Resale price maintenance
Encyclopedia
Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices (resale price maintenance), at or above a price floor
(minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market
), the manufacturer may stop doing business with it.
Resale price maintenance prevents resellers from competing too fiercely on price, especially with regard to fungible goods. Otherwise, resellers worry it could drive down profits for themselves as well as the manufacturer. Some argue that the manufacturer may do this because it wishes to keep resellers profitable, and thus keeping the manufacturer profitable. Others contend that minimum resale price maintenance, for instance, overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer's product are able to recoup the additional costs of such promotion in the price they charge consumers. Some manufacturers also defend resale price maintenance by saying it ensures fair returns, both for manufacturer and reseller and that governments do not have the right to interfere with freedom to make contracts without very good reason. Governments can sometimes be seen as upholding price controls as in the case of CD WOW!
.
case, the House of Lords held that Dunlop Tyres
(a tyre manufacturer) could not enforce an agreement between a tyre dealer and a tyre buyer to pay £5 per sale under a liquidated damages clause if tyres were sold (other than to motor traders) below the list price. But this had nothing to do with the legality of resale price maintenance clauses, which was not in any question at the time: the decision was based on the doctrine of privity of contract
as Selfridges had bought Dunlop's goods from an intermediary. In the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
[1915] AC 79 the House of Lords upheld the enforceability of the requirement in the resale price maintenance clause to pay £5 damages per item sold below list price, on the basis that it was not a penalty clause (which would be unenforceable) but a valid and enforceable liquidated damages clause.
In 1955 in the UK
, the Monopolies and Mergers Commission's report Collective Discrimination - A Report on Exclusive Dealing, Aggregated Rebates and Other Discriminatory Trade Practices recommended that resale price maintenance when collectively enforced by manufacturers should be made illegal, but individual manufacturers should be allowed to continue the practice. The report was the basis for the Restrictive Trade Practices Act 1956, this specifically prohibited collective enforcement of resale price maintenance in the UK. Restrictive agreements had to be registered at the Restrictive Practices Court, and were considered on individual merit. In 1964 the Resale Prices Act was passed, which now considered all resale price agreements to be against public interest unless proven otherwise. In 2010 in what could be a landmark case The Office of Fair Trading
started to investigate allegations of resale price maintenance in the hotel industry. The investigation will focus on allegations that there could be agreements and concerted practices resulting in fixed or minimum resale prices.
In relation to competition, Article 81
and Article 82
of the EC Treaty are paramount over all member states' national laws relating to competition. The ECJ and the Commission have both held that Resale Price Maintenance is generally prohibited. UK law must apply this interpretation when dealing with inter member-state agreements between undertakings.
, Slip Op. No. 06–480 (Decided June 28, 2007). This marked a dramatic shift on how attorneys and enforcement agencies address the legality of contractual minimum prices, and essentially allowed the reestablishment of resale price maintenance in the United States in most (but not all) commercial situations.
In Dr. Miles Medical Co. v. John D. Park and Sons, , the United States Supreme Court affirmed a lower court's holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act
. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel
. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful per se
- that is, without regard to its impact on the marketplace or consumers.
During the Great Depression
in the 1930s, a large number of U.S. state
s began passing fair trade laws
. These were intended to protect independent retailers from the price-cutting competition of large chain store
s by authorizing resale price maintenance. Since these laws allowed vertical price fixing
, they directly conflicted with the Sherman Antitrust Act, and Congress had to carve out a special exception for them with the Miller-Tydings Act of 1937. This special exception was expanded in 1952 by the McGuire Act (which overruled a 1951 Supreme Court decision that gave a narrower reading of the Miller-Tydings Act).
The fair trade laws became widely unpopular after World War II
and so the Miller-Tydings Act and the McGuire Act were repealed by the Consumer Goods Pricing Act of 1975.
In 1968 the Supreme Court extended the per se rule against minimum resale price maintenance to maximum resale price maintenance, in Albrecht v. Herald Co., . The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice "may" channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the "maximum" price could instead become a minimum price.
