For Official Use DAF/COMP/WD(2008)63
Organisation de Coopération et de Développement Économiques
Organisation for Economic Co-operation and Development 16-Oct-2008
___________________________________________________________________________________________
English text only
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
COMPETITION COMMITTEE
ROUNDTABLE ON RESALE PRICE MAINTENANCE
-- Note by the United States --
This note is submitted by the United Kingdom to the Competition Committee FOR DISCUSSION at its
forthcoming meeting to be held on 21-23 October 2008.
JT03253136
Document complet disponible sur OLIS dans son format d'origine
Complete document available on OLIS in its original format
DAF/COMP/WD(2008)63
ForOfficialUse
Englishtextonly
DAF/COMP/WD(2008)63
2
1. Introduction
1. The United States Supreme Court recently addressed competition policy approaches to minimum
resale price maintenance (RPM) agreements. In its 2007 Leegin decision, the Supreme Court (supported
by the U.S. antitrust agencies) concluded that these agreements, under which the producer of a product sets
a minimum price at which retailers can sell the product, should be evaluated under the rule of reason
standard.1
With Leegin, the Supreme Court firmly moved to overrule the existing case law based on the
1911 Dr. Miles decision, which held that RPM was per se illegal under Section 1 of the Sherman Act.2
While over the years there have been certain exceptions to this per se treatment of RPM,3
the Dr. Miles
decision continued to prevent firms from adopting explicit minimum RPM agreements until the Court
issued its opinion in Leegin. Leegin thus grants manufacturers, i.e., the upstream firms in the vertical chain
of production, greater freedom to use RPM in their relationships with distributors and retailers, i.e., the
downstream firms in the vertical chain of production.
2. The Leegin decision brings the legal treatment of minimum RPM in line with the treatment of
other vertical restraints that U.S. courts evaluate under the rule of reason, such as exclusive territories and
exclusive dealing. While the courts once viewed many vertical restraints with considerable suspicion, over
time they began to recognise that these practices can lead to substantial efficiencies and may therefore
benefit consumers.4
Whereas vertical restraints may have an anticompetitive effect in some circumstances,
they also may promote competition by allowing vertically related firms to structure their relationships in a
way that improves their ability to compete against rivals. Because consumers may frequently benefit from
these practices, it is inappropriate to condemn a particular vertical restraint as a per se violation of the
Sherman Act without first considering its actual effect on consumers. This reasoning applies equally to
minimum RPM as well as to other vertical restraints. As the Court noted in the majority opinion in Leegin,
because adopting a per se rule against RPM "would proscribe a significant amount of procompetitive
conduct, these agreements appear ill-suited for per se condemnation."5
This perspective is shared by a
substantial consensus of economists, many of whom have long argued that a consistent rule of reason
treatment of RPM and exclusive territories is proper, since their potential effects and benefits to consumers
are similar.6
1
Leegin Creative Leather Products, Inc. v. PSKS, Inc. 127 S. Ct. 2705 (2007). See Brief for the United
States as Amicus Curiae Supporting Petitioner, Leegin 127 S. Ct. 2705 (2007).
2
Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
3
For a discussion of the scope of permissible RPM agreements prior to the repeal of the Miller-Tydings and
McGuire Acts in 1975, see Pauline Ippolito and Thomas Overstreet, Resale Price Maintenance: An
Economic Assessment of the Federal Trade Commission's Case Against the Corning Glass Works, 39 Jl. of
Law and Econ. 285 ­ 328 at 287 (1996). For a discussion of permissible behavior under United States v.
Colgate & Co., 350 U.S. 300 (1919), see Pauline Ippolito, Resale Price Maintenance: Empirical Evidence
From Litigation, 34 Jl. of Law & Econ. 263 ­ 294 at 266 (1991).
4
A key turning point was the Supreme Court's decision in Cont'l T.V. Inc. v. GTE Sylvania Inc., 433 U.S.
36 (1977), which held that U.S. courts would judge non-price vertical restrictions according to the rule of
reason. For a discussion of the effects of Sylvania, see James Cooper, Luke Froeb, Dan O'Brien, and
Michael Vita, Vertical Antitrust Policy as a Problem of Inference, 23 Int'l Jl. of Ind. Org. 639 ­ 664 at 640
(2005).
5
Leegin, 127 S. Ct. at 2718.
