Vertical Restraints Flashcards
(34 cards)
Two ways to evade § 2 liability for vertical intrabrand price restraints
- The agreement was reasonable (it was not an “unreasonable restraint on trade”)
- There was never an agreement.
Fundamental Fact to Understand RPM Economics
Manufacturer sells to retailer at wholesale price. The difference between the wholesale price and the retail price = the retail margin (or retail markup).
The retail markup is the manufacturer’s “cost” of the retail service.
When a manufacturer imposes min RPM it INCREASES the retail margin/markup (since competition can’t keep forcing retailers to keep lowering price). The increase in retail margin/markup GOES TO THE RETAILER.
Which is “bad” for the manufacturer (it wants the markup/margin to be as small as possible consistent with efficient distribution of their product). So there MUST be procompetitive reasons they are doing this…
Anticompetitive red herrings for min RPM
- Reduces intrabrand competition
This is true… but anytime a manufacturer sets any kind of standard about how its product is to be sold it reduces competition between retailers.
Sometimes, restraints on intrabrand competition are necessary to promote interbrand competition. So this is not an anticompetitive harm. - Min. RPM raises prices
True… but there mere fact that something a manufacturer does raises prices does not mean that practice is anticompetitive (ex: advertising raises prices and is incredibly competitive).
Actual anticompetitive harms of min RPM
- Facilitates retailer collusion
Two big hurdles to collusion are establishing an agreement and policing an agreement.
Min. RPM makes both of these a lot easier. Easier to spot cheating. Easier to make an agreement. - Facilitates Manufacturer level collusion
- reduces incentive for manuf to cheat (min RPM insures cheater won’t increase sales)
- makes cheating more visible - Exclusionary Device for Dominant Manufacturer
- Retailers love RPM (guaranteed profit margin & know rivals can’t undersell you)
- If the dominant manufacture has RPM, they may exclude other manufacturers from shelves. - Exclusionary Device for Dominant Retailer
- If there is a dominant retailer that manufacturers HAD to be in business with, the dominant retailer could demand RPM (to prevent being undersold by online/other retailers) or they won’t buy/give desirable shelf space.
Procompetitive benefits of min RPM
- Avoids free riding on point of sale services
- Manufacturer wants retailer to have POS services to make their product more attractive to consumers.
- People will go get the POS services, then buy online/bix box–running POS service dealer out of business. - Facilitates entry of new brands
- The first retailers to give up shelf space for a new brand, “pioneer retailers,” incur costs by promoting this new product. Once brand is established and other retailers want in, without RPM, other retailers could undersell the pioneer retailer. - Encourages sales-enhancing retailer services that are not subject to free riding (favorable shelf space, attractive product displays, etc.)
- RPM markup incentivizes retailers to give products better shelf space because they get a better/guaranteed cut from the retail margin.
- Can set min RPM with liberal termination clause if the retailer doesn’t sell enough units.
This incentivizes retailer to come up with the best ways to sell the product, rather than having manuf. trying to contract for them.
Min RPM ROR overview
(1) Plaintiff must prove the pre-requisites to one of the 4 theories of RPM anticompetitive harm. (if not, D wins). Plaintiff’s prima facie case
(2) Defendant must prove that the RPM achieves one of the 3 procompetitive benefits. (if not, P wins)
(3) Plaintiff may then show that the procompetitive benefit could be achieved equally effectively using substantially less restrictive means. (if P makes that showing, P wins)
(4) If P doesn’t show substantially less restrictive alternative ^^ then court balances the likely competitive effects.
Min RPM ROR AT Harm Prerequisites: Facilitates Dealer/Retailer Collusion
(1) Dealers/Retailers stand to benefit from it. This requires:
(A) Retailer’s market is susceptible to collusion (some can’t be – too many dealers, susceptible to cheating, etc) AND
(B) Either:
- Manufacturer has market power (Brand without close substitutes) OR
- Basically all manufacturers use RPM (so customers can’t switch away)
(2) Manufacture has to concede to it (which they won’t want to since they want retail margins as low as possible). So when would they concede? Only if:
- (A) Dealers have market power AND
(Manufactuer REALLY wants dealer to carry their brand so has no choice but to give into the higher margins)
- (B) Forward integration is impracticable
(Manufacturer can’t just open a retail outlet themselves and bypass the retailers)
Min RPM ROR AT Harms Prerequisites: Facilitates Manufacturer Collusion
(1) Manufacturer market is susceptible to collusion
- Concentrated,
- Fungible, or
- Barriers to entry
(2) Retail Price Maintenance is widely used among manufacturers
- If only one is using, it is not likely being used to sure up manufacturer-level collusion.