In 1997, the Supreme Court overruled Albrecht, in State Oil v. Khan, .
Several decades after Dr Miles, scholars began to question the assertion that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester G. Telser
, an economist at the University of Chicago
, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in the desired promotion of a manufacturer's product through local advertising, product demonstrations, and the like. Without such contractual restraints, Telser said, no frills distributors might "free ride" on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion. Six years later, Robert Bork
reiterated and expanded upon Telser's argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration
, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints
, such as exclusive territories, could achieve the same results.
Some scholars subsequently questioned Telser's theory, arguing that, by itself, minimum retail price maintenance cannot ensure that dealers will engage in an optimal level of promotion. These scholars argued that minimum price served as a contract enforcement mechanism, guaranteeing compliant dealers a stream of rents if they adhered to a manufacturer's promotional directives. However, some contended that the promotional efforts resulting from minimum price and other vertical restraints could actually reduce economic welfare by encouraging undue product differentiation and the resulting market power. Others claimed that manufacturers could achieve the same objective by less restrictive alternatives.
In 1978, the U.S. Supreme Court held that non-price vertical restraints, such as vertically imposed exclusive territories, were to be analyzed under a fact-based "rule of reason
." In so doing, the Court embraced the logic of Bork and Telser as applied to such restraints, opining that, in a "purely competitive situation," dealers might free ride on each others' promotional efforts.
In 1980, the U.S. Supreme Court held that the repeal of Miller-Tydings implied that the Sherman Act's complete ban of vertical price fixing was again effective, and that even the 21st Amendment
could not shield California
's liquor resale price maintenance regime from the reach of the Sherman Act. California Liquor Dealers v. Midcal Aluminum, . Thus, from the 1975 enactment of the Consumer Goods Pricing Act to the 2008 Leegin decision, resale price maintenance was again no longer legal in the United States.
Price floor
A price floor is a government- or group-imposed limit on how low a price can be charged for a product. For a price floor to be effective, it must be greater than the equilibrium price.-Effectiveness of price floors:...
(minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market
Grey market
A grey market or gray market also known as parallel market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer...
), the manufacturer may stop doing business with it.
Resale price maintenance prevents resellers from competing too fiercely on price, especially with regard to fungible goods. Otherwise, resellers worry it could drive down profits for themselves as well as the manufacturer. Some argue that the manufacturer may do this because it wishes to keep resellers profitable, and thus keeping the manufacturer profitable. Others contend that minimum resale price maintenance, for instance, overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer's product are able to recoup the additional costs of such promotion in the price they charge consumers. Some manufacturers also defend resale price maintenance by saying it ensures fair returns, both for manufacturer and reseller and that governments do not have the right to interfere with freedom to make contracts without very good reason. Governments can sometimes be seen as upholding price controls as in the case of CD WOW!
CD WOW!
CD WOW! is an online retailer, offering Games, CD, DVD, Books and Cosmetics. Similar to Amazon.com, it offers websites in and ships from multiple countries including: UK, USA, Hong Kong, New Zealand, Republic of Ireland, Australia, Sweden, Norway, Denmark, Netherlands, Japan and Germany. Started...
.
United Kingdom law
In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, an English contract lawEnglish contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
case, the House of Lords held that Dunlop Tyres
Dunlop Tyres
Dunlop Tyres is a British company owned 75% by Goodyear Tire and Rubber Company and 25% by Sumitomo Rubber Industries, which bought the right to sell Dunlop-branded road tyres....
(a tyre manufacturer) could not enforce an agreement between a tyre dealer and a tyre buyer to pay £5 per sale under a liquidated damages clause if tyres were sold (other than to motor traders) below the list price. But this had nothing to do with the legality of resale price maintenance clauses, which was not in any question at the time: the decision was based on the doctrine of privity of contract
Privity of contract
The doctrine of privity in the common law of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it....
as Selfridges had bought Dunlop's goods from an intermediary. In the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] is an English contract law case, concerning the extent to which damages may be sought for failure to perform of a contract when a sum is fixed in a contract...
