A Dynamic Analysis of Resale Price Maintenance: Inefficient Brand Promotion, Higher Margins, Distorted Choices, and Retarded Retailer Innovation

• Author: Warren S. Grimes
• Published date: 01 March 2010
• Date: 01 March 2010
• DOI: http://doi.org/10.1177/0003603X1005500105
• Subject Matter: Article

Adynamic analysis of resale price

maintenance: Inefficient brand promotion,

higher margins, distorted choices,

and retarded retailer innovation

BY WARREN S. GRIMES*

This article responds to Professor Benjamin Klein’s recently published

article that describes a comprehensive procompetitive rationale for

RPM—resolving the incentive incompatibility between the brand

manufacturer and the retailers that sell that brand. Retailers commonly

have insufficient incentive to carry and promote products that, if

effective distribution were available, would be highly profitable to the

manufacturer. The Klein article uses a manufacturer profit/output

standard to argue that RPM resolves this incompatibility in a

procompetitive manner. I accept Klein’s premise that RPM is a way of

encouraging retailers to carry and promote the manufacturer’s brand,

but challenge his measure of procompetitive effect as inconsistent with

the Sherman Act’s focus on competition, not profitability for individual

market participants. I further develop salient features of RPM that

undercut the Klein thesis, including the inefficiency of RPM as a brand

promotion tool, the inflated manufacturer margins commonly

associated with RPM, and the stifling effect of RPM on innovative and

efficient retailing. An analysis of six contemporary RPM cases

illustrates these anticompetitive effects and provides robust support

for a strong presumption that RPM is a violation of the Sherman Act.

THE ANTITRUST BULLETIN:Vol. 55, No. 1/Spring 2010 :101

* Professor, Southwestern Law School.

AUTHOR’S NOTE: I am grateful to Jonathan Glecken, Greg Gundlach, Howard Marvel,

John Kirkwood, and Robert Steiner for comments on earlier drafts. This analysis addresses

only the setting of minimum retail prices—vertical minimum price fixing. Vertical

maximum price fixing presents a different set of issues. See Symposium: State Oil v.

Khan, 66 ANTITRUST L.J. 531–640 (1998).

© 2010 by Federal Legal Publications, Inc.

The manufacturer cannot get the dealer to do more

without increasing the dealer’s margin.

Frank Easterbrook1

The manufacturer can sometimes get the dealer to do more by increasing

the dealer’s margin, but there are more efficient and less anticompetitive

ways to buy dealer services.

Author’s correction of Easterbrook2

Resale price maintenance (RPM) makes money for both manufactur-

ers and dealers. The manufacturer profits by maintaining or increas-

ing sales, by selling at a higher price, or by a combination of both. The

dealer profits by selling at a higher margin, providing an incentive to

sell the manufacturer’s brand regardless of its cost or underlying

quality. The key issue in a competitive assessment of RPM, then, is

simply put: Is the increased profit primarily a result of an efficient

payment for procompetitive dealer promotion? Or is this increased

profit primarily occasioned by an anticompetitive suppression of nat-

urally occurring interbrand or intrabrand competition?

Dissenting Justice Breyer complained in Leegin Creative Leather

Products, Inc. v. PSKS, Inc., that the Court majority had overturned a

venerable precedent based on “arguments well known in the antitrust

literature for close to a half century.”3Indeed, almost a century before

Leegin, Louis Brandeis wrote a passionate populist essay in support of

RPM, canvassing many of the arguments advanced by contemporary

proponents of RPM (and some that are usually ignored).4More than

fifty years before Leegin, economist Basil Yamey’s 1954 book, rich with

historical perspectives on RPM, anticipated most of the analysis on both

sides that has filled subsequent volumes of antitrust writings,

102 :THE ANTITRUST BULLETIN:Vol. 55, No. 1/Spring 2010

1Frank Easterbrook, Vertical Agreements and the Rule of Reason, 53

ANTITRUST L.J. 135, 156 (1984).

2My correction of Easterbrook’s statement is explained infra part I.B.

3551 U.S. 877, 908 (2007) (Breyer, J., dissenting).

4Louis D. Brandeis, Cutthroat Prices—The Competition That Kills,

HARPER’SWEEKLY, Nov. 1913, reprinted in Fair Trade, Hearings Before the

Subcommittee on Monopolies and Commercial Law, H. Comm. on the Judiciary,

94th Cong. 36 (1975).

congressional testimony, and court briefs.5Yamey’s empirical and

historical anchor in the business realities of RPM is notably absent in the

majority’s opinion in Leegin. The same could be said for much of

contemporary RPM scholarship. It is easy to find scholars wielding

favored economic theories and selectively plucked Supreme Court

precedents to argue deductively for or against RPM. The economics

literature includes game theorists who craft elegant and undeniably

sophisticated proofs of pro- or anticompetitive effects from the use of

RPM. While a boon to the employment of economists, much of this

analysis is sterile—far removed from the market place conditions

confronting a producer deciding whether to impose RPM. Equally

troubling, neither the Leegin majority nor much of the contemporary

literature looks at the historical ebb and flow of RPM. RPM has been

alternately embraced, tolerated, and abandoned in various industry

segments over more than a century of brand marketing.6To b e

persuasive, a comprehensive RPM theory must account for these shifts.

DYNAMIC ANALYSIS OF RPM : 103

5Drawing on an impressive knowledge of the history of RPM in the

United Kingdom and elsewhere, Yamey analyzes most of the contemporary

arguments, including RPM’s potential to build and maintain dealer

networks and enhance dealer services. Although Yamey did not use the term

“free rider,” his 1954 book aptly describes contemporary arguments for and

against the hypothesis that RPM is needed to discourage free riding on

presale services or to provide an incentive to maintain an adequate

inventory. BASIL S. YAMEY, THE ECONOMICS OF RESALE PRICE MAINTENANCE

52–56 (1954). In the United States, economist Lester Telser is usually given

credit for developing the free rider hypothesis, six years after Yamey’s book

was published. Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3

J.L. & ECON. 86 (1960).

More than four decades before Leegin, marketing professor Stanley

Hollander described the RPM landscape in the United States with an

encyclopedic knowledge of American retailing and the concerns of

manufacturers and retailers that caused RPM to be pursued in some segments

and ignored in others. Stanley C. Hollander, United States of America, in RESALE

PRICE MAINTENANCE 65–100 (Basil S. Yamey ed., 1966). Other theorists who

have built their RPM analysis upon an empirical foundation include Ward S.

Bowman, Jr., Resale Price Maintenance—A Monopoly Problem, 25 J. BUS. U. CHI.

141 (1952) (analyzing RPM for liquor sales) and Robert L. Steiner,

Manufacturers’ Promotional Allowances, Free Riders and Vertical Restraints, 36

ANTITRUST BULL. 383 (1991) (drawing upon the author’s distribution

experience as an executive for a toy manufacturing firm).

6Yamey’s 1954 book cites a number of examples of this, including an

early example involving the British book publishing industry, which