Resale pricing issues
| Pages | 69-121 |
CHAPTER III
RESALE PRICING ISSUES
A resale price maintenance (RPM) agreement is an actual or implied
agreement between firms at different levels of the supply chain that
restricts the price at which a distributor or retailer may offer products upon
resale. The restraints typically are grouped into three categories: specific;
minimum; and maximum resale price maintenance agreements. As the
names suggest, agreements in the first category set the actual price that
firms will sell products to consumers, while agreements in the second and
third groups create a price floor or ceiling, respectively, that distributors
must comply with when setting resale prices.
Resale price maintenance agreements can be implemented through
explicit promises, threats, or other means. Often, suppliers and resellers
enter into express arrangements allowing the supplier to establish its
desired price limitations.1 However, there are alternative methods of
implementation, such as requiring supplier approval for deviation from the
suggested retail price.2 Also, a supplier may announce unilaterally its
desired resale price and refuse to deal with those firms that do not comply.3
Each method is a vehicle that suppliers can use to achieve the same end:
constraining the resale price of their products.
Resale price maintenance agreements were condemned to the status of
per se illegality early in the history of the enforcement of the Sherman Act
when the Supreme Court issued its Dr. Miles Medical Co. v. John D. Park
& Sons Co.4 decision. That status began to change when, in State Oil Co.
v. Khan,5 the Supreme Court held that lower courts should evaluate price
ceilings on resale prices under the rule of reason. In its Leegin Creative
Leather Prods. V. PSKS, Inc. 6 decision, the Court went further by
abandoning per se treatment for price floors (and hence, in combination
408 (1911).
2. Pitchford v. PEPI, Inc., 531 F.2d 92, 98 (3d Cir. 1975).
3. See, e.g., United States v. Colgate & Co., 250 U.S. 300 (1919).
4. 220 U.S. at 408.
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70 Antitrust Law and Economics of Product Distribution
with Khan, actual prices), and replaced it with a rule of reason that
recognizes that, in some instances, resale price maintenance arrangements
may be procompetitive. Resale price maintenance may structure
distribution efficiently and increase a supplier’s ability to compete with
the products of its rivals (interbrand competition). The legal change
allowed economics to be brought to bear on resale pricing matters, but it
did not specify the weight that efficiency explanations should be accorded
in rule of reason adjudication.
The required rule of reason analysis could include a presumption that
resale price maintenance is competitive unless the facts demonstrate a
credible anticompetitive alternative for its use. This is, in fact, the situation
that has emerged in the wake of Khan for maximum resale price
maintenance arrangements, with the result that successful challenges to
resale price ceilings are essentially nonexistent.
There are several reasons why this status could be extended to price
floors as well. First, although resale price maintenance raises distributor
margins above the level that would prevail in the absence of supplier
intervention, for a given demand schedule higher margins for distributors
will reduce the price that a supplier can charge its dealers for the product
in question. Thus suppliers will only raise margins to the extent that doing
so increases the demand for their products. Demand increasing activities
are procompetitive, and so permitting a supplier to deploy resale price
maintenance is procompetitive as long as distributors are not in a position
to coerce the supplier to act against its own interest and as long as resale
price maintenance does not enhance the ability of suppliers to suppress
competition among themselves. The second reason for adopting a
rebuttable presumption that resale price floors are procompetitive is when
a resale price maintenance agreement facilitates a cartel agreement either
among suppliers or among their distributors–a clearly anticompetitive
purpose–the cartel in question per se violates the antitrust laws and can be
challenged directly, thereby allowing legitimate resale price maintenance
agreements to proceed without obstruction when such a direct challenge is
not possible.7
An alternative approach would include the opposite presumption–that
minimum resale price maintenance agreements are presumptively
anticompetitive. One argument for such an approach is that banning
supplier product discounting is harmful on its face because it increases
7. See, e.g., Frank H. Easterbrook, Antitrust Law Enforcement in the Vertical
Restraints Area: Vertical Arrangements and the Rule of Reason, 53
ANTITRUST L.J. 135 (1984).
Resale Pricing Issues 71
dealer margins. If the price that a supplier charges to dealers remains
unchanged after the supplier imposes minimum resale price maintenance,
resale prices will necessarily increase. Indeed, comparisons of retail prices
across jurisdictions that differ in their treatment of resale price
maintenance have found that prices are higher when resale price
maintenance is permitted.8 A rule of reason that begins with a presumption
that minimum resale price maintenance is normally harmful will require a
showing of efficiencies substantial enough to offset direct price effects.
Another argument in favor of a presumption of illegality is that
minimum resale price maintenance impairs intrabrand competition
directly by limiting discounting. Though enhanced interbrand competition
may more than offset the suppression of intrabrand competition in a
particular case, the presumption that resale price maintenance is
anticompetitive would be a significant hurdle to overcome. Courts may be
concerned that efficiency explanations are merely pretext for behavior that
was motivated by unrelated (and, given the presumption, anticompetitive)
purposes.
Until the parameters of the rule of reason applicable to resale price
maintenance are established, suppliers may wish to adopt pricing policies
that provide the competitive benefits of resale price maintenance but that
do not qualify as resale pricing agreements. Such policies were legal prior
to Leegin and remain so.
In this chapter, we begin by considering the economics of resale price
maintenance, describing its possible benefits for competition and
efficiency. We then address potentially anticompetitive resale price
maintenance policies. Next, we discuss the legal standards that govern
resale price maintenance agreements. We move on to consider the
circumstances under which a resale price policy does not constitute an
agreement, and therefore can avoid Section 1 scrutiny. Then we engage in
a brief analysis of damages. Finally, we discuss retail price maintenance
in the context of minimum advertised pricing programs.
8. Justice Breyer summarizes a number of price effect studies in his dissenting
opinion in Leegin, 551 U.S. at 912. But see Howard P. Marvel and Stephen
McCafferty, The Political Economy of Resale Price Maintenance, 94 J. POL.
ECON. 1074 (1986), for an economic analysis of this type of price evidence,
pointing out that it may be misleading.
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