Speaking of Resale Price Maintenance …

Josh Wright —  29 October 2008

It looks like the FTC is interested in doing more than just investigating RPM (see Thom’s excellent post), as the agency just announced a series of public workshops on the question of how best to distinguish pro-competitive uses of RPM from those that raise competitive concerns. From the announcement:

The FTC is requesting public comment from attorneys, economists, marketing professionals, the business community, consumer groups, law enforcers, academics, and other interested parties on three general subjects:

  1. The legal, economic, and management principles relevant to applying Sections 1 of the Sherman Act and Section 5 of the FTC Act to RPM, including the ability to administer current or potential antitrust or other rules for applying these laws;
  2. The business circumstances regarding the use of RPM that the Commission should examine in the upcoming workshops, including examples of actual conduct; and
  3. Empirical studies or analyses that might provide better guidance and assistance to the business and legal communities regarding RPM enforcement issues.

Thom’s paper offers one proposed test based on the available theoretical and empirical evidence and grounded in the error-cost approach. One of the key virtues of Thom’s test is that he would initially place the burden on the plaintiff to demonstrate an output effect. I’ve written before, as have many others, that all of this talk about RPM and its effect on prices is nothing more than distraction given that both pro-competitive and anti-competitive theories predict a price increase. Thom’s test is nuanced and includes structured rule of reason inquiries for establishing the likelihood of such an effect through circumstantial evidence. You should read the paper if you haven’t already.

In the paper, Thom is a bit too kind to the proponents of proposed tests that would either turn on observing prices before and after the imposition of RPM or would place a burden on the defendant utilizing RPM to first show, without a predicate showing of actual or likely reduction in output, that its use fit some pre-determined justification for RPM. The former tests are wrong on the economics because we want price and not output. We should not entertain price tests as relevant here. We should also dismiss as inconsistent with economic learning tests that do not at least attempt to reconcile burdens with the theoretical and empirical learning on vertical restraints and RPM more specifically. I’ll leave as an exercise to the reader to figure out which tests those might be and which errors they commit.

The latter tests are also wrong on the economics, but in a different way. One of the many advantages to setting the rule of reason as the analytical default for business practices and reserving the per se rule for those practices which we know, through judicial learning or economic experience, “always or almost always reduce output” is that it constrains antitrust enforcers and judges from condemning business practices which look unfamiliar or which we do not understand simply because we do not yet have an efficiency justification. Antitrust has a long history of condemning business practices which we later found out are a normal part of the competitive process. We can tell that story for RPM, vertical mergers, horizontal mergers, exclusive dealing contracts, tying — well, we can tell it about nearly everything within antitrust’s domain. This is what Ronald Coase was warning us about when he wrote:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly
explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Many of the proposed tests which would place substantial burdens on defendants to explain their conduct with reference to some narrowly accepted justifications for RPM, usually based on what I view to be an overly restrictive and erroneous reading of Leegin, come very close to looking like attempts to design structured rule of reason approaches with the goal of circumvent the burden shifting consequence of overturning Dr. Miles. The notion that we know so much about the competitive effects of RPM such as to justify its treatment as “inherently suspect” or worthy of summary condemnation under certain specific and identifiable conditions is both wrong as a matter of economics and empirical evidence and inconsistent with Leegin.

There is a lot that we do know know about precisely how RPM works, when and by whom it is adopted, and to what effect. But both what we do and what we don’t know about RPM can and should cut in favor of adopting burdens which require plaintiffs to show meaningful competitive harm before we condemn a business practice which all agree is efficient most of the time. Precisely how we specify those burdens, presumptions and safe harbors in a way that is consistent with the principles of rule of reason analysis and economic learning is a very important question (Thom’s paper is a step in the right direction toward answering that question) and one that the FTC should be applauded for allocating resources toward in these workshops. I’d also note that while much attention has been paid to developing a sensible structured rule of reason approach for the plaintiff’s prima facie burden in RPM cases, less (but not zero) has been paid to developing safe harbors grounded firmly in economic theory and empirical evidence which would provide firms using RPM to distribute their products some certainty with respect to antitrust exposure.

I’ll have more thoughts on RPM, the economics of vertical restraints, and sensible safe harbors later.