6
The brief filed in Leegin by a wide variety of leading antitrust and industrial organisation economists
reflects a general consensus among economists regarding the proper legal standard for evaluating RPM
agreements. See Brief of Amici Curiae Economists in Support of Petitioner, Leegin 127 S. Ct. For
additional discussion of the desirability of evaluating RPM under the same standard as other vertical
DAF/COMP/WD(2008)63
3
3. In the wake of Leegin, vertically related firms such as manufacturers and retailers may now begin
to adopt minimum RPM agreements as standard business practices. If RPM becomes more common,7
the
U.S. antitrust enforcement agencies ­ the Federal Trade Commission (FTC) and the U.S. Department of
Justice (DOJ) ­ and the courts may need to evaluate the effects of these arrangements with greater
frequency. To aid in this task, the antitrust community will be able to rely on the insights from a
substantial economics literature that explores the rationales for and effects of RPM. The theoretical branch
of this literature identifies both situations where RPM can benefit consumers and ways that firms can
potentially use RPM to reduce competition. While this theoretical literature is ultimately inconclusive
about whether minimum RPM is generally pro- or anti-competitive, it provides a useful backdrop for
assessing the available empirical evidence about the effects of RPM and for guiding investigations into
particular instances of RPM. This paper reviews some of the highlights of this theoretical and empirical
research and then concludes by discussing some of its practical implications for competition law enforcers.
2. Theoretical Literature Related to RPM
4. A substantial theoretical economic literature related to minimum RPM developed during the
years prior to Leegin. Although this literature explores ways that firms could use RPM to harm
competition, just as importantly it identifies a variety of circumstances in which RPM may enhance
competition and benefit consumers. This research thus generally supports the view that a policy of per se
illegality for minimum RPM is inappropriate. On the one hand, minimum RPM agreements inherently
suppress intrabrand price competition, i.e., competition among competing retailers of a particular good.
On the other hand, however, RPM agreements may encourage competition among retailers along non-price
dimensions. Whether a particular instance of RPM makes consumers better off or worse off depends on
how they value these different kinds of competition. Furthermore, the net effect on welfare of a given
instance of RPM depends on how it affects the intensity of interbrand competition between the
manufacturer and retailers of the good in question and the manufacturers and retailers of other competing
goods. The relative importance of these factors is ultimately an empirical question, but it is useful to
review the main theoretical arguments regarding the effects of RPM to help identify the kinds of empirical
inquiries that might be useful in the investigation of a particular instance of RPM.
2.1. Service Theories
5. A prominent strand of economic literature related to RPM emphasises its use as a mechanism to
encourage retailers to provide valuable services to consumers.8
Examples of such services include the
provision of information about product attributes, product demonstrations, post-sale support, pleasant
stores, and extended shopping hours. Such services have two key features. First, they are costly to
restraints, see W. Kip Viscusi, John Vernon, and Joseph Harrington, Economics of Regulation and
Antitrust, 2nd
ed., 240 ­ 246 (1995).
7
Press reports indicate that this shift may already be occurring. See "Price-Fixing Makes Comeback After
Supreme Court Ruling," August 18, 2008, p. A1, Wall Street Journal.
8
By "services" we refer to any non-price action by retailers that enhances the demand for the product. The
seminal article on RPM's promotion of services is Lester G. Telser, Why Should Manufacturers Want Fair
Trade?, 3 Jl. of Law and Econ., 86 ­ 105 (1960) (examining the case in which retail services are subject to
free riding by rival retailers). Telser's argument was generalised and extended to the case of downstream
oligopoly by Frank Mathewson & Ralph Winter, The Incentives for Resale Price Maintenance Under
Imperfect Information, 21 Econ. Inq., 337-348 (1983) and Frank Mathewson & Ralph Winter, An
Economic Theory of Vertical Restraints, The Rand Journal of Economics, 27-38 (1984). The Mathewson
and Winter papers also show that services need not be subject to free riding by rival retailers to motivate
the use of RPM. The role of RPM when services are not free rideable is analysed further in Ralph Winter,
"Vertical Control and Price versus Nonprice Competition," 108 Q. J. Econ. 61 (1993).
DAF/COMP/WD(2008)63
4
provide. Retailers will invest in these kinds of services only if they are able to recoup their cost, either
directly by charging customers for the service, which is not always feasible, or indirectly through the price
of the product in question. Second, such services typically expand demand for the product in question.
For example, consumers who receive more information about a technologically complex product may be
more likely to purchase it, because they have greater confidence that they will receive the product that
meets their needs. In such cases, both consumers and the upstream manufacturer benefit from the
provision of these services. The consumer benefits directly by receiving the service, and the manufacturer
benefits from increased sales, e.g., when the additional retail services enable it to compete more effectively
against the producers of other brands of the good in question.
