Manufacturers’ Promotional Allowances, Free Riders and Vertical Restraints

• Author: Robert L. Steiner
• Published date: 01 June 1991
• DOI: 10.1177/0003603X9103600204
• Date: 01 June 1991
• Subject Matter: Article

The Antitrust Bulletin/Summer

1991

Manufacturers' promotional

allowances, free riders and

vertical restraints

BY ROBERT L. STEINER·

383

At one time the vertical restraints literature pondered whether

manufacturers might solve free-rider problems more efficiently

by resale price maintenance (RPM) or by paying retailers directly

for performing the desired promotional services. The latter

option was rejected on the grounds

that

manufacturers' promo-

tional allowance programs inherently involved higher costs and

greater legal risks than RPM.

Although the analysis was partially flawed

and

no empirical

evidence for this conclusion was adduced

then-or

since-the

verdict has stood. Recent writings have, with only a few excep-

tions, ignored manufacturers' promotional allowances. Certainly,

the literature has made no serious attempt to integrate their role

•Consultant, Washington, D.C.

AUTHOR'S NOTE: Ithank William Comanor, Alan Fisher, Stephen

Greyser, Robert Lande and Richard Steuer

for

their helpful comments

on an earlier draft.

©1991by Fede

...

l Legal Publications, Inc.

384 :The antitrust bulletin

into the larger vertical restraints picture. This article undertakes

that task.

The article presents a simple theoretical framework in which

to analyze how manufacturers' promotional allowances

and

verti-

cal price

and

distributional restraints enable a profit-maximizing

manufacturer to deal with various commonly encountered prob-

lems, including

but

not

limited

to

several kinds

of

free-rider

situations. The manufacturer's optimal policy choice is seen to

depend on such variables as the type

of

merchandise, the struc-

ture

of

the industry's retailing segment

and

the relative market

power

of

the manufacturer and his retailers.

It

turns out that

promotional allowances and vertical restraints are typically inde-

pendent or complementary (rather than substitute) marketing

policies

that

are designed to solve different sorts

of

problems.

Section III infra is a case study

of

the U.S. toy industry.

It

illustrates how manufacturers adapted their marketing strategy to

changes in underlying industry conditions that resulted from the

opportunity to advertise their toys on television

and

from the

simultaneous advent

of

discount stores. None

of

the problems

hypothesized in the vertical restraints literature prevented toy

makers from operating strong

and

successful manufacturers'

promotional allowance programs, either in the pre-TV era

of

uniform resale prices or in the subsequent post-TV era

of

ram-

pant

retail price cutting. Moreover, in the pre-TV era, neither the

manufacturers' promotional allowances nor the uniform resale

prices were the result

of

attempts by toy manufacturers to control

free riders.

I. Background

The vertical price

and

distributional restraints placed by a

manufacturer on resellers

of

his brand are classified as voluntary

when they are not owing to a manufacturer or dealer cartel.

Promotional allowances are payments by manufacturers

to

retail-

ers

to

cover the cost

of

specific retailer "special services"I

Telser, Why Should Manufacturers Want Fair Trade? 3

J.L.

&

ECON.

86 (1960).