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The Rule of Reason and the Per Se Concept: Price Fixing and Market Divi- Sion I, 74 YALE L.J

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The Rule of Reason and the Per Se Concept: Price Fixing and Market Divi- Sion I, 74 YALE L.J THE YALE LAW JOURNAL VOLUME 75 JANUARY 1966 No. 3 THE RULEOF REASON AND THE PER SE CONCEPT: PRICEFIXING AND MARKETDIVISION* ROBERTH. BORKt TABLE OF CONTENTS THE RULE OF REASON: ANCILLARY RESTRAINTS AND THE PER SE RULE 377 The Present Confusion Concerning the Per Se Rule ..... ....... 378 The Respective Functions of the Per Se Rule and the Doctrine of Ancillary Restraints .......... ............................ 380 The Propriety of a Per Se Rule ........ ........................ 384 The Rule of Reason In the Trial Process ...... ................ 387 RESTRICTION OF OUTPUT: HORIZONTAL AND VERTICAL RESTRAINTS .... 391 Horizontal Market Division and Price Fixing ..... .............. 391 Vertical Market Division and Price Fixing ...... ............... 397 A Consideration of Some Objections to the Legality of Vertical Restraints .................. ............................ 405 The Dealer Cartel Objection ........ ........................ 405 The Manufacturer Cartel Objection ...... ................... 411 The Objection that Vertical Restraints Transfer Imperfect Market Structures . ............................................. 415 This is the second section of a three-part article. The first appeared in 74 YALEL.J. 775 (1965). The author wishes to acknowledge his great indebtedness to Professor Ward S. Bowman for many invaluable conversations on the topics discussed here and for his criti- cisms of a draft of this section. It should also be mentioned that the second and third sections of the article constitute a substantial expansion on and partial modification of views previously expressed in Bork, Ancillary Restraints and the Sherman Act, 15 A.B.A. SECTION OF ANTITRUST LAW 211 (1959). t Professor of Law, Yale University. 374 THE YALE LAW JOURNAL [Vol. 75:373 The Problem of Price Discrimination ...... .................. 416 The Problem of Distinguishing Between Horizontal and Vertical Restraints ............... ............................... 424 CREATION OF EFFICIENCY: MARKET DIVISION AND PRICE FIXING ...... 429 Market-Division Agreements ........ .......................... 430 1. Local Sales Effort: The Free-Ride Problem ..... ........... 430 2. Local Sales Effort: The Size-of-the-Market Problem .... .... 438 3. Exchanges of Information ....... ....................... 439 4. Post-Sale Service ........................................ 446 5. Effectiveness of a Service or Facility Whose Cost Is Shared .... 449 6. Minimizing Costs and Customer Irritation Due to Overlapping Distributive Efforts ............. ...................... 451 Price-Fixing Agreements ...................................... 453 1. Local Sales Effort: The Free-Ride Problem ..... ........... 453 2. Local Sales Effort: The Uniform Product ...... ............ 454 3. Reinforcing a Market-Division System ...... .............. 456 4. Providing the Means of Transferring Information ..... ..... 457 5. Economies of Scale In Advertising ....... ................. 460 6. Protection Against Fraud by a Joint Venturer ..... ......... 461 7. Breaking Down Cartels and Controlling Local Monopolies ... 464 ALTERNATIVES AND OBJECTIONS TO THE DOCTRINE OF ANCILLARY RE- STRAINTS .................................................. 465 The Alternative Suggestions .............. .................... 465 The Inadequacy of Exclusive Franchises and Profit Pass-Over Sys- tems . .............................................. 466 The Fallacy of Area-of-Primary-Responsibility Clauses ..... ..... 467 The Objections: Three False Issues ......... ................... 469 The Dual Distribution Objection ......... ................... 470 Interbrand Versus Intrabrand Competition ...... ............. 472 Consumer Choice Between Lower Prices and Alternative Induce- ments ................................................ 473 SUMMARY . ............................................... 473 1966] THE RULE OF REASON 375 II THE first section of this article' argued that the uncertainty and inconsistency which patently afflict the law concerning price fixing and market division are attributable to the twofold failure of Sherman Act courts to be clear about the ultimate values the law implements and to develop a realistic analysis of the economic phenomena with which the law is required to deal. The main tradition of the Sherman Act's rule of reason-established by Justice Peckham, Judge Taft, and Chief Justice White in 1911- necessarily rests, whether phrased in such terms or not, upon the premise that the law's exclusive concern is with the maximization of wealth or consumer want satisfaction. Though this premise is not the only one upon which social legislation may be