6. Using RPM to create an incentive to provide retail services would not be necessary if the
downstream retailer had an optimal independent incentive to invest in the services, or the upstream
manufacturer had other, equally effective mechanisms for providing the necessary incentives. In many
situations, however, neither of these conditions is satisfied. If retailers bear the full cost of the services
they provide and yet do not receive the full benefit, their independent incentive to provide the services will
generally be less than optimal. Furthermore, there may be only limited or ineffective mechanisms
available to the manufacturer for overcoming the externality that arises from this divergence of private
costs and benefits. For example, it may not be possible for the manufacturer to specify the desired level of
selling services for its retailers in a contract that can be enforced in court.9
If it is not possible or
economical to write such a contract, then the retailers will independently choose how much of the relevant
service to provide, given their individual incentives.
7. A manufacturer may wish to use RPM with its retailers in this situation in order to increase their
independent incentive to provide retail services. At the margin, an individual retailer's incentive to provide
such services depends on both the responsiveness of its own demand to the level of services it provides and
the profit margin that it earns on sales of the product. A manufacturer can influence both of these factors
by implementing RPM agreements with its retailers.
8. An important point that is relevant to policy discussions is that the retailer services need not be
subject to free riding for RPM to be a profitable and consumer welfare-enhancing strategy. The motivation
for RPM arises because retail competition reduces retail margins below the level that a fully integrated
manufacturer would have. This causes retailers to provide less service than would an integrated firm.
RPM can be used to increase the retail margin thereby giving the retailer incentives to provide additional
service.
9. RPM may be especially useful when retailers cannot appropriate the full benefits of their
investments in services because competitors are able to free ride.10
The iconic example of this
phenomenon is the provision of pre-sale information about a product.11
If a product is highly differentiated
or technologically complex, consumers may require information about product attributes before making a
decision about whether to purchase. A full service retailer may provide this information, possibly by
employing knowledgeable salespeople or offering free product demonstrations, but it would need to set a
price that is sufficiently high to cover not only the wholesale price of the good and the usual selling costs
9
This kind of situation, where one party in an economic relationship takes a costly action that benefits
another party, and where it is not possible to verify the action in court, is commonly known as moral
hazard. See, e.g., Paul Milgrom and John Roberts, Economics, Organization, and Management, at 167
(1992).
10
See Telser and Mathewson & Winter, supra note 8.
11
See Kenneth Elzinga and David Mills, The Economics of Resale Price Maintenance, in Wayne D. Collins
(ed.), Issues in Competition Law and Policy, vol 3, 1841.
DAF/COMP/WD(2008)63
5
but also the provision of information to prospective customers. A discount retailer could then profitably
undercut the full service retailer's price, since it would not need to bear the cost of educating customers.
Consumers could inform themselves for free at the full service retailer and save money by purchasing from
the discount retailer. This behavior would reduce the responsiveness of a full service retailer's demand to
its investments in educating customers. Such free riding by discounters would generally undermine a
retailer's incentive to provide the needed information to consumers. This underprovision of useful
information would then lead to a reduction in demand for the manufacturer's product. Economic theory
generally predicts a similar effect for any retail service that is vulnerable to free riding.12
10. RPM provides a mechanism for mitigating the effect of this free rider problem. By imposing a
minimum retail price, RPM agreements would reduce discounters' sales by preventing them from
undercutting the prices of their full service competitors. Retailers would then have a greater incentive to
provide a higher level of service to their customers, since they would be more likely to internalise the
benefits of such an investment. Although RPM in this case would reduce intrabrand price competition, it
would increase service competition and decrease interbrand competition. Its net effect on consumers'
welfare would depend on how they assessed the tradeoff between these different kinds of competition.13
11. A related argument is that RPM may encourage the development of retailers that provide
certification that a manufacturer's product is of high quality.14
In many cases consumers are unable to
observe the true quality of a product at the time of purchase. This uncertainty is a particular problem for a
high quality manufacturer; it would increase demand for its product if it could credibly communicate its
true product quality. If retailers are in a better position to assess product quality than consumers, they may
find it feasible and worthwhile to develop a reputation for carrying only high quality goods. A retailer that
possessed such a reputation would effectively certify that a manufacturer's product is of high quality by
choosing to carry it. Establishing such a reputation would generally require costly investments, and
retailers would need to earn a return to compensate them for undertaking these investments. This return
would generally take the form of a higher markup over the wholesale cost of the product.
