Friday, January 19, 2007

Superprecedent....and Kryptonite

Posted by Shubha Ghosh

Wonderful thread at Truth on the Market sparked by my comments on the status of Dr Miles as superprecedent.  Two issues still floating: superprecedents in antitrust and the per se treatment of minimum RPM. 

As far as superprecedent goes,  there is an argument that the term applies only to constitutional precedents.  Justice Roberts, as far as I know, has not explicitly said so, but the examples he gives are constitutional.  Precedents on statutory interpretation may be more flexible and may  never become invincible.  On the other hand, Justice Roberts may have been talking about the integrity of the Court and that there are some precedents, whether constitutional or statutory, that are so well established and accepted, that the Court will lose credibility if they are reversed.  So was Justice Roberts using the concept of superprecedents to apply solely to the integrity of the Constitution or the institution that interprets it?  Discuss.

Let me assume that the Chief Justice was concerned with the integrity of the Court. His recent interview in The Atlantic Monthly seems consistent with that assumption.  What are the implications for antitrust?  I would argue that Socony-Vacuum, and its condemnation of price fixing and its broader statement that price competition is the central nervous system of the economy, constitute a superprecedent.  The promotion of price competition that leads to lower prices for consumers would arguably be a basic principle, a grundnorm, for antitrust law.  Under this view, reversing Dr Miles is not as simple as my colleagues at Truth on the Market suggest.  While my colleagues are correct that there are output expanding justifications for minimum RPM, there are other contractual measures to increase output that will resolve the free riding problems and increase output (territorial restrictons, requirements of minimum expenditures on service and quality, trademark law and policing).  So the question becomes: should the court countenance restrictions on price competition--establishing a floor on price--that have benefits which can be realized through non-price restrictions?

I can anticipate two objections.  First, Socony-Vacuum is about price fixing among competitors rather than price fixing imposed by a manufacturer on a retailer.   But there are output expanding benfits from so-called horizontal price fixing.  Price supports can have economic benefits but not as pronounced, admittedly, as those from minimum RPM.   Appalachian Coals is still good precedent for allowing price fixing in times of crisis, whatever that means.  Despite these potential benefits from horizontal price fixing,  the per se rule still stands with good reason.   A similar logic should apply to minimum RPM.  There may be output expanding benefits, but the question is whether these benefits could just as readily be realized through non-price restrictions.

Second,  the current asymmetry between the treatment of maximum RPM (rule of reason) and minimum RPM (per se) may , with its superficial inconsistency, seem to show a chink in the armor of the Court's integrity.   But a foolish consistency is the hobgoglin of little minds, with the emphasis on foolish.  Maximum RPM serves to check market power among retailers, market power that may in part be the product of territorial restrictions and intellectual property law.   Therefore, there is strong economic justification for RPM and more importantly, an output expanding result that cannot readily be obtained through non-price restrictions.  As noted above, minimum RPM has a different justification and can be mimicked through non-price mechanisms.

Now perhaps economics is the kryptonite for antitrust superprecedents.  Where appropriate,  fields outside of law should provide the kryptonite.  Remember the role of social science data in Brown to reverse Plessy.  But even when you expose Dr. Miles to the kryptonite of economics, I think it does still fly, perhaps not at the pace of a speeding bullet, but up, up and away nonetheless.

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These issues are at the forefront not merely of the Supreme Court but also of both the FTC and DOJ. John Conyers, the new Democrat Chair of the House Judiciary Committee, has given both agencies until January 22 to respond the following questions (as listed in today's BNA Antitrust and Trade Regulation Report):

* Given Congress' active involvement in the RPM issue--most recently in 1975 and in 1983 in unequivocal support of the Dr. Miles line of cases--would the agencies agree that the Supreme Court should defer to Congress on this issue?

* If the FTC or DOJ plan to file a brief in this case, would the agencies agree to consult with the relevant committees of the Congress in advance of any filing?

* In light of the support of the FTC and DOJ in 1975 in favor of the Consumer Goods Pricing Act--arguing that the per se rule condemning RPM protects competition and consumers--Conyers asked both agencies to provide "comments on that testimony, indicating areas of agreement or disagreement."

* Conyers noted that, in a relatively recent enforcement initiative, the FTC acted against the sound recording industry's use of minimum advertised prices for the sale of CDs. In that case, the FTC estimated that the restricted resale prices cost consumers $480 million over a three-year period. "Would you agree that RPM or minimum advertised pricing can be particularly harmful to consumers in cases such as this where there is little interbrand competition?"

Posted by: D. Daniel Sokol | Jan 19, 2007 10:29:28 AM

One thing that has always struck me as odd in the RPM debate is the almost total lack of hard empirical data demonstrating that consumers actually receive any benefits from RPM. Most of the economics articles, on both sides of the debate, seem to be written from almost a purely theoretical perspective. The one RPM article I've found, which uses empirical data dates from the mid 1980's and involves the liquor industry (it suggests consumers are incurring costs and not receiving offsetting benefits). Could anyone point me to other articles based on empirical data?

The FTC studies which preceded the 1975 Consumer Goods Pricing Act indicated that RPM cost consumers hundreds of millions of dollars. In light of those studies, shouldn't the burden be on those who argue for rule of reason treatment (or worse per se legality) of RPM to demonstrate that the supposed procompetitive or efficiency benefits of RPM actually (as opposed to theoretically) exist?

Posted by: Harry Gerla | Jan 22, 2007 7:28:57 AM

Harry -- you might check out Resale Price Maintenance: Empirical Evidence from Litigation, 34 J. L. & Econ. 263 (1991), in which Pauline Ippolito purports to perform empirical analysis of various litigated RPM cases. I came across the article by accident this morning in the course of other research, and have only skimmed the beginning and the end, but Ippolito seems to think that the agency theories of RPM have more traction than collusion theories.

Having represented dozens of clients with RPM issues over ten years of private antitrust practice, however, I have to cast my vote with the TOTM folks -- RPM is simply not a practice worthy of per se condemnation. Is it potentially anticompetitive, even under a hard-core Chicago School consumer welfare approach? Absolutely. Thus I would not endorse per se legality, either. But the reality for many of my former clients was that RPM-type restrictions would have been the most attractive and most useful mechanisms for sustaining and improving interbrand competition in scenarios in which Sylvania-style territorial restrictions were not feasible and free-riding is likely.

As with most beginning academics, I have lots of additional thoughts, but I'll keep my mouth shut for now and will just hope you find that the article adds something to the debate.

Posted by: Paul Stancil | Jan 23, 2007 11:08:08 AM

Thanks for all the comments. I looked at the Ippolito article a couple of years ago, and it is worth reading. But I also remember thinking that the agency and collusion theories are not mutually exclusive and there could be instances where minimum RPM serves to resolve the agency problems that arise with any price fixing scheme. Professor Stancil makes a good argument for rule of reason treatment, but, from a trademark and franchising perspective, many of the arguments in favor of min RPM to reduce free riding and ensure investments in quality could equally apply to contractual restrictions requiring minimal investments in service and advertising and the general requirements of maintaining goodwill in a mark. Here's what I think is an interesting question: perhaps it is less costly from a contracting perspective to utilize minimum RPM rather than the other restrictions I mentioned, and Professor Stancil's comments about his former clients reflect in part the recognition of these lower costs, but are the lower costs met by greater benefits, especially when one considers the possibility of min RPM being used collusively? In other words, doesn't the per se treatment of RPM lead to non-price restrictions and more targeted allocation of resource to developing quality and service?

Posted by: Shubha Ghosh | Jan 26, 2007 11:07:45 AM

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