Search Results For RPM

Geoff recently highlighted AAG Christine Varney’s closing remarks at the Horizontal Merger Guidelines workshop and was fairly critical.   Thom intervened to suggest that we at TOTM, while fairly critical of the agencies from time to time, also give credit where it is due — highlighting AAG Varney’s RPM article.  OK, that’s enough credit for now.

Now, I’d like to highlight another portion of the speech Geoff mentioned that, as Commissioner Rosch has done in earlier remarks of his own, takes a shot at the Chicago School in order to justify greater intervention and a “reinvigorated” antitrust enterprise.  On the one hand, it sure is nice to see convergence between the agencies compared to the days when Commissioner Kovacic described the sister agencies as “an archipelago of policy makers with very inadequate ferry service between the islands” and “too many instances when you go to visit those islands the inhabitants come out with sticks and torches and try to chase you away.”  Ah.  Nothing like attacking a vaunted enemy of interventionist antitrust policy like the Chicago School bogeyman to create warm feelings between the agencies.   On the other hand, convergence would seem like a less impressive feat if what is converged upon is an embarrassing error that demonstrates a lack of understanding about the Chicago School in the first instance, and even still less impressive if the error is bootstrapped into justifications for policy changes.

What is all this about?  In leveraging discussion of the financial crisis as the basis of an argument that microeconomic theory that forms the basis of industrial organization economics has been turned on its head, the chiefs of both antitrust agencies have now made the same error.  I’ve criticized Commissioner’s Rosch’s error in declaring the Chicago School “on life support, if not dead” in great detail elsewhere.  Antitrust is getting a little bit depressing.  While the US enforcement agencies would have the Chicagoans on life support, or at least retired, of course, Professor Elhauge goes the whole way to “death of the single monopoly profit theorem.”  All this talk about the Chicago School’s death, retirement, general malaise and otherwise fragile state and one almost forgets the state of Supreme Court jurisprudence, much less the actual empirical evidence.

Let’s turn to AAG Varney’s statement:

The evolution of antitrust law needs to keep pace with the advancement of economic thinking. Judge Posner convincingly made this case for reassessing economic beliefs in his recent, thought-provoking piece entitled “How I Became a Keynesian: Second Thoughts in a Recession,” wherein he questioned some of the theoretical assumptions that had previously guided his work. In an even more recent interview, he is quoted to say that “‘the term “Chicago School” should be retired.'” Theoretical assumptions that market forces naturally and inevitably correct for market failures clearly need to be reconsidered. In the context of the Horizontal Merger Guidelines, the most relevant aspect of this reassessment involves explicit or implicit assumptions that entry will erode market power otherwise enhanced by a merger.

Here’s the link to the interview.  Varney clearly wants to use Posner’s quote about the retirement of the Chicago School to support the next sentence, that is, that we ought to reconsider our priors about markets working and reevaluate antitrust priorities in a way that supports greater intervention.  I mean, if Chicago’s own Richard Posner says the Chicago School should be retired — well, I leave the rest of the proof as an exercise for the reader.

So did Posner And here’s what Posner actually said:

Ronald (Coase) is alive, but he’s very, very old. He’s not active. Stigler is dead. Friedman is dead. There’s Gary (Becker) of course. But I’m not sure there’s a distinctive Chicago School anymore. Except there are probably a higher percentage of conservative people here, but not all. Jim Heckman—not particularly conservative at all. He’s very distinguished. Steve Levitt—he’s very famous. I don’t think he’s conservative. You’ve got people like (Richard) Thaler. So probably the term “Chicago School” should be retired.

There were people—people like Stigler and Coase, Harold Demsetz, Reuben Kessel, and people at other schools like Armen Alchian. They were people rebelling against the very liberal economics of the nineteen-fifties—very Keynesian, very regulatory, very aggressive anti-trust, little faith in the self-regulating nature of markets. Francis Bator, who’s a very distinguished Harvard economist, he wrote a famous essay entitled “The Anatomy of Market Failure.” And he gave so many examples of market failure that you couldn’t believe a market could exist. You have to have an infinite number of competitors, full information, you can’t have any economies of scale, and so on. It was too austere. That was what the Chicago people, with their more informal approach, rebelled against. So we had our moment in the sun, but by the nineteen-eighties the basic insights of the Chicago School had been accepted pretty much worldwide.

