Cass on Leegin

Thom Lambert —  24 March 2007

Ronald Cass, dean emeritus of Boston University Law School, argues in today’s WSJ that the Supreme Court should overrule Dr. Miles:

The decision was a mistake that has plagued antitrust law and American business ever since. Manufacturers have no interest in suppressing price competition to help increase profits for retailers. A manufacturer with a meaningful monopoly can extract all of his potential profit from controlling the prices (and quantities) at which he sells, and would have no concern for the prices charged downstream. Prices for products that don’t have market power are constrained by forces outside the manufacturer’s control. In either case, the Supreme Court in Miles misunderstood how markets work.

The context for RPM agreements also doesn’t fit the Supreme Court’s assumption — that manufacturers were enforcing conspiracies among retailers. RPMs are common in markets where there is almost no possibility of effective cartels and typically concern products that aren’t likely vehicles for suppressing retail competition. As in Leegin, the products protected from price-cutting generally don’t dominate markets. RPMs serve a different end: they promote brand loyalty — and thus brand value — in highly competitive markets for differentiated, but still largely substitutable, products. While manufacturers can do much to establish brand value, not all of the factors influencing brand value are easily within a manufacturer’s control.

Retailers can help or hurt by tilting sales toward or away from a brand through their choices on how to display it, promote it, service it, or provide information about it — all actions that affect consumers’ perceptions of product quality. By reducing price competition among a brand’s retailers, the RPM provides a profit margin that can make such brand-enhancing behavior affordable and prevent competitors from free-riding on a retailer’s investment in such behavior.

The makers of some brands succeed in the market by reducing price aggressively; others by providing higher quality products. The ability to choose from more products marketed in more varied ways provides options to serve a broad spectrum of consumer tastes and values, including the values of economizing on their time, of making products easier to understand and to use, or of generating straightforward financial savings.

Well said.

Thom Lambert

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I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.