[1915] AC 79 the House of Lords upheld the enforceability of the requirement in the resale price maintenance clause to pay £5 damages per item sold below list price, on the basis that it was not a penalty clause (which would be unenforceable) but a valid and enforceable liquidated damages clause.
In 1955 in the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, the Monopolies and Mergers Commission's report Collective Discrimination - A Report on Exclusive Dealing, Aggregated Rebates and Other Discriminatory Trade Practices recommended that resale price maintenance when collectively enforced by manufacturers should be made illegal, but individual manufacturers should be allowed to continue the practice. The report was the basis for the Restrictive Trade Practices Act 1956, this specifically prohibited collective enforcement of resale price maintenance in the UK. Restrictive agreements had to be registered at the Restrictive Practices Court, and were considered on individual merit. In 1964 the Resale Prices Act was passed, which now considered all resale price agreements to be against public interest unless proven otherwise. In 2010 in what could be a landmark case The Office of Fair Trading
Office of Fair Trading
The Office of Fair Trading is a not-for-profit and non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator...
started to investigate allegations of resale price maintenance in the hotel industry. The investigation will focus on allegations that there could be agreements and concerted practices resulting in fixed or minimum resale prices.
In relation to competition, Article 81
Article 81
Article 101 of the Treaty on the Functioning of the European Union prohibits cartels and other agreements that could disrupt free competition in the European Economic Area's common market. Article 101 reads,1...
and Article 82
Article 82
Article 102 of the Treaty on the Functioning of the European Union is aimed at preventing undertakings who hold a dominant position in a market from abusing that position. Its core role is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for...
of the EC Treaty are paramount over all member states' national laws relating to competition. The ECJ and the Commission have both held that Resale Price Maintenance is generally prohibited. UK law must apply this interpretation when dealing with inter member-state agreements between undertakings.
United States law
On June 28, 2007, the Supreme Court overruled Dr. Miles, discussed below, holding that such vertical price restraints as Minimum Advertised Pricing are not per se unlawful but, rather, must be judged under the "rule of reason." Leegin Creative Leather Products, Inc. v. PSKS, Inc.Leegin Creative Leather Products, Inc. v. PSKS, Inc.
Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 , is a US antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act, replacing the older doctrine with the rule of...
, Slip Op. No. 06–480 (Decided June 28, 2007). This marked a dramatic shift on how attorneys and enforcement agencies address the legality of contractual minimum prices, and essentially allowed the reestablishment of resale price maintenance in the United States in most (but not all) commercial situations.
In Dr. Miles Medical Co. v. John D. Park and Sons, , the United States Supreme Court affirmed a lower court's holding that a massive minimum resale price maintenance scheme was unreasonable and thus offended Section 1 of the Sherman Antitrust Act
Sherman Antitrust Act
The Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...
. The decision rested on the assertion that minimum resale price maintenance is indistinguishable in economic effect from naked horizontal price fixing by a cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
. Subsequent decisions characterized Dr Miles as holding that minimum resale price maintenance is unlawful per se
Illegal per se
The term illegal per se means that the act is inherently illegal. Thus, an act is illegal without extrinsic proof of any surrounding circumstances such as lack of scienter or other defenses...
- that is, without regard to its impact on the marketplace or consumers.
During the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
in the 1930s, a large number of U.S. state
U.S. state
A U.S. state is any one of the 50 federated states of the United States of America that share sovereignty with the federal government. Because of this shared sovereignty, an American is a citizen both of the federal entity and of his or her state of domicile. Four states use the official title of...
s began passing fair trade laws
Fair trade laws
A fair trade law was a statute that permitted manufacturers the right to specify the minimum retail price of a commodity, a practice known as "price maintenance". They first appeared in 1931 during the Great Depression in the state of California...