Posner did not make the point that the Chicago School ought to be retired because it is outdated, incorrect, or led to antitrust policy that provided inadequate protection for consumers because of misguided notions about market failures.  Posner was making the point, as he has made elsewhere time and time again, that the Chicago School as applied to regulation, antitrust, and industrial organization economics, had been so broadly adopted into mainstream economic thought that it no longer made sense to describe a distinctive “Chicago School.”  This is the point he also makes in the speech.   Posner, actually goes so far as to reject the assertion Varney invites the reader to make, i.e. that the financial crisis should undermine faith in markets in a sense relevant to regulation and antitrust generally.

When asked “Has the financial crisis undermined your faith in markets and the price system outside of the financial sector?”

Here is Judge Posner’s answer:

No. But of course one of the more significant Chicago (positions) was in favor of deregulation, based on the notion that markets are basically self-regulating. That’s fine. The mistake was to ignore externalities in banking. Everyone knew there were pollution externalities. That was fine. I don’t think we realized there were banking externalities, and that the riskiness of banking could facilitate a global financial crisis. That was a big oversight. It doesn’t make me feel any different about the deregulation of telecommunications, or oil pipelines, or what have you.

It really can’t be made more clear than that can it?  I understand that it is tempting to use figures like Greenspan and Posner to play “gotcha.”  I’m quite sure its even an effective rhetorical device at times with those who do not follow the debates closely or do not read the language carefully.  But in both cases, the AAG and the Commissioner do a disservice to those lawyers and economists in their agencies who are dedicated to getting the answer right by hard economic analysis and not by sloganeering.  For a serious and intellectually powerful discussion from a public antitrust enforcement official discussing the Chicago School’s role, along with contributions from Harvard, in forming the intellectual basis of modern antitrust jurisprudence, see Commissioner and former Chairman Kovacic’s seminal article on the subject.

As I’ve written on this topic previously:, at that time motivated by the declaration out of the Federal Trade Commission that the Chicago School was either on life support or dead:

I had always thought that the “Chicago School” stood for the proposition that microeconomic theory should be applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.  These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.  That faith, where it exists, is earned by persuasive theory and evidence.

And with all due respect to the Commissioner, an intellectually honest survey of the state of evidence concerning the actual competitive effects of antitrust-relevant business practices reveals that the Chicago School isn’t close to dead.  In fact, Chicago School principles are alive as ever in the Supreme Court’s jurisprudence.  Perhaps this disappoints the Commissioner and others who might like economics (and particularly Chicago School antitrust economics) to be a lesser constraint on antitrust enforcement decisions.  But it’s the state of play in both the federal courts and in the empirical antitrust literature.  The debate over whether to deviate from the state of play should be determined by the quality of theory and evidence.   A rigorous review of the empirical evidence suggests not only that the Chicago School of antitrust is alive, but in my view, that it is the “best available” mode of analysis for understanding many business practices relevant to antitrust enforcement.

The search for evidence-based antitrust cannot be conducted by assertion.  Instead, if it is to be fruitful, it must take a more scientific approach.

If the Chicago School’s influence on antitrust policy is going to be defeated — let it be by strong theoretical and empirical evidence that its insights give less predictive power than alternative theories and result in policies that provide fewer benefits to consumers than alternatives.  T-shirt slogans are not going to reverse Supreme Court decisions or win Section 2 cases — though perhaps acts of Congress and expanded use of Section 5 will leave a dent.  Still, here’s to authorities and leading voices in the antitrust community, and particular those at the antitrust enforcement agencies, using their podiums to encourage productive and intellectually honest debate and not cheap, deceptive, and misleading rhetorical tricks.

Speaking of, let’s have new Section 2 hearings!

Are Dr. Miles' Days Numbered?

