Free Minds, Slightly More Expensive Markets

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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.)

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  1. Sorry for not having a contrary opinion to yours. I agree completly. Legal yet stupid.

    First I became aware of this practice was when shopping for a VCR in the early 1980s and was told that the manufacturer I was shopping did this sort of pricing when I tried to dicker a little.

    Shortly after that they got banned from selling stuff in the US because they illegally sold 8 axis lathes (or something) to the Soviets for propeller manufacturing.

    Ended up with a great Mitsubishi machine, but the practice really annoyed me.

  2. When I bother to think about it, which isn’t often, I wonder why nobody has ever gone after Apple on this. When was the last time you saw an imac (or any other Apple product) at a significant discount?

  3. Dave, could you clarify a little?

    What strikes you as a stupid idea? RPMs? Banning them? Loosening the law to use the “reason standard?”

  4. Its fine for it to be legal. If they dont let their retailers the flexibility to effectively retail, theyre not going to make any money.

  5. I’m not the smartest guy around (just ask my wife), so please correct my concept if it’s wrong.

    I see this as being the end of the mom-and-pop. If the agreement says you must sell at 19.95, and MnP can only afford to carry 3 at a time, they’ll have to pay 19.00 each for them. Wal-Mart, on the other hand, will carry 3 million of them, and only have to pay .95 each.

    MnP will have less and less to offer over time, and will go under, and the liberals will say that Wal-Mart caused it, when in fact it was the manufactures.

  6. I would guess that if the Sherman anti-trust act, and all of its descendants pass constitutional muster, than the ban on RPM agreements should be as well. However, anti-trust law is a tangled thicket, and I’m sure there are issues that this layman is unaware of.

  7. WS- I can’t comment intelligently on what this would mean for MnP stores, but I can say that if the MnP stores around me are an indication of how most are, then good riddance to them.

  8. I have no problem with voluntary contractual arrangements between manufacturers and retailers. If a retailer signs an agreement with a manufacturer and promises not to discount the product, the retailer should honor that agreement. He can avoid the agreement by choosing not to sell the manufacturer’s goods. Of he can enter into a less restrictive contract with the manufacturer’s competitor(s). In other words, I favor unrestricted capitalism.

  9. What ed said.

    All we’re talking about here is fixing the price of a single manufacturer’s product. If you don’t want to pay full price for a particular purse or belt, then you can always buy another one.

    There is a way around the rule, of course, which is to own your own outlets.

    From the customer’s perspective, there’s no difference between 2,000 stores all owned by the manufacturer and selling at the same price, and 2,000 independent stores that have contracted with the manufacturer to sell at the same price.

  10. I’ll go with “cartel formation and enforcement presents many difficulties in a reasonably competitive marketplace.” The short version is that many kinds of collusion are unlikely because one or both parties has a reason to cheat in order to collect more profits. Look at the enforcement problems faced by the world’s most famous cartel, OPEC: they have member countries cheating on quotas all the time> [PDF].

    That said I’m definitely in the “probably legal but ultimately stupid” camp on the RPM issue. And I doubt that too many manufacturers would attempt to work one of these agreements, although it might be something manufacturers with retail operations attempt to keep competition to a minimum.

  11. wsdave, I think WalMart likes to sell most products the way they do now – cheaper than small stores and with a larger margin. If anything, minimum prises would help smaller stores since outlets wouldn?t be able to offer a better price.

  12. I see this as causing higher prices only for items where little or no competition exists if it even is ruled that way.

    Food and clothing are not likely to rise in price, nor cars, most electronics etc.

    Some premium brands will likely try this, but since most are offerred by corps that have non-premium brands, the average person will not care. So he buys a Sony instead of a Bravia.

    And most that try it will be undercut by hungry competetors seeking entry into the market. Unless the ones trying RPM’s offer enough extra value to justify the higher price, they will fail and either return to competetive pricing or go bye-bye.

    As Guy notes, RPM’s were common until less than 20 years ago. Nothing new. The market will remember and deal with it.

    So far as Apple and some others no being discounted, most are sold by Apple directly, online or in Apple stores. So they can ask what they want, as can others that sell only in their own facilities. They are not subject to the anti-RPM laws because they do not sell to intermediaries. They only come into efect when you sell to all retailers that want to buy them.

  13. When I bother to think about it, which isn’t often, I wonder why nobody has ever gone after Apple on this. When was the last time you saw an imac (or any other Apple product) at a significant discount?

    Because Apple is “nice” and Microsoft is “evil”.

    See? Pretty simple.

  14. If I recall correctly, the ban on RPM isn’t actually written as such into antitrust statute, it is court-created. The policy arguments are somewhat besides the point.

  15. This practice is common in the musical instrument market…in a more complex way. Everyone sets their retail at about double the minimum suggested price, but there is a discount floor beyond which you get in trouble as a seller. Watch musical instrument ads…any large retailer will “match their best advertised price” because they know what that price will be. I watched a large retailer turn in an on-line discounter when I showed him the ad that was lower than the floor price. “They aren’t allowed to sell it for that cheap!” He gave me the item “at a loss” (I am guessing he still made a good chunk of money – it was only about 5% lower than his discount price).

