of unutilized resources, and a potential shortage of ordinary goods. From this perspective, given the human tendency to invest in status, the availability of status goods is likely to be less wasteful than the alternative.
Fourth and last, antitrust laws are not intended to intervene in consumers' preferences and choices. Antitrust laws honor and protect many unwise human desires, such as the demand for tobacco products, high-cholesterol foods, alcohol, and other unhealthful products. (83) The willingness to pay for status goods represents another type of ordinary consumer preference that may or may not be wise. Thus, even under the hypothetical assumption that status goods are socially undesirable, their supply should not be an antitrust concern.
To summarize, RPM as a production technique of status goods is a socially superior alternative to other production methods for status goods. Additionally, there is no apparent reason to regulate production of status goods through antitrust laws by banning RPM. If RPM serves the product image, banning its use may undermine markets for status goods. This may be a socially desirable outcome, but antitrust laws are not intended to accomplish this goal.
F. The nonexclusive nature of the image theory
Like other explanations for RPM, the image theory is nonexclusive and may coexist with other explanations. Burlington v. Esprit (84) illustrates such circumstances.
Esprit, a manufacturer of a high-price line of clothing, sold its products to Burlington, a no-frills discounter, and Federated, one of the largest full-price retailing organizations in the country. In July 1983, Esprit informed Burlington that it would no longer do business with it.
A month earlier, in a public speech at a meeting of some 600 major retailers and garment makers, Federated's chairman said that "Federated believed that discounters were taking unfair advantage of the marketing efforts of full-price retailers." (85) Therefore, he stated, Federated would act "[t]o end this free-riding" and "stop dealing with manufacturers who sold current-season fashions to discounters." (86)
The chairman also added that:
[i]t is inconceivable to us ... how a manufacturer could possibly justify bastardizing a great brand name or designer in whom they have invested millions to build status, credibility and consumer confidence [by selling to discounters].... Doing business with a compromising [manufacturer] may just be too great a risk for the department store to take. (87)
Burlington sued Esprit and Federated for violation of section 1 of the Sherman Act and lost on motion for summary judgment. (88)
Conspiracy theorists might say that Burlington offers an example of a powerful retailer that squeezed RPM from a manufacturer and encouraged other retailers to act in a similar manner. (89) Free riding theorists would find support for their theories in the chairman's statement. Yet, the case also seems consistent with the image theory. Since the facts of Burlington have never been studied, the validity of each explanation remains unknown. Circumstances under which more than one RPM explanation could apply are very common in practice.
IV. A NOTE ON THE DISCOUNT PRICING CONSUMER PROTECTION ACT
Shortly after the Supreme Court handed down its decision in Leegin, Senator Herbert Kohl of Wisconsin introduced The Discount Pricing Consumer Protection Act. (90) The bill's legislative findings provide:
(1) From 1911 in the Dr. Miles decision until June 2007 in the Leegin decision, the Supreme Court had ruled that the Sherman Act forbid in all circumstances the practice of a manufacturer setting a minimum price below which any retailer, wholesaler or distributor could not sell the manufacturer's product (the practice of "resale price maintenance" or "vertical price fixing").
(2) The rule of per se illegality forbidding resale price maintenance promoted price competition and the practice of discounting all to the substantial benefit of consumers and the health of the economy.
(3) Many economic studies showed that the rule against resale price maintenance led to lower prices and promoted consumer welfare.
(4) Abandoning the rule against resale price maintenance will likely lead to higher prices paid by consumers and substantially harms the ability of discount retail stores to compete.... (91)
The bill, therefore, was intended to amend section 1 of the Sherman Act by adding a statutory per se prohibition against RPM: "Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act." (92) Congress never voted on this bill and in January 2009 Senator Kohl reintroduced it. (93)
Congress often intervenes in consumer preferences and choices by employing various soft and hard paternalistic legislative tools. Congress may indeed decide to address the pursuit of status by attempting to alter social preferences. Senator Kohl's bill, however, does not target the pursuit of status or willingness to pay for brands. The bill condemns the RPM practice categorically, disregarding all business justifications for RPM and potential consumer preferences for high prices. As such, the bill, like any other categorical ban on RPM, is unwarranted.
Moreover, assuming that Congress ever wishes to address the pursuit of status, a ban on RPM that intends to promote a brand image is unlikely to alter preferences for luxury or to reduce the quantities or prices of status goods on the market. Congress will have to employ other means to address this issue.
