Some Preliminary Reactions to the Leegin Transcripts

Josh Wright —  27 March 2007

Transcripts in Leegin are available here (HT: Antitrust Review where David Fischer points out some of the highlights of the oral argument).  I may add some additional thoughts later after I read the whole thing again, but for now here are some first impressions:

  1. Breyer and Souter both had some interest comments on what to make of economists views on RPM (“we’re supposed to count economists?”) — with Breyer relying heavily on the fact that Professor Scherer Yamey’s 1966 book on RPM.  To the extent that Souter and Breyer expressed interest in the empirical evidence  regarding the impact of RPM, I hope his clerks have read the Economists’ Brief which surveys some of the more recent and impressive evidence on the subject of RPM.   It would be a shame if they voted in favor of per se rules based on the state of empirical evidence.
  2. Scalia was fairly impressive in his understanding of the economics.  He had the right response to the classic “how does increasing the retailer’s margin guarantee you that the retailer provides the *right* services?” question that the per se crowd is fond of asking.  In a few spots, Scalia demonstrates that he understands that some of the services we are talking about in many of these markets are non-contractible or not conducive to third party enforcement.  Contracts are incomplete.  Parties rely on self-enforcement mechanisms and court enforcement to induce services like these.  The manufacturer gives the retailer a larger margin coupled with the threat of termination to induce performance.  The answer: “well you can just contract for the services directly” denies the incompleteness of contracts.
  3. Scalia, pretty early in the oral argument, re-directed the discussion from prices to consumer welfare by suggesting that the higher retail margin is only bad for consumers if it reflects higher retail prices than otherwise (not always true in theory) and is not offset by increased services.  The question is about the services and whether we get a total increase in output — or rather, the burden is really whether the empirical evidence shows that we do not always or almost always get a total decrease in output.  On that point, it really isn’t a close question.
  4. Given Breyer and Souter’s interest in the empirics, I would have liked to see a bit more direct response to the reliance on these older studies suggesting higher prices from the lawyers with reference to current work and a level of detail greater than “there is now a consensus …”  I know, I know, we don’t want to bore the Justices with our talks of empirical studies — but they asked for it.

Shubha Ghosh at Antitrust& Competition Policy Blog thinks that at least four Justices (Breyer, Ginsburg, Stevens, Souter) are in the bag for upholding Dr. Miles.  I doubt it.  I’m not much of a vote counter, but I don’t think it will be that close.  7-2 or 6-3.  Something like that.

What do you think after reading the transcripts Thom?  Any surprises?

14 responses to Some Preliminary Reactions to the Leegin Transcripts

  1. 
    Steven Donegal 29 March 2007 at 3:16 pm

    I hope you’re wrong about the ability to enforce the VPRMs. I want to be able to buy my Pings from eBay.

  2. 

    One note in response Steven: I don’t completely agree with the notion that VRPM will be difficult to enforce. This would be true to some extent if the primary role of RPM is to prevent “discount” dealer free-riding where retailer’s provision of services is free-ridable by another competing retailer.

    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.

  3. 
    Steven Donegal 28 March 2007 at 4:24 pm

    I would agree about the scope of the effects. This has always struck me as an issue that was more interesting to academics than one with real world implications. I’m sure you will see some manufacturers try to maintain upscale brand image (wasn’t that really what the Ping brief was about) but in this day of eBay, it is going to be extremely difficult for a manufacturer to enforce VRPM.

  4. 

    Steven, I think the claims that the future of retailing is at stake are incredibly overstated here. Given that manufacturers and retailers have been allowed to enter into de facto RPM contracts for years, it would be surprising if there was any large effect at all. The advantage will be that the parties will be able to accomplish the same ends more efficiently, and that those efficiencies will be passed to consumers through retail competition.

    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.

  5. 
    Steven Donegal 28 March 2007 at 3:47 pm

    One of the justices (either Stevens or Souter as I recall) made the comment that overruling Dr. Miles would change the face of retailing in the US. I think that comment is quite overstated. However, I would be interested in your views as to what the effects of an overrule would be on retailing.

  6. 

    Thanks. This is very interesting! I guess I still don’t see how this manufacturer pricing prerogative ultimately helps the consumer when their own service generally continues to stink (I am thinking here mostly about technology products, but this also may be where this kind of price restraint is most prevalent). Apple, for example, charges more to repair an iPod than to replace it. They also seem to have a planned life of about 18 months to two years for the iPods to encourage new sales. And everyone knows how hard it is to speak with a live human on a customer service question involving a technology product. It is not clear to me that competition has helped in this regard, although I guess someone could buy a crummier (or simply less cool) MP3 player for less money, but with the same level of poor service.

  7. 

    Let me add the following to Thom’s explanation which makes the important point that consumer welfare is maximized by satisfying heterogenous consumer preferences for price, quality, services, 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.

  8. 

    Thank you Thom. That is very helpful. But don’t retailers, not manufacturers, provide the service? For example, few people praise Apple’s or Sony’s service even though they seem to benefit from this arrangement. And even selling these expensive products at a (generally low-margin) place like Best Buy does not really improve service, does it? I also wonder if the manufacturers, in this case, are still the ones pocketing the margins. It makes sense to me that competing on price AND service is still the best way to go for stores (and manufacturers) who want to drive sales volume. The argument for price restraint here, at least, seems to me to be similar to the argument pharmaceutical companies make for their drug prices, which is that research & development (and great design and ease of use) that distinguish Apple and Sony and (I hate to say it) Microsoft products require high prices and the high margins that result. Does this make sense? I am not sure that argument would protect these companies from the anti-trust laws, however.

  9. 

    Peter–

    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.

  10. 

    This is a pretty elementary question, but why do L&E practitioners emphasize the consumer welfare associated with low prices (and lousy service) with regard to WalMart, but support high prices (and good service) with restraint of trade associated with Dr. Miles? I am not making a judgment here. I’m just curious.

  11. 

    I, too, was impressed with Scalia. I bet he’ll draft the majority opinion overruling Dr. Miles. (He wrote Business Electronics, the most recent Supreme Court decision to limit Dr. Miles’s reach.)

    I’ll be most interested in Justice Breyer’s vote. While he mentions empirical evidence of higher prices, he’s a smart guy, and he’ll grasp the Scalia point that prices alone are not the only consideration when it comes to consumer welfare.

    In addition, at one point (p. 33, line 10), he asks a very telling question. Having just heard an account of how overruling Dr. Miles might impair consumer welfare by driving up prices, he says: “Now I can imagine circumstances like you say. I can imagine they’re not like you say. I don’t know. And so what should I do if I really don’t know?”

    That question was presumably rhetorical. Justice Breyer knows that per se treatment is, and should be, reserved for practices that are always or almost always anticompetitive. In case of doubt, the rule of reason should apply.

    I expect that he’ll join a majority opinion, authored by Scalia, that overrules Dr. Miles.

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