based, it is implicit- and sometimes explicit-in the key decisions which established the main tradition of the rule of reason, and it is, moreover, the only premise capable of producing rational decisional law under the Sher- man Act as now written. Acceptance of consumer want satisfaction as the law's ultimate value requires the courts to employ as their primary criterion the impact of any agreement upon output, and thus to determine whether the net effect of the agreement is to create efficiency, and thereby increase output or, alternatively, to restrict output.2 This common acceptance of the wealth-maximization premise and its inherent standards of judgment explains why the interpreta- tions given the Sherman Act by Peckham, Taft and White, despite their widely differing phrasings, were so similar in result, and why each 1. Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Divi- sion I, 74 YALE L.J. 775 (1965). 2. Peckham, Taft, and White all displayed concern that the law not destroy efficient forms of combination but that it strike down combinations whose sole effect was the elim- ination of competition. Id. at 783-805, 829-32. White most explicitly defined the evil to be avoided as restriction of output because his version of the common law, which he incor- porated into the Act, viewed the evils of monopoly as: (1) the power to fix price; (2) the power to limit production; and (3) the danger of deterioration in quality. Id. at 802. These evils are each reducible to restriction of output. The second-limitation of produc- tion-is obviously that. The first-the power to fix prices-can be wielded only by re- stricting output. The third-deterioration in quality-is merely a restriction of output accomplished by putting less into each item produced rather than making fewer items. The net effect of the two opposing tendencies-efficiency and restriction of output- determines whether the questioned agreement is efficient in the larger sense of allocating resources to maximize consumer want satisfaction. In order to avoid confusion, the nar- rower meaning of efficiency will be used throughout this article. The broader meaning will be indicated by such phrases as consumer want satisfaction, wealth maximization, etc. 376 THE YALE LAW JOURNAL [Vol. 75:373 assigned a prominent place within the rule of reason to a category of agreements illegal per se. The primary deviant tradition of the rule of reason-originally espoused by Justice White in 1897 and in 1918 by Justice Brandeis- rejects consumer welfare as the sole value of the law and admits com- peting considerations, most notably, perhaps, concern for small pro- ducers. The criteria required by the simultaneous use of wholly inconsistent values are necessarily either arbitrary or indefinable. Probably because this deviant strain has never become dominant, the criteria of the Brandeis tradition have in fact remained rather vague. They seem reducible, however, to the idea, early rejected by the judges of the main tradition, that a cartel should be judged by the "reason- ableness" of the price it fixes. White's 1897 Trans-Missouri dissent is thus to be equated with Brandeis' reading of the Act in the 1918 Chi- cago Board of Trade opinion. The introduction of values incompatible with consumer welfare, values that could, in fact, be furthered by cartel agreements at the expense of consumers, was the reason that neither White (in 1897) nor Brandeis (in 1918) gave a prominent, or perhaps any, role to the per se concept. The main tradition, with its insistence upon efficiency and re- striction of output as the standards of the Sherman Act, is, therefore, entitled to be preferred not merely as a matter of precedent but also because of its exclusive ability to achieve those attributes of rationality, efficacy, tolerable certainty, and the proper demarcation of the respec- tive functions of legislature and judiciary which are characteristics of good law.3 Though a proper choice of values is necessary to good law it is not sufficient. The Sherman Act, which deals with price fixing and market division in widely varying business contexts, requires a coherent analytical structure to translate values into conclusions. The Act, how- ever, has not evolved doctrine adequate to cope with this diversity of phenomena. Too often the law deals with particular forms of price fix- ing and market division as isolated and unique topics, neglecting to locate each within a rational conception of the whole. Perhaps just as often the law commits the opposite error of failing to make distinctions corresponding to economic differences, and applies broad formulas to situations in which they are wholly inappropriate. This second section of a three-part article attempts to provide a general theory capable of 3. 74 YALEL.J. 775, at 829-47 and particularly at 831-32, 840-47. 1966] THE RULE OF REASON 377 making
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