Min RPM ROR AT Harm Prerequisite: Exclusionary Device for Dominant Manufacturer
(1) RPM must be a significant benefit to dealers (provide a nice profit margin)
(2) Dealers subject to the RPM comprise a cobstantial portion of available market outlets for competing manufacturers products
- If rivals loose access to favorable shelf in a grocery store, but have a ton of other places they sell a lot of product still, not as big of a deal.
Min RPM ROR AT Harm Prerequisite: Exclusionary Device for Dominant Retailer
(1) Initiated by a dealer with market power
- If the manufacturer initiated, it’s not likely being used for this purpose.
(2) Brands upon which dealer procured RPM comprise a significant portion of sales in the dealer/retailer market.
Min RPM ROR: How can D evade liability if they cannot prove RPM achieves a procompetitive benefit?
The Colgate exception for purely unilateral action
The manufacturer simply announces its intention not to do business with dealers that sell below a certain price level and then does no more than abide by that announced policy.
Park Davis: If the manufacturer does anything more than announce its policy up front and then follow it—for example, if it “reminds” dealers of its policy or encourages them to abide by the resale restriction—the Colgateexception will not apply. (The court will infer that any dealer who follows the pricing policy after having been “reminded” or “encouraged” has agreed with the manufacturer. Thus the weird procedures used by Ping.)
How do we treat Maximum Resale Price Maintance (RPM)
Since state oil = not a single successful max RPM case. We can pretty confidently say max RPM is per se legal. Only ever saw in Globe democrat scenerio: worried about distributors exercising market power so they limit their price
Since that’s the only place we ever see it, we can say its per se legal
How do we treat Consumer restriction agreements
Still theoretically able to establish liability, but the only real viable theory is dealer/retailer collusion (don’t want to compete for market, so let’s have manufacturers split up market for us).
Plaintiff has to demonstrate that this is what was going on when the manufacturer set up exclusive sales territories.
But most of the time the manufacturer set up these exclusive sales territories to avoid freeriding, so there aren’t a lot of successful challenges to these practices.
Avoiding Vertical Intrabrand “Agreements”
- Confinement (Agency)
- Manufacturer who wants to control can retail title even after it passes into the hands of the retailer.
- Technically no RPM because no sale.
- AND two parties that are part of the same economic enterprise cannot conspire – Copperweld
But kind of dead/less applicable now since Dr. Miles (per se RPM) is dead (RPM is ROR). - Colgate Exception **
There was never an agreement, it was just a unilateral announcement of our policy (policy is = we don’t sell products to retailers who sell under $X). So no agreement between anyone. This is just what we do.
CANNOT do anything beyond announcing the policy and enforcing the policy. Warnings, reminders, encouragement, discussing boundaries, etc. will be held to be evidence an agreement, and courts will infer one. – Park Davis
- Ping Brief points out how hard it is to comply with Colgate. Colgate policies are difficult to implement because if basically do anything, taken to agree with dealer and hence liable.
Exclusive Dealing Anticompetitive harms
- Anticompetitive foreclosure of available marketing outlets (*biggest one)
- If the exclusive dealing arrangements foreclose so many sales opportunities (marketing outlets) that your rivals costs (RRC raise rivals cost) are raised either because
- (A) Dominant firm has taken up so many of the available marketing opportunities it drives rivals to cut back on production and thus fall below minimum efficient scale
- (B) Dominant firm forecloses opportunities that forces rivals to be relegated to costlier marketing/sales outlets, driving up their cost. - Reduced price competition
- Incidents of price competition are reduced.
Exclusive dealing procompetitive benefits
- Secures distributional efficiencies by allowing “partial” vertical integration
- Exclusive dealing allows manufacturers to get the best of both worlds. They get the benefit of outsourcing distribution to professionals, don’t have as high of transaction costs, and don’t have to monitor as much to ensure they aren’t favoring other brands. - Guaranteed demand or supply
- this has a lot for obvious benefits. But a less obvious one is that it can encourage expansion because E/D will guarantee demand once the expansion is complete (don’t have to worry about not being able to recoup investment) - Avoidance of inter-brand freeriding (*big one)
- If it’s possible for the manufacturer to want to invest in the retailer (to make them more attractive), then inter-brand freeriding is a concern.
POLICING E/D: When are exclusive dealing arrangements unreasonable restraints?
Qualitative Foreclosure Test – Tampa Electric
- Assess the degree of foreclosure
- define product market
- define geographic market (form perspective of rival manufacturer)
- Assess the foreclosure percentage of the market due to the E/D
(sales covered by exclusive dealing)/(total amount of sales in market)
<15% = legal
>40% = presumptively illegal.
