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Challenges for Empirical Research on RPM

Abstract

This article discusses the empirical challenges that researchers face when demonstrating the existence and effects of resale price maintenance (RPM). We outline three approaches for finding price effects of RPM and the corresponding hurdles in data and methodology. We show that the quantity test that was suggested by Posner (Univ Chic Law Rev 45(1):1–20, 1977; Univ Chic Law Rev 48:6–26, 1981) does not identify the change to welfare when demand-enhancing effects are considered generally. Finally, we present some solutions to the challenge of identifying welfare effects, and we suggest guidelines for future research.

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Notes

  1. 1.

    Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

  2. 2.

    See, e.g., Marvel and McCafferty (1984) and Elzinga and Mills (2008).

  3. 3.

    See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977).

  4. 4.

    See United States v. Kellogg Toasted Corn Flake Co., 222 Fed. 725 (1915).

  5. 5.

    See United States v. Colgate & Co., 250 U.S. 300 (1919).

  6. 6.

    Adolph Coors Co. v. FTC, 497 F.2d 1178 (1974), 419 U.S. 1105 (1975).

  7. 7.

    See Monsanto Co. v. Spray-Rite Service Corp., 104 S. Ct. 1464 (1984).

  8. 8.

    See Ippolito (1991).

  9. 9.

    For a discussion of the inter-firm contract evidence that does exist, see Lyons (1996) and Lafontaine and Slade (2013).

  10. 10.

    See, e.g., Bailey and Leonard (2010) (video game prices in Maryland), Lach and Tsiddon (1992) (foodstuff prices in Israel), and Rátfai (2007) (meat prices in Hungary).

  11. 11.

    This may be due to a combination of highly elastic consumers and left-digit bias. Left-digit bias is a concept in behavioral economics and experimental psychology that refers to the tendency to focus on the left-most digit of a number while partially ignoring other digits. See Lacetera et al. (2012), Korvorst and Damian (2008) and Poltrock and Schwartz (1984).

  12. 12.

    See Bailey and Leonard (2010) and MacKay and Smith (2014) for examples of studies that estimate the effects of RPM by exploiting a change in the legal treatment of RPM.

  13. 13.

    Specifically, the authors suggest that antitrust enforcement policy should be guided by “inferences about the competitive effects of the restraint from a natural experiment. The quality of the experiment and how closely it mimics the effect of the restraint would be issues for the court or decision-maker to resolve”.

  14. 14.

    That is not to claim that retailers have nothing to lose. Our interviews with retailers indicate that those that threaten or pursue litigation risk losing their relationship with manufacturers.

  15. 15.

    See Elzinga and Mills (2010).

  16. 16.

    See Ippolito and Overstreet (1996).

  17. 17.

    Posner (1977, pp. 19–20; 1981, p. 21).

  18. 18.

    Any transformation of the demand curve that is composed of a shift and a rotation can be decomposed into these two transformations.

  19. 19.

    There is a well-known result that a monopolist will not change its price when the demand curve rotates about a fixed point on the price axis and marginal costs are constant. This result is applicable when demand is linear. When the demand curve is non-linear, a monopolist may wish to raise or lower its price. The price increase may be great enough to lower net consumer surplus, after accounting for the demand-enhancing rotation.

  20. 20.

    Other demand considerations, such as dynamics, make the analysis more complex. For example, Aviv et al. (2016) show that “a higher price and lower output of a limited lifetime product can be welfare-improving if they result from a policy that leads to an intertemporal redistribution of demand,” such as when retailers implement a most-favored-customer clause.

  21. 21.

    See, e.g., MacKay and Smith (2014).

  22. 22.

    For a discussion of minimum RPM as a self-enforcing contract, see Klein and Murphy (1997).

  23. 23.

    The Sony BRAVIA model KDL-32BX300 was released March 2010; the KDL-32BX320 was released in 2011; and the KDL-32BX330 was released in 2012, around the time Sony began enforcing minimum RPM. See Ann Zimmerman, “Sony, Samsung Rein In Retailers’ Discounts on TVs,” The Wall Street Journal, May 23, 2012. Retrieved August 12, 2016, from http://www.wsj.com/articles/SB10001424052702304791704577420383631021786.

  24. 24.

    This may come as no surprise to those who recall that, not long ago, Best Buy—a store that primarily sells durable goods with high search costs—was said to have the worst CEO in the world. See Louis Lavelle, “The Worst CEOs of 2012,” Bloomberg, December 13, 2012. Retrieved August 12, 2016, from http://www.bloomberg.com/news/articles/2012-12-13/the-worst-ceos-of-2012.

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  24. Rátfai, A. (2007). The frequency and size of price adjustment: Microeconomic evidence. Managerial and Decision Economics, 28(7), 751–762.

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Correspondence to David A. Smith.

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MacKay, A., Smith, D.A. Challenges for Empirical Research on RPM. Rev Ind Organ 50, 209–220 (2017). https://doi.org/10.1007/s11151-016-9562-8

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Keywords

  • Antitrust issues and policies
  • Antitrust law
  • Firm behavior: empirical analysis
  • Resale price maintenance
  • Welfare economics