RPM as an Exclusionary Practice
| Published date | 01 June 2010 |
| DOI | 10.1177/0003603X1005500203 |
| Date | 01 June 2010 |
| Author | Ittai Paldor |
| Subject Matter | Article |
RPM as an exclusionary practice
BY ITTAI PALDOR*
A key distinction in classifying RPM systems according to the present
state of the literature is the distinction between single
manufacturer–driven RPM and any other RPM system. While
anticompetitive explanations suggest that RPM is introduced in
furtherance of a cartel either at the retail level or at the
manufacturing level, procompetitive explanations show how RPM
may benefit a single manufacturer. Subsequent to the Supreme
Court’s ruling in Leegin v. PSKS, it would seem logical to create a
presumption of procompetitiveness when RPM is introduced at the
genuine initiative of a single manufacturer. This article challenges the
consensus according to which single manufacturer–driven RPM is
categorically procompetitive. I show that RPM can be used, and is
likely to be used, as an exclusionary measure for the elimination of
upstream competition. It thus has significant anticompetitive
potential even when it is not introduced in furtherance of a cartel.
* Research Fellow, Law and Economics Forum, Hebrew University,
Jerusalem; Post-doctoral Fellow, Hebrew University, Jerusalem.
AUTHOR’S NOTE: I am greatly indebted to Edward Iacobucci, Michael Trebilcock
and Ariel Katz for extremely helpful comments and suggestions on several earlier
drafts of this article, an earlier version of which is one chapter of my S.J.D. thesis. I
also thank Roger Ware and Benjamin Alarie for comments. The financial support
granted by the University of Toronto and by the Milton and Miriam Handler
Foundation is appreciated.
© 2010 by Federal Legal Publications, Inc.
310 : T H E A N T I T R U S T B U L L E T I N : Vol. 55, No. 2/Summer 2010
INTRODUCTION
A divided U.S. Supreme Court has recently overturned its long-
standing condemnation of minimum resale price maintenance
(RPM),1 a practice whereby an upstream firm (normally a manufac-
turer) sets a minimum price for the resale of its product by independ-
ent downstream firms (normally retailers).2 The court did not rule
that RPM is always legal. It merely lifted its century-old per se ban on
RPM,3 subjecting the practice to the standard rule of reason, accord-
ing to which the legality of a practice depends on the balance
between its pro- and anticompetitive effects under specific market cir-
cumstances. The Court invited lower courts to develop workable liti-
gation rules for the evaluation of the practice, saying:
As courts gain experience considering the effects of these restraints by
applying the rule [of reason] over the course of decisions, they can estab-
lish the litigation structure to ensure the rule operates to eliminate anti-
competitive restraints from the market and to provide more guidance to
businesses. Courts can, for example, devise rules over time for offering
proof, or even presumptions when justified, to make the rule of reason a
fair and efficient way to prohibit anticompetitive restraints and to pro-
mote competitive ones.4
The existing explanations for RPM are divided along a clear line
that separates the pro- and anticompetitive explanations. According
to the anticompetitive explanations, RPM is introduced in furtherance
of a cartel either at the retail level or at the manufacturing level.5 The
procompetitive explanations, by contrast, are all based on the
assumption that RPM is designed to benefit a single manufacturer.
Each of the procompetitive explanations identifies an advantage a
1
Leegin Creative Leather Prods., Inc. v. PSKS, Inc., No. 06-480, slip op.
(2007).
2
I generally use RPM as shorthand for minimum resale price mainte-
nance, which is the focus of this article. In this context RPM does not include
the practice of setting price ceilings.
3
Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
4
Leegin, slip op. at 19.
5
On the retailers’ cartel explanation, see infra note 14 and accompany-
ing text. On the manufacturers’ cartel explanation, see infra note 15 and
accompanying text.
R P M A S E X C L U S I O N : 311
manufacturer may get from elevating retail prices.6 A key distinction
in classifying RPM systems according to the present state of the litera-
ture is thus the distinction between single manufacturer–driven RPM
and any other RPM system.7 This distinction was of little practical
importance prior to Leegin, since RPM was per se illegal. But subse-
quent to the Court’s ruling, the issue of distinguishing pro- and anti-
competitive RPM systems has become one of major importance. And
in light of the existing explanations for RPM, it would seem logical to
create a presumption, perhaps an irrefutable presumption, of pro-
competitiveness when RPM is introduced at the genuine initiative of
a single manufacturer.8 The object of this article is to challenge the
consensus according to which single manufacturer–driven RPM is
categorically procompetitive9 and caution against such RPM systems.
