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Tuesday, March 27, 2007

Resale Price Maintenance and Consumer Welfare

Here are sections from the transcript of a Supreme Court case about the economics of price maintenance agreements and whether they should remain illegal on a per se basis under antitrust law. The issue in this particular case is:

Justices Hear Arguments About Pacts on Pricing, by Linda Greenhouse, NY Times: A 96-year-old rule that treats as an automatic antitrust violation any agreement between a manufacturer and its retailers to adhere to a minimum resale price is considered archaic and out of touch by the Bush administration and economists of the Chicago school.

But it still has friends, and several of them sit on the Supreme Court. A Supreme Court argument on Monday laid to rest any expectation that the [per se] rule against “resale price maintenance” would go quietly...

The old per se rule got a spirited defense not only from lawyers representing a small boutique in Texas and a coalition of 37 states, but from Justices Stephen G. Breyer, John Paul Stevens, Ruth Bader Ginsburg and David H. Souter.

These justices questioned the impact on consumers of permitting anti-price-cutting agreements and suggested that it was up to Congress and not the court to disavow a foundational principle of modern antitrust law, one that was announced by the Supreme Court in a 1911 case, Dr. Miles Medical Company v. John D. Park & Sons.

These four justices include two with substantial expertise in antitrust law: Justice Stevens, who made antitrust his specialty as a practicing lawyer before he became a federal judge, and Justice Breyer, who taught the subject at Harvard Law School.

The court’s other antitrust expert, Justice Antonin Scalia, also practiced and taught antitrust law in his pre-judicial career. Justice Scalia, however, expressed a very different view of the question. He offered a helping hand to Theodore B. Olson, the lawyer who was arguing on behalf of a leather goods manufacturer that the per se rule against resale price maintenance should be overturned.

Mr. Olson’s client, Leegin Creative Leather Products Inc., which makes the Brighton line of leather goods, lost a multimillion-dollar jury verdict to a retailer it had cut off for discounting its products. Mr. Olson accepted Justice Scalia’s help gratefully after having endured a barrage of skeptical questions in the opening minutes of his argument as Justice Breyer and the others warned that retail prices would inevitably rise if Mr. Olson won his appeal.

The colloquy proceeded as follows:

Justice Scalia: Is it the sole object of the Sherman Act to produce low prices?

Mr. Olson: No.

Justice Scalia: I thought it was consumer welfare.

Mr. Olson: Yes, yes, it is.

Justice Scalia: And I thought some consumers would prefer more service at a higher price.

Mr. Olson: Precisely.

Justice Scalia: So the mere fact that it would increase prices doesn’t prove anything. If in fact it’s giving the consumer a choice of more service at a somewhat higher price, that would enhance consumer welfare, so long as there are competitive products at a lower price, wouldn’t it?

Mr. Olson: That’s absolutely correct.

If the court does use this case, Leegin Creative Leather Products Inc. v. PSKS Inc., No. 06-480, to overturn the per se rule, resale price maintenance would not automatically be legal. Rather, any challenge to an agreement between a manufacturer and retailer to forbid discounting would be subject to the “rule of reason,” a familiar concept in antitrust law under which courts evaluate the anticompetitive effects of a marketing restriction case by case. ...

Leegin’s marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell the Brighton line through small boutiques that could offer personalized service. Retailers were required to accept its no-discounting policy. Leegin did not dispute that this amounted to price fixing, but argued that consumers benefited from the extra care that the retailers’ guaranteed margin enabled them to give to promoting and servicing the products. ...

Here's the actual transcript. I shortened it considerably:

IN THE SUPREME COURT OF THE UNITED STATES ...

P R O C E E D I N G S (10:03 a.m.)

CHIEF JUSTICE ROBERTS: We'll hear argument first this morning in case 06-480, Leegin Creative Leather Products versus PSKS Incorporated. Mr. Olson.

ORAL ARGUMENT OF THEODORE B. OLSON ON BEHALF OF THE PETITIONER MR. OLSON: Mr. Chief Justice, and may it please the Court:

The per se illegality rule for resale price maintenance is widely recognized to be outdated, misguided and anticompetitive. It should be replaced with the same rule of reason standard that applies to other forms of vertically imposed marketing restrictions.

The Sherman Act bars only unreasonable restraints of trade and the court presumptively applies a rule of reason analysis to determine whether a restraint is unreasonable.