12. As is the case with other services that are vulnerable to free riding, a retailer that established a
reputation for carrying high quality goods would be vulnerable to the appearance of discounters that could
profitably undercut its prices. A consumer could first visit a retailer that had a reputation for carrying high
quality goods in order to determine if it carried a particular product. After determining the product's
quality, the consumer could then purchase from a discounter, which would free ride on the quality
certification reputation of its competitor. Such behavior would reduce the incentive to invest in the
development of a reputation for carrying high quality goods in the first place. As with other services, RPM
could increase this incentive by preventing discounters from undercutting the retailer's price.
12
But cf. Frederic M. Scherer & David Ross, Industrial Market Structure and Economic Performance 551-
554 (3d ed. 1990). (Scherer and Ross describe limitations to the free rider argument, noting that: only
presale service, including advertising and on-site demonstration, should be of concern under a free rider
analysis; presale service is unnecessary when customers know what they want and why; and, free riding
arguments apply mainly to high value purchases, often sold by high-quality stores enjoying a reputational
advantage and an inelastic customer base. "To sum up, the free rider justification has severe limitations.
Its plausibility is palpably low in many product areas where RPM is used.")
13
Observers have pointed out that the desire to provide an incentive to invest in these kinds of services can be
a rationale for manufacturers to grant exclusive territories to their retailers. See, e.g., Viscusi et al., supra
note 6 at 245. In such cases RPM arguably restricts retail competition less than exclusive territories.
14
See the discussion in Brief of Amici Curiae Economists, supra note 6, at 7, or Howard Marvel & Stephen
McCafferty, Resale Price Maintenance and Quality Certification, 15 RAND Jl. Econ. 346 ­ 359 (1984).
DAF/COMP/WD(2008)63
6
13. While some retail services are clearly vulnerable to free riding, others are not. For example, a
retailer that creates a pleasant shopping environment for its customers and has extended shopping hours
would likely appropriate the benefits of these investments. It might then seem that retailers would have an
optimal incentive to provide these services. This conclusion is not always justified, however, because a
manufacturer may prefer that its retailers invest more in such retail services in order to increase the
competitiveness of its product relative to those offered by other manufacturers. From the perspective of
the entire vertical chain of production and distribution, the retailers' independent incentives may lead them
to invest too little in demand-enhancing services. This outcome could occur because intrabrand price
competition among the retailers reduces the profit margin that they earn from selling the product, which in
turn reduces the incentive to invest in services that would increase sales.15
There is no guarantee that
independent price competition among retailers will lead to optimal incentives to invest in retail services.
By imposing minimum RPM, a manufacturer could potentially overcome this problem by using the
combination of its wholesale price and the minimum permissible retail price to increase the margin that its
retailers earn from their sales of the manufacturer's product. This higher margin would provide the
retailers with a greater incentive to invest in retail services.16
2.2. Using RPM to Influence Retail Inventories
14. Several papers argue that manufacturers may also wish to adopt minimum RPM in order to
influence the amount of inventory that their distributors or retailers hold.17
This literature observes that the
level of final consumer demand for a manufacturer's product may be uncertain at the time that retailers
must make their inventory decisions. For example, a retailer may not be able to predict perfectly the
ultimate level of consumer demand for a particular book or music CD. If the actual level of demand turns
out to be lower than expected, fierce price competition may ensue as retailers scramble to liquidate their
inventories. In such cases price may fall below wholesale cost and the retailers might lose money. If the
actual level of demand turns out to be higher than expected, the retailers may wish that they had ordered
more units. Yet the possibility of aggressive competition when demand is low could lead retailers to place
conservative orders.
15. Because minimum RPM inhibits the price cutting that would otherwise occur when demand is
low, it may lead retailers to hold larger inventories when demand for a product is uncertain. These larger
inventories would then lead to lower prices and higher quantity sold when demand is high. Whether
consumers benefit from the higher inventories depends on whether their expected gain from the increase in
available units in the event of high demand exceeds their loss from higher prices when demand is low.
While the effects of this use of RPM on consumers are uncertain and would require an empirical
investigation in any particular case, this literature does demonstrate that there are circumstances where the
use of RPM can be competitively benign even if the level of retail services does not have an important
effect on the level of demand.
2.3. Possible Anti-Competitive Uses of RPM
16. The preceding discussion notwithstanding, there are circumstances where it is possible that firms
could use RPM to harm competition. One potential concern is that colluding firms could use RPM to
15
See Benjamin Klein & Kevin Murphy, Vertical Restraints as Contract Enforcement Mechanism, 31 Jl of
Law & Econ. 265 ­ 297 (1988).
16
See Mathewson & Winter and Winter, supra note 8.
