Life After Dr. Miles

Thom Lambert —  18 August 2008

An article in today’s WSJ, Price-Fixing Makes Comeback After Supreme Court Ruling, reports that minimum resale price maintenance (i.e., the setting of minimum retail prices by product manufacturers) is increasing in light of last summer’s Leegin decision. That’s great news for me, because I’ve spent most of the summer cranking out an article on how exactly such price-fixing should be evaulated now that the Dr. Miles rule of per se legality is dead.

While there is an abundance of academic writing on the economic question of whether and under what conditions RPM may be anticompetitive, very little has been written on the legal question of exactly how courts should evaluate instances of RPM to determine their legality. My article aims to fill in that gap.

The article proceeds in three parts. Part I summarizes the economic literature on RPM, setting forth the anticompetitive risks the practice may pose, the procompetitive benefits it may provide, and the economic conditions that would support the various effects. Part II then summarizes and critiques six legal approaches to RPM that may conceivably govern in a post-Leegin world. The six approaches that have been proposed are: (1) an unstructured rule of reason (i.e., an approach based on Justice Brandeis’s famous “all things considered” version of the rule of reason); (2) a rule of per se legality (suggested by Judge Posner); (3) the approach proposed by a group of states attorneys general (it would require a procompetitive justification for RPM if the practice resulted in a price increase); (4) the approach set forth by the FTC in the Nine West matter (it would require a procompetitive justification if certain “Leegin factors” were present); (5) the approach proposed by economists William Comanor and F.M. Scherer (it would condemn dealer-initiated RPM and would subject all other RPM to a quantitative foreclosure test); and (6) the approach set forth in the Areeda/Hovenkamp treatise (it would allow a challenger to set forth a prima facie case on the basis of certain structural criteria and would then provide for an affirmative defense that the practice is procompetitive). Finding all of these approaches deficient, I set forth, in Part III of my article, an alternative approach. I’ll provide more detail on my approach in a subsequent post.

I wonder if I’ve left out any proposed rules of reason. Has anyone seen another proposal for how RPM should be evaluated post-Leegin? If so, I’d love to know!

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.

One response to Life After Dr. Miles

  1. 

    Looking forward to seeing the article Thom! A few random thoughts. I think its pretty clear that Leegin didn’t authorize (2), though I favor that rule as a normative matter. I also agree that the other 5 are problematic in either getting the economics wrong or conflicting with Leegin. The notion of dealer-instigated RPM being a trigger is driven by the presumption that dealer instigation is a proxy for collusion. There is just no evidence to suggest that is right. The FTC position in 9West also doesn’t seem to take the opinion in Leegin too seriously, or the economic literature that was the basis of that opinion.

    Another point, and its a basic one we’ve both made in our posts on RPM here: ANY price test for RPM cant be right. You read over and over again, including in the WSJ article (which I thought was sloppy on the literature and evidence), that RPM results in higher retail prices. First, that may or may not be true. It depends on the elasticities, but one can increase the margin by lowering the wholesale price and keeping the retail price constant too. Second, and more importantly, both pro and anti-competitive stories predict a price increase. In the pro-competitive dealer services story, one gets a price increase because a demand shift. Therefore, if we were interested in a consumer welfare test for RPM we better have an output-based test, not a price test to distinguish between the stories.

    Third, we may not want to have that sort of test, but instead, some safe harbors and presumptions for legality. Personally, from an error cost perspective, I think this is the way to go. In fact, I’d go so far as to say that the state of the empirical literature on RPM justifies a bright line rule of per se legality in the absence of collusion (which would be a per se violation of a different variety anyway, not really an RPM problem other than it is being used to facilitate a horizontal agreement).