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Vertical Restraints, Dealers with Power, and Antitrust Policy

Herbert J. Hovenkamp

University of Iowa - College of Law

September 24, 2010

U Iowa Legal Studies Research Paper No. 10-37

The Supreme Court’s Leegin decision has now brought the rule of reason to all purely vertical intrabrand distribution restraints. But the rule of reason does not mean per se legality and occasions for anticompetitive vertically imposed restraints may still arise. Of all those that have been suggested the most plausible are vertical restraints imposed at the behest of a powerful dealer or group (cartel) of dealers.

Although a vertical distribution restraint resembles a dealer cartel in that both limit intraband competition, a manufacturer restraining the distribution of its product shuns the excess dealer profits a dealer cartel would seek. Accordingly, a knowledgeable and un-coerced manufacturer who restricts rivalry among dealers must do so for some other reason, such as to facilitate dealer services. In fact, however, manufacturers have been known to restrain intrabrand competition - especially through resale price maintenance - not to achieve more effective distribution but rather to appease dealer interests in excess profits. Whatever the social benefits of a distribution restraint that serves a manufacturer's self-interest, a competition-limiting restraint extracted by dealer power can be harmful.

Vertical restraints reflecting dealer power could well be ignored by antitrust law if they were rare, insignificant in magnitude, or readily detected and remedied under other branches of antitrust law. But we doubt that dealer power is that rare and are troubled by an apparent history of price-enhancing resale price maintenance for the benefit of dealers. At least some of the claimed justifications for it actually reflect dealer power, and antitrust rules controlling horizontal combinations cannot themselves prevent those distribution restraints that result from the power of a single dealer.

Requiring the plaintiff to prove that the challenged restraint is explained solely and exclusively on cartel, dealer power, or other non-efficiency grounds would be an attractive policy option for those who think such instances are rare. This option allows prompt validation of many such restraints. On the other hand, requiring the defenders to offer a plausible and legitimate business reason for every restraint would allow the antitrust tribunal easily to condemn those restraints obviously lacking justification but would complicate many cases in which dealer power is unlikely. Depending on the restraint, challengers might be required to prove specified indicia of dealer power, or, for legally less favored restraints, such power might be presumed subject to rebuttal by disproof of the same specified indicia. In sum, presumptions must be developed that will both clarify and simplify the fact finding process.

Number of Pages in PDF File: 30

Keywords: antitrust, resale price maintenance, vertical restraints, leegin, rule of reason, cartels, dealers

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Date posted: September 25, 2010 ; Last revised: December 2, 2010

Suggested Citation

Hovenkamp, Herbert J., Vertical Restraints, Dealers with Power, and Antitrust Policy (September 24, 2010). U Iowa Legal Studies Research Paper No. 10-37. Available at SSRN: https://ssrn.com/abstract=1681921 or http://dx.doi.org/10.2139/ssrn.1681921

Contact Information

Herbert J. Hovenkamp (Contact Author)
University of Iowa - College of Law ( email )
407 Boyd Law Building
Iowa City, IA 52242
United States
319-335-9079 (Phone)
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