17
See Raymond Deneckere, Howard Marvel, and James Peck (1997), Demand Uncertainty and Price
Maintenance: Markdowns as Destructive Competition, Am. Econ. Rev, 619 ­ 641 (1997). See also
Raymond Deneckere, Howard Marvel, and James Peck, Demand Uncertainty, Inventories, and Resale
Price Maintenance, Quar. Jl. of Econ., 885 ­ 913 (1996).
DAF/COMP/WD(2008)63
7
sustain a price-fixing cartel. Such a cartel could arise at either the retailer or the manufacturer level. As
noted in the FTC and DOJ's joint amicus brief in Leegin, such cartels are themselves per se illegal and
hence receive condemnation under the antitrust laws irrespective of the legal standard that the courts use to
evaluate RPM.18
Still, the possibility that RPM could be used to sustain such conduct in itself justifies
scrutinising these agreements under the rule of reason, rather than adopting a rule of per se legality.
17. Enforcing discipline among its members is one of the main challenges that a price-fixing cartel
faces.19
Because it sets prices at supracompetitive levels, a cartel's members all have an incentive to offer
secret price cuts to customers in order to steal sales from the other members. If the members are unable to
detect and punish such defections, discipline is more likely to break down and the cartel is more likely to
fail. Faced with these challenges, a cartel of retailers or distributors might welcome industry-wide RPM
agreements that required the members to charge the collusive price. RPM might then enable the cartel to
outsource enforcement of its anti-competitive agreement to upstream manufacturers. The use of RPM to
sustain collusion, resulting in price increases, causes consumer harm. The Supreme Court recognised this
risk in its Leegin decision, and emphasised that "the potential anticompetitive consequences of vertical
price restraints must not be ignored or underestimated,"20
and cautioned courts "to be diligent in
eliminating [the] anticompetitive uses" of RPM from the market.21
18. While it is certainly possible that RPM could be used to support a cartel of retailers or
distributors, there are good reasons to believe that such conduct is unlikely to be common. Most
importantly, a manufacturer would generally not have an incentive to join a conspiracy that eliminated
competition among its retailers, because this would lead to a decrease in the derived demand for its
product. In effect, a retail cartel would exacerbate the well-known problem of double marginalisation.22
Thus, absent substantial monopsony power that made a threat of boycott credible, it is unlikely that a group
of retailers could successfully convince manufacturers to grant RPM agreements that implemented the
terms of a downstream price-fixing cartel.23
Even if it were compelled to accede to demands for such
agreements, a manufacturer would have a strong incentive to foster the development of alternative
channels of distribution for its product. The retailer cartel might therefore be short-lived.
19. A cartel of manufacturers would face the same problem of how to police its collusive agreement.
Such a cartel could potentially use industry-wide RPM agreements as a mechanism to help enforce
discipline among its members, provided that retail prices are observable.24
If an individual manufacturer
attempted to steal sales from its rivals by offering secret price discounts to its distributors, minimum RPM
agreements would prevent retailers from passing on the discount to final consumers, thus limiting any
18
See Brief for the United States as Amicus Curiae Supporting Petitioner, supra note 1 at 21 ­ 22.
19
See, e.g., George Stigler, A Theory of Oligopoly, 72 J. Pol. Econ. 44 ­ 61 (1964).
20
Leegin, 127 S. Ct. at 2717.
21
Id. at 2719.
22
See Viscusi et al., supra note 6 at 227 for a discussion of double marginalisation, also known as the
problem of successive monopolies. See also the Brief for the United States, supra note 1 at 18.
23
Even if they could obtain such RPM agreements to implement a cartel, it is not clear how the retailers
would be able to monitor the manufacturer's enforcement of the RPM if they were not in a position to
directly monitor adherence to a mutual cartel agreement by observing each other's prices. It would
generally be in the manufacturer's interest in this case to allow retailers to renege on their agreements in
order to reduce the loss from double marginalisation.
24
See Ippolito, supra note 3 at 281. It is important to recognise that, while industry-wide RPM agreements
might be consistent with the existence of a manufacturer cartel, they would also be consistent with a
conclusion that RPM is generally efficient in the industry in question.
