Toward an Economic Approach to Agency Agreements

Abstract

It is a long-standing antitrust principle that agency relationships are exempt from price fixing violations. But the agency relationship must be "genuine." To discern genuine agency agreements, the prevailing approach adopted in both the United States and the EU focuses on whether the agent has incurred any specific risk or cost in relation to the distribution of the manufacturer's goods. Yet this approach has tended to obscure the economic nature of agency relationships. The real question to ask is not whether the agent has incurred any cost or risk, but instead whether in a given case an agency model, rather than a distribution model, actually constitutes a more efficient form for organizing distribution functions between the contracting parties. In fact, over a quarter of a century ago, Judge Posner proposed a business justification approach for analyzing agency agreements in Morrison v. Murray Biscuit. Building on Morrison and on the economic literature of property rights and agency problems, this article explores the fundamental question of how parties choose to enter into an optimal contractual form and, moreover, proposes an economic approach to discern genuine agency agreements. It also calls for revision of the current EU Vertical Guidelines on agency agreements, which are so stringent that they deter businesses unnecessarily from entering into agency arrangements.

Keywords: genuine agency, resale price maintenance, contract design, e-book, travel industry

JEL Classification: K21, K0, L1, L2, L4, O31