Per se rules should be rare and imposed only where the court is virtually certain based upon considerable economic experience that a practice is nearly invariably anticompetitive. Vertical minimum retail -- resale price maintenance are plainly not invariably anticompetitive. In fact, a broad consensus of economists and decisions of this Court recognize that vertical restraints promote interbrand competition, which is the goal of the antitrust laws and are rarely, if ever, anticompetitive. ...

JUSTICE STEVENS: Mr. Olson, suppose just the dealers in New York, the retail dealers agreed among themselves on the price. Would that be lawful?

MR. OLSON: No. I think that that would be covered by a horizontal prohibition, Justice Stevens.

JUSTICE STEVENS: Would you say that it's per se unlawful?

MR. OLSON: I think it would be...

JUSTICE STEVENS: Why should that be any different from the arrangement where those dealers all got together in the convention and recommended to the manufacturer that he impose a vertical restraint of precisely the same dimensions? Why ... should you draw a distinction?

MR. OLSON: Because the motivation for the arrangement ... comes from a manufacturer... I think it's very unrealistic that that would happen. ...

CHIEF JUSTICE ROBERTS: Maybe, Mr. Olson, you could give us an example where the rule of reason would find a violation in this situation?

MR. OLSON: Well, ... the economists have written about this, say that it would be very rare, and would require retailers with a strong powerful market power to impose a situation where the manufacturer would do that to help facilitate a horizontal cartel. That certainly was not involved in this case, and that would probably be found to violate the rule of reason. ... The economists say that that would very seldom happen.

JUSTICE BREYER: You say very. Which economists? I know the Chicago school tends to want rule of reason and so forth. Professor Sherer is an economist, isn't he? Worked at the FTC for a long time. A good expert in the field. He points out the drug industry after you got rid of ... resale price maintenance, the margins fell 40 percent. The drug stores it went down 20 percent. He says with blue jeans, alone, it saved American consumers $200 million to get rid of it. And his conclusion is, as in the uniform enforcement of resale price maintenance, the restraints can impose massive anti-consumer benefits. Massive.

MR. OLSON: Well -

JUSTICE BREYER: What that sounds like is that if at least he, who is an economist, thinks if you get rid of Dr. Miles, every American will pay far more for the goods that they buy at retail. Now that's one economist, of course. There are other whose think differently. So how should we decide this? ... Should we overturn Dr. Miles and run that risk?

MR. OLSON: In, in the vast majority of the economist whose have looked at this have come out to the opposite conclusion, Justice Breyer. Secondly -

JUSTICE BREYER: We're supposed to count economists?

MR. OLSON: No. No. I think that -

JUSTICE BREYER: Is that how we decide it?

(Laughter.)

MR. OLSON: But what this Court -- what this Court has repeatedly said, that under circumstances such as this where there's a consensus among leading respected economists, that is one factor. ...

JUSTICE BREYER: Well, I haven't seen a consensus. A consensus? Isn't, doesn't Sherer and all these people, doesn't that point of view count, too?

MR. OLSON: This is one factor that the Court should consider... The enforcing agencies have changed their view..., the Antitrust Division and the Federal Trade Commission, all of whom have announced that they believe that it is very rare for a rule such as this, for an arrangement such as this to be anticompetitive.

JUSTICE GINSBURG: But it was not so long ago that the Department of Justice took a different view. ...

CHIEF JUSTICE ROBERTS: What about ... the reliance interest, though? I mean, hasn't a whole industry of discount stores developed in reliance on the Dr. Miles rule? And don't we need to be concerned about the disruption to that established practice?

MR. OLSON: There's really no evidence that the marketplace as it exists today is a result of the Dr. Miles rule of 1911...

JUSTICE BREYER: Well, I don't know -- just for fun I got out of the library a book by Professor B. S. Yamey, called Resale Price Maintenance where he has five economists... Now I didn't find in that book a single argument that isn't also in your briefs, nor did I find in your brief as single argument that isn't in the book.

There's one interesting thing about the book. It was written in 1966. So I guess my question is what's changed? Now I know two things have changed.

One is there's evidence in Canada, Britain, and in the states that ... when you got rid of resale price maintenance, prices went down. That's changed. And the second thing that's changed is there's far more concentration, I gather, today in the retail side of the market than there are used to be, a factor which makes resale price maintenance dangerous because it's more likely to take place at the request of the dealers.

Now, I see those two changes. My question to you is looking at Yamey's book which is called Resale Price Maintenance, so you might have found even it even on Google, and --what's changed? What's new?

MR. OLSON: Well, a number of things have changed. The ... number of respected individuals, notwithstanding that book, who have ... said that because it ... increases the possibility of interbrand competition, it can provide incentives for dealers to provide service...