DAF/COMP/WD(2008)63
8
increase in the cheater's sales. The main effect of such a secret discount would then be to enrich the
distributor, since it would earn a higher profit margin on sales of the discounted product. By limiting the
responsiveness of final demand to secret price cuts, minimum RPM would reduce each manufacturer's
incentive to cheat on their cartel agreements.25
2.4. Conclusion
20. Minimum RPM would cause great concern if its main effect were to reduce competition among
retailers or manufacturers by, for example, facilitating the establishment of price-fixing cartels. While
RPM may injure competition in some cases, the theoretical literature demonstrates that there are many
situations where manufacturers may wish to use RPM to increase sales of their products. When the level
of retail services has an important effect on demand, the manufacturer's goal is not to eliminate
competition among the retailers of its product, but rather to provide them with an incentive to shift their
emphasis from price competition to non-price competition. The manufacturer has an incentive to change
the terms of its retailers' competition if doing so strengthens the manufacturer's ability to compete with its
rivals. Consumers generally benefit from this increase in interbrand competition.
3. Empirical Evidence on the Effects of RPM
21. Theory alone may not be sufficient to resolve whether minimum RPM is beneficial or harmful to
competition in a particular case. Given this uncertainty, careful empirical research on the effects of RPM
is needed to help guide the competition law enforcement agencies and the courts as they evaluate this
conduct in the future. While some empirical work exists, the fact that minimum RPM agreements have
long been per se illegal has necessarily limited the amount of empirical research that could be done.
Nevertheless, several relevant findings have emerged from the empirical literature that has appeared to
date.
22. The available empirical evidence does not support a conclusion that RPM is widely used to
support the operation of price-fixing cartels. Ippolito26
analysed all litigated U.S. RPM cases between 1976
and 1982 and concluded that the collusion theory could potentially explain the adoption of RPM in only a
small fraction of these cases. Only 13.1 percent of the cases in this sample included any allegation of
horizontal collusion.27
A study of the FTC's RPM enforcement efforts between 1965 and 1982 found that
they typically involved very competitive retail markets where widespread collusion was not plausible.28
23. Ippolito's study also considers whether there is evidence to support the pro-competitive retail
service theories for why firms adopt RPM. These theories are difficult to test directly. Nevertheless, this
study sheds indirect light on the question by classifying the different products at issue in the cases in the
sample into different categories, such as complex products, fashion goods, goods with unobservable
quality, and simple products. It is plausible that the retail service theories are more likely to apply to cases
that involved complex products, "for which quality and use information were nontrivial issues prior to
25
The cheating cartel member might enjoy some increase in its sales even if RPM agreements were in force,
if retailers had the ability and incentive to use non-price means to shift sales to the relatively more
profitable product.
26
See Ippolito, supra note 3.
27
Id. at 282.
28
Thomas Overstreet, Resale Price Maintenance: Economic Theories and Empirical Evidence, Bureau of
Economics, Federal Trade Commission (1983).
DAF/COMP/WD(2008)63
9
purchase,"29
than for simple goods. This analysis concludes that the retail service theories could explain a
large fraction of the cases in the sample.
24. In another study, Ippolito and Overstreet30
take a different tack by closely examining the record
in one individual case for evidence for and against different possible theories for why firms might adopt
RPM. This study examines the evidence gathered during the FTC's successful case against Corning Glass
Works over its long-standing use of RPM. Subsequent to the court upholding the FTC's decision, Corning
abandoned its RPM program. Based on their review of the record in this case, Ippolito and Overstreet
conclude that the evidence is inconsistent with a conclusion that RPM supported collusion at either the
retailer or distributor level.31
Furthermore, they conclude that the evidence does not support a theory that
Corning used RPM in order to support a manufacturer cartel in any plausible product market.32
Based on
an analysis of Corning's and its competitors' sales and promotional spending before and after the decision
in the FTC case, Ippolito and Overstreet conclude that the evidence provides some support for the service
theories.33
For example, their analysis demonstrates that Corning's sales declined in the years following
the FTC case, while its competitors' sales generally did not. This pattern of effects is consistent with the
conclusion that Corning's RPM enabled it to compete more effectively against its rivals.
25. While the available empirical evidence regarding the effects of RPM is limited, it is consistent
with the conclusion that it is appropriate to analyse RPM under the rule of reason. If explicit RPM
agreements become more common in coming years, there should be opportunities to develop additional
empirical evidence on the effects of this practice.