Josh Wright —  12 September 2006

Maybe. WSJ Law Blog reports that SCOTUS may revisit the nearly century old precedent applying the per se rule to minimum resale price maintenance (RPM). Dr. Miles may well be the last vestige of antitrust before consumer welfare’s promotion as the guiding principle of the Sherman Act, which is to say, before economics had a significant role in antitrust jurisprudence. As of today, SCOTUS has not granted cert in Leegin Creative Leather Products v. PSKS, but its agreement to stay a 5th Circuit judgment upholding Dr. Miles may well signal that cert is forthcoming. While there is still some disagreement between antitrust scholars on the issue (Georgetown’s Robert Pitofsky is Dr. Miles‘ most well known advocate), I would venture to guess — and it is not more than a guess — that the majority of antitrust scholars and economists believe that Dr. Miles is misguided.

Hanno Kaiser (this time without his always excellent graphics!) sketches one case against Dr. Miles in this post at Antitrust Review: minimum RPM is one of several forms of solving an incentive incompatibility problem between manufacturers and retailer, i.e. get the retailer to engage in jointly profit-maximizing activities that are not in the retailer’s economic interests in the absence of the contractual restraint. Interestingly, antitrust decisions (and scholars) have focused on one particular type of vertical contracting problem: the “discount” dealer free-riding problem. Where retailer promotional effort results in additional, and jointly profit-maximizing (total incremental profit greater than the cost of promotion) sales, the manufacturer wants the retailer to engage in greater promotional effort. In some cases, buyers can “consume” the promotional effort at a high-end retailer (let’s say, listen to an informative product demonstration about the virtues of various HDTVs … ) and then purchase the product across the street at a “discount” retailer who does not supply those services but is able to undercut the prices of the “high-end” retailer. RPM and other vertical restraints can solve this problem.

A brief tangent: RPM and other vertical restraints solve a number of pervasive incentive incompatability problems between manufacturers and retailers. Some much more common than the “discount” free-rider problem. We observe, for example, RPM, slotting, exclusive territories, and other restraints where a “discount” free-riding story is implausible. In any event, the point is that there are a number of contractual instruments at the disposal of manufacturers and retailers to solve these problems and reach the efficient solution.

As Hanno points out, Dr. Miles has been eroded over the years from a series of indirect attacks. For this reason, overturning Dr. Miles would allow manufacturers and retailers additional freedom in contracting around incentive problems, but will probably have less impact than, say, Independent Ink. Overturning Dr. Miles may have more symbolic value, however, as the result of its status as the “last survivor” of the Chicago School’s assault on per se analysis in vertical restraint cases. In any event, it will be interesting to see how this shakes out, including the possibility that Congress brings Dr. Miles back to life even if it is overturned.

Dan Crane and Thom (who has promised more remarks!) have now both posted their prepared remarks for the Section 2 hearings panel on bundled discounts. Both call for bright-line, administrable liability rules for all forms of unilateral exclusionary conduct, and have important things to say about designing antitrust rules for bundled discounts. Both are worth reading in their entirety. Administrable rules that sensibly balance Type I and II errors are certainly an indisputably admirable goal for antitrust analysis and bundled discounts have proven to be a particularly tricky form of conduct for Section 2 analysis. Despite all of the agreement around here between Thom, Dan and I on the design of antitrust rules in a world of costly Type I errors, I think I have found a topic upon which I can at least offer a mild dissent (or at least a different perspective) regarding the usefulness of the analogy of various anticompetitive theories of bundled discounting practices to exclusive dealing.

The overlap between exclusive dealing and bundled/ loyalty discounts is frequently addressed by commentators, and is a topic of newfound interest in what has become the quest for a “holy grail’, one size fits all standard for Section 2 analysis of exclusionary conduct. At times, I detect a tension between the analysis of bundled discounts and exclusive dealing contracts which both purport to exclude exclude by depriving rivals from the opportunity to compete for distribution sufficient to support minimum efficient scale. For example, I discuss what I perceive to be a tension in Professor Hovenkamp’s very sensible analysis of bundled discounts and exclusive dealing in this post:

Hovenkamp concludes that adminstrative costs justify a predatory pricing-type rule in the context of for bundled discounts where the anticompetitive mechanism is de facto “foreclosure” or deprivation from distribution resources (i.e. shelf space) that would prevent rivals from achieving minimum efficient scale and extend the duration of monopoly by increasing barriers to entry. One would think that it would follow from Hovenkamp’s position that a predatory pricing-type rule would also be sensible for exclusive dealing and tying arrangements where the anticompetitive mechanism is the economic equivalent. To the contrary, Hovenkamp advocates rule of reason analysis (p. 201) for exclusive dealing and tying, noting that “foreclosure concerns can be assessed meaningfully only via the rule of reason” and that “the antitrust law of exclusive dealing,” which generally requires proof of substantial foreclosure as a necessary condition of competitive harm, “seems to be on the right track.”

