Black and White Thinking in the Gray Areas of Antitrust: The Dismantling of Vertical Restraints Regulation

Abstract

In this Article I present a two-pronged analysis of vertical restraints, one in law and one in economics. By tracing the checkered legal history of vertical restraints, I show the marked changes recent antitrust decisions have wrought, in particular, by comparing the legal standards expressed by the Supreme Court in Monsanto Co. v. Spray-Rite Service Corp. with those in Business Electronics Corp. v. Sharp Electronics Corp and Atlantic Richfield Co. (ARCO) v. USA Petroleum Co. If through the latter two cases the Court has, for all practical purposes, created a category of per se legality for vertical price restraints, which I believe to be the case, then it would not be unreasonable to expect the Court to proceed in the same fashion with respect to vertical non-price restraints in the future.

After assessing the current legal status of vertical restraints through market analyses, I demonstrate that the economic reasoning justifying their per se legal treatment is not as compelling as previously believed. I show this in two respects. One evaluation stems from recent advances in economic theory exploring the dynamics underlying the manufacturer's decision process when selecting a method of product distribution. By drawing on those developments, I identify market scenarios not previously considered, in which the anticompetitive effects of vertical price restraints on certain distribution strategies raise new and legitimate antitrust concerns. A second inquiry reexamines the economic issue that initially gave rise to arguments in favor of the legalization of vertical price restraints, that is, the phenomenon of price-discounting retailers who are also free riders.

Some commentators have argued that manufacturers should be able to impose vertical price restraints to protect against the dealer erosion that free-riding precipitates. Reaching a different conclusion, this Article demonstrates that either the manufacturer can achieve those same ends through less trade-restrictive business methods that may, in addition, enhance consumers' satisfaction, or, that the strategies themselves, from an economics perspective, are not worthy of protection.

Together, both economic analyses, that of the manufacturer's distribution choices and that of the free rider phenomenon, signify that unfettered freedom for manufacturers to impose whatever vertical arrangements they choose actually can foster lower efficiency levels and consumer welfare, the primary economic measures used to evaluate antitrust policy. These results are at variance with those of the Chicago School and indicate the need for more subtle, yet well-defined, antitrust treatment of vertical restraints than per se legal rules offer.

Moreover, the conclusions of this Article's market evaluations also demonstrate that the rigidity created by per se illegal treatment of vertical price restraints lowers consumer welfare as well, when applied to certain commonly occurring manufacturer-retailer relationships. Given that neither per se illegal nor per se legal rules for vertical price restraints have the flexibility to make the crucial distinctions between a manufacturer's pro- and anticompetitive conduct, this Article argues for the application of a rule of reason standard that incorporates those features of market structure that economic reasoning indicates will ensure procompetitive impact.

Keywords: Antitrust, Vertical Restraints, Price Restraints, Non-Price Restraints, Efficiency, Anticompetitive, Competition, per se illegal, per se legal, Rule of Reason, Market Forces, Economic Analysis, Procompetitive, Competitive, Trade Restrictions, Consumer Welfare, Social Welfare, Scalia,

JEL Classification: K21, K29, K39, K49, L42, L49