I’ve been having fun following the debate and briefs around the Leegin case, currently before the Supreme Court. In addition to the NY amicus brief and the American Antitrust Institute’s amicus brief, there have been interesting blog posts. Thom Lambert, over at Truth on the Market, has an interesting post on Commissioner Harbour’s open letter to the Supreme Court, in which the Commissioner argues in favor of keeping the per se rule of Dr. Miles. Here is a taste:

[C]onsider Commissioner Harbour’s arguments for why affording VRPM rule of reason treatment is “bad as a matter of economic policy.” According to the commissioner, more prevalent VRPM will result in the following laundry list of maladies: “higher prices set by manufacturers” [Really? If manufacturers set higher prices without receiving enhanced point-of-sale services worth more than those price hikes, total sales will fall — to the detriment of manufacturers.] “reduced efficiency in distribution and retailing” [Why would a manufacturer impose a scheme that reduces the efficiency of distribution and retailing, since such will result in higher retail mark-ups and reduced sales of his product?] “lower levels of retail sales per outlet” [If total sales fall, the manufacturer will not pursue a VRPM strategy.] “higher rates of business failure” [I don’t know the basis for the commissioner’s claim here. She cites a Senate report comparing rates of firm failure in “fair trade” states (states that had legislatively preempted Dr. Miles, as they were permitted to do for a period) with those in other states. Unless some study controlled for lots of other variables, this comparison is meaningless.] “reduced opportunities for effective entry by new competitors and products” [This seems inconsistent with the higher prices assertion above. Higher prices invite entry. Perhaps the commissioner is arguing that new retailers will not be able to gain a foothold by underpricing (i.e., free-riding off of) full-service retailers…I’m not sure.] “distortion of retailer incentives to provide objective comparisons of competing brands on their shelves” [Does anyone really think retailers do (or should do) this??? If so, slotting fees would certainly seem to present some problems.] “diminished levels of competition between competing brands of goods” [Not if VRPM is being used to combat the free-rider problem discussed above. If it is, it works to enhance the quality of the manufacturer’s product, thereby enhancing interbrand competition.] AND “increased competition by manufacturers for the loyalty of their dealers, the costs of which will be borne by consumers” [In the footnote accompanying this statement, the commissioner refers to “upward-spiraling price escalations to attract dealer loyalty.” Any manufacturer that sought dealer loyalty by raising the retail mark-up on his products in excess of the value added by the dealer would be shooting himself in the foot. Manufacturers thrive by selling lots of products (which they won’t do if the retail mark-up is too high), not by winning their dealers’ affections.]

Thom’s comments show the basic hostility toward per se rules in antitrust law, which grows from the Chicago School’s trust in the self-correcting forces of the market. Efficiency and consumer welfare coincide, and any harm to consumers that would derive from RPM (that is, higher prices) would either lead to loss of profits through reduced output or invite entry. All that begs for empirical evidence, of course, and I am curious to see what the Supreme Court will have to say on where the economic literature comes out. Josh Wright, currently scholar-in-residence at the FTC, has this assessment of the literature to offer (speaking strictly in a personal capacity):

I think the empirical evidence here is rather overwhelming in favor of a rule of reason approach. I had suspected that I would be reading arguments in favor of the per se rule that read something more like: “yes, the evidence is not in our favor but it is too inconclusive to change the rule yet because ….” Of course, this argument would not be persuasive because the modern per se approach tells us that we condemn under the per se rule if and only if we know the restraint always or almost always has anticompetitive effects. Instead, the argument is being made that the literature affirmatively demonstrates that RPM meets this standard. This surprises me. Maybe it shouldnt. But that is not how I, and many others, read this literature.

In contrast, the NY Antitrust Bureau argues in its amicus brief that there is no empirical support for the proposition that the rule of reason is preferable for vertical minimum price restraints (p. 10-11):

[P]etitioner offers no real-world evidence supporting those assertions. Nor does the economic literature contain empirical support for the belief that minimum RPM has procompetitive effects. Thus, the following observation, made in 1987, continues to be true today: “the basic reason the per se rule continues to be accepted is that those .. . who would argue against it[] have not made their case outside of an economic laboratory.” Sanford M. Litvack, The Future Viability of the Current Antitrust Treatment of Vertical Restraints, 75 Cal. L. Rev. 955, 956 (1987). Although the procompetitive theories have been discussed by scholars since at least 1960,5 the literature forthrightly acknowledges that there is an “empirical vacuum” that “seriously limits the development of economic understanding of these practices” and has left “[t]he host of competing theories .. . untested.” Indeed, much of the literature does not even purport to rest its conclusions on empirical work. This lack of empirical work may reflect that while the direct, negative consumer-welfare effects of minimum RPM are readily observable, the hypothesized procompetitive benefits are too ephemeral to be tested. Advocates of the procompetitive explanations do not even assert that the benefits are measurable empirically.

As Josh expected, the brief does go on to argue from the inconclusiveness of the research. But the NY amicus brief also makes the following interesting observation about RPM and market power (p. 13-14):

For example, the literature has not resolved even basic questions about whether, under the procompetitive explanations, one would expect to find evidence of market power at the supplier level in industries in which minimum RPM is used. Petitioner assumes that minimum RPM occurs in competitive interbrand markets. Pet. Br. at 22. This suggests that suppliers who use minimum RPM need not have market power. But much of the literature that petitioner cites posits that suppliers using minimum RPM must have market power — and, in effect, confer some of that power on retailers in return for preferential treatment.

Another important point is whether the per se rule for minimum RPM actually matters. That is, to what extent can firms today use Colgate enforcement of suggested retail prices and non-price restraints like minimum-advertised-price programs to reach a result that is very similar to minimum RPM? That argument cuts both ways, of course, and it has been advanced both in support of overruling Dr. Miles and in support of keeping the per se rule in place.

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