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Resale Price Maintenance: Economic Theories and Empirical Evidence

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Resale Price Maintenance: Economic Theories and Empirical Evidence "RESALE PRICE MAINTENANCE: ECONOMIC THEORIES AND EMPIRICAL EVIDENCE Thomas R. Overstreet, Jr. Bureau of Economics Staff Report to the Federal Trade Commission November 1983 RESALF. PRICE INTF.NANCE: ECONO IC THEORIES AND PIRICAL EVIDENCE Thomas R. Overstreet, Jr. Bureau of Economics Staff Report to the Federal Trade Commiss ion November 1983 . FEDERAL TRDE COM~ISSION -f. JAMES C. ~ILLER, III, Chairman MICHAEL PERTSCHUK, Commissioner PATRICIA P. BAILEY, Commissioner GEORGE W. DOUGLAS, Commissioner TERRY CALVANI, Commi S5 ioner BUREAU OF ECONO~ICS WENDY GRA~, Director RONALD S. BOND, Deputy Director for Operations and Research RICHARD HIGGINS, Deputy Director for Consumer Protection and Regulatory Analysis JOHN L. PETE , Associate Director for Special Projects DAVID T. SCHEFF N, Deputy Director for Competition and Anti trust PAUL PAUTLER, Assistant to Deputy Director for Competition and Antitrust JOHN E. CALFEE, Special Assistant to the Director JAMES A. HURDLE, Special Assistant to . the Director THOMAS WALTON, Special Assistant to the Director KEITH B. ANDERSON, Assistant Director of Regulatory Analysis JAMES M. FERGUSON, Assistant Director for Antitrust PAULINE IPPOLITO, Assistant Director for Industry Analysis WILLIAM F. LONG, ~anager for Line of Business PHILIP NELSON, Assistant Director for Competition Analysis PAUL H. RUBIN, Assistant Director for Consumer Protection This report has been prepared by an individual member of the professional staff of the FTC Bureau of Economics. It rsfle cts solely the views of the author, and is not intended to represent the position of the Federal Trade Commission, or necessarily the views of any individual Commissioner. -ii - fI. ACKNOWLEDGMENTS I would like to thank former FTC Commissioner David A. Clanton whose interest in resale price maintenance issues and requests for factual information about the practice prompted this research. I would also like to recognize the contributions to this report of numerous current and former FTC staffnombers. Helpful comments on earlier drafts were provided by Richard Craswell, Jack Kirkwood, and Robert Lande of the Bureau of Competition. The report benefitted considerably from numerous discussions on resale price maintenance issues and extensive comments on earlier drafts provided by Douglas Dobson, Alan Fisher, John Hilke, Ron Lafferty, Michael Lynch, Robert L. S te i oer, and Robert Stoner of the Bureau of Economi C5. Thanks are also given to the other Bureau of Economics staff members, too numerous to ftntion, .who took the time to read and commnt on earlier drafts. leva Cucinelli read an earlier draft and was very helpful in preparing the final ma uscrip Delores Munson r Susan Painter, Carolyn Samuels, and Cheryl Williams provide valuable research assistance. Word processing was ably performed by Betsy 2 ichterman, Dianne Jones , Angela Newsome, and Deborah Ruggles. -iii- . ... .... .... ................................... .... .... .. ....... ....... ..... ..... .. ....... ... ... ..... ...... ........ ...... ..... ........-... ..... .... .... TABLE OF CONTENTS Section Paqe INTRODUCTION (A) Purpose of the Report.. (B) Organization of the Report (C) . Historical Background: Ambivalent Rules of Law .. (D) Historical Background: Economists I Amivalence -f. (E) The Policy Debate: Shflld RP~ Be Per I 11egal? . II. ANTICOMPETITIVE THEORIES OF VERTICAL PRICE RESTRAINTS. (A) Retailer Collusion (B) Manufacturer Collusion (C) Life Cycles and Marketing Inert or Mistakes.. III. EXPLANATIONS FOR VERTICAL PRICE RESTRAINTS WITH AMBIGUOUS WELFARE EFFECTS (A) Price Discrimination (B) Relational Governance and Bilateral Monopoly IV. EFFICIENCY OR PROCO~PETITIVE EXPLANATIONS FOR VERTICAL PRICE RESTRAINTS (A) Outlets or Availability. (B) Special Services (C) Generalized Free-Rider Effects (Ouality Signaling FTC RESALE PRICE INTENANCE CASES: 1965-1982 . (A) Information Frequently Not Available (B) Size of Firms.. (C) Structure of Markets (D) A Comparison With Markets From the Fair-Trade Era. ( E) Dealer Concentration (F) Summry and Conclusion VI. PIRICAL STUDIES OF RP~ . 106 (A) Price Surveys. 106 ( 1) Before and After 107 (2) Fair-Trade and Nonfair-Trade Price Changes. 109 (3) Cross-Section Price Comparisons 110 (4) Price-Related Surveys of the Cost of Fair Trade. 113 (5) Usefulness of Price Surveys 116 (B) . Other Surveys. 117 (C) Case Studies 119 ( 1 ) Ligh t Bulbs 119 (2) Fine China and Televis ions. 119 ( 3) Jeans 120 ( 4 ) Shoes 122 ( 5) Stereo Components 123 ( 6) Beer and Bread. 125 (7) Repeal of Fair Trade in Rhode Island: Various Products. 126 (D) Previous FTC Studies of RPM 129 (1) 1929/31 FTC Study 129 (2) 1945 FTC Study. 