In his dissent in Dr. Miles, Justice Holmes wrote: "I cannot believe that in the long run the public will profit by this court permitting knaves to cut reasonable prices for some ulterior purpose of their own, and thus to impair, if not to destroy, the production and sale of articles which it is assumed to be desirable that the public should be able to get." (94) Justice Holmes did not explain his resentment toward price-cutters, but explained his view of "reasonable prices":
We, none of us, can have as much as we want of all the things that we want. Therefore, we have to choose. As soon as the price of something that we want goes above the point at which we are willing to give up other things to have that, we cease to buy it and buy something else. Of course, I am speaking of things that we can get along without. There may be necessaries that sooner or later must be dealt with..., but they are not Dr. Miles's medicines. With regard to things like the latter, it seems to me that the point of most profitable returns marks the equilibrium of social desires, and determines the fair price in the only sense in which I can find meaning in those words. (95)
Justice Holmes probably did not have the refined image theory in mind, but when he considered the quack medicines of Dr. Miles, image and branding must have been on his mind. He may not have considered the possibility that high prices contribute to the demand for certain branded goods, but he preferred not to intervene in pricing decisions that are related to "social desires." In this sense, this article's conclusion is consistent with Justice Holmes's dissent in Dr. Miles.
The RPM controversy is more than a century old and gravitates around conspiracy, free riding, and demand-uncertainty theories. Throughout the history of RPM, manufacturers have provided various explanations for RPM, some of which are consistent with free riding and demand-uncertainty theories. For obvious reasons, manufacturers do not tend to justify the practice with any conspiracy theory.
This article formulates the "image theory," which focuses on what might be the most frequent explanation that manufacturers offer for RPM: Discounts harm brand image and demand for certain branded goods. Courts and scholars have mentioned this assertion in passing but, to the best of my knowledge, have never discussed what stands behind it. One explanation for this neglect is that the notion of high prices as a desirable product feature contradicts the convenient antitrust premise that, for all consumers, paying less is always better.
This premise, however, does not hold for consumers who seek exclusivity and status. Unless limited discounts are available only to a select group of consumers, those who seek exclusivity and status may be willing to pay high prices to purchase goods and services that others cannot afford or are unwilling to pay for. For such consumers, high prices may be the product feature that confers the exclusivity and status they desire.
I conclude that, under the rule of reason, antitrust law should not prohibit RPM that is designed to protect a brand image. While occasionally resulting in high consumer prices, the strategy serves a particular consumer preference. Antitrust laws are not intended to intervene in consumer preferences, even when they appear unwise.
AUTHOR'S NOTE: This article builds on my article, Antitrust Vertical Myopia: The Allure of High Prices, 50 ARIZ. L. REV. 261 (2008). The article focuses on a peculiar human taste that motivates certain manufacturers to engage in RPM. Scholastic refinements are also a matter of taste and, thus, I should state that I would not have written this article unless I believed that its improvements are important to the underlying thesis. I owe this article to the editor of this special issue, Gregory Gundlach, who encouraged me to write it, and to our conversations that inspired many of the improvements. This article also benefited from comments and criticism from Carol Rose, Frances Sjoberg, and two anonymous referees. All errors are mine.
(1) See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2725-26 (2007) (Breyer, J., dissenting) ("The Court justifies its departure from ordinary considerations of stare decisis by pointing to a set of arguments well known in the antitrust literature for close to half a century.").
(2) In 1916, the economist Frank Taussig examined the RPM practice and noted that manufacturers often set RPM for "identified articles" and, specifically, "articles of prestige." He suggested that one of the possible explanations for RPM is the "psychology of demand" for which low prices for "articles of prestige" do not always lead to increased demand. Frank W. Taussig, Price Maintenance, 6 AM. ECON. REV. 170, 172 (Supp. 1916).
(3) See Barak Y. Orbach, Antitrust Vertical Myopia: The Allure of High Prices, 50 ARIZ. L. REV. 261 (2008). Several scholars have mentioned in passing this explanation. The only other direct discussion of RPM illegality and luxury goods that I am aware of is a 1995 student note. George R. Ackert, Note, An Argument for Exempting Prestige Goods from the Per Se Ban on Resale Price Maintenance, 73 TEX. L. REV. 1185 (1995). Mr. Ackert argued that high prices are necessary for luxury goods and, thus, they warrant an exemption from the ban on RPM. Id. at 1205.
(4) Louis D. Brandeis, Cutthroat Prices: The Competition that Kills, HARPER'S WEEKLY, NOV. 15, 1913, at 10. The Supreme Court decisions that Brandeis criticized were Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), and Bauer & Cie. v. O'Donnell, 229 U.S. 1 (1913).
(5) Id. at 11.
(7) Id. at 12.
(8) Id. at 11-12.
(9) This point was made already in 1918 by the marketing scholar Harry Tosdal, who noted that "[p]rice maintenance has developed in part as a concomitant of national advertising." Harry R. Tosdal, Price Maintenance, 8 AM. ECON. REV. 28, 31 (1918). Harry Tosdal is regarded as the pioneer of the area of sales management. See Ross M. Cunningham, Harry R. Tosdal, 23 J. MARKETING 65 (1958). For a discussion of the rise of advertising in the United States, see generally JAMES D. NORRIS, ADVERTISING AND THE TRANSFORMATION OF AMERICAN SOCIETY, 1865-1920 (1990); FRANK PRESBREY, THE HISTORY AND DEVELOPMENT OF ADVERTISING 113-445 (1929).
