A New Defense of the Per Se Prohibition Against RPM?

Josh Wright —  15 April 2007

Professor Sokol points to this paper by Ittai Paldor (an SJD student at U. Toronto) which Sokol points out qualifies as the rarely observed defense of the per se rule against RPM. Here’s an excerpt from the abstract:

In the following I argue that legal policymakers’ current approach is economically justified. I show that all pro-competitive explanations for RPM suffer from a common flaw, the possibility of non-price competition, which challenges RPM’s ability to achieve any of the pro-competitive goals attributed to it. I then proceed to show that non-price vertical restraints are capable of achieving the pro-competitive goals which RPM is incapable of achieving. This justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.

Dr. Miles, RPM, the pending Leegin decision, and the economics of vertical restraints are topics that we have blogged about quite a bit here (see here for a collection of these posts). In fact, Thom wrote a very persuasive response to Commissioner Harbour’s “Open Letter” to the Supreme Court which cites to Paldor’s article. Readers of this blog know my views on the economics of RPM and my belief that the per se rule is not appropriate for any vertical restraints.  So without saying much more about them here, it should not be difficult to figure out that I think Paldor misunderstands the economics of vertical restraints — and more specifically, the promotional services rationale for RPM.

However, I want to make a simpler point here. Paldor’s argument is not even capable of justifying the per se approach to RPM even if his claims about the pro-competitive explanations were true. Let’s assume arguendo that the author had successfully shown that the existing pro-competitive rationales for RPM were invalid (he has not, but that is besides the point).  It would not follow from such a showing, as the author asserts, that “this justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.”   The default rule in antitrust analysis, the one applied when we know nothing or little about a practice, is the rule of reason.   This principle is settled and well known.

The real burden is for those advocating the use of the per se prohibition to demonstrate that RPM always or almost always tends to produce anticompetitive effects.  A claim that we dont know much about the practice just doesn’t cut it in terms of justifying use of the per se rule on the Court’s own terms.  There is plenty of disagreement on the relative importance of various pro-competitive explanations (discount free-riding, inducing promotional services without such free-riding, dealing with demand uncertainty … ) and the cartel explanations.  But I don’t know of a single economist familiar with the RPM literature that has taken the view that RPM satisfies the “always or almost always” anticompetitive standard — and for good reason.  The focus of the per se advocates must turn away from the evidence.  As we’ve discussed here previously, there is a good amount of empirical evidence that supports the view that RPM is generally output-increasing and very little to support the view that RPM is frequently (much less always or almost always) used to facilitate a dealer or manufacturer cartel. Frankly, it is a bit surprising to see support for the per se rule given the high standard for use of these rules in the United States coupled with the strength of the evidence here.

The bottom line: Consumers will be better off when Dr. Miles is overturned.

3 responses to A New Defense of the Per Se Prohibition Against RPM?

  1. 

    These blogs continue to talk about vertical restraints. If you read the transcripts you’ll see that Leegin believes that there should be a different interpretation with “Horizontal” restraints. Can small mfg’s with little market power with horizontal RPM hurt the consumer? I believe that is really the issue before the court.

  2. 

    Very well put and I agree entirely.

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