May Dr. Miles Finally Rest in Peace?
Tony Mauro at Law.com has the story. The per se rule against minimum resale price fixing is a strange anomaly indeed, that has spawned a number of almost comical judicial circumvention devices, such as:
- The Colgate doctrine (”I suggest that you sell for at least $10 and I will terminate you immediately if you don’t, but, please, don’t say yes, don’t nod, don’t respond at all to what I just said so that we won’t have to call this an agreement, okay? Oh no! I shouldn’t have asked!”);
- An artificially narrow definition of vertical price fixing that the manufacturer can do pretty much anything (e.g., withholding all-important cooperative advertising funds) short of setting a fixed minimum dollar amount. (Which, of course, is in stark contrast to the hair-trigger price fixing standard in horizontal cases.)
- Broad exemptions for agency arrangements and consignment sales.
In this situation, D2 is free-riding on D1’s efforts. As a result, D1 has little incentive to continue his investment in customer service, which is troubling for M1, if M1 relies on high quality service at the retail level to move its products. Put differently, M1 enjoys higher profits if D1 keeps providing high-quality service, but D1 has no incentive to do so. What can M1 do?
- M1 could grant D1 exclusive rights within a certain territory. If the customers can’t buy M1’s stereos across the street, D1 will capture a greater percentage of “his” sales. (Territorial restraint; rule of reason). The downside is that M1 loses the sales through D2.
- M1 could require its distributors to only sell to high-end boutique stores and not to discounters. (Customer restraint; rule of reason). The effect is similar to (1); the high-end boutiques (such as D1’s store) capture a greater percentage of “their” sales, but M1 loses its sales from the discount channel.
- M1 could require D1 and D2 (and all other stores that carry M1’s products) to adhere to a certain minimum resale price level, which would guarantee a profit margin for the retailer, sufficient to make investment in high quality customer service profitable. (Minimum resale price maintenance; per se illegal courtesy of Dr. Miles). Here, too, the effect is similar to that of (1) and (2). As price competition below the minimum price floor between D1 and D2 is no longer permissible, whoever offers better service to the customer wins. This result is ideal from M1’s point of view, because it provides D1 with proper incentives by eliminating D2’s free riding, yet it allows M1 to continue its sales trough D2 (and other discounters).
So maybe it is time to let poor old Dr. Miles retire from his unruly afterlife in the antitrust world.
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September 11th, 2006 at 10:44 am
Perhaps, instead, it is time to inter the free rider mantra instead of Dr. Miles. As numerous commentators have pointed out, there are a large number of holes in the free rider story. First, there’s the assumption that the botique will put the added profits into point of sales service, an assumption that may or may not to accurate. Second, a big box retailer which is more efficient than a botique retailer can’t pass along savings to consumers in the face of RPM. Third, there’s the little matter of history. Many of the products which historically have been subject to regimes of RPM are products where little or no point of sales service is required, e.g., blue jeans, raincoats. Moreover, RPM does transfer income from consumers to producers. While interbrand competition may prevent that transfer, it doesn’t necessarily work. Indeed,when Levi Strauss was forced to abandon its RPM system on blue jeans, not only did the price of Levis drop, but the prices of competing jeans dropped. Fourth, if a retailer is determined to evade RPM it can do so. It can throw in “free” ancillary services, sell a 2d product at a “discounted” price etc. etc.
The above are just some of the criticisms that have been leveled at the eliminating free rider justification for RPM. While the “free rider” rationale has the provenance of being approved in Sylvania, it may be just as formalistic as Dr. Miles. Perhaps that is why many economists in the 30 years since Sylvania have tried to come up with other procompetitive justifications for RPM, e.g., premium shelf space rental, brand image and positioning etc. Whether these justifications hold water or not is a matter beyond the scope of the present discussion. The development of these rationales does indicate, however, that the elimination of free riding is no longer the slam dunk justification for RPM that its originators thought it was.
September 12th, 2006 at 3:58 pm
[…] Hanno Kaiser (this time without his always excellent graphics!) sketches one case against Dr. Miles in this post at Antitrust Review: minimum RPM is one of several forms of solving an incentive incompatibility problem between manufacturers and retailer, i.e. get the retailer to engage in jointly profit-maximizing activities that are not in the retailer’s economic interests in the absence of the contractual restraint. Interestingly, antitrust decisions (and scholars) have focused on one particular type of vertical contracting problem: the “discount” dealer free-riding problem. Where retailer promotional effort results in additional, and jointly profit-maximizing (total incremental profit greater than the cost of promotion) sales, the manufacturer wants the retailer to engage in greater promotional effort. In some cases, buyers can “consume” the promotional effort at a high-end retailer (let’s say, listen to an informative product demonstration about the virtues of various HDTVs … ) and then purchase the product across the street at a “discount” retailer who does not supply those services but is able to undercut the prices of the “high-end” retailer. RPM and other vertical restraints can solve this problem. […]
December 8th, 2006 at 10:30 am
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