4. Implications for Enforcement
26. In the wake of Leegin, the U.S. competition enforcement agencies and the courts may more
frequently need to evaluate the competitive effects of individual RPM agreements. In fact, the FTC has
already considered a request by Nine West Footwear Corporation to release it from an earlier consent
agreement that settled a case dealing with Nine West's use of RPM.34
Relying on Leegin, the FTC granted
Nine West's petition on the basis that its potential use of RPM agreements was not deemed to harm
consumers at this time. In particular, the FTC reviewed the three factors cited by the Court as particularly
relevant to the application of the rule of reason to RPM agreements.35
These factors are: the number of
competitors in the market that have adopted RPM agreements (The Court notes that interbrand competition
would divert consumers to lower priced substitutes, thus limiting the likelihood that resale price
maintenance could facilitate a manufacturing or retail cartel in markets in which only few competitors
employ RPM.36
); whether the RPM originated with the manufacturer or the retailer (The Court observed
that because a manufacturer generally has incentives to promote efficient distribution that are aligned with
the interests of consumers, harm to competition is more likely if RPM agreements are brought about as a
result of retailer pressure rather than on the manufacturer's own initiative.); and, whether the manufacturer
29
Ippolito, supra note 3 at 283.
30
Ippolito and Overstreet, supra note 3.
31
Id. at 300.
32
Id. at 301.
33
Id. at 305 ­ 306.
34
See In the Matter of Nine West Group, Inc., Docket No. C-3937, Order Granting in Part Petition to Reopen
and Modify Order Issued April 11, 2000.
35
Leegin, 127 S. Ct. at 2719-20.
36
Id. at 2719.
DAF/COMP/WD(2008)63
10
or retailer party to the RPM agreement has market power ("If a retailer lacks market power, manufacturers
likely can sell their goods through rival retailers . . . [a]nd if a manufacturer lacks market power, there is
less likelihood it can use the practice to keep competitors away from distribution outlets."37
). The FTC
concluded that Nine West demonstrated that it did not "run afoul of the Leegin factors," due, inter alia, to
its "modest market share."38
The Commission concluded that Nine West's use of RPM at this time does
not pose any potential competitive concerns.
27. The FTC's order states that "the Court's elaboration of these relevant factors provides an
approach for identifying when RPM might be subjected to closer analytical scrutiny,"39
and in particular,
whether RPM could be used to support either a manufacturer or retail cartel. Accordingly, an investigation
into a particular instance of RPM should begin by examining whether there is any reason to believe that
such a cartel is possible. One key question is whether RPM is widespread in the industry in question. If
few manufacturers have RPM agreements in place with their retailers, or if few retailers have RPM
agreements in place with a given manufacturer, then it is not plausible that RPM is being used to help
enforce a cartel. Of course, a finding that RPM is widespread in a particular industry would be only a
necessary, and not a sufficient condition to conclude that a cartel might exist. Widespread use of RPM is
equally consistent with a hypothesis that its efficiencies are widespread, so further evidence would be
needed to determine whether collusion was likely.
28. If the evidence does not point to a manufacturer cartel, possibly because RPM is not widespread
among the different manufacturers, it would be appropriate to evaluate whether the manufacturer in
question possesses meaningful market power in the relevant product market. If it does not, it is not clear
how retailers could use RPM to enforce a cartel agreement; raising the retail price of the one
manufacturer's product would just shift sales to the other manufacturers' products. If those products are
not also covered by RPM agreements, or if they are sold in other channels of distribution, then the retail
cartel might not be able to earn supracompetitive profits.
29. In the absence of market power, a manufacturer selling through competitive retailers would
generally not be able to use RPM unilaterally to harm competition. Although a manufacturer could use
RPM to shift the terms of competition among its retailers away from intrabrand price competition and
towards competition on non-price dimensions, the presence of robust competition from other
manufacturers would prevent consumers from suffering harm from the change in the nature of competition.
If price increased by more than the value of the additional retail services, consumers could just switch to
one of the alternative products. If a manufacturer selling through competitive retailers faces vigorous
competition from rivals, its decision to adopt RPM likely reflects an effort to improve its ability to
compete. The existence of market power is therefore a useful screen to determine whether a more
thorough consideration of the actual effects of RPM on consumers is warranted. In fact, the FTC cites the
lack of significant market power as one reason that it was appropriate to release Nine West from the
consent agreement it entered into in 2000, following the FTC's investigation of Nine West's use of RPM.40
30. While the presence of market power is a necessary condition for RPM to harm consumers, it is
important to recognise that it is not a sufficient precondition in and of itself. Indeed, consumers could
37
Id. at 2720.
38
In the Matter of Nine West Group, Inc., Docket No. C-3937, Order Granting in Part Petition to Reopen and
Modify Order Issued April 11, 2000 at 15, May 6, 2008.
39
Id. at 14.
40
Id. at 15.