  16. An important point on my story.
    The drumset I purchased was a unique item only made by one factory.

    http://www.musiciansfriend.com/product/Yamaha-Hipgig-Sr.-Al-Foster-Signature-Series-Drum-set?sku=404104&src=3SOSWXXA

  17. 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.

  18. It’s easy enough to buy Apple products direct from their website/stores, which provides an upper price cap, and I would guess they wholesale them at a high enough percentage of their retail price to provide an effective bottom cap, especially when combined with state anti-loss-leader laws.

    I’ve heard of Apple resellers being blacklisted for leaking product info before launch, or selling early, but not for selling for too low a price.

  19. Neu Mejican, I was thinking the same thing as you. Based on experience with musical instruments, I thought this kind of agreement was perfectly legal.

    So, in other words, if online discounter X gets their Gibson Guitars franchise taken away because they dared to sell a guitar under the “floor” price, they could turn in Gibson to the FTC–or at least threaten to? I had no idea.

  20. Back in the late 90’s Apple decided to just focus on it’s operating system and other inovations and let other companies build Mac’s, the way Microsoft did. New “versions” of Macs came out and prices dropped due to competition. I thought this was a great idea, it’d increase market share, etc. But Apple (pre-ipod days) started loosing money and put an end to all that within a couple years.

  21. Why would companies want to restrict the retail prices of their goods so long as they get a fixed amount for those goods?

  22. The functional equivalent of RPMs, Minimum “Suggested” Retail Price, is perfectly legal, although enforcement by the manufacturer is somewhat less efficient. The only difference between the two is that there cannot be an agreement between the manufacturer and the retailer.

    Also, I don’t think holding RPMs legal will impact the prices charged by the Amazons and the Walmarts of the world. In many respects power is shifting to large retailers who can resist any efforts by manufacturers to force them to raise prices. I doubt many publishers would be willing to sacrifice the large sales they get from Amazon in order to raise book prices a few bucks.

  23. Because of the per se rule against RPM, consumers have saved hundreds of billions of dollars over the years, …

    This is a statement made without any support.

    In fact, one can almost guarantee that this statement is wrong. There is no market failure here. There is no reason on earth to think that, in a free market, the relationship chosen between producer, retailer, and consumer wouldn’t be the most efficient for all of them.

    I concur that RPMs would be rare in a free market. So the statement could be corrected by changing “per se rule” to “de facto marketing guideline”, which begs the question, why have such a law?

    I certainly can’t anticipate the corner cases where RPMs will be more efficient than variable pricing. I doubt the legislators and courts can either.

  24. Companies in Antingua will soon be selling DVD’s of 24 for a couple bucks, thanks to it’s win of the US in WTO dispute.

  25. Okay, the phrase “Creative Leather Products” made my ears prick up. Details? Pics?

  26. I would suggest that RPM could be to guarantee post-sale support–as support and the sale are a bundle of goods, think of car dealers and warranty work–and to prevent the free-rider problem noted earlier. As the contract between manufacturer and retailer may require that the retailer provide parts and service, RPM is another way of guaranteeing the quality of the service–it becomes the competitive margin.

  27. I’m not familiar with the facts of this case, but getting rid of minimum retail price maintenance would make sense. Using the rule of reason would make the vertical restraint portion of antitrust law consistent since maximum resale price maintenance is evaluated under the rule of reason as are non-price vertical restraints. I don’t think it’s clear that the economic harm from minimum rpm agreements is so great that the per se rule is necessary.

  28. That should say:

    “getting rid of the per se rule with respect to minimum retail price maintenance would make sense…”

  29. Okay, the phrase “Creative Leather Products” made my ears prick up.

    Interestingly, when I was trying to figure out what sort of product would benefit from RPMs, I came up with designer handbags. Then I remembered that the plaintiff was in leather.

    Designer handbags (a) attract buyers because of their exclusivity, (b) change in fashion often, and (c) suffer competition from knockoffs. For all of these reasons, they beg to be sold at a high price — a price set by the producer who manages the brand and a price high enough to yield exclusivity as well as to definitely distinguish the product from the knockoffs.

    And one would also expect such RPMs to expire as the product went out of season. The next season’s product is competing with past seasons’ product just as it is competing with knockoffs.

    This arrangement harms exactly nobody, and it plainly should not be illegal.

  30. I thought I was reading the wrong blog for a second. RPMs are fine; specifically manufacturers and retailers should be able to enter into any kind of agreement they like.

    And for us to play armchair quarterback and tell manufacturers that they are making poor choices for their businesses is the height of hubris.

  31. Let’s remember that the Supreme Court isn’t deciding whether RPM should be legal, but whether a “per se” or “rule of reason” standard should apply to antitrust challenges to RPM. The “per se” rule means “no due process,” because it prevents defendants from introducing evidence that a challenged practice is economically beneficial. In other words, judges and antitrust lawyers declare themselves economic experts and forbid dissent.

  32. “The example of resale price maintenance illustrates an important principle: Business practices that appear to reduce competition may in fact have legitimate purposes.” — Greg Mankiw

    http://gregmankiw.blogspot.com/2007/03/resale-price-maintenance.html

  33. Question: If such a law came into effect, would it somehow overreach and spill over into the secondary market? How easily would it be for ‘legitimate’ retailers to argue that secondhand sellers are working around the legalities, and try to have such sales stopped?

  34. 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.

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