JUSTICE KENNEDY: Mr. Olson, does brand competition generally help retailers, or is this a question that can't be answered? ... Do retailers like interbrand competition?

MR. OLSON: Well, ... I don't know whether people like competition. But the antitrust laws like competition and this Court likes competition. ...

JUSTICE KENNEDY: Well, but we're talking about ... retailers. It, it seems to me at the outset of the argument ... you acknowledged ... that if the retailers themselves have this resale price maintenance, it is invalid. Well, if the manufacturer does this just for the convenience of the retailers, and that's ... many of the examples in your brief..., then why shouldn't there be a per se rule? Why should we allow the manufacturer to do something we that wouldn't allow the retailers to do, if it's for the retailers?

MR. OLSON: Well, the manufacturer is very unlikely to do this for the convenience of the retailers, ... because it's in the interest of the manufacturer to have the retail price as low as possible...

JUSTICE SCALIA: If ... indeed that's ... what he's aiming at, low price. Is it the ... sole object of the Sherman Act to produce low prices?

MR. OLSON: No.

JUSTICE SCALIA: I thought it was consumer welfare.

MR. OLSON: Yes, yes, it is.

JUSTICE SCALIA: And I thought some consumers would prefer more service at a higher price.

MR. OLSON: Precisely.

JUSTICE SCALIA: So the mere fact that it would increase prices doesn't prove anything. It doesn't prove that it's serving consumer welfare. If, in fact, it's giving the consumer a choice of more service at a somewhat higher price, that would enhance consumer welfare, so long as there are competitive products at a lower price, wouldn't it?

MR. OLSON: That's ... absolutely correct.

JUSTICE SCALIA: So I don't know why ... we should have to focus our entire attention on whether it's going to ... produce higher prices or not. ...

MR. OLSON: I ... agree completely. ... [T]he purpose of the antitrust laws is not price, but it's competition, because competition between competing manufacturers give the consumers more choice. Some people may want the cheapest product. Some people may want ... the return policy or the warranty policy or the repair policy that the dealer provides. ...

CHIEF JUSTICE ROBERTS: Thank you,

Mr. Olson. Mr. Hungar? ORAL ARGUMENT OF THOMAS G. HUNGAR ON BEHALF OF UNITED STATES, AS AMICUS CURIAE SUPPORTING PETITIONER MR. HUNGAR: Thank you Mr. Chief Justice, and may it please the Court.

The same considerations that led this Court in Sylvania and State Oil to reject outmoded per se rules compel that same result here. The Dr. Miles rule conflicts with this Court's modern antitrust jurisprudence in three fatal -

JUSTICE BREYER: ... I understand perfectly that the per se rule is a result of balancing differ things. Of course, resale price maintenance does raise prices, and it is very often anticompetitive. Of course, sometimes, there are good reasons for it that might help consumers.

Now, in addition, you need clear rules. Now those three sets of things require a balance. And we have a hundred years of history where this Court and Congress and others have balanced those three sets of considerations, and they've come out one way. Now, the Department of Justice wants to rebalance them and come out the other way.

There are good arguments on both sides. Why should we overrule a case that's 96 years old, in the absence of any -- any -- congressional indication that that's a good idea, when it's simply a question in a difficult area of people reaching a slightly different weight on some these three sets of things?

MR. HUNGAR: Several reasons.... It's not ... a close question whether this Court under its modern antitrust jurisprudence ... would impose a per se rule in this context. There is economic -- there is consensus among the respected economists -

JUSTICE BREYER: I would think it is quite a close question. ...

JUSTICE SOUTER: We do have empirical evidence, ... don't we, that the decision of this case is going to be very significant in the sort of battle between Wal-Mart and the Main Street stores; and why should this Court in effect take a shot in the dark at resolving that, as distinct from leaving it to Congress, which is in a position to know more about where the shot is going to land than we are?

MR. HUNGAR: ...There's no empirical evidence that I'm aware of about what impact eliminating Dr. Miles would have on the Wal-Marts of the world.

JUSTICE SOUTER: That's my point. But it seems to me there is a body of some empirical evidence that the success of the Wal-Marts and the Targets and the Home Depots was a success which was correlated with the elimination of price maintenance by the States.

MR. HUNGAR: I don't think so, Your Honor. In fact, as Mr. Olson pointed out, the K-Marts of the world began during the fair trade era.

JUSTICE SOUTER: They began, but they have flourished in the post-fair trade era.