(10) The first federal statute that protected trademarks was enacted in 1870. Act of July 8, 1870, ch. 230, 16 Stat. 198 (revising, consolidating, and amending the statutes relating to Patents and Copyrights). In the Trade-Mark Cases, 100 U.S. 82 (1879), the Supreme Court struck down the federal trademark law on constitutional grounds. In 1881, Congress responded to the Trade-Mark Cases decision and enacted a trademark law that targeted trademarks used in interstate commerce. Act of Mar. 3, 1881, ch. 138 (authorizing the registration of trademarks and protecting the same). Prior to 1870, trademarks were protected by common law but the reported infringement cases suggest that the available legal protection was not practically meaningful.
(11) See, e.g., SAMUEL HOPKINS ADAMS, THE GREAT AMERICAN FRAUD 4 (1906); STEWART H. HOLBROOK, THE GOLDEN AGE OF QUACKERY (1959); JAMES HARVEY YOUNG, THE TOADSTOOL MILLIONAIRES: A SOCIAL HISTORY OF PATENT MEDICINES IN AMERICA BEFORE FEDERAL REGULATION (1961); JAMES HARVEY YOUNG, THE MEDICAL MESSIAHS: A SOCIAL HISTORY OF HEALTH QUACKERY IN TWENTIETH-CENTURY AMERICA (1967); see also WILLIAM RADAM, MICROBES AND THE MICROBE KILLER 56 (1890) (glorifying Radam's Microbe Killer and noting that "it is quite immaterial to know the peculiarity of the microbe that we find in any particular instance.... A microbe is a microbe"); George M. Sternberg, Science and Pseudo-Science in Medicine, 5 SCI. 199, 201 (1897). Sternberg stated:
Hand in hand with the progress of medical science we see an army of pseudo-scientific quacks who trade upon the imperfect knowledge of the masses, and by plausibly written advertisements convince many, even of the educated classes, that their particular method of treatment is based upon the latest scientific discoveries.... The pseudoscientific quack writes, or has written, advertisements in which fact and fiction are so commingled that even educated persons may be deceived.
Id. at 202.
(12) See, e.g., Fowle v. Park, 131 U.S. 88, 93 (1889).
(13) NAT'L WHOLESALE DRUGGISTS' ASS'N, A HISTORY OF THE NATIONAL WHOLESALE DRUGGISTS' ASSOCIATION 29-31 (1924).
(14) Patent Medicine Trade: Efforts to Secure a New Plan for Distributing Articles. "Cutters" Still Defy Wholesalers, N.Y. TIMES, Nov. 29, 1895, at 8.
(15) 131 U.S. 88. The first reported RPM case in the United States that I am aware of is Clark v. Frank, 17 Mo. App. 602 (1885).
(16) Fowle, 131 U.S. at 88. The manufacturer described the balsam as "a valuable family medicine for consumption of the lungs, coughs, colds, asthmas, bronchitis, croup, whooping-cough, difficulty of breathing, pains in the side or breast, liver complaints, etc." and occasionally also added that it treated "influenza, hoarseness, pains or soreness of the chest." Fowle v. Spear, 9 F. Cas. 611, 612 (C.C.E.D. Pa. 1847); see also The Age of Improvement, SAT. EVENING POST, Dec. 9, 1848, at 3 (a placed article that praised the medicine). In a trademark dispute over this medicine, the court refused to issue an injunction against a trademark infringer because the dispute was "between vendors of a quack medicine, the elements and action of which [were] not disclosed in evidence." Fowle, 9 F. Cas. at 612.
(17) Fowle, 131 U.S. at 97. A few months later, a district court in Connecticut declined defendants' argument that the manufacturer's setting of minimum retail prices was "void because it [was] in restraint of trade, was unreasonable and oppressive, and attempted to create a monopoly." Bowling v. Taylor, 40 F. 404, 407 (C.C.D. Conn. 1889). In this case, the court believed that the plaintiff's patent rights allowed him to set prices for retailers. Id. For many years, courts continued to enforce RPM agreements between patent holders and retailers.
(18) See, e.g., John D. Park & Sons Co. v. Hartman, 153 F. 24 (6th Cir. 1907); John D. Park & Sons Co. v. Nat'l Wholesale Druggists' Ass'n, 67 N.E. 136 (N.Y. 1903); John D. Park & Sons Co. v. Nat'l Wholesale Druggists' Ass'n, 50 N.Y.S. 1064 (Sup. Ct. 1906); see also John D. Park & Sons Co. Again Beaten, 37 AM. DRUGGIST & PHARM. REC. 305 (1900); Victory for the N.W.D.A.: Decision in the Park Appeal, 37 AM. DRUGGIST & PHARM. REC. 327 (1900).
