The Vertical Restraints' Paradox: Justifying the Different Legal Treatment of Price and Non-Price Vertical Restraints

Posted: 23 Feb 2009  

Ittai Paldor

Hebrew University of Jerusalem - Faculty of Law

Date Written: January 24, 2007

Abstract

In a case currently pending before the U.S. Supreme Court the court has been urged to overrule the longstanding per se illegality rule presently applicable to minimum resale price maintenance, or RPM. Over the past fifty years antitrust theorists and economists have advanced several pro-competitive explanations for RPM. Additionally, scholars have argued that non-price vertical restraints (such as territorial exclusivity) and RPM have similar effects on price and quantity and should therefore be treated similarly by law. Nearly thirty years ago, the Supreme Court ruled that non-price vertical restraints should be subject to a rule of reason, acknowledging their pro-competitive potential. Since no explanation has been forwarded to justify treating RPM differently, there seems to be good reason to rectify the inconsistency and subject RPM to a rule of reason too. And indeed, the Court has recently granted Certiorari, signaling at least a willingness to reconsider its position. In the following I argue that legal policymakers' current approach is economically justified. I show that all pro-competitive explanations for RPM suffer from a common flaw, the possibility of non-price competition, which challenges RPM's ability to achieve any of the pro-competitive goals attributed to it. I then proceed to show that non-price vertical restraints are capable of achieving the pro-competitive goals which RPM is incapable of achieving. This justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.

Keywords: antitrust, vertical restraints, RPM, vertical non-price restraints

JEL Classification: K21, L22, L42

Suggested Citation

Paldor, Ittai, The Vertical Restraints' Paradox: Justifying the Different Legal Treatment of Price and Non-Price Vertical Restraints (January 24, 2007). Available at SSRN: https://ssrn.com/abstract=960486 or http://dx.doi.org/10.2139/ssrn.960486

Ittai Paldor (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus, 91905
Israel

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