As I have written in a few posts on this blog and elsewhere (too lazy to find links right now), the free-riding problems faced by manufacturers seeking to induce promotional services (even when not free-ridable by competing retailers) are significant. RPM is used in lots of instances where this discount free-riding is not plausible. In those cases, I suspect that manufacturers will engage in VPRM directly rather than the cooperative advertising programs or other alternatives in use now. Again, the effect will be the same but it will be less costly. By how much, I don’t know. But I don’t suspect the magnitude of the effect is huge in either event.

The higher stakes here, I think, are more symbolic, e.g. the appropriate scope of per se rules, the trend towards aligning legal standards with economic theory and evidence, etc.

Peter notes that manufacturer’s on these products make large margins. Of course this is true, but it has little to do with RPM. We see RPM and other vertical restraints on products where manufacturers have high margins because the manufacturer would like the retailer to engage in promotional services that procure highly profitable (incrementally) sales. By increasing the retailer’s margin, the manufacturer gives the retailer something valuable to induce provision of those services. So the manufacturer gets Best Buy to give prominent display space to a particular product, or a dedicated sales staff, or product demonstrations, etc. that would not otherwise occur and increase sales (which again, are highly profitable to the manufacturer because of the large margins). There are more wrinkles to the theory, but this is the basic story (see, e.g. Klein & Murphy or my slotting paper w. Klein for more detail).

The conventional story that sellers who engage in lots of R&D have big markups over marginal cost is true. But cannot explain a restraint between a manufacturer and retailer. That products with high fixed costs have large margins and the market price allows those firms to recover those costs has little to do with the economics of RPM. Nor would RPM provide price protection in this sense because producers of these products face inter-brand competition.

I won’t purport to speak for all “L&E practitioners” (and I’m not really sure I am one), but I think the point is that “consumer welfare” is maximized when consumer preferences are satisfied to the greatest degree possible. Since consumers differ in the degree to which they value point-of-sale services, an ideal system would permit sellers to respond to these heterogenous preferences by offering some low price/low service options and some higher service/higher price options. Because manufacturers want to sell as many of their units as possible (any retail mark-ups go not to them, but to retailers), they’ll elect the higher service/higher price option only if they think it will attract more consumers. A legal regime that allowed manufacturers to choose this sort of option if they thought it would enhance sales would maximize the degree to which consumer preferences are satisfied. Jettisoning Dr. Miles would permit manufacturers — who have every incentive to maximize sales — to select the service/price combinations that best reflect consumer preferences.