The basic tension here is that the anticompetitive theories underlying both forms of conduct require foreclosure of a rival sufficient to deprive the opportunity to compete for minimum efficient scale. Of course, the pro-competitive side of the ledger differs. One might sensibly believe that the standard for the two forms of exclusion should be different because lower prices are inherently pro-competitive whereas exclusive dealing may not invoke the same immediate consumer benefits. This is certainly a sensible position. But it only suggests that the standard for bundled discounts ought to be more difficult to satisfy than the exclusive dealing standard given equal administrative costs and the same anticompetitive mechanism. This point is not sufficient to render the exclusive dealing analogy fruitless. I offer below some tentative thoughts on the usefulness of the exclusive dealing analogy to bundled discounts.

Continue Reading…

Bye Bye, Dr. Miles.

Thom Lambert —  9 December 2006

So it looks like Dr. Miles is going down. That’s a good thing.

For non-antitrusters, Dr. Miles is a 1911 Supreme Court decision holding that “minimum vertical resale price maintenance” is per se illegal — that is, automatically illegal without inquiry into the practice’s actual effect on competition. Minimum vertical resale price maintenance (or “RPM”) occurs when a manufacturer requires dealers who sell its product to charge no less than a set price for that product. For example, Ford might require its dealers to charge at least $30,000 for an Explorer.

Several theories have been asserted for why RPM is anticompetitive. Some complain that it interferes with dealer freedom. That’s a non-starter. Manufacturers could eliminate dealers altogether and sell their own goods directly, and they’ll be more likely to engage in such “vertical integration” if they can’t exercise meaningful control over how dealers promote and sell their products. It’s therefore in dealers’ interests to permit manufacturers to tailor the dealer relationship — a creature of contract — as they see fit. In any event, dealers would seem to benefit, at least as much as manufacturers, from minimum RPM. Dealers’ compensation is the difference between wholesale price and retail price, so the larger that difference, the greater their compensation. High fixed retail prices might cause total sales to fall, of course, but that would seem to impact manufacturers more adversely than dealers. (Unless they raise wholesale prices as well, manufacturers only suffer lost sales from supracompetitive retail prices; retailers, by contrast, at least make more money on the smaller number of sales that do occur.) In short, theories of dealer harm are unconvincing.

More promising theories of anticompetitive harm have focused on RPM’s potential to facilitate the creation and enforcement of cartels. It might, for example, make it easier to form and enforce dealer-level cartels. Given the strict rules against horizontal price-fixing, it’s tough for competing dealers to agree on a fixed price. If they can get the manufacturer to dictate that price, formation of the cartel is easier. Moreover, the manufacturer could enforce the cartel by punishing dealers who depart from the minimum price. Dealers might therefore pressure manufacturers to mandate minimum resale prices. On the manufacturers’ side, minimum RPM might facilitate a manufacturer-level cartel by decreasing each manufacturer’s incentive to “cheat” by charging its dealers less than the agreed-upon wholesale price. If the dealers are unable (because of RPM) to pass a price cut on to consumers, then manufacturers won’t be able to sell more of their products to end users by lowering their wholesale price from the fixed level. RPM thus reduces their incentive to cheat on a price-fixing agreement in order to expand their output and increase revenues.

