Free Minds, Slightly More Expensive Markets
David Weigel | March 27, 2007, 11:12am
Peter Barile at the liberal American Constitution Society's blog flags the case of Leegin Creative Leather Products, Inc. v. PSKS, Inc, argued before the SCOTUS yesterday.
A fundamental rule of our free-market system is at stake in Leegin v. PSKS: the rule that manufacturers may not prevent retail discounting by colluding with dealers to fix the prices at which their products are sold at retail. The question presented is whether such minimum resale price maintenance (“RPM”) agreements should continue to be per se illegal or, rather, should be evaluated under a very lenient standard, which in antitrust parlance is called the “rule of reason.”
When employed, RPM prevents consumers from “shopping around” for the best price because it prevents retailers from putting on sale any and all types of products, including not only large purchases, but also everyday purchases—from groceries to gasoline. Because of the per se rule against RPM, consumers have saved hundreds of billions of dollars over the years, while the retailing industry has progressed from small shops to department stores to discount warehouses to, most recently, online commerce. Abandoning the per se rule in favor of rule of reason would provide cold comfort to American consumers; for it is widely recognized that to accord RPM a rule of reason treatment would effectively make RPM legal.
Short version: Hey, don't you like getting those $20 sale copies of 24 from Amazon ("You might also be interested in: The War Against the Terror Masters by Michael Ledeen; Twin Peaks: Fire Walk With Me by David Lynch")? Too bad. Soon, companies will have to agree to the price set by manufacturers.
This strikes me as a Constitutionally correct-yet-lousy idea, but I'd like to hear arguments to the contrary. (I imagine they'll sound like the FairTax arguments, as the prices businesses set will end up being so close to their old retail prices that no one will notice.)
(Via Slashdot.)
Chris S. | March 27, 2007, 12:08pm | #
To be clear, this case only involves vertical price restrictions -- horizontal restrictions between retailers and manufacturers would still be
per se violations. Thus, price competition between manufacturers of comparable products will be as fierce as ever. In my opinion, this alone is enough to move this type of agreement -- and all vertical restraints -- from
per se to rule of reason, but it’s unlikely that this will ever happen.
Most proponents of this change argue that these agreements prevent free-riding by certain retailers. Their argument is that retailers who don't promote products, but sell at a discount, will free-ride on the promotional efforts of retailers who invest money in product promotion, etc. For instance, the promotional efforts of a store selling PS3s might attract a consumer who would then buy the PS3 online from a discounter who hasn't invested anything in promotion.
I don’t know if I completely buy this argument, as most promotion is done at the manufacturer level, not at the retailer level. Modern media makes it much easier for manufacturers to advertise to targeted audiences, so they no longer rely on brick & mortar stores to hype their wares. They probably no longer need these agreements to ensure an adequate level of promotion.
Opponents of this change argue that these agreements are being made to secure monopoly type profits for companies with high market power that lack distributional capacity. The idea is that such manufacturers can raise manufacturer-->retailer prices to monopoly levels if retailers can ensure an adequate return due to the absence of retailer/retailer price competition. However, this is only a problem if the manufacturer has sufficient market power. Moreover, manufacturers with sufficient market power can simply raise prices to monopoly levels with or without price maintenance agreements. In effect, a higher wholesale price is basically a price maintenance agreement as long as the manufacturer has a monopoly.
Ultimately, I don’t think antitrust lawyers really know why companies would enter into these agreements, and I don’t think we can safely generalize. It’s best to allow some degree of flexibility when dealing agreements that aren’t clearly anticompetitive -- hence the rule of reason analysis.
independent worm | March 28, 2007, 12:19pm | #
To follow up on what Ed and RC Dean said above, I would add this:
Ed's scenario (the reseller signs a contract saying he won't sell below X) is not as common as you'd think.
Often, a "reseller" is someone with no contract, but a course of dealing. Further, that reseller may add other services, such as installation and maintenance (or tech support). For more complex items, such as factory equipment, they may provide engineering and customization.
So in those arrangements, there is some question as to just how much the actual goods themselves are being sold for, vs the other stuff. Not everyone likes, for competitive reasons, to itemize or unbundle the services. And for sure, that should be up to them.
And while it's true - and legal - for manufacturers to preserve their brand integrity throughout their many distribution channels by placing restrictions on resellers, its also true that many resellers invest enormous amounts of capital and time in training, certification, etc. In many instances, the process of becoming a "certified" dealer or reseller effectively prevents the reseller from being able to sell other manufacturers' products.
So if the manufacturer pulls the plug on them, they're screwed.
Now to (attempt to) tie this together: many manufacturer-reseller arrangments are long established, and the resellers have invested a lot in being able to be "authorized" resellers. If suddenly the manufacturers are allowed to change the terms of these relationships (as I said at the outset, very often there is no written contract regarding resale price) it could effectively destroy a lot of these companies.
C'est la vie? Maybe. But in my view, its more a case of legalizing price-rigging, instead of encouraging entrepreneurship at the retail level.
Remember, manufacturers presumably gain some benefit by using resellers instead of owning all the retail themselves. If they wanted to integrate, or found it useful, they could, and would. But we're talking about ones that have chosen not to. In doing so, they have accepted the benefits of having resellers move their products.
To now give them the power of life and death over these companies in the form of (private) price control, in my view gives them too much market power, and moreover, enables them to renege on years of prior dealing with companies that have come to rely on the symbiosis between them.
Bottom line: manufacturers don't need to set minimum prices unless they believe the market won't pay them what they want. If they are allowed to, you pave the way to "conscious parallelism" where their "competitors" set similar prices for similar products, rather than accepting what the market dictates.
PS I'm a lawyer not an economist, so my forays into economics might be wrong, but they are based on what I've gleaned from observing economic competition at combat level. What I see may be an inaccurate sample and not hold at the theory level.
