The resale price maintenance policy dilemma.

• Author: Blair, Roger D.
• Position: Communications

1. Introduction

   When a supplier forbids the resale of its product below some specified minimum price, it engages in resale price maintenance (RPM). As a business practice, this seems anomalous since lower resale prices would appear to expand the supplier's sales and profits. Although RPM has been a per se violation of the Sherman Act since 1911, it was not until 1960 that Lester Telser |17~ provided an efficiency rationale for RPM.(1) Following Telser's seminal insight, other ingenious explanations for RPM have been offered(2) and some serious doubts have been expressed about the empirical relevance of the efficiency explanations.(3) Kleit |8~ has stepped into this empirical void with a valuable bit of economic history that links theory with reality. He reviewed the testimony of businessmen given at Congressional hearings held during 1915-1917 and FTC hearings in 1917. Several businessmen articulated efficiency justifications that are remarkably consistent with the efficiency rationales "discovered" by economic theorists. Kleit's contribution is valuable because the advances in our theoretical understanding of the causes and consequences of RPM would not be relevant to a sound antitrust policy without some empirical confirmation.

   Let us start from the assumption that the goal of antitrust policy is to maximize either consumer surplus or the sum of consumer and producer surplus.(4) Further, let us assume that RPM is not being used to promote cartel activity among the dealers or among the manufacturers.(5) In other words, we are confining our attention to promotional uses of RPM. The question, then, is whether RPM increases or decreases the relevant measure of surplus. Ordinarily, a business practice is properly deemed per se lawful or unlawful when it predictably produces net gains or net losses a very high percentage of the time. Otherwise, it is appropriate to conduct a rule of reason analysis in which the procompetitive and anticompetitive consequences of the practice are weighed. If, on balance, the practice is procompetitive, it is legal; otherwise, it is illegal. In the case of RPM, a per se approach cannot be justified on the basis of a confident prediction as to its likely effects. Surprisingly, however, given the current state of economic theory and our (in)ability to measure welfare effects, a rule of reason analysis will similarly prove unavailing. This leads to the disconcerting conclusion that a coherent antitrust policy regarding RPM is not possible. In what follows, we show this in a simple model and examine some of the implications.

2. RPM and Consumer Welfare

   Telser's classic argument is now familiar. Providing product-specific services is costly and vulnerable to free riding.(6) If a full-service dealer provides these costly services (e.g., test drives for automobiles or technical advice on products like computers), then customers are free to avail themselves of these services...