For an explanation of why these competitive concerns do not justify a per se rule against minimum RPM, see below the fold. Continue Reading…

Huh? This statement appears in this article by Professor Anthony D’Amato (Northwestern) on the failure of interdisciplinary scholarship in the legal academy. HT: Brian Leiter. Quite frankly, I was very surprised to see a claim like this in a paper written after 1970 or so. Even in corners of the academy hostile to economic analysis, antitrust is conventionally distinguished as a special case where economics is useful, typically along with some statement about the uniqueness of antitrust. D’Amato reserves no such special treatment for antitrust, criticizing that field in the context of a more general critique of what he describes as the “interdisciplinary turn” in the legal academy on three grounds:

First is the unlikelihood that the joint-degreed persons who join the law faculty will happen to be the ones that their colleagues will end up collaborating with. Second is the even greater unlikelihood that any given discipline can communicate usefully with another discipline. Third is the opportunity-cost factor: that the new interdisciplinary courses will crowd out an essential part of the legal discipline, namely, an understanding of the foundations and dialectical evolution of its forms of language.

Those who study antitrust might be surprised to read the claim that economics has not changed antitrust in any significant way. To give some context, this claim comes as part of D’Amato’s rebuttal case against law and economics as an example of successful interdisciplinary scholarship. D’Amato’s conclusion? Economic analysis earns a “gentlemanly C+” on its report card and claims of success are “misleading if not false.” The rebuttal case consists largely of claims that economic analysis has not been fruitful in many areas of law: contracts (see Eric Posner), torts, criminal law, and includes the statement that the Coase theorem “is hardly helpful to lawyers.” I admit that I found the argument about criminal law difficult to follow (it consists largely of a response to hypothetical examples of crimes that Richard Posner could have but apparently did not write and the obligatory mention of Posner’s comments on the potential benefits of a market in parental rights.

My disagreement is somewhat predictable, as someone engaged in law and economics. But I want to focus on D’Amato’s claim that economic analysis has not even been successful in areas that are “ideal for the division of labor between lawyer and economist,” like antitrust. D’Amato offers as support for the words in the title to this post the following analysis (p.65):

The focus on the quantitative aspects of antitrust — such as Robert Bork’s reductionism of antitrust to the goal of delivering the lowest prices to the consumer — has had a distorting effect on the field. The original impetus for antitrust legislation — combating an incipient fascist tendency of huge corporate combinations to overwhelm and run the government — seems to be an inconvenient memory for those who would like economic analysis to place a price tag on every legal value.

I respectfully dissent. I discuss an objection to D’Amato’s characterization of the antitrust endeavor and ten reasons to think that D’Amato’s claim in the title of this post are wrong below the fold.
Continue Reading…

Thursday night I will be speaking at a dinner and discussion sponsored by the eSapience Center for Competition Policy (eCCP) on the pending Leegin decision and the application of per se rules to minimum RPM. Here is the eCCP announcement:

Presentations will be made by Prof. Robert Pitofsky, and Prof. Joshua Wright. Prof. Pitofsky is the Sheehy Professor of Antitrust & Trade Regulation Law at Georgetown University Law Center, and Of Counsel with Arnold & Porter LLP. Prof. Wright is is an Assistant Professor of Law at George Mason University School of Law, and has been recently appointed to the newly created position of Scholar in Residence in the Federal Trade Commission’s Bureau of Competition.

I will be presenting the view that per se rules should not be applied to minimum RPM opposite Professor Pitofsky who has long been the most prominent champion of the per se approach. It should be fun!

*I should note that Thom, Geoff, and I are Advisory Board members at eCCP.

Federal Trade Commissioner Pamela Jones Harbour has sent the U.S. Supreme Court justices an “open letter” regarding the pending Leegin case. [HT: Danny Sokol.]

Leegin, as regular TOTM readers know, will test the continued vitality of Dr. Miles, the 1911 decision making it per se illegal for manufacturers and retailers to agree on minimum retail prices for the manufacturers’ products. I have previously argued (here and here) that such “vertical resale price maintenance,” or “VRPM”, should not be automatically illegal and that Dr. Miles should be overruled. Based on his upcoming eCCP presentation, I believe Josh agrees. He may, however, be reluctant to go head-to-head with a commissioner since he’s now a scholar-in-residence at the FTC.

I have no such qualms.