DAF/COMP/WD(2008)63
11
benefit from the effects of minimum RPM agreements even if the upstream manufacturer is a monopoly.41
Accordingly, it would be inappropriate to conclude merely from a finding that the manufacturer possessed
market power that its use of RPM is likely to be harmful to consumers. If products are highly
differentiated or technologically complex, it would not be unusual for manufacturers to possess significant
market power, and this is exactly the kind of setting where RPM may be most useful to encourage retailers
to offer valuable services to consumers.42
31. If available, reliable evidence regarding the effect of RPM on sales of the product in question
would be directly relevant to an assessment of its competitive effect. If RPM enables a manufacturer to
compete more effectively against its rivals, it should gain sales at their expense. Even if the manufacturer
is a monopolist, it may still wish to use RPM to encourage retailers to promote its product or hold greater
inventories, thus expanding output and benefiting consumers. A finding that RPM caused sales of the
manufacturer's product to increase would also be strong evidence against the hypothesis that its purpose
was to sustain a cartel among either retailers or manufacturers.
32. Critics of RPM generally express a concern that it will lead to higher prices for consumers.43
Therefore, it might seem that a direct examination of the effect of RPM on retail prices would be useful
and important to help to discern whether this is indeed the case, and if so, in which circumstances. The
pro-competitive theories about why firms may adopt RPM rest on the manufacturer's desire to influence
retailers' behavior by increasing their profit margin on sales of the product in question. These theories
make no prediction about whether RPM leads to higher or lower prices.44
The manufacturer could increase
this margin either by imposing a higher retail price through RPM or by using RPM to maintain the current
price (or even lower it) and then reducing its wholesale price. A manufacturer might choose to lower price
if the additional demand it expected from enhanced retail services enabled it to exploit economies of scale
more fully. If an increase in retailer services is associated with an increase in the price elasticity of
demand, RPM can lead to lower retail prices. Of course, a manufacturer might also choose both to
increase the retail price and reduce the wholesale price. However, a careful empirical analysis would be
needed to establish that RPM had this effect in practice.
33. Even if the available evidence established that RPM led to a higher retail price for a product, it
would still be inappropriate to conclude on that basis that consumers had been harmed. If the higher retail
price created an incentive for retailers to provide valuable services or higher quality, consumers could be
better off, and evidence that sales had increased despite the price increase would suggest that they are. In
general, evidence of RPM's effect on quantity is far more probative than price evidence for establishing its
41
In Deneckere et al., supra note 17, a monopoly upstream manufacturer adopts RPM in order to influence
its retailers' inventory choices, and they show that there are conditions under which this RPM benefits
consumers. Furthermore, the retail service theories do not generally require that the manufacturer faces
competition in order for RPM to benefit consumers.
42
As noted above, Ippolito, supra note 3 at 283, found that RPM was widely used with the sale of such
products.
43
Writing in dissent in Leegin, supra note 1, Justice Breyer expresses exactly this concern.
44
Whether minimum RPM leads to higher or lower retail prices depends on a range of factors, including the
elasticity of demand with respect to price and service, the effect of additional service on the price elasticity,
the presence or absence of scale economies, the nature of upstream and downstream rivalry, and the nature
of supply terms (e.g., linear or nonlinear contracts). For a discussion of one set of conditions in which
RPM reduces price, see Howard P. Marvel & Stephen McCafferty, The Political Economy of Resale Price
Maintenance, 94 J. Polit. Econ. 1074 (1986) and Howard P. Marvel & Stephen McCafferty, The Welfare
Effect of Resale Price Maintenance, 28 J.L. & Econ, 1985.
DAF/COMP/WD(2008)63
12
effect on consumer welfare. While it might still be useful to investigate directly whether service
competition among retailers is significant, it is important to recognise that knowing only how RPM affects
final retail prices provides little or no information about its effect on consumer welfare.
34. Third, any evaluation of the effect of RPM on price should recognise that, if RPM is not an
option, a manufacturer may choose to adopt an alternative, less-preferred strategy to accomplish its goals.
For example, it may choose to establish exclusive territories or to vertically integrate. Any conclusion
about the effect of RPM on retail prices should be based on the appropriate counterfactual comparison.
Eliminating RPM may not lead to an increase in intrabrand retail competition, and it may harm interbrand
competition.
5. Conclusion
35. As we concluded in our amicus brief in Leegin, "[t]here is no sound basis for treating RPM
differently from other vertical arrangements."45
The shift to a rule of reason treatment has the potential to
create substantial benefits for consumers, and there is no reason to believe that competition law enforcers
and courts will not be able to protect against anticompetitive abuses. While it is unlikely that Leegin has
ended the debate over RPM, it may spark a new wave of studies that will allow the conversation in the
future to be even better informed.
45
Brief for the United States as Amicus Curiae Supporting Petitioner, supra note 1.