The resale price maintenance policy dilemma: reply.

• Author: Blair, Roger D.

1. Introduction

   To some extent, Boudreaux and Ekelund [3] is a criticism of the views that we expressed in Blair and Fesmire [2]. In particular, we have been criticized for being too cautious and not advocating per se legality for resale price maintenance (RPM). Although our critics confess that they "have little quarrel with the formal analysis [we] used," they minimize the policy dilemma that we described. Interestingly, in spite of the fact that their analysis contains neither a theoretical refutation of our work nor any empirical evidence to the contrary, we have come to agree with their conclusion, at least to some extent. Our reasons for this conversion are set out below.

2. Background

   Resale price maintenance (RPM) refers to a vertical restraint that is perplexing. A supplier that employs RPM forbids the resale of its product below some specified minimum level. Since lower resale prices would appear to be beneficial to the supplier, this practice has been difficult to understand. As Coase [4, 67] pointed out, when "an economist finds something - a business practice of one sort or other - that he does not understand, he looks for a monopoly explanation." And so it was with RPM. Initially, the practice was seen as a collusive device, which could be used by either colluding resellers or by colluding manufacturers. Under either of these circumstances, welfare losses result and the practice deserves to be per se illegal as the Supreme Court ruled in Dr. Miles.(1)

   Noncollusive explanations for RPM began to appear in the economics literature starting with Telser's [6] seminal insight in 1960.(2) These explanations, however, provide empirically ambiguous welfare results. In Blair and Fesmire [2], we presented a simple model in which the use of RPM to induce the provision of product-specific services may have two decidedly different effects on demand. In the example that we constructed, price and quantity increased by exactly the same amount as a result of the different demand shifts. In spite of identical price-quantity results, welfare clearly increases with one demand shift but may decline with the other. In a litigation context, data availability is apt to be confined to the pre-RPM price and quantity and the post-RPM price and quantity. Unfortunately, these data are not sufficient to determine whether welfare has increased or decreased. Thus, we were led to the antitrust policy dilemma that we described earlier.

3. The Policy Options

   There...