Free Riding: An Overstated, and Unconvincing, Explanation for Resale Price Maintenance

Abstract

This paper was prepared as a chapter for a forthcoming book, How the Chicago School Overshot the Mark: Effect of Conservative Economic Analysis on U.S. Antitrust (Ed. Robert Pitofsky, Oxford Univ. Press).

Lester Telser's free rider theory provided a rational efficiency explanation for vertical restraints under the conditions of his model. It soon became the basis for a comprehensive claim that vertical restraints, including resale price maintenance, generally increase distribution efficiency, enhance interbrand competition, and improve consumer welfare. This claim was a principal rationale for the Court's recent 5-4 decision, in Leegin, to overrule Dr. Miles' per se rule for minimum RPM.

I argue that the free rider concept, though theoretically correct, cannot support such a broad claim. The theory has limited application in its original formulation because few goods require tangible dealer services for effective marketing. I also analyze why the expansive versions of the theory, which include free riding on general intangible services and on reputation or quality certification are flawed on their own terms. Moreover, free riding, ubiquitous in our economy, is not necessarily harmful and does not have to be eliminated wherever it occurs. In the absence of good empirical data, we should not assume that minimum RPM usually confers substantial consumer benefits.

In overruling Dr. Miles without good empirical evidence of (or economic consensus about) the regularity or harshness of the free rider problem, Leegin apparently assumes that the per se rule is inappropriate for any class of conduct for which procompetitive benefits are possible. This approach seems contrary to modern decision theory, which requires focus, not on whether a practice has any procompetitive benefit (or anticompetitive harm), but on the frequency and relative magnitude of those benefits and harms, and on the availability of less anticompetitive alternatives.

The full implications of Leegin will depend on how lower courts interpret that opinion and apply the rule of reason. Given minimum RPM's anticompetitive risks, I suggest that courts reject the Sylvania rule of reason standard, which has become a de facto legality rule, and instead apply the quick-look standard now frequently employed in horizontal restraint cases.

Keywords: antitrust, free riding, reputation free riding, resale price maintenance, RPM, vertical restraints, rule of reason, quick look

JEL Classification: K21, L42, L40, L14