Cornerstone Research economists Dr. Daniel M. Garrett, Dr. Michelle Burtis, and Dr. Vandy Howell have coauthored “Economics of Antitrust: An Economic Analysis of Resale Price Maintenance,” for the Global Competition Review’s Antitrust Review of the Americas 2008
. Resale price maintenance (RPM) occurs when a firm controls the downstream price of its products, typically by setting a minimum retail price. RPM has new relevance to antitrust and in-house counsel now that the Supreme Court has found that the practice is no longer per se illegal under the Sherman Act.
In Leegin Creative Leather Products, Inc. v. PSKS, Inc.,
the Court reversed Dr. Miles Medical
, an antitrust precedent from 1911 that found RPM was per se illegal. For the 96 years following Dr. Miles
, U.S. courts had viewed a firm’s vertical price agreements with its distributors or retailers to be on the same legal footing as a horizontal price agreement with its competitors. In Leegin
the Court found that RPM agreements can be pro-competitive, and that the legality of a particular agreement should be considered under a rule of reason analysis. The Court noted that RPM “can stimulate interbrand competition among manufacturers selling different brands of the same type of product.”
The Garrett-Burtis-Howell article explores the economics underlying RPM agreements and highlights circumstances under which such agreements can be either pro- or anti-competitive. The article explains that the problem being solved in pro-competitive applications of RPM is that, without it, a manufacturer receives insufficient services from its retailers. The manufacturer wants retailers to “do more” than they would otherwise. Moreover, insufficient services cannot be efficiently addressed through contract provisions. The article also explores anti-competitive applications of RPM that facilitate horizontal cartels among manufacturers or resellers.
Noting that “only through a careful economic analysis of the market conditions in a specific situation can both the pro- and anti-competitive effects of an RPM policy be evaluated,” the authors state that the “use of an RPM policy by manufacturers or retailers who have little or no market power is unlikely to have anti-competitive effects.” Among the conditions that bear on the competitive effects of an RPM policy are “(i) the market share of the affected products, a calculation which generally involves defining a relevant market; (ii) the extent of any barriers to entry for providers of the goods in question; and (iii) the supply elasticities of other providers of those goods.”
The article, an extract from The Antitrust Review of the Americas 2008,
a Global Competition Review
special report, is available to the right.