MR. HUNGAR: Yes, Your Honor, but I think considerations likes the opening up of international trade and the development of markets like China to supply low-cost goods have a lot more to do with the success of the Wal-Marts of the world than a rule like Dr. Miles. ... Your Honor, in 1945 during the height of the fair trade era the FTC did a study which concluded only about 5 percent of the economy was affected by fair trade. ...

CHIEF JUSTICE ROBERTS: Thank you, Mr. Hungar.

MR. HUNGAR: Thank you.

CHIEF JUSTICE ROBERTS: Mr. Coykendall.

ORAL ARGUMENT OF ROBERT W. COYKENDALL ON BEHALF OF THE RESPONDENT MR. COYKENDALL: Thank you, Mr. Chief Justice, and may it please the Court: As recently as last month, this Court restated a guiding principle of antitrust jurisprudence: Discouraging price cuts and depriving consumers of low prices is bad antitrust policy. ...

JUSTICE SCALIA: Is that right? I mean, You really think that antitrust policy means when -- any arrangement that produce a higher price is bad? ... I mean, a lot of consumers want, you know, extended warranties. They want show rooms where they can go and look at things. All of which costs more money. And where you can not have resale price maintenance the customers -- or you have the free rider problem. The customers shop at the place that has the big show room, likes at all the product there, and goes and buys it from somebody else who has not incurred that expense.

Now, I just don't think that all the customers want is cheap. ... I think they want service. I think they want selection. I think they want the ability to view goods and so forth. Why do you discount all of those things?

MR. COYKENDALL: I don't discount all those things. All those things are available under our current regime where we have a per se prohibition against resale price maintenance.

JUSTICE SCALIA: Well, they aren't available. This company thought that it could provide higher service if it could assure its retailers that they would not be undercut by people who are not providing that kind of service. ...

JUSTICE ALITO: So you don't agree with the argument that we've heard this morning that the transformation of American retailing since the 1970s and the rise of the large-scale low-price retailers has anything to do with the end of the fair trade laws and that overruling Dr. Miles would reverse that?

MR. COYKENDALL: No, I absolutely agree with that. ...

JUSTICE ALITO: Is there anything to suggest that the large-scale low-price retailers who were supposedly dependent on Dr. Miles are -- support its retention? Have they filed amicus briefs here or otherwise suggested that this is essential to their continuing operation?

MR. COYKENDALL: Again, the large-scale dominant players in the retail industry have their own market power. They don't need the protection of the per se rule in order to enforce them. ...

JUSTICE SCALIA: I don't understand that. I mean, if it was really the case that they were going to be losing ... profits, I think they would have been here. I mean, we talk about the Wal-Marts and the Targets. They're not here on amicus briefs because ... what they're selling is cheap. They are selling price, and people who want low price ... above all other things are going to continue to go to those stores. So they're not going to be harmed by the fact that some manufacturers want to provide not just the low price -- ... but service.

I just don't see what, what harm can possibly come, so long as there's no market dominance, from allowing some people to make their money on service ... -- rather than cheap price.

MR. COYKENDALL: Well, again I would suggest that under this current system the way it is we have both the full service providers of complete service ... and we have discounters selling those same goods. There is currently a mix of service and price ...

JUSTICE STEVENS: ...I'm not sure that economically it makes any difference whether the dealers are the one who decide to do it or the manufacturer was, or they all did...

MR. COYKENDALL: Horizontal conspiracies, even among a single brand, has always been a per se violation of the antitrust law. ...

JUSTICE SCALIA: ...I cannot imagine why a horizontal conspiracy among dealers could ever produce consumer welfare. It will be a horizontal conspiracy to get more money out of the consumer; but whereas the manufacturer who wants to impose resale price maintenance, his interest isn't to give the retailer ... more money than the retailer is now making. He's going to try to keep their margin just as low as it ever was, so that he can sell as many of his products as possible consistent with his desire to sell his product by attaching to it more service, better warranty, more showrooms, whatever.

You know, horizontal conspiracy, the incentives are entirely different. When you're dealing with a manufacturer, it seems to me his incentive is still to keep the price as low as possible consistent with the additional good that he wants to give consumers to attract those consumers to his product. ...

CHIEF JUSTICE ROBERTS: Thank you... The case is submitted.

(Whereupon, at 11:05 a.m., The case in the above-entitled matter was submitted.)

    Posted by on Tuesday, March 27, 2007 at 12:03 AM in Economics, Market Failure | Permalink  TrackBack (1)  Comments (4)

          

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