I attempt to show that RPM may be anticompetitive even when it is
introduced for reasons other than the furtherance of a cartel.
The remainder of this article is structured as follows: section I
briefly summarizes the current state of the literature on RPM, with a
focus on the upshot of the commonalities among the procompetitive
explanations and the anticompetitive explanations. Section II intro-
duces the hypothesis, according to which RPM may be used as a rent-
shifting mechanism in return for retail-level exclusivity intended to
forestall competition at the upstream level. Section III explains why
RPM may be preferable, from the contracting parties’ perspective, to
traditional exclusivity agreements. Section IV explains why RPM-
induced exclusivity is likely to be anticompetitive, in contrast to tra-
6
See infra section I.
7
See Richard A. Posner, The Rule of Reason and the Economic Approach:
Reflections on the Sylvania Decision, 45 U. CHI. L. REV. 1 17–18 (1977).
8
Richard A. Posner, The Next Step in the Antitrust Treatment of Restricted
Distribution: Per Se Legality, 48 U. CHI. L. REV. 6, 8–14 (1981); Robert H. Bork,
The Rule of Reason and the Per Se Concept: Price Fixing and Market Division (II),
75 YALE L.J. 373, 397–475 (1965). As a practical matter, distinguishing genuine
single-manufacturer impetus from acquiescence to retail level pressure may
prove complex. See Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752
(1984). See also Frank H. Easterbrook, Vertical Arrangements and the Rule of Rea-
son, 53 ANTITRUST L.J. 135, 171–172 (1984).
9
See sources supra note 8.
312 : T H E A N T I T R U S T B U L L E T I N : Vol. 55, No. 2/Summer 2010
ditional exclusivity agreements, which may be procompetitive. Sec-
tion V addresses several potential objections to the hypothesis. Sec-
tion VI enumerates the policy implications of the hypothesis.
I.
PRO- AND ANTICOMPETITIVE USES OF RPM
At first blush, RPM is a puzzling practice. For any given whole-
sale price, the lower the retail markup the larger the quantity the
manufacturer will sell and, consequently, the larger its profits. Raising
retail prices reduces the total quantity of the product sold and the
manufacturer’s overall profits. This puzzle was observed as early as
1916 by Taussig, who pointed out:
In all this price-fixing system, the price received by the manufacturer
himself is in no way restricted or even directly affected. His own price to
the trade remains no less and no more. It is only the resale price that is
sought to be controlled. Now, the manufacturer’s immediate interest, and
indeed his only interest, would seem to be in his own receipts. So long as
he settles the price which comes to him, why should he concern himself
with the terms of further sale by jobber or retailer? Nay, his interest
would seem to be that these middlemen, and especially the retailers,
should sell as cheaply as possible, and advertise as much as possible their
cheap sales.10
The puzzle of RPM has resulted in a plethora of explanations for
its existence. Scholars have identified a host of reasons for employing
RPM, most of which are procompetitive. Each of the procompetitive
explanations identifies an advantage that the manufacturer may get
out of imposing RPM. An inflated margin between wholesale and
resale prices may facilitate investment in various kinds of point-of-
sale, product-specific services that consumers value at more than their
cost, which retailers will not provide without a restriction on price
competition, for fear that their competitors will free ride on their
efforts and underprice them.11 An increased per-unit margin may also
make it profitable for retailers to incur the costs of erecting establish-
ments in remote locations, for example, thereby allowing consumers
10
F.W. Taussig, Price Maintenance, 6 AM. ECON. REV. 170, 171 (1916).
11
Ward S. Bowman, The Prerequisites and Effects of Resale Price Mainte-
nance, 22 U. CHI. L. REV. 825 (1955); Lester Telser, Why Should Manufacturers
Want Fair Trade?, 3 J.L. & ECON. 86 (1960).
R P M A S E X C L U S I O N : 313
who would otherwise not have purchased the product to purchase
it.12 In total, there are seven procompetitive explanations for RPM,
each focusing on a different advantage a single manufacturer may
derive from the introduction of RPM.13 And since a manufacturer has
no incentive in a retail-level markup absent an offsetting benefit, it
can be assumed that the benefit derived offsets the cost. As the benefit
to the manufacturer derives from consumers’ willingness to pay for
the product, it can generally be assumed that consumers value what-
ever...
To continue reading
Request your trial