(19) 220 U.S. 373 (1911). Due to conflicting court decisions, the legal status of RPM was uncertain between 1908 and 1917. For a discussion of the uncertainty era, see EDWIN R. A. SELIGMAN & ROBERT A. LOVE, PRICE CUTTING AND PRICE MAINTENANCE: A STUDY IN ECONOMICS 23-29 (1932) (discussing the landmark cases of the era).
(20) Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 762 (1984).
(21) See, e.g., In re Corning, 51 F. 205 (N.D. Ohio 1892) (alcohol); Weiboldt v. Standard Fashion Co., 80 Ill. App. 67 (1898) (fabrics); Dueber Watch-Case Mfg. Co. v. E. Howard Watch & Clock Co., 66 F. 637 (2d Cir. 1895) (watches).
(22) See, e.g., Edison Phonograph Co. v. Kaufmann, 105 F. 960 (C.C.W.D. Pa. 1901).
(23) See Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908); Bobbs-Merrill Co. v. Straus, 139 F. 155 (C.C.S.D.N.Y. 1905). In Britain, by the 1880s, RPM was already common in the publishing industry. In 1887, Macmillan & Co. convinced Alfred Marshal to fix the retail price for his forthcoming book, Principles of Economics. See C. W. Guillebaud, The Marshall-Macmillan Correspondence Over the Net Book System, 75 ECON. J. 518, 519 (1965). See generally SIR FREDERICK ORRIDGE MACMILLAN, KT., THE NET BOOK AGREEMENT 1899 AND THE BOOK WAR 1906--1908, at 15--17 (1924).
(24) Brandeis, supra note 4, at 11-12.
(25) See, e.g., Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340 (1990) ("Low prices benefit consumers regardless of how those prices are set, and so long as they are above predatory levels, they do not threaten competition."); Nat'l Collegiate Athletic Ass'n v. Bd. of Regents of Univ. of Okla. 468 U.S. 85, 107 (1984) ("[Low prices and large output that] are unresponsive to consumer preference ... [are] perhaps the most significant, since 'Congress designed the Sherman Act as a 'consumer welfare prescription.'' (citation omitted)). See generally Barak Y. Orbach, The Antitrust Consumer Welfare Paradox, 6 J. COMPETITION L. & ECON. (forthcoming 2010).
(26) Any simple presentation of the consumer's surplus and seller's surplus on a two-dimensional graph of supply and demand curves would illustrate this point. For a classic explanation, see PAUL A. SAMUELSON, ECONOMICS 550--51 (13th ed. 1989). For a discussion of the role of surplus in antitrust analysis, see Orbach, supra note 25.
(27) See, e.g., Arizona v. Maricopa County Med. Soc'y, 457 U.S. 332, 360 (1982) ("Normally consumers search for high quality at low prices.").
(28) In 1895, Alfred Marshall first proposed the existence of Giffen goods: goods for which demand falls when prices decline. ALFRED MARSHALL, PRINCIPLES OF ECONOMICS 109-10 (8th ed. 1920) (1895). Economists have remained skeptical of the existence of Giffen goods. See, e.g., Gerald P. Dwyer & Cotton M. Lindsay, Robert Giffen and the Irish Potato, 74 AM. ECON. REV. 188 (1984); George J. Stigler, Notes on the History of the Giffen Paradox, 55 J. POL. ECON. 152 (1947); Sherwin Rosen, Potato Paradoxes, 107 J. POL. ECON. S294 (1999); cf. William R. Dougan, Giffen Goods and the Law of Demand, 90 J. POL. ECON. 809 (1982).
(29) The 2008 recession forced many luxury-good sellers to cut prices. Observers considered this trend a "rare move." See, e.g., Rachel Dodes & Christina Passariello, In Rare Move, Luxury-Goods Makers Trim Their Prices in U.S., WALL ST. J., Nov. 14, 2008, at B1.
(30) See, e.g., Ruth La Ferla, When High Price is the Allure, N.Y. TIMES, Aug. 9, 2007, at G1. See generally Georg Simmel, Fashion, 10 INT'L Q. 130 (1904).
(31) Ellen Byron, Fashion Victim: To Refurbish Its Image, Tiffany Risks Profits, WALL ST. J., Jan. 10, 2007, at A1.
(32) Jonathan D. Glater & Alan Finder, In New Twist on Tuition Games, Popularity Rises with the Price, N.Y. TIMES, Dec. 12, 2006, at A1.
(33) Noka Chocolate, http://www.nokachocolate.com/philosophy.html.
(34) Damon Darlin, Figuring Out Gift Giving in the Age of $2,000-a-Pound Chocolate, N.Y. TIMES, Feb. 10, 2007, at C1.
(35) Winn v. Edna Hibel Corp., 858 F.2d 1517 (11th Cir. 1988).