. These were intended to protect independent retailers from the price-cutting competition of large chain store
Chain store
Chain stores are retail outlets that share a brand and central management, and usually have standardized business methods and practices. These characteristics also apply to chain restaurants and some service-oriented chain businesses. In retail, dining and many service categories, chain businesses...
s by authorizing resale price maintenance. Since these laws allowed vertical price fixing
Price fixing
Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
, they directly conflicted with the Sherman Antitrust Act, and Congress had to carve out a special exception for them with the Miller-Tydings Act of 1937. This special exception was expanded in 1952 by the McGuire Act (which overruled a 1951 Supreme Court decision that gave a narrower reading of the Miller-Tydings Act).
The fair trade laws became widely unpopular after World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
and so the Miller-Tydings Act and the McGuire Act were repealed by the Consumer Goods Pricing Act of 1975.
In 1968 the Supreme Court extended the per se rule against minimum resale price maintenance to maximum resale price maintenance, in Albrecht v. Herald Co., . The Court opined that such contracts always limited the freedom of dealers to price as they wished. The Court also opined that the practice "may" channel distribution through a few large, efficient dealers, prevent dealers from offering essential services, and that the "maximum" price could instead become a minimum price.
In 1997, the Supreme Court overruled Albrecht, in State Oil v. Khan, .
Several decades after Dr Miles, scholars began to question the assertion that minimum resale price maintenance, a vertical restraint, was the economic equivalent of a naked horizontal cartel. In 1960, Lester G. Telser
Lester G. Telser
Lester Greenspan Telser is an American economist and Professor Emeritus in Economics at the University of Chicago.He is a graduate of Roosevelt University. He received his Ph.D...
, an economist at the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, argued that manufacturers could employ minimum resale price maintenance as a tool to ensure that dealers engaged in the desired promotion of a manufacturer's product through local advertising, product demonstrations, and the like. Without such contractual restraints, Telser said, no frills distributors might "free ride" on the promotional efforts of full service distributors, thereby undermining the incentives of full service dealers to expend resources on promotion. Six years later, Robert Bork
Robert Bork
Robert Heron Bork is an American legal scholar who has advocated the judicial philosophy of originalism. Bork formerly served as Solicitor General, Acting Attorney General, and judge for the United States Court of Appeals for the District of Columbia Circuit...
reiterated and expanded upon Telser's argument, contending that resale price maintenance was simply one form of contractual integration, analogous to complete vertical integration
Vertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
, that could overcome a failure in the market for distributional services. Bork also argued that non-price vertical restraints
Vertical restraints
Vertical restraints are competition restrictions in agreements between firms or individuals at different levels of the production and distribution process. Vertical restraints are to be distinguished from so-called “horizontal restraints,” which are found in agreements between horizontal competitors...
, such as exclusive territories, could achieve the same results.
Some scholars subsequently questioned Telser's theory, arguing that, by itself, minimum retail price maintenance cannot ensure that dealers will engage in an optimal level of promotion. These scholars argued that minimum price served as a contract enforcement mechanism, guaranteeing compliant dealers a stream of rents if they adhered to a manufacturer's promotional directives. However, some contended that the promotional efforts resulting from minimum price and other vertical restraints could actually reduce economic welfare by encouraging undue product differentiation and the resulting market power. Others claimed that manufacturers could achieve the same objective by less restrictive alternatives.
In 1978, the U.S. Supreme Court held that non-price vertical restraints, such as vertically imposed exclusive territories, were to be analyzed under a fact-based "rule of reason
Rule of reason
The Rule of Reason is a doctrine developed by the United States Supreme Court in its interpretation of the Sherman Antitrust Act. The rule, stated and applied in the case of Standard Oil Co. of New Jersey v. United States, 221 U.S...
." In so doing, the Court embraced the logic of Bork and Telser as applied to such restraints, opining that, in a "purely competitive situation," dealers might free ride on each others' promotional efforts.
