The Economics ofMinimum Resale Price

Maintenance

Robert WilligPrinceton University

Competition Policy Associates(COMPASS)

Supreme Court ReconsideringPer Se Treatment of RPM

Set in Dr. Miles Decision of 1911

• Current case is Leegin Creative Leather Products, Inc. v. PSKS

• Leegin asking for rule of reason standard.

• Bevy of amicus briefs have been filed on both sides, and the community awaits …

Procompetitive Uses of Minimum RPM by Manufacturers

• To motivate with higher margins more spending and investment by retailers to sell the manufacturer’s product.

• To protect retailers from others’ free-riding on their service provisions, in order to preserve retailers’ incentives to perform.

• To permit the higher margins that motivate retailers to invest in their own reputations that can be transferred to the product.

What Retailer Services?

Displays, advice, demonstrations, skilled sales force, effective showroom, demand-inspiring shopping experience, local advertising, post-sales servicing and parts availability, greater inventories, appropriate storage, longer selling hours, better retail location, more retail outlets, better shelf placements, …

Why Are These Vulnerable?

• Without minimum RPM, price competition among outlets could drive margins too low to support the costs of these retail services, and to motivate their being incurred by the retailers.

• Without minimum RPM, retailers who charged high margins to support provision of services would be undercut by free-riding retail competitors who benefit from the services without paying for them. So retailers won’t spend on the services without reward of diverted sales .

Retail Reputation

• Retailers can invest to create high reputations, but must expect to earn high margins to cover the costs and to motivate living up to the reputation.

• High reputation transfers to the products because elite retailer perceived to carry only desirable products.

• Without minimum RPM, other retailers without reputation can undercut on elite products, undermining creation of reputation and transferal to the product.

Manufacturers’ Incentives

• These retail services can be powerful or necessary for developing and maintaining demand for products.

• High retail margins supported by minimum RPM are costly due to demand repression from price and “leaving $$ on the table.”

• Services can be worth the cost to the manufacturer.

Can’t ManufacturersInduce the Retail Services

In Better Ways?• Not always, because contracts for the services

very incomplete, and very costly to monitor.• Retailers may know better what services to

provide to build demand if motivated.• Can’t charge consumers, except through the

good’s price.• Other incentive mechanisms even more limiting

of dealer competition, like exclusives.

In Some Circumstances, Minimum Price RPM Can Facilitate Collusion• Collusion among manufacturers: RPM stops

pass-through of maverick manufacturer discounting, and so lowers the gain from increased sales to the maverick – facilitating practice.

• Collusion among dealers: RPM turns manufacturer into central monitor of adherence to cartel pricing, and agent of punishment of mavericks. It is key that manufacturer must be forced into this role since against interest.

These Theories Don’t ApplyWhere Market Not Conducive to

Collusion

• Interbrand competition• Lack of concentration • Disharmony of incentives• Low entry barriers• Product differentiation and dynamics• Information still makes monitoring difficult• Non-discounting retailers lack power to coerce

Apart from Collusion --

• Manufacturers’ incentives to undertake minimum RPM are aligned with social welfare.

• Interbrand competition disciplines manufacturers to arrange distribution and marketing efficiently for consumers, and to make RPM decisions accordingly.

• True manufacturing monopolists are profit motivated to arrange distribution and marketing efficiently also, even as they exercise monopoly power over price and output.

Proposal of Commissioner Harbour in open letter to the Court

If a case arises that warrants more lenient treatment of vertical pricing restraints, the Court should still begin with a firm presumption that vertical minimum price fixing is unlawful. That presumption should only be rebuttable by a factual, case-specific showing that (1) vertical minimum price fixing is necessary to deliver identifiable net consumer benefits (2) in a quantity at least as great as the amount by which prices have been raised, and (3) such benefits could not be delivered by less-restrictive, alternative means.

In order to rebut the presumption of illegality for vertical minimum price fixing, the factual showing should also detail the comparative losses and gains by marginal and inframarginal consumers.

• It’s great that the Harbour proposal calls for penetrating economic analysis of the facts, but we appreciate the extent of the burden.

• Is this proposal a form of rule of reason?• The proposal does not condition the cost-

benefit test on a showing of monopoly power at the brand level!

• It surely is a call for giving up “per se” rule.

Rule of Reason• Allegation of collusion facilitated by minimum

RPM should be a required starting point for violation.

• Little interbrand competition should be a necessary condition for proceeding with allegation of manufacturer collusion.

• Manufacturer coercion should be a necessary condition for proceeding with allegation of dealer collusion.

• Effects analysis should consider pro-competitive function of the RPM and how conducive is the market to collusion due to the RPM.