(36) United States v. Colgate Co., 250 U.S. 300, 307 (1919); see also Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984).
(37) Edna Hibel, 858 F.2d at 1518.
(38) THORSTEIN VEBLEN, THE THEORY OF THE LEISURE CLASS: AN ECONOMIC STUDY IN THE EVOLUTION OF INSTITUTIONS (1899).
(39) Id. at 154-55. Veblen stated: "Goods are produced and consumed as a means to the fuller unfolding of human life and their utility consists, in the first instance, in their efficiency as a means to this end.... But the human proclivity to emulation has seized upon the consumption of goods as a means to an invidious comparison, and has thereby invested consumable goods with a secondary utility as evidence of relative ability to pay." Id.
(40) Prior to 1950, economists' treatment of preferences that could lead to a divergence between the willingness to pay and the product's intrinsic value was mostly restricted to acknowledging their possible existence. For example, Arthur Pigou briefly discussed some aspects of "desire[s] to possess what other people possess" and "desire[s] to possess what other people do not possess." ARTHUR C. PIGOU, THE ECONOMICS OF WELFARE 225-28 (4th ed. 1932); see also Henry Smith, Discontinuous Demand Curves and Monopolistic Competition: A Special Case, 49 Q.J. ECON. 542 (1935) (discussing the case of discontinuous demand curves, in which changes in established prices, even downward, could lead to decline in demand); Taussig, supra note 2, at 172 (arguing that the "psychology of demand" is one of the explanations for RPM and noting that "[i]f diamonds were to become very plentiful and very cheap, it is probable that people would buy not more of them than now, but less").
(41) Harvey Leibenstein, Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand, 64 Q.J. ECON. 183 (1950).
(42) Leibenstein's work was influenced by the pioneering game-theory studies of Von Neumann and Morgenstern, which were published a few years earlier. See JOHN VON NEUMANN & OSKAR MORGENSTERN, THEORY OF GAMES AND ECONOMIC BEHAVIOR (1944); see also Oskar Morgenstern, Demand Theory Reconsidered, 62 Q.J. ECON. 165 (1948) (studying the non-additive nature of demand functions that results from their interrelated characteristics).
(43) Leibenstein, supra note 41, at 193-99.
(44) Id. at 199-202.
(45) Id. at 203.
(46) Id. at 202-05.
(47) See, e.g., ROBERT H. FRANK, LUXURY FEVER: WHY MONEY FAILS TO SATISFY IN AN ERA OF EXCESS (1999); ROBERT H. FRANK, CHOOSING THE RIGHT POND: HUMAN BEHAVIOR AND THE QUEST FOR STATUS (1985); Laurie Simon Bagwell & B. Douglas Bernheim, Veblen Effects in a Theory of Conspicuous Consumption, 86 AM. ECON. REV. 349 (1996); Robert L. Basmann et al., A Note on Measuring Veblen's Theory of Conspicuous Consumption, 70 REV. ECON. & STAT. 531 (1988); Kaushik Basu, Monopoly, Quality Uncertainty and "Status" Goods, 5 INT'L J. INDUS. ORG. 435 (1987); B. Douglas Bernheim, A Theory of Conformity, 102 J. POL. ECON. 841 (1994); Ottmar L. Braun & Robert A. Wicklund, Psychological Antecedents of Conspicuous Consumption, 10 J. ECON. PSYCHOL. 161 (1989); Angela Chao & Juliet B. Schor, Empirical Tests of Status Consumption: Evidence from Women's Cosmetics, 19 J. ECON. PSYCHOL. 107 (1998); Giacomo Corneo & Olivier Jeanne, Snobs, Bandwagons, and the Origins of Social Customs in Consumer Behavior, 32 J. ECON. BEHAVIOR &: ORG. 333 (1997); Robert H. Frank, The Demand for Unobservable and Other Nonpositional Goods, 75 AM. ECON. REV. 101 (1985); Peter Jason Kalman, Theory of Consumer Behavior When Prices Enter the Utility Function, 36 ECONOMETRICA 497 (1968); Giovanni B. Ramello, What's in a Sign? Trademark Law and Economic Theory, 20 J. ECON. SURVEYS 547 (2006).
(48) See, e.g., Jeffrey L. Harrison, Trademark Law and Status Signaling: Tattoos for the Privileged, 59 FLA. L. REV. 195, 196 (2007); Richard S. Higgins & Paul H. Rubin, Counterfeit Goods, 29 J.L. & ECON. 211, 211 (1986); Alex Kozinski, Trademarks Unplugged, 68 N.Y.U.L. REV. 960, 962-63 (1993); Kal Raustiala & Christopher Sprigman, The Piracy Paradox: Innovation and Intellectual Property in Fashion Design, 92 VA. L. REV. 1687, 1733 (2006). In his seminal work on advertising and trademarks, Ralph Brown did not cite Veblen, but his arguments resonate Veblen's arguments. Ralph S. Brown, Jr., Advertising and the Public Interest: Legal Protection of Trade Symbols, 57 YALE. L.J. 1165 (1948).
