The Economics of Minimum Resale Price Maintenance

1
The Economics ofMinimum Resale Price Maintenance

• Robert Willig
• Princeton University
• Competition Policy Associates
• (COMPASS)

2
Supreme Court ReconsideringPer Se Treatment of
RPMSet 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

3
Procompetitive Uses of Minimum RPM by
Manufacturers

• To motivate with higher margins more spending and
  investment by retailers to sell the
  manufacturers 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.

4
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,

5
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 wont spend on the services
  without reward of diverted sales .

6
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.

7
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.

8
Cant ManufacturersInduce the Retail ServicesIn
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.
• Cant charge consumers, except through the goods
  price.
• Other incentive mechanisms even more limiting of
  dealer competition, like exclusives.

9
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.

10
These Theories Dont 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

11
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.

12
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.
13

• Its 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.

14
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.