Putting aside any procedural impropriety here (Is it kosher for a commissioner to send an open letter to the Supreme Court regarding a pending appeal? I have no idea, but it seems fishy to me….), Commisioner Harbour’s letter is substantively off base. Continue Reading…

There’s just so much paper going back and forth on Leegin that it’s hard to keep up.

In addition to various briefs and commentaries and Commissioner Harbour’s de facto brief (also discussed here), there has been some interesting correspondence between Rep. Conyers, Chair of the House Committee on the Judiciary, and Deborah Platt Majoras, Chair of the FTC.

Back in January, Rep. Conyers wrote to Chairman Majoras and Assistant Attorney General Thomas Barnett, head of DOJ’s antitrust division, “to request the Department’s and Commission’s views” on RPM in general and the Leegin case in particular. Based on Rep. Conyers’ leading questions, it was pretty clear where he stood on Leegin. (e.g., “Given Congress’ active involvement in the RPM issue…in unequivocal support of the Dr. Miles line of cases — would you agree that the Supreme Court should defer to Congress on this issue?”)

Chairman Majoras has responded. The crux of her response is the eminently sensible point that RPM is a “mixed bag” competitively — i.e., it can sometimes be anti-competitive and sometimes pro-competitive — and that rule of reason treatment is therefore appropriate.

Specifically, Chairman Majoras addresses:

The relevance of the 1975 Consumer Goods Pricing Act. The 1937 statute repealed by the 1975 Act effectively permitted states to provide per se legality for RPM schemes. In repealing the Act, Congress again subjected RPM to antitrust scrutiny, but it did not mandate a particular standard to govern such scrutiny. Instead, it contemplated that the standard would evolve with judicial understanding of the practice.

The fact that the DOJ and FTC testified in favor of the 1975 Act. The agencies testified in favor of the 1975 Act because they believed — and still believe — that exemptions and immunities from the antitrust laws (the practical result of the “fair trade” laws authorized by the federal statute repealed by the 1975 Act) are disfavored. They believed RPM should be subject to antitrust scrutiny, but they did not necessarily think it should be subject to the per se rule. Moreover, to the extent their 1975 testimony “failed to recognize potential procompetitive and proconsumer justifications for RPM,” it “did not reflect the subsequent experience and economic analysis that has developed during the last thirty-plus years.”

The FTC’s 2000 enforcement action against the recording industry’s use of minimum advertised prices for the sale of CDs. Sure — some schemes restricting competition over resale prices can be anticompetitive. With regard to this particular scheme, “[t]he Commission examined the circumstances under the rule of reason and concluded that it had reason to believe that the practices were anticompetitive.” Overruling Dr. Miles would not prevent courts and regulators from condemning RPM schemes that, upon investigation, appear to be anticompetitive on balance. But “whether an RPM agreement is anticompetitive or procompetitive depends on the particular facts of the case.”

Academic commentary suggesting that RPM is more dangerous than vertical non-price restraints. The evidence here is unclear. Indeed, economists who have weighed in on the case “observed that nonprice vertical restraints, such as exclusive territories, can more completely restrict intrabrand competition than does RPM.” That’s because, “[w]hile exclusive territorial restrictions can eliminate virtually all intrabrand competition, RPM permits retailers to engage in intrabrand competition on factors other than price, leaving multiple sellers of the brand in the same geographic market to engage in interbrand competition.” (Internal quotation and alteration omitted.) Bottom line: RPM, like vertical non-price restraints, is a mixed bag and should be evaluated as such — that is, subject to the rule of reason.

***

All in all, a succinct and persuasive response to some of the leading arguments against overruling Dr. Miles.

Cass on Leegin

Thom Lambert —  24 March 2007

Ronald Cass, dean emeritus of Boston University Law School, argues in today’s WSJ that the Supreme Court should overrule Dr. Miles:

The decision was a mistake that has plagued antitrust law and American business ever since. Manufacturers have no interest in suppressing price competition to help increase profits for retailers. A manufacturer with a meaningful monopoly can extract all of his potential profit from controlling the prices (and quantities) at which he sells, and would have no concern for the prices charged downstream. Prices for products that don’t have market power are constrained by forces outside the manufacturer’s control. In either case, the Supreme Court in Miles misunderstood how markets work.