(49) See, e.g., Robert H. Frank & Cass R. Sunstein, Cost-Benefit Analysis and Relative Position, 68 U. CHI. L. REV. 323 (2001); Norman J. Ireland, On Limiting the Market for Status Signals, 53 J. PUB. ECON. 91 (1994); Richard H. McAdams, Relative Preferences, 102 YALE L.J. 1, 91-103 (1992).
(50) See, e.g., Edward Miller, Status Goods and Luxury Taxes, 34 AM. J. ECON. & Soc. 141,143-44 (1975); Yew-Kwang Ng, Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for their Values, 77 AM. ECON. REV. 186 (1987).
(51) See, e.g., David A. Butz, Durable-Good Monopoly and Best-Price Provisions, 80 AM. ECON. REV. 1062, 1071 (1990); Thomas E. Cooper & Timothy L. Fries, The Most-Favored-Nation Pricing Policy and Negotiated Prices, 9 INT'L J. INDUS. ORG. 209 (1991).
(52) FRANK H. KNIGHT, RISK, UNCERTAINTY AND PROFIT 62 n.1 (1921).
(53) See, e.g., T.H. Silcock, Some Problems of Price Maintenance, 48 ECON. J. 42 (1938); Smith, supra note 40, at 549. Some of the studies of most-favored-nation pricing make the same point. See, e.g., Butz, supra note 51, at 1071; Cooper & Fries, supra note 51.
(54) Silcock, supra note 53, at 352-54 (discussing the preference of movie exhibitors to maintain uniform pricing at the theater).
(55) Barak Y. Orbach, Antitrust and Pricing in the Motion Picture Industry, 21 YALE J. ON REG. 317, 352-55 (2004).
(56) Brandeis, supra note 4. For a detailed discussion, see supra part I.
(57) An example for this argument can be found in a comprehensive study of RPM that the Federal Trade Commission conducted from 1929-1931, which finds loss leader pricing as the "principal argument" of manufacturers in favor of RPM. FED. TRADE COMM'N, REPORT ON RESALE PRICE MAINTENANCE PART II, at 4, 9-10 (1931). See also Ward S. Bowman, Jr., The Prerequisites and Effects of Resale Price Maintenance, 22 U. CHI. L. REV. 825, 836-38 (1955) (discussing the use of RPM as an anti-loss leader mechanism); Howard P. Marvel & Stephen McCafferty, The Welfare Effects of Resale Price Maintenance, 28 J.L. & ECON. 363, 374-78 (1985) (same).
(58) For the classic study of this point, see Tibor Scitovsky, Some Consequences of the Habit of Judging Quality by Price, 12 REV. ECON. STUD. 100 (1945); see also Kyle Bagwell & Michael H. Riordan, High and Declining Prices Signal Product Quality, 81 AM. ECON. REV. 224 (1991); Yuk-Shee Chan & Hayne Leland, Prices and Qualities in Markets with Costly Information, 49 REV. ECON. STUD. 499 (1982); Russell Cooper & Thomas W. Ross, Prices, Product Qualities and Asymmetric Information: The Competitive Case, 51 REV. ECON. STUD. 197 (1984); Eitan Gerstner, Do Higher Prices Signal Higher Quality?, 22 J. MARKETING RES. 209 (1985); Paul Milgrom & John Roberts, Price and Advertising Signals of Product Quality, 94 J. POL. ECON. 796 (1986).
(59) Hilke Plassmann et al., Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness, 105 PROC. NAT'L ACAD. SCI. 1050 (2008).
(60) Akshay R. Rao, The Quality of Price as a Quality Cue, 42 J. MARKETING RES. 401 (2005); Baba Shiv et al., Placebo Effects of Marketing Actions: Consumers May Get What They Pay For, 42 J. MARKETING RES. 383 (2005) (using subject-reported effects for data, not objectively measured results).
(61) See Rebecca L. Waber et al., Commercial Features of Placebo and Therapeutic Efficacy, 299 J. AM. MED. ASS'N 1016 (2008).
(62) Lester Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. &. ECON. 86, 87-92 (1960); Lester Telser, Why Should Manufacturers Want Fair Trade II?, 33 J.L. & ECON. 409, 409-10 (1990). Many authors mistakenly credit Telser for introducing the free riding problem as a justification for RPM. The argument, however, was frequently used before 1960. See, e.g., Bowman, supra note 57, at 837 ("[T]he argument [is] ... that sales are.., more responsive to convenience and service than to price."); Silcock, supra note 53, at 45-46; Comment, Resale Price Maintenance and the Anti-trust Laws, 18 U. CHI. L. REV. 369, 377 (1951).