15%-40% = look at the EFFECT (fact-specific) of what the foreclosure is going to do. Intensive ROR required (this is the second half of Tampa Electric) - After looking at the foreclosure percentage, now you have to look at the actual or likely effects of this foreclosure.
(1) Do we think this level of foreclosure would hold rivals under minimum efficient scale?
- Hard to know what min eff. scale really is, but we can get a sense of it by asking if the industry has a few really big companies (like auto)? Just a gut check here: Wow all the firms here are really big and little firms can’t stay in business and this E/D will prevent rivals from being big enough to stay in business.
(2) What about procompetitive justifications?
- Ex: is there a great need for a guaranteed source of demand or supply??
(3) Is this an industry where we are really concerned with interbrand freeriding?
- Aka: is this the type of industry where manufacturers typically invest in retailers? If so, more reasonable.
(4) Duration
- The shorter it is, the less problematic. Lots of courts have adopted a brightline rule that E/D of 1 year or less is per se legal.
Tying vocab: Tied product; tying product
Tying product = market/monopoly market product
Tied product = competitive product
INCORRECT anticompetitive effect that International Salt used to establish per se treatment of tying
The incorrect belief that tying allows monopolists to immediately enhance their monopoly profits.
Debunked by the “Single Profit Monopoly Theory”
- If you are a monopoly, there is only one monopoly profit available (there is only 1 Pm). You cannot enhance it by tying in something and charging more. That will actually result in a REDUCTION of profit.
If you have a monopoly on A product, you are going to charge the profit-maximizing price for A, Pm.
The B product is subject to normal competition. So in B’s market, the Pc is going to be close to or equal to marginal cost.
Consumers are going to be thinking about how much the B product costs when they buy your tied product of A & B.
The profit-maximizing cost for the tying is the Pm of A + the Pc of B.
ANY increase trying to charge more for the B product is tantamount to an increase of price on the tying product, which moves the price OFF Pm, and therefore would REDUCE profit.
Economic Harms of tying
(1) Enhance market power in the tied product market.
- use tying to foreclose rival market opportunities force them out of business/below min eff. scale to create a monopoly in tied market
(2) Enhance market power in the tying product market.
- If a monopoly is afraid of a company in tied market may evolve to threaten its monopoly in tying market, they could use tying to foreclose tied market opportunities to weaken or eliminate the threat.
- Microsoft Windows tying internet explorer to foreclose the threat of java + netscape becoming a substitute operating system.
Procompetitive benefits of tying
(1) Protect Brand (Procompetitive)
If you sell a product with some kind of input and the quality of your product depends to some degree on the quality of input, you may want to require people use your high quality thing
(2) Elimination of Double Marginalization (Procompettiive)
If you have market power and sell a product that has a compliment and the compliment also has a monopoly you would be worried the compliment product will cause double marginalization
Economic effects of tying that could be good or bad…
(1) Using Tying to Evade Rate Regulation
- A tie-in can enable a price-regulated seller who is forced to sell below Pm to avoid or conceal avoidance of price regulation.
- depends on why the rate regulation is in place
- TL doesn’t think A/T law should govern this issue
(2) Price discrimination / surplus extraction
(A) Via “metering” tie-in (aka “variable proportion requirements ties”)
- When the tied product is a requirement (like printer ink, printer paper to printers) charging less than Pm on tying product, and then charging supracompetitve price on the tied product.
- Economically extremely efficient (kind of like price discrimination). Low user may not have entered the market if monopoly charged Pm on tying product.
(B) Stigler-Type Bundling
- Bundling goods that consumers value differently in order to extract the most profit
- “if you want one of the favors you have to buy all of the flavors”
^^ are these good or bad?
- If you subscribe to consumer welfare model of AT = bad. Shifting surplus to producers
- If you subscribe to the maximization of output model (TL) then these things are good.
Policing Tying — how do courts treat tying?
Quasi Per Se rule: tying is per se illegal if
(1) Two separate products are invovled in the tie-in sale;
(2) Seller has market power over the tying product
**this is always the one that makes or breaks the analysis
(3) tie in effects a “not insusbstantial” dollar value of commerce in the tied market.
If meets these 3 elements = per se illegal.
If not, ROR based on degree of foreclosure of opportunities for rivals in tied market (similar to E/D ROR).
Quasi per se rule: Element 1.
How do we know when there is two products?
Current test (O’Conner dissent from Jefferson Parish)
Ask: Are there obvious efficiencies to selling them together?
If so = they should be viewed as a single product
If not = two products.
Translation: ask “is the TYING product regularly sold in competitive markets without the TIED product?
If yes = separate products
If no = single product
Make sure you get this ^ question right. Tires are often sold without cars, but that’s the wrong question.