In 1980, the U.S. Supreme Court held that the repeal of Miller-Tydings implied that the Sherman Act's complete ban of vertical price fixing was again effective, and that even the 21st Amendment
Twenty-first Amendment to the United States Constitution
The Twenty-first Amendment to the United States Constitution repealed the Eighteenth Amendment to the United States Constitution, which had mandated nationwide Prohibition...
could not shield California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
's liquor resale price maintenance regime from the reach of the Sherman Act. California Liquor Dealers v. Midcal Aluminum, . Thus, from the 1975 enactment of the Consumer Goods Pricing Act to the 2008 Leegin decision, resale price maintenance was again no longer legal in the United States.
See also
- Competition policy
- Competition regulatorCompetition regulatorA competition regulator is a government agency, typically a statutory authority, sometimes called an economic regulator, which regulates and enforces competition laws, and may sometimes also enforce consumer protection laws...
- Price fixingPrice fixingPrice fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
- Suggested retail priceSuggested retail priceThe manufacturer's suggested retail price , list price or recommended retail price of a product is the price which the manufacturer recommends that the retailer sell the product. The intention was to help to standardise prices among locations...
- In the Japanese resale price maintenance system for music and print publications, saihan seido, the typographic symbol marks the first date for the fixed price and marks the last date.
Further reading
- Bork, Robert H. (1966), "The Rule of Reason and the Per Se Concept: Price Fixing and Market Division", 75 Yale L. J. 373
- Easterbrook, Frank H.Frank H. EasterbrookFrank Hoover Easterbrook is the Chief Judge of the United States Court of Appeals for the Seventh Circuit. He has been Chief Judge since November 2006, and has been a judge on the court since 1985...
(1984), "Vertical Arrangements Under The Rule of Reason", 53 Antitrust L. J. 135 - Goldberg, Victor (1979), "The Law and Economics of Vertical Restraints: A Relational Perspective", 58 Tex. L. Rev. 91
- Grimes, Warren (1992), "Spiff, Polish and Consumer Demand Quality: Vertical Price Restraints Revisited", 80 California Law Review 815
- Klein, Benjamin and Murphy, Kevin M. (1988), "Vertical Restraints As Contract Enforcement Mechanisms", 31 J. L. & Econ. 265
- Lopatka, John and Blair, Roger (1998), "The Albrecht Rule After Khan: Death Becomes Her", 74 Notre Dame Law Review 123-79
- Marvel, Howard (1994), "The Resale Price Maintenance Controversy: Beyond The Conventional Wisdom", 63 Antitrust L. J. 59
- Meese, Alan (1997), "Price Theory and Vertical Restraints: A Misunderstood Relation", 45 UCLA L. Rev. 143
- Meese, Alan (2004), "Property Rights and Intrabrand Restraints", 89 Cornell L. Rev. 553
- Orbach, Barak (2007), "Antitrust Vertical Myopia: The Allure of High Prices", 50 Arizona L. Rev. 261
- Pitofsky, RobertRobert PitofskyRobert Pitofsky, born December 27, 1929, was chairman of the Federal Trade Commission of the United States from April 11, 1995 to May 31, 2001. He had previously been Dean of the Georgetown University Law Center from 1983 to 1989, and is currently a professor there, teaching in the areas of...
(1983), "In Defense of Discounters: The No-Frills Case for a Per Se Rule Against Vertical Price Fixing", 71 Geo. L.J. 1487 - Pitofsky, Robert (1984), "Why Dr. Miles Was Right", 8 Regulation 27
- Roszkowski, Mark (1992), "Vertical Maximum Price Fixing: In Defense of Albrecht", 23 Loyola University of Chicago Law Journal, 209
- Roszkowski, Mark (1998), "State Oil Company v. Khan and the Rule of Reason: The End of Intrabrand Competition?" 66 Antitrust Law Journal 613-640
- Telser, Lester G. (1960), "Why Should Manufacturers Want Fair Trade", 3 J. L. & Econ. 86