(63) Bowman, supra note 57, at 848:
Insofar as resale price maintenance is successful in eliminating price competition among dealers, competition in non-price areas, such as service and convenience, is increased, and the entry of new dealers is made more attractive. Low-cost, non-service dealers whose merchandising policies involve high turnover and low mark-ups are prevented from selling price-maintained merchandise at low margins.
(64) The literature often uses preferred shelf-space as an example of a promotional service that RPM encourages. See, e.g., George Bittlingmayer, Resale Price Maintenance in the Book Trade with an Application to Germany, 144 J. INSTITUTIONAL & THEORETICAL ECON. 789 (1988); Victor P. Goldberg, The Free Riding Problem, Imperfect Pricing, and the Economics of Retailing Services, 79 NW. U. L. REV. 736, 738--44 (1984); Greg Shaffer, Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices, 22 RAND J. ECON. 120 (1991). Another promotional service that RPM arguably promotes is reduction of the time it takes to purchase a good. See, e.g., Ralph A. Winter, Vertical Control and Price versus Nonprice Competition, 108 Q.J. ECON. 61, 63 (1993).
(65) Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2715 (2007); see also Monsanto Co. v. Spray-Rite Serv. Corp, 465 U.S. 752 (1984); Cont'l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 55 (1977); Martin K. Perry & Robert H. Porter, Can Resale Price Maintenance and Franchise Fees Correct Sub-Optimal Levels of Retail Services?, 8 INT'L J. INDUS. ORG. 115 (1990) (analyzing the circumstances in which certain RPM schemes may correct the retail free riding problem).
(66) See, e.g., Straus v. Am. Publisher's Ass'n, 231 U.S. 222 (1913); Scribner v. Straus, 210 U.S. 352 (1908); Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908); Bittlingmayer, supra note 64.
(67) Trust Legislation: Hearings Before the H. Comm. on the Judiciary, 63d Cong. 767-87 (1914) (testimony of Alfred Lucking, General Counsel, Ford Motor Company); see also Ford Motor Co. v. Benjamin E. Boon, Inc., 244 F. 335 (9th Cir. 1917); Ford Motor Co. v. Union Motor Sales Co., 225 F. 373 (S.D. Ohio 1917).
(68) See, e.g., Boston Store of Chi. v. Am. Graphophone Co., 246 U.S. 8 (1918); Straus v. Victor Talking Mach. Co., 243 U.S. 490 (1917); N.J. Patent Co. v. Schaefer, 178 F. 276 (3d Cir. 1909); Nat'l Phonograph Co. v. Schlegel, 128 F. 733 (8th Cir. 1904); Victor Talking Mach. Co. v. Fair, 123 F. 424 (7th Cir. 1903); Thomas A. Edison, Inc. v. Ira M. Smith Mercantile Co., 188 F. 925 (C.C.W.D. Mich. 1911); Edison Phonograph Co. v. Pike, 116 F. 863 (C.C. Mass. 1902); Edison Phonograph Co. v. Kaufmann, 105 F. 960 (C.C.W.D. Pa. 1901).
(69) Leegin, 127 S. Ct. at 2711 (citing a letter from Leegin to its retailers that announced the "Brighton Retail Pricing and Promotion Policy"):
In this age of mega stores like Macy's, Bloomingdales, May Co. and others, consumers are perplexed by promises of product quality and support of product which we believe is lacking in these large stores. Consumers are further confused by the ever popular sale, sale, sale, etc. We, at Leegin, choose to break away from the pack by selling [at] specialty stores; specialty stores that can offer the customer great quality merchandise, superb service, and support the Brighton product 365 days a year on a consistent basis. We realize that half the equation is Leegin producing great Brighton product and the other half is you, our retailer, creating great looking stores selling our products in a quality manner.
(70) See, e.g., Basil S. Yamey, The Origins of Resale Price Maintenance: A Study of Three Branches of Retail Trade, 62 ECON. J. 522, 527-28 (1952) (studying the origins of the practice in the United Kingdom); Robert Pitofsky, In Defense of Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price Fixing, 71 GEO. L.J. 1487, 1490 (1983) ("Indeed, experience shows that the manufacturer is often induced to act as an organizer of the dealer's cartel by dealer threats or enticements.").
(71) Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 407 (1911) ("[T]he advantage of established retail prices primarily concerns the dealers. The enlarged profits ... would go to them, and not to the [manufacturer].').
(72) Id. at 381.
(73) See, e.g., Fowle v. Park, 131 U.S. 88 (1889); John D. Park & Sons v. Hartman, 153 F. 24 (6th Cir. 1907); Jayne v. Loder, 149 F. 21 (3d Cir. 1906); Wells & Richardson Co. v. Abraham, 146 F. 190 (C.C.E.D.N.Y. 1906); Dr. Miles Med. Co. v. Platt, 142 F. 606 (C.C.N.D. Ill. 1906); Dr. Miles Med. Co. v. Goldthwaite, 133 F. 794 (C.C. Mass. 1904); John D. Park & Sons Co. v. Nat'l Wholesale Druggists' Ass'n, 67 N.E. 136 (N.Y. 1903).
