Comments on: May Dr. Miles Finally Rest in Peace? http://www.antitrustreview.com/archives/687 News and commentary about antitrust, economics, technology, policy Fri, 25 Jul 2008 03:38:34 +0000 http://wordpress.org/?v=2.2 By: The Fire of Genius » Supreme Court’s Growing Antitrust Docket http://www.antitrustreview.com/archives/687#comment-8314 The Fire of Genius » Supreme Court’s Growing Antitrust Docket Fri, 08 Dec 2006 15:30:44 +0000 http://www.antitrustreview.com/archives/687#comment-8314 <p>[...] Wright weighed in at Truth on the Market. Filed under: Antitrust , Supreme Court Permalink | Trackback URL| [...]</p> […] Wright weighed in at Truth on the Market. Filed under: Antitrust , Supreme Court Permalink | Trackback URL| […]

]]> By: TRUTH ON THE MARKET » Are Dr. Miles’ Days Numbered? http://www.antitrustreview.com/archives/687#comment-5178 TRUTH ON THE MARKET » Are Dr. Miles’ Days Numbered? Tue, 12 Sep 2006 19:58:12 +0000 http://www.antitrustreview.com/archives/687#comment-5178 <p>[...] 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. [...]</p> […] 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. […]

]]> By: Harry Gerla http://www.antitrustreview.com/archives/687#comment-5150 Harry Gerla Mon, 11 Sep 2006 14:44:49 +0000 http://www.antitrustreview.com/archives/687#comment-5150 <p>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.</p> <p>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.</p> 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.

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