Economic Theory, Trader Freedom and Consumer Welfare: State Oil Co. v. Khan and the Continuing Incoherence of Antitrust Doctrine

36 Pages Posted: 29 Dec 2022

Date Written: 1999

Abstract

In Albrecht v. Herald Co., 390 U.S. 145 (1968) the Supreme Court declared vertical maximum price fixing unlawful per se. The Court identified three potential negative consequences of maximum rpm: (1) the agreement may fix prices too low for the dealer to provide services that enhance the quality of the good or other services for which the consumer is willing to pay; (2) low resale prices may channel distribution through a few large or specifically advantaged dealers, thereby limiting nonprice competition; (3) maximum prices may become de facto minimum prices, thereby transforming the arrangement into minimum rpm, which was then itself unlawful per se.

The Court did not claim that maximum rpm always or even usually resulted in one of more of these three consequences. However, the Court also identified a fourth consequence that maximum rpm always produces. That is, the practice always “cripple[s] the freedom of traders and thereby restrain[s] their ability to sell in accordance with their own judgment.” Thus, Albrecht banned all instances of maximum rpm, regardless of economic effect, to protect the autonomy of dealers to charge consumers whatever price maximized dealer profits.

The Supreme Court overruled Albrecht in State Oil v. Khan, 522 U.S. 3 (1997). The Court asserted that changes in economic theory cast new light on the consequences of maximum rpm and required the conclusion that the practice is often procompetitive. As a result, the Court said, the practice no longer met the exacting standard for per se illegality. While Albrecht was entitled to respect as a matter of stare decisis, the Sherman Act empowered the Court to adjust antitrust doctrine, including by overruling previous decisions, in light of changed understandings of the impact of a commercial practice.

While the Court emphasized the economic impact of the practice, it did not question Albrecht’s assumption that the autonomy of dealers was a paramount antitrust value. Instead, the Court opined that Albrecht itself had infringed that value, because the ban on maximum rpm had induced some firms to integrate forward, thereby eliminating altogether some independent dealerships. However, the Court’s assumption that such forward integration and reduction in dealer autonomy was itself lawful seemed to turn on an implicit preference for efficiency and thus consumers over the autonomy of dealers.

This essay demonstrates that Khan’s repudiation of Albrecht cannot be explained as a ministerial application of changed economic theory. Albrecht did not depend upon any particular account of the purely economic effects of maximum rpm. Instead, the decision was ultimately based on a conclusion that the practice always interfered with the discretion of dealers to price as they saw fit and thus restricted “trader freedom,” a value the Court held worthy of protection under the Sherman Act. Revised economic theory could not, as such, undermine Albrecht’s purely normative conclusion that this value was worthy of such protection. Still, Khan’s (correct) determination, based on Transaction Cost Economics, that maximum rpm is more often procompetitive than Albrecht supposed starkly highlighted the trade-off between the protection of traders and the welfare of consumers, placing the Court in the difficult position of balancing two incommensurable values. Moreover, Khan’s choice of consumers over traders rested upon the repudiation — explicit in Continental T.V. v. GTE Sylvania, 433 U.S. 36, 53, n.21 (1977) — of dealer autonomy as an independent antitrust value, at least in those cases where protection of that value will require condemnation of restraints that increase consumer welfare. This choice allowed the Court to avoid the illegitimacy costs that would have resulted from balancing trader freedom against consumer welfare. However, where protection of trader freedom will have no impact on consumer welfare, the Justices may continue to ban contracts that interfere with such freedom, thereby preserving some protection for trader freedom at the expense of doctrinal incoherence.

Keywords: Albrecht v. Herald Co., State Oil Co. v. Khan, Sherman Act, Maximum Resale Price Maintenance, Trader Freedom, Consumer Welfare, Transaction Costs, Judicial Legitimacy, Stare Decisis

JEL Classification: D23, D86, K21, L14, L22, L24, L40, L42

Suggested Citation

Meese, Alan J., Economic Theory, Trader Freedom and Consumer Welfare: State Oil Co. v. Khan and the Continuing Incoherence of Antitrust Doctrine ( 1999). Cornell Law Review, Vol. 84, No. 3, 1999, Available at SSRN: https://ssrn.com/abstract=4306267

Alan J. Meese (Contact Author)

William & Mary Law School ( email )

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P.O. Box 8795
Williamsburg, VA 23187-8795
United States
757-221-1609 (Phone)
757-221-3261 (Fax)

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