(74) See, e.g., Let Druggists Work Together, 22 AM. DRUGGIST 81, 81-82 (1892); George Cutts, Prize Competition: A Uniform Price Scale for Prescriptions, 22 AM. DRUGGIST & PHARMACEUTICAL REC. 385 (1893); Cutting Still the Topic, 31 AM. DRUGGIST & PHARMACEUTICAL REC. 240 (1897). According to the 1924 self-published history of the National Wholesale Druggists Association, the long economic depression that started in 1873 led to bitter competition that resulted in low revenues. NAT'L WHOLESALE DRUGGISTS' ASS'N, supra note 13, at 26-27. The industry's trade association was formed "to create a permanent social feeling between the wholesale druggists.., to obliterate the feeling of distrust and jealousy ... [and] to correct excessive and unmercantile competition.... " Id. at 19; see also Patent Medicine Trade, supra note 14.
(75) For details of the "Rebate Plan" devised by the industry's trade association, see NAT'L WHOLESALE DRUGGISTS' ASS'N, supra note 13, at 30-41; see also HERBERT HOVENKAMP, THE ANTITRUST ENTERPRISE: PRINCIPLE AND EXECUTION 186-87 (2005); HERBERT HOVENKAMP, ENTERPRISE AND AMERICAN LAW: 1836-1937, at 340-47 (1991).
(76) See Bowman, supra note 57, at 838-39; Pitofsky, supra note 70, at 1490-91; see also Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 127 S. Ct. 2705, 2716 (2007); Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 725-26 (1988).
(77) Standard Sanitary Mfg. Co. v. United States, 226 U.S. 20, 46-47 (1912).
(78) See, e.g., Toys "R" Us, Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000).
(79) 8 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 35 (2004).
(80) Id. at 35-68.
(81) Marvel & McCafferty, supra note 57, at 366-68; see also ALFRED S. EICHNER, THE EMERGENCE OF OLIGOPOLY: SUGAR REFINING AS A CASE STUDY 190-95 (1969); See BASIL S. YAMEY, THE ECONOMICS OF RESALE PRICE MAINTENANCE 20 (1954); Richard Zerbe, The American Sugar Refinery Company, 1887-1914: The Story of a Monopoly, 12 J.L. & ECON. 339, 368 (1969).
(82) See, e.g., Jane H. Pease, A Note on Patterns of Conspicuous Consumption Among Seaboard Planters, 1820-1860, 35 J. S. HIST. 381, 389 (1969); C. Arden Pope, III & H. L. Goodwin, Jr., Impacts of Consumptive Demand on Rural Land Values, 66 AM. J. AGRIC. ECON. 750, 750-51 (1984) (arguing that conspicuous consumption motivates some of the purchases of rural land in the United States). See also Lior Jacob Strahilevitz, Exclusionary Amenities in Residential Communities, 92 VA. L. REV. 437 (2006) (studying how real estate developers circumvent fair housing laws by embedding costly, demographically polarizing amenities within a new development and recording covenants mandating that all homeowners pay for those amenities.)
(83) See, e.g., Daniel A. Crane, Harmful Output in the Antitrust Domain: Lessons from the Tobacco Industry, 39 GA. L. REV. 321, 323-24 (2005). See generally Orbach, supra note 25.
(84) Burlington Coat Factory Warehouse Corp. v. Esprit De Corp., 769 F.2d 919 (2d Cir. 1985).
(85) Id. at 921-22.
(86) Id. at 922.
(88) Both the district court and the Court of Appeals for the Second Circuit granted defendants' summary judgment motion because Burlington provided no direct or circumstantial evidence of an illegal agreement between Esprit and Federated. Id. at 922, 925. Such evidence is necessary under Monsanto v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984).
(89) Esprit argued that it was unaware of the statement and that, due to its inability to meet the demand for its goods, it dropped discounters and full-price retailers that did not meet its marketing standards. Burlington, 769 F.2d at 922. For a survey of RPM conspiracy theories, see Orbach, supra note 3, at 268-71.
(90) S. 2261, 110th Cong. (2007). The bill was cosponsored by then--Senators Joe Biden and Hillary Clinton.
(91) S. 2261 [section] 2.
(92) S. 2261 [section] 3.
(93) S. 148, 111th Cong. (2009).
(94) Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 412 (1911).
BY BARAK Y. ORBACH, Associate Professor of Law, University of Arizona James E. Rogers College of Law. Materials related to this study are available at http://www.orbach.org/rpm.
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|Title Annotation:||Special Issue: Antitrust Analysis of Resale Price Maintenance After Leegin, vol. 2|
|Author:||Orbach, Barak Y.|
|Date:||Jun 22, 2010|
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