The context for RPM agreements also doesn’t fit the Supreme Court’s assumption — that manufacturers were enforcing conspiracies among retailers. RPMs are common in markets where there is almost no possibility of effective cartels and typically concern products that aren’t likely vehicles for suppressing retail competition. As in Leegin, the products protected from price-cutting generally don’t dominate markets. RPMs serve a different end: they promote brand loyalty — and thus brand value — in highly competitive markets for differentiated, but still largely substitutable, products. While manufacturers can do much to establish brand value, not all of the factors influencing brand value are easily within a manufacturer’s control.

Retailers can help or hurt by tilting sales toward or away from a brand through their choices on how to display it, promote it, service it, or provide information about it — all actions that affect consumers’ perceptions of product quality. By reducing price competition among a brand’s retailers, the RPM provides a profit margin that can make such brand-enhancing behavior affordable and prevent competitors from free-riding on a retailer’s investment in such behavior.

The makers of some brands succeed in the market by reducing price aggressively; others by providing higher quality products. The ability to choose from more products marketed in more varied ways provides options to serve a broad spectrum of consumer tastes and values, including the values of economizing on their time, of making products easier to understand and to use, or of generating straightforward financial savings.

Well said.

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?

A few more thoughts to supplement Josh’s fine posting on the transcript of oral argument in Leegin.

I don’t understand Justice Breyer. He recognizes that there are at least some circumstances in which RPM helps consumers. Why isn’t that enough for Dr. Miles to be overruled?

Justice Breyer regards this as a “close case” (presumably for reasons of stare decisis rather than on the merits) and asks “what has changed?”

What has changed is our state of economic understanding. When Dr. Miles was decided in 1911, the proconsumer aspects of RPM were not yet recognized. And that was largely true even in 1966, a year that Justice Breyer has focused upon, given the publication that year of an academic book criticizing RPM, which seems (so far as Justice Breyer can tell) to have made all of the same arguments against RPM that are now being made today. But it was not and could not have been argued back in 1966 that it would be inconsistent to exempt some vertical restraints from the per se rule but not others. Only once the late 1970s came, when Continental overruled Schwinn, did it become clear how foolish Dr. Miles is. Now that we allow (subject to the rule of reason) non-price vertical restraints, it seems entirely crazy not to allow RPM as well. As then-Professor Posner argued back in the 1970s, RPM is likely in many cases to be a more efficient vertical restraint than the now permissible non-price ones. So banning RPM across the board on a per se basis does not seem to make any sense. And while many of the same arguments against RPM could have been made in 1966, there are some new ones now that didn’t exist then. Anyway, Dr. Miles was decided in 1911, not 1966. It’s not as though the Court considered overruling Dr. Miles in 1966 and decided not to. The Court is now squarely addressing whether Dr. Miles should be overruled for the first time. So any post-1911 developments in economic science are fair game; there’s no basis for excluding from debate what happens to have been known in 1966!

Justice Breyer is impressed by Professor Scherer’s examples of cases where RPM has been harmful to consumers. But how can these examples justify a per se rule? If Professor Scherer can persuasively demonstrate the benefits of banning RPM in the market, say, for blue jeans, then RPM should be banned in that context under the rule of reason. But this does not come close to showing that RPM is”always or almost always” harmful to consumers such that a per se rule is justified.

But enough about Justice Breyer. I also don’t understand Justice Stevens. What on earth does a horizontal conspiracy among New York distributors have to do with this case? As Justice Scalia said, what possible procompetitive benefit could be associated with a horizontal agreement on price? It’s very hard to think of one. But if Justice Stevens can think of one, then sure: apply the rule of reason in that context too!

Predictions are hard to make. But I don’t think Shubha Ghosh is right about Dr. Miles definitely have four votes in the bag. I say it’s one, not four. Justice Breyer says it’s a close case and may well come around. Justice Souter seems altogether uncertain. Justice Ginsberg if anything seems to be leaning the other way–given her interest about what arguments would be available to the plaintiff on remand assuming (as she appears to think likely) a loss in the Supreme Court. As I read the transcript, Dr. Miles can be confident only about Justice Stevens’ vote.

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.