The next installment in a seemingly never-ending series (see here for earlier offenders).
This time, its the California Attorney General Kamala Harris in a press release announcing a settlement with Bioelements, Inc., a Colorado-based company which sells skin care products in salons and online. The relevant allegation, from the Complaint (Para. 10) is the following:
Beginning in mid 2009, Bioelements entered into many dozens of written contracts, entitled either “Bioelements Agreement for Authorized Professional Account Status” or “Bioelements Internet Only Accounts Agreement,” with third-party companies -several dozen of them physically located in California -that distribute and/or sell, retail to the public, Bioelements products, where such contracts contained resale price maintenance components. The “Authorized Professional Account” contract states, in part, that “Accounts shall not charge less than the Manufacturer’s Suggested Retail Price (MSRP).” The “Internet Only Accounts” contract states, in part, that “Accounts are prohibited from charging more or less than the Manufacturer’s Suggested Retail Price (MSRP).
Its an Resale Price Maintenance case. No allegation of horizontal conspiracy. Here’s AG Harris:
“Bioelements operated a blatant price-fixing scheme by requiring online retailers to sell its products at high prices,” Harris said. “Price manipulation harms consumers, competition and our business community. We will continue to be vigilant in protecting our markets from these kinds of abuses.”
The settlement is one of the first applications of California’s strict, pro-consumer antitrust law banning vertical price-fixing in the wake of a controversial 2007 U.S. Supreme Court decision that weakened federal law in this area. Vertical price-fixing occurs when companies along the distribution chain conspire to set the price of a product or service at an artificially high level. In California, prices must be set independently — and competitively — by distributors and retailers.
This is highly misleading on several fronts as a matter of basic antitrust economics. I’ve covered the difference between “price-fixing” in the general antitrust sense and the use of RPM previously. The difference is critical because while the former is known and well understood to have pernicious competitive consequences, the same is not true for RPM. Indeed, the existing empirical evidence (the evidence overwhelmingly shows (see also here)) suggests that a per se rule against RPM will harm consumers — bold assertions about “protecting our markets from these kinds of abuses” notwithstanding.
Yes, a vertical agreement “fixes prices” but this is a fairly transparent attempt to obfuscate the economic issues by analogizing it to a cartel and thereby make strong claims about the enforcers generating consumer welfare benefits for its constituents. The data simply do not support that claim. State AG offices are known to generate these press releases from time to time — or similar ones claiming that the RPM enforcement action generated $X in consumer welfare gains. I’m not sure if they know better. But they should. And perhaps they do, but that knowledge is outweighed by the desire to win in the court of public opinion, in the press, and perhaps with policy makers.
There is a reasonable discussion to be had over the appropriate rule of reason treatment for RPM post-Leegin. But the policy discussions should take place with a solid understanding of the underlying economics and evidence. Press releases such as these undermine those efforts in my view. Again. I understand that the AG’s are marketing. But this is all the more reason why groups that think seriously about antitrust, such as the ABA Antitrust Section — who certainly knows better — shouldn’t be making the same mistakes.
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I’ve read the economic arguments in both directions and I find neither compelling. To examine businesses or industries where RPM has been maintained and to demonstrate either the perceived or actual efficiencies is not conclusive. As a businessman I see RPM as a manipulative and lazy option. It may well bring about efficiencies but will they be greater than a smarter pricing or marketing strategy? The economic comparisons typically, if not always, measure RPM against the status quo rather than more competitive alternatives.
It is a fairly simple, axiomatic argument to say, as a manufacturer, that the employment of RPM will keep the price of my product at the level at which it can be supported by the necessary service levels. PhoneCo may say, the xPhone should be no less than $499 because they need $400 to manufacture and market the phone, $50 for service and support leaving the distributor $49 commission.
So, PhoneCo will tell the phone distributor to sell at $499 for which the distributor will receive $49. However, what is the argument against selling the phone to the distributor at $449 and allowing it to sell the product at any price they like whether that’s $349 or $549? PhoneCo will still attain the income it requires to market and service the product and there will be far more downstream competition to distribute the products.
In my own industry (hotels) the argument in favour of RPM is rate integrity – the consumer will be confused as to the value of a hotel room is it is sold at different prices by different distributors. Instead the industry has opted for rate parity. By taking the control of pricing away from distributors the hotel now sets the retail rate itself but that’s not the free-market rate. That’s the rate which supports the hotel and it’s preferred distribution partners but how does a hotel know what commission their distributors can exist on if they preclude competition? The consumer may well be paying the price of excessive profits by the distributors.
I see your point about the potential efficiencies of RPM. I’m sure they exist within the narrow context in which they’re prescribed. Meanwhile, I still see RPM as inherently anti-competitive and, as such, believe the onus should be on the manufactures or service providers to demonstrate the benefits prior to employing them.
As it stands, Leegin has opened up the market to all sorts of anti-competitive behaviour. Even Amazon is now enforcing rate parity preventing their suppliers from selling their products for less elsewhere. Is that really good for the consumer? I foresee a legislative backlash.
Dorian: Really? I’m talking about studies, not opinions. The argument that things that were outlawed for many years are bad is neither very good in economic terms (consider the history of RPM, tying arrangements, vertical mergers, horizontal mergers, etc., etc., etc.) in antitrust or other areas. But lets cut to the chase: You’ve got a theory that RPM is “in essence, anticompetitive” — i.e. your theory says the facts are wrong. What facts?
Consider two leading (and recent) literature surveys on the empirical evidence on vertical restraints and integration. E.g., Cooper et al. observe that “empirical analyses of vertical integration and control have failed to
find compelling evidence that these practices have harmed competition, and numerous studies find otherwise,” and while “some studies find evidence consistent with both pro- and anticompetitive effects,” “virtually no studies can claim to have identified instances where vertical practices were likely to have harmed competition.”
Surveying a (somewhat overlapping) set of 23 papers on the competitive effects of vertical arrangements, Francine Lafontaine & Margaret Slade conclude that the evidence demonstrates that “it appears that when manufacturers choose to impose restraints, not only do they make themselves better off, but they also typically allow consumers to benefit from higher quality products and better service provision . . . the evidence thus supports the conclusion that in these markets, manufacturer and consumer interests are apt to be aligned.”
In a still more recent survey of this literature, economist Dan O’Brien notes that “with few exceptions, the literature does not support the view that these practices are used for anticompetitive reasons,” and supports “a fairly strong prior belief that these practices are unlikely to be anticompetitive in most cases.”
There are quite a few reasonable quibbles one could have w. about individual studies or the aggregate state of evidence. One of those reasonable quibbles is NOT whether there is evidence that suggests RPM “always or almost always” reduces output (the standard for per se illegality) or even “generally” anticompetitive.
Josh, you’re overstating your case against Resale Price Maintenance. There’s no wealth of empirical evidence supporting RPM. Far from it. At most the opinions are relatively balanced. Why do you suppose it was outlawed for so many years?
RPM is, in essence, anti-competitive. Whether or not there’s a conspiracy behind it is largely academic. Horizontal agreements may be superficially more unpleasant in nature because they appear to be underhand but no more so that vertical.
In both cases companies are agreeing to work together to increase their market share at the expense of others and your suggestion that RPM is relatively transparent is spurious. It only ever comes to the public’s attention when there is a whistle blower.