Rethinking RPM: Did the Courts Have it Right All Along?

324 Pages Posted: 25 Jun 2007  

Ittai Paldor

Hebrew University of Jerusalem - Faculty of Law

Date Written: 2007

Abstract

Minimum resale price maintenance (RPM) is a practice whereby an upstream firm, typically a manufacturer, sets a price below which downstream firms, typically retailers, may not resell its product.

RPM is a puzzling practice. Having sold the product to retailers at a price satisfactory to itself, a manufacturer should want retail prices to be as low as possible. All else equal, this will increase volume and result in larger profits for the manufacturer.

The RPM puzzle has attracted significant academic interest. Antitrust theorists have offered various explanations for RPM, most of which identify pro-competitive goals that RPM may achieve. The use of RPM to achieve anti-competitive goals is considered unlikely. Therefore, the prevailing scholarly view is that RPM is generally pro-competitive. Most scholars advocate a lenient legal approach to RPM and some have even argued that RPM should never be condemned by antitrust law.

The treatment of RPM by lawmakers across jurisdictions sharply diverges from what the vast majority of scholars consider to be the appropriate treatment. RPM is generally illegal per se; that is, it is condemned with no inquiry required into its actual effects on competition. Lawmakers have not, however, provided an economic justification for applying the per se illegality rule to RPM. The existing state of the law is consequently heavily condemned by scholars, who agree almost unanimously that it is in need of change.

This thesis challenges the contemporary scholarly view. It argues that RPM is, at least typically, anti-competitive and that the current legal rule is therefore appropriate. The thesis first shows that anti-competitive explanations of RPM are more persuasive than they are normally considered to be. Next, the thesis points to major shortcomings in the pro-competitive explanations for RPM, and argues that these are generally unpersuasive. Finally, the thesis shows that RPM may be used as an exclusionary measure to forestall competition at the upstream level. This new theory demonstrates that RPM may be anti-competitive even in circumstances under which the existing anti-competitive hypotheses cannot explain its use. I conclude that RPM should remain subject to a per se illegality rule.

Keywords: RPM, resale price maintenance, vertical restraints

JEL Classification: L42, K21, L22

Suggested Citation

Paldor, Ittai, Rethinking RPM: Did the Courts Have it Right All Along? (2007). Available at SSRN: https://ssrn.com/abstract=994750 or http://dx.doi.org/10.2139/ssrn.994750

Ittai Paldor (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus, 91905
Israel

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