68 Pages Posted: 14 Jan 2007
Most antitrust scholars agree that vertical and horizontal intrabrand restraints such as minimum resale price maintenance and ancillary exclusive territories usually enhance welfare. Nonetheless, there is not universal agreement regarding how, exactly, such restraints have this impact. Following the lead of Lester Telser and Robert Bork, many scholars argue that, without more, such restraints can overcome a failure in the market for promotional services. Others, however, argue that such restraints cannot themselves induce dealers to engage in promotional activity. Under this view, intrabrand restraints are said to confer upon dealers economic rents that such dealers forfeit if terminated. The threat of such termination, it is said, serves as a performance bond for a set of promotional obligations that manufacturers and dealers negotiate separate and apart from the intrabrand restraint. Under this view, manufacturers basically plan the promotional activities of dealers and employ intrabrand restraints to encourage dealers to execute such plans. Finally, a few holdouts continue to argue that intrabrand restraints are anticompetitive and that firms can achieve the same benefits as such restraints by means of the less restrictive alternative of contracting directly with dealers for promotional services or integrating forward to take on the distribution function themselves.
This article examines and articulates an account of intrabrand restraints that helps evaluate the competing explanations of such agreements. In particular, the article argues that - as some have adumbrated or proposed - intrabrand restraints function as contractual property rights. By insulating firms from certain forms of rivalry, such contracts can function as property rights that ensure that dealers internalize the benefits of promotional expenditures. In this way, such restraints can play an important role in a system of distribution that delegates economic decision making to dealers with localized knowledge about the characteristics of actual and potential consumers. Far from facilitating a manufacturer's efforts to plan and direct a dealer's promotional strategy, such restraints help empower dealers, who compete with dealers distributing other products, to choose their own promotional strategies, thereby furthering a manufacturer's policy of relying upon the market to distribute its products in the first place. Thus, the property rights explanation fortifies the original Telser and Bork account of such restraints.
The property rights account of intrabrand restraints also lays the foundation for a rebuttal of arguments for banning such restraints. For instance, those who claim that manufacturers can achieve the same benefits via the less restrictive alternative of specifying promotional obligations fail to recognize the manufacturer's interest in delegating authority over promotional decision making to individual dealers who are in a better position to discern and implement promotional strategies that achieve the manufacturer's objectives. In addition, those who invoke complete vertical integration as a less restrictive alternative ignore the beneficial consequences of relying upon numerous individual firms, each with an incentive to maximize its own profits, to distribute a manufacturer's products. When coupled with intrabrand restraints, such a strategy can achieve the best of both worlds: decentralized decision making by firms that fully internalize the costs and benefits of their actions.
None of this is to say that the "property rights" account explains each and every intrabrand restraint. Some such restraints may, in fact, function as performance bonds. Others may be anticompetitive. Still, the property rights account tends to undermine any claim that such restraints are usually performance bonds or "always or almost always" anticompetitive.
Keywords: Intrabrand Restraints, Property Rights, Minimum Resale Price Maintenance, Transaction Costs
JEL Classification: D21, D23, D62, K21, L14, L22, L42
Suggested Citation: Suggested Citation
Meese, Alan J., Property Rights and Intrabrand Restraints. Cornell Law Review, Vol. 89, p. 553, 2004. Available at SSRN: https://ssrn.com/abstract=955981