Resale Price Maintenance: A Reassessment of its Competitive Harms and Benefits

Abstract:     
This paper was prepared for the Academic Society for Competition Law (ASCOLA) Conference on 'More Common Ground for International Competition Law?' held in Washington, D.C., June 17, 2009.

In a 5-4 antitrust decision in Leegin, the Supreme Court overruled Dr. Miles in 2007 to end per se condemnation of resale price maintenance (RPM) in favor of a rule of reason analysis. But the case has hardly settled the debate on the economics and appropriate legal treatment of RPM. It has also created a divergence with EU competition law, which treats RPM as a 'hard core' restraint.

In this paper, after providing a short history of RPM and a synopsis of Leegin and post-Leegin developments, I will discuss the theories relating to RPM’s competitive harms and benefits. With respect to anticompetitive theories, I will primarily develop arguments on two less recognized effects - to explain why evidence of higher prices under RPM should not be viewed as neutral or irrelevant, but should be read to presume anticompetitive effect; and to focus attention on RPM’s adverse effect on the retail sector. With respect to the procompetitive theories, I argue that the free-rider explanation for RPM, though theoretically elegant, has limited application. As for the more recently advanced non free-rider procompetitive theories, I identify and analyze a few common problems: their failure to show that the theories are socially efficient and not merely privately efficient; their unpersuasive explanation as to why RPM would be necessary in a competitive retail market absent free riding; and the lack of consideration of less restrictive alternatives.

The problem with a full-blown rule of reason analysis in real-world antitrust litigation is that it often devolves into a de facto legality rule, at least in vertical restraint cases. Indeed, given the stringent pleading standards recently articulated by the Supreme Court in Twombly, RPM plaintiffs may have difficulty even surviving a motion to dismiss on the pleadings going forward, a result that is undesirable. We should not forget that market competition is the norm in our economy and that price is a dimension of competition. RPM is essentially a restraint on intrabrand price competition. To the extent that economists disagree on the prevalence and significance of RPM’s benefits, and there is little reliable empirical evidence, it seems wiser to place the onus on those seeking to restrain competition, through RPM (which almost always raises prices), to demonstrate that it is procompetitive.

Keywords: antitrust, resale price maintenance, RPM, free riding, Leegin, per se, rule of reason

JEL Classifications: K21, L42, L40, L14

Accepted Paper Series