Are Dr. Miles' Days Numbered?

Josh Wright —  12 September 2006

Maybe. WSJ Law Blog reports that SCOTUS may revisit the nearly century old precedent applying the per se rule to minimum resale price maintenance (RPM). Dr. Miles may well be the last vestige of antitrust before consumer welfare’s promotion as the guiding principle of the Sherman Act, which is to say, before economics had a significant role in antitrust jurisprudence. As of today, SCOTUS has not granted cert in Leegin Creative Leather Products v. PSKS, but its agreement to stay a 5th Circuit judgment upholding Dr. Miles may well signal that cert is forthcoming. While there is still some disagreement between antitrust scholars on the issue (Georgetown’s Robert Pitofsky is Dr. Miles‘ most well known advocate), I would venture to guess — and it is not more than a guess — that the majority of antitrust scholars and economists believe that Dr. Miles is misguided.

Hanno Kaiser (this time without his always excellent graphics!) sketches one case against Dr. Miles in this post at Antitrust Review: minimum RPM is one of several forms of solving an incentive incompatibility problem between manufacturers and retailer, i.e. get the retailer to engage in jointly profit-maximizing activities that are not in the retailer’s economic interests in the absence of the contractual restraint. Interestingly, antitrust decisions (and scholars) have focused on one particular type of vertical contracting problem: the “discount” dealer free-riding problem. Where retailer promotional effort results in additional, and jointly profit-maximizing (total incremental profit greater than the cost of promotion) sales, the manufacturer wants the retailer to engage in greater promotional effort. In some cases, buyers can “consume” the promotional effort at a high-end retailer (let’s say, listen to an informative product demonstration about the virtues of various HDTVs … ) and then purchase the product across the street at a “discount” retailer who does not supply those services but is able to undercut the prices of the “high-end” retailer. RPM and other vertical restraints can solve this problem.

A brief tangent: RPM and other vertical restraints solve a number of pervasive incentive incompatability problems between manufacturers and retailers. Some much more common than the “discount” free-rider problem. We observe, for example, RPM, slotting, exclusive territories, and other restraints where a “discount” free-riding story is implausible. In any event, the point is that there are a number of contractual instruments at the disposal of manufacturers and retailers to solve these problems and reach the efficient solution.

As Hanno points out, Dr. Miles has been eroded over the years from a series of indirect attacks. For this reason, overturning Dr. Miles would allow manufacturers and retailers additional freedom in contracting around incentive problems, but will probably have less impact than, say, Independent Ink. Overturning Dr. Miles may have more symbolic value, however, as the result of its status as the “last survivor” of the Chicago School’s assault on per se analysis in vertical restraint cases. In any event, it will be interesting to see how this shakes out, including the possibility that Congress brings Dr. Miles back to life even if it is overturned.

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