Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, December 4, 2007

Antitrust Vertical Myopia: The Allure of High Prices and Consumer Experiences and Consumer Experiences

Posted by D. Daniel Sokol

Orbachbarak One of the toughest tricks in the academic business is to take a well known topic and make an important contribution to it.  Barak Orbach of the University of Arizona Rogers School of law has done so with his forthcoming article Antitrust Vertical Myopia: The Allure of High Prices and Consumer Experiences and Consumer Experiences.

The paper re-examines the well-known RPM puzzle: why would a manufacturer be interested in maintaining high retail prices that potentially could result in low sales volume and lower revenues for the manufacturer? Hundreds of books and articles have been written about RPM and, thus, one should always be modest about writing on the topic. Yet, after reviewing the literature since the late 19th century, Orbach offers several interesting insights into the practice of RPM and at least three important contributions to the literature. The three primary contributions that the essay makes:

1. The Allure of High Prices and Consumer Experiences: The pursuit of status and immediate gratifications frequently leads consumers to make silly decisions. Manufacturers and retailers often take advantage of these human weaknesses. This insight is well-known and established in the general literature, but not in antitrust literature thus far. The paper examines how RPM is used to allure consumers through high prices and consumer experiences.

2. Judicial and Academic Blindness: Manufacturers have always admitted that they take advantage of human weaknesses of the kind mentioned above and argued that discounts and lusterless stores harm their products. Nevertheless, courts, lawyers, and economists have never studied this point. Rather, they studied other explanations for manufacturers’ interests in high retail prices. The paper argues that the source for this failure is the reliance on the simplistic premise that “paying less is always better.”

3. A General Framework for Courts and Experts: The paper maps in a systematic manner the traditional explanations for resale price maintenance and shows the applicability of each explanation to reality.

ABSTRACT: Low prices are one of antitrust law's traditional promises to society. Resale price maintenance (RPM), the practice whereby a manufacturer sets pricing rules for retailers, artificially inflates prices and, thus, allegedly runs afoul of antitrust laws. The practice emerged in the last quarter of the nineteenth century with the rise of advertising and has been one of the most controversial antitrust topics ever since. This Essay examines the practice of RPM and argues that courts and scholars have been trapped in the habit of using traditional arguments for and against the practice, overlooking its common uses in markets for premium-brand goods. The Essay argues that manufacturers of premium-brand goods often use RPM to protect the appeal of their products as status goods.

In Leegin Creative Leather Products v. PSKS (2007), the Supreme Court overruled the longstanding per se illegality rule for RPM, holding that the practice should be reviewed under the rule of reason. The Essay offers courts, lawyers, and economists a general framework for analyzing RPM cases.

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