135 -iv- . ... .... " .... ... .",. .. ... .. ... .. .. ... .. ... .. .. .... ....'... - TABLE OF CONTENTS--Continued Section Page (E) Effects of RPM on Innovation and Efficiency in Distribution. 148 (1) United Kingdom. 149 (2) Canada. 155 (3) Sweden...... 156 (4) Denmark . 157 (5) Other Countries 157 -f- (6) A WOrd of Caution 157 160 (F) Summry of Empirical Evidence. VII. SU~ Y AND SUGGESTIONS FOR POLICY DEVELOP~ENT . 164 (A) Rule-of-Reason: Several possible Versions 171 Only One (1) Evidence ~ust Support One and Interpretation. 172 (2) The -Preponderance of the Evidence - Must -Support the Finding 172 (3) A re Narrowly Focused Ru1e-of -Reason 173 ( 4) Reverse the Burden of Proof 174 (B) Per Se With Exceptions or Exemptions from Prosecution. 174 (C) Simple Market Share Rule 175 - (D) Conclusion 176 APPENDIX: Examples of Firms That Have Used Resale Price Maintenance and Products Involved. 177 BIBLIOGRAPHY. 199 . .. .. .. .. .. .. .... ... ... ... ... .... .... .... .... ...... .. .. ..... .... .... .. LIST OF TABLES Table Paqe V-I Size of Firms Involved in FTC RPM Cases: 1965 to 1982 . V-2 Size of Firms Involved in FTC RPM Cases 1965-1982 Bas ad Upon Sales in Constant Dollars . f!- V-3 Size Distribution of Active anufacturing Corporations Based Upon 19-78 - Corporate Income Tax Returns V-4 Percentage Distribution of Four-Digit S. Industries Involved in FTC RPM Cases 1965-1982 by Concentration Ratios. V-5 Percentage Distribution of Five-Digit S. C. Product Classes .Invo1ved in FTC RP~ Cases 1965-1982 by Concentration Ratios. V-6 Percentsge Distribution of Four-Digit S. Industries Involved in FTC RP~ Cases 1965-1982 by 1972 Adjusterl Concentratio" Ratios. V-7 Distribution of 450 Four-Digit Manufacturing Industries in lq72 by Four-Firm Sales Concentration Ranges. V-8 Distribution of 448 1972 Four-Digit anufacturing Industries by Four-Firm Adjusted Concentration Ratios. V-9 Distribution of Four Digit S. C. Industries by 1954 Four-Firm Concentration Ratios. V-10 Joint Distribution of Four-Firm Concentration and Firm Size V-ll FTC RP~ Cases: 1965-1982 VI-1 Industrial Distribution of the Fair-Traded Merchandise of 175 Firms, 1954 . ll! VI-2 Size Distribution of 175 Fair-Trading Manufacturers, by Value of Gods Sold Under Fair-Trade Contracts, 1954 III Effects of the Repeal of Fair-Trade in Rhode Island. 13! A-I Data on Fair Trade and Competitive Prices Compiled by .Schwegmann Brothers Giant Supermarket, New Orleans. 1952 . A-2 Data on Fair Trade Prices and -Discount. Prices Compiled by Julius Gutman and Company, Baltimore, June 4, 1952 . 17' A-3 Price Comparisons Prepared by the Mary land Pharmaceutical Association and the Baltimore Retai Druggists Association A-4 List af Fair-Traded Products Prepared by the Nat lanaI Jewelers Association. List of Fair Traded Merchandise: Submitted by Samuel Rosenthal. vi- .. .. .. -. .. .. .. .. .. .. .. LIST OF TABLES --Cont i nued Page A-6 Partial of Manufacturers Whose Products Were Fair-Traded at Both Wholesale and Retail Levels 189 A-7 Fair Trade Merchandise Sold by Hardware Stores.. 191 A-8 Industries Represented by Members of the American . - 198 -f. Fair-Trade Council. i i - INTRODUCTION (A) Purpose of the Report The purpose of this report is to review and evaluate -te.. current economic theories and the available empirical evidence concerning vertical price restraints or resale price maintenance of the (RP~). In light of this review, the ipropriateness current legal treatment of the practice is considered and contrasted with several policy options. What should become clear from the following discussion is that neither the economic. theories nor the existing empirical evidence currently offer overwhelming support to any single view concerning RPM. A single view is s imply not tenable on the basis of current economic theory. Neither is it well supported by available empirical evidence. The general conclusion drawn here is that the current rigi applied standard of per se illegality appears to be unnecessarily costly when evaluated in terms of economic efficiency. Further, if sufficient economic evidence can be obtained, it is possible to analyze RP~ matters and make reasonable judgments whether particular uses of RPM are, on balance, more likely to be bene- fie ial or harmful to compet i tion or consumers. This suggests the appropriateness of adopting a policy which recognizes explicitly that RP~ can have both desirable an undesirable competitive effects. A ru1e-of-reason standard 18 one such policy option. Clearly, rule-of"-reason approach should dominate per se rules in term of the potential for minimizing application errors, and in the abstract seems the most desirable policy option. Obtaining the information necessary to implement a rule-of-reason could be difficult and costly, however, and theoretical 1imita- tions might confound unambiguous interpretations. In addition, Assuming the purpose
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