Download The Economics of Minimum Resale Price Maintenance

The Economics of
Minimum Resale Price
Maintenance
Robert Willig
Princeton University
Competition Policy Associates
(COMPASS)
Supreme Court Reconsidering
Per Se Treatment of RPM
Set in Dr. Miles Decision of 1911
• Current case is Leegin Creative Leather
Products, Inc. v. PSKS
• Leegin asking for rule of reason standard.
• Bevy of amicus briefs have been filed on
both sides, and the community awaits …
Procompetitive Uses of Minimum
RPM by Manufacturers
• To motivate with higher margins more
spending and investment by retailers to
sell the manufacturer’s product.
• To protect retailers from others’ free-riding
on their service provisions, in order to
preserve retailers’ incentives to perform.
• To permit the higher margins that motivate
retailers to invest in their own reputations
that can be transferred to the product.
What Retailer Services?
Displays, advice, demonstrations, skilled
sales force, effective showroom, demandinspiring shopping experience, local
advertising, post-sales servicing and parts
availability, greater inventories,
appropriate storage, longer selling hours,
better retail location, more retail outlets,
better shelf placements, …
Why Are These Vulnerable?
• Without minimum RPM, price competition
among outlets could drive margins too low to
support the costs of these retail services, and to
motivate their being incurred by the retailers.
• Without minimum RPM, retailers who charged
high margins to support provision of services
would be undercut by free-riding retail
competitors who benefit from the services
without paying for them. So retailers won’t spend
on the services without reward of diverted sales
.
Retail Reputation
• Retailers can invest to create high reputations,
but must expect to earn high margins to cover
the costs and to motivate living up to the
reputation.
• High reputation transfers to the products
because elite retailer perceived to carry only
desirable products.
• Without minimum RPM, other retailers without
reputation can undercut on elite products,
undermining creation of reputation and transferal
to the product.
Manufacturers’ Incentives
• These retail services can be powerful or
necessary for developing and maintaining
demand for products.
• High retail margins supported by minimum
RPM are costly due to demand repression
from price and “leaving $$ on the table.”
• Services can be worth the cost to the
manufacturer.
Can’t Manufacturers
Induce the Retail Services
In Better Ways?
• Not always, because contracts for the services
very incomplete, and very costly to monitor.
• Retailers may know better what services to
provide to build demand if motivated.
• Can’t charge consumers, except through the
good’s price.
• Other incentive mechanisms even more limiting
of dealer competition, like exclusives.
In Some Circumstances, Minimum
Price RPM Can Facilitate Collusion
• Collusion among manufacturers: RPM stops
pass-through of maverick manufacturer
discounting, and so lowers the gain from
increased sales to the maverick – facilitating
practice.
• Collusion among dealers: RPM turns
manufacturer into central monitor of adherence
to cartel pricing, and agent of punishment of
mavericks. It is key that manufacturer must be
forced into this role since against interest.
These Theories Don’t Apply
Where Market Not Conducive to
Collusion
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Interbrand competition
Lack of concentration
Disharmony of incentives
Low entry barriers
Product differentiation and dynamics
Information still makes monitoring difficult
Non-discounting retailers lack power to coerce
Apart from Collusion -• Manufacturers’ incentives to undertake minimum
RPM are aligned with social welfare.
• Interbrand competition disciplines manufacturers
to arrange distribution and marketing efficiently
for consumers, and to make RPM decisions
accordingly.
• True manufacturing monopolists are profit
motivated to arrange distribution and marketing
efficiently also, even as they exercise monopoly
power over price and output.
Proposal of Commissioner Harbour in
open letter to the Court
If a case arises that warrants more lenient treatment of vertical
pricing restraints, the Court should still begin with a firm
presumption that vertical minimum price fixing is unlawful. That
presumption should only be rebuttable by a factual, casespecific showing that (1) vertical minimum price fixing is
necessary to deliver identifiable net consumer benefits (2) in a
quantity at least as great as the amount by which prices have
been raised, and (3) such benefits could not be delivered by
less-restrictive, alternative means.
In order to rebut the presumption of illegality for vertical
minimum price fixing, the factual showing should also detail the
comparative losses and gains by marginal and inframarginal
consumers.
• It’s great that the Harbour proposal calls
for penetrating economic analysis of the
facts, but we appreciate the extent of the
burden.
• Is this proposal a form of rule of reason?
• The proposal does not condition the costbenefit test on a showing of monopoly
power at the brand level!
• It surely is a call for giving up “per se” rule.
Rule of Reason
• Allegation of collusion facilitated by minimum
RPM should be a required starting point for
violation.
• Little interbrand competition should be a
necessary condition for proceeding with
allegation of manufacturer collusion.
• Manufacturer coercion should be a necessary
condition for proceeding with allegation of dealer
collusion.
• Effects analysis should consider pro-competitive
function of the RPM and how conducive is the
market to collusion due to the RPM.