Resale price maintenance
From Wikipedia, the free encyclopedia
Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). These rules prevent resellers from competing too fiercely on price and thus driving down profits. Some argue that the manufacturer may do this because it wishes to keep resellers profitable, and thus keeping the manufacturer profitable. Others contend that minimum resale price maintenance, for instance, overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer's product are able to recoup the additional costs of such promotion in the price they charge consumers. Some manufacturers also defend resale price maintenance by saying it ensures fair returns, both for manufacturer and reseller and that governments do not have right to interfere with freedom to make contracts without very good reason.
Contents |
[edit] United Kingdom law
In 1955 in the UK the Monopolies and Mergers Commission's report Collective Discrimination - A Report on Exclusive Dealing , Aggregated Rebates and Other Discriminatory Trade Practices recommended that resale price maintenance when collectively enforced by manufacturers should be made illegal, but individual manufacturers should be allowed to continue the practice. The report was the basis for the Restrictive Trade Practices Act of 1956, this specifically prohibited collective enforcement of resale price maintenance in the UK. Restrictive agreements had to registered at the Restrictive Practices Court, and were considered on individual merit. In 1964 the Resale Prices Act was passed, which now considered all resale price agreements to be against public interest unless otherwise proved. However practices such as the Net Book Agreement continued to prevent discounting in some market segments.
[edit] United States law
In Dr. Miles Medical Co. v. John D. Park and Sons, 220 U.S. 373 (1911), the United States Supreme Court affirmed a lower court's holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel. Subsequent decisions characterized Dr. Miles as holding that minimum resale price maintenance is unlawful "per se" - that is, without regard to its impact on the marketplace or consumers.
During the Great Depression in the 1930s, a large number of U.S. states began passing fair trade laws. These were intended to protect independent retailers from the price-cutting competition of large chain stores by authorizing resale price maintenance. Since these laws allowed vertical price fixing, they directly conflicted with the Sherman Antitrust Act, and Congress had to carve out a special exception for them with the Miller-Tydings Act of 1937. The fair trade laws became widely unpopular after World War II, and eventually, the Miller-Tydings Act was repealed by the Consumer Goods Pricing Act of 1975.
In 1968 the Supreme Court extended the "per se" rule against minimum resale price maintenance to maximum resale price maintenance, in Albrecht v. Herald Co., 390 U.S. 145 (1968). The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice "may" channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the "maximum" price could instead become a minimum price.
In 1997, the Supreme Court overruled Albrecht, in State Oil v. Khan, 522 U.S. 3 (1997).
Several decades after Dr. Miles, scholars began to question the assertion that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester Telser, an economist at the University of Chicago, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in desired promotion of the manufacturer's product through local advertising, product demonstrations, and the like. Absent such contractual restraints, Telser said, no frills distributors might "free ride" on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion. Six years later, Robert Bork reiterated and expanded upon Telser's argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints, such as exclusive territories, could achieve the same results.
Some scholars subsequently questioned Telser's theory, arguing that, by itself, minimum retail price maintenance cannot ensure that dealers will engage in an optimal level of promotion. These scholars argued instead that minimum price served as a contract enforcement mechanism, guaranteeing compliant dealers a stream of rents if they adhered to a manufacturer's promotional directives. However, some contended that the promotional efforts resulting from minimum price and other vertical restraints could actually reduce economic welfare, by encouraging undue product differentiation and the resulting market power. Others claimed that manufacturers could achieve the same objective by means of less restrictive alternatives.
In 1978, the U.S. Supreme Court held that non-price vertical restraints, such as vertically imposed exclusive territories, were to be analyzed under a fact-based "rule of reason." In so doing, the Court embraced the logic of Bork and Telser as applied to such restraints, opining that, in a "purely competitive situation," dealers might free ride on each others' promotional efforts.
In 1980, the U.S. Supreme Court held that the repeal of Miller-Tydings implied that the Sherman Act's complete ban of vertical price fixing was again effective, and that even the 21st Amendment could not shield California's liquor resale price maintenance regime from the reach of the Sherman Act. California Liquor Dealers v. Midcal Aluminum, . Thus, resale price maintenance is again no longer legal at the present in the United States.
[edit] See also
[edit] External links
[edit] Bibliography
Lester G. Telser, Why Should Manufacturers Want Fair Trade, 3 J. L. & Econ. 86 (1960)
Robert H. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division, 75 Yale L. J. 373 (1966)
Victor Goldberg, The Law and Economics of Vertical Restraints: A Relational Perspective, 58 Tex. L. Rev. 91 (1979)
Frank H. Easterbrook, Vertical Arrangements Under The Rule of Reason, 53 Antitrust L. J. 135 (1984)
Robert Pitofsky, Why Dr. Miles Was Right, 8 Regulation 27 (1984)
Benjamin Klein and Kevin M. Murphy, Vertical Restraints As Contract Enforcement Mechanisms, 31 J. L. & Econ. 265 (1988)
Warren Grimes, Spiff, Polish and Consumer Demand Quality: Vertical Price Restraints Revisited, 80 California Law Review 815 (1992)
Mark Roszkowski, Vertical Maximum Price Fixing: In Defense of Albrecht, 23 Loyola University of Chicago Law Journal, 209 (1992)
John Lopatka and Roger Blair, The Albrecht Rule After Khan: Death Becomes Her, 74 Notre Dame Law Review 123-79 (1998)
Mark Roszkowski, State Oil Company v. Khan and the Rule of Reason: The End of Intrabrand Competition? 66 Antitrust Law Journal 613-640 (1998).
Alan Meese, Property Rights and Intrabrand Restraints, 89 Cornell L. Rev. 553 (2004)
