Abstract
When the U.S. Supreme Court overturned its century-old precedent that treated resale price maintenance (RPM) as a per se violation of the antitrust laws, it signaled approval for the vertical restraint’s widespread use. But the increased use of RPM occurred under a pre-existing rule that permitted RPM as long as no formal agreement over price was reached. This paper documents not only the increased use of RPM post Leegin but also the importance of avoiding the appearance of agreements to control resale prices. The paper then discusses how plaintiffs, previously enamored of claims of RPM, are now recasting vertical RPM arrangements as ancillary to horizontal agreements among distributors that are made effective though enforcement by producers.
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Notes
Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007).
Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).
United States v. Colgate & Co., 250 U.S. 300 (1919).
The Supreme Court marked a path along which producers could proceed to deal with discounting dealers in Monsanto [Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 761 (1984)]:
Section 1 of the Sherman Act requires that there be a “contract, combination ... or conspiracy” between the manufacturer and other distributors in order to establish a violation. Independent action is not proscribed. A manufacturer of course generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently. Under Colgate, the manufacturer can announce its resale prices in advance and refuse to deal with those who fail to comply. And a distributor is free to acquiesce in the manufacturer?s demand in order to avoid termination (Internal citations omitted).
RPM forced on a producer is offered as an anticompetitive use of RPM: “A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the unlawful arrangement with resale price maintenance” (Leegin, p. 893).
Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988).
Leegin remarked on the limitations of defending resale price maintenance as unilateral:
A manufacturer can exercise its Colgate right to refuse to deal with retailers that do not follow its suggested prices. The economic effects of unilateral and concerted price setting are in general the same. The problem for the manufacturer is that a jury might conclude its unilateral policy was really a vertical agreement, subjecting it to treble damages and potential criminal liability. Even with the stringent standards in Monsanto and Business Electronics, this danger can lead, and has led, rational manufacturers to take wasteful measures. A manufacturer might refuse to discuss its pricing policy with its distributors except through counsel knowledgeable of the subtle intricacies of the law. Or it might terminate longstanding distributors for minor violations without seeking an explanation. The increased costs these burdensome measures generate flow to consumers in the form of higher prices (Internal citations omitted).
MM Steel, L.P. v. JSW Steel (USA) Inc., 806 F.3d 835 (5th Cir. 2015).
Meyer v. Kalanick, 2016 U.S. Dist. LEXIS 43944 (S.D.N.Y. Mar. 31, 2016).
A Consumer Reports article from 2010, “Best Price Comparison Search Engines,” (http://www.consumerreports.org/cro/2010/10/start-your-engines/index.htm) compared prices of eight items, finding considerable variation. For example, New Balance cross-training sneakers had a range of $47.48–$69.74. In early 2017, the New Balance Men’s Minimus 40 cross trainers sold for a range of $109.95–$109.99 (apart from New Balance direct, which charged $10 more). Swarovski 10x42 binoculars, which ranged from $1539.99 to $1929 in 2010, were $1799 at all sellers. Other products were no longer available or no longer trend-setting. But while the Samsung netbook computer investigated by Consumer Reports in 2010 had a high price nearly 50% above the low price offered for that machine, in 2017, the price of a Samsung Notebook 9 13.3 inch computer was identical at all locations except Amazon.com, where a 10% discount was available.
Joseph Pereira, “Price-Fixing Makes Comeback After Supreme Court Ruling,” Wall Street Journal, August 18, 2008, p. A.1. The report states that “Retailers say an array of manufacturers now require them to abide by minimum-pricing pacts, or risk having their supplies cut off. Jacob Weiss of BabyAge.com, which specializes in maternity and children’s gear, says nearly 100 of his 465 suppliers now dictate minimum prices, and nearly a dozen have cut off shipments to him. ‘If this continues, it’s going to put us out of the baby business,’ he says. ... Consumer advocates say they are seeing the impact particularly in baby goods, consumer electronics, home furnishings and pet food. Edgar Dworsky of ConsumerWorld.org, a provider of price comparisons for consumers, says retail-pricing norms have already changed significantly. ‘My sense is that price-fixing is becoming more common,’ says Mr. Dworsky, a former Massachusetts assistant attorney general who has worked on antitrust matters.” I am indebted to Greg Gundlach for the pointer. See Gundlach, Manning, and Cannon (2017, in press). (The site http://www.babyage.com no longer exists. http://www.babysuperstore.com, another baby products discounter, is also gone.
See Paul Sawers, “Shopzilla’s parent company Connexity acquires PriceGrabber to create ‘retail marketing platform for the future’,” http://venturebeat.com/2015/06/16/shopzillas-parent-company-connexity-acquires-pricegrabber-to-create-retail-marketing-platform-for-the-future/, June 16, 2015, visited October 15, 2016. Connexity, the owner of Shopzilla, acquired PriceGrabber in 2015.
See “Company Overview of Wize Commerce, Inc.,” http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=32160, visited October 15, 2016.
See also Alistair Barr and Rolfe Winkler, “Google Antitrust Case Spotlights Decline of Shopping Sites,” Wall Street Journal, April 16, 2015, which notes that “comparison shopping websites like Nextag, BizRate and LeGuide ... have been crushed by the rise of new ways of finding goods and services online.” This article notes that the price comparison sites are bypassed by consumers who go directly to retailer sites, but, of course, that is a reasonable approach if the amount that can be saved from intrabrand shopping is modest. Given the decline in traffic to one-time popularity of the price comparison sites, it is difficult to imagine how consumers would have forgotten their addresses had the benefits to comparison shopping persisted.
PriceGrabber.com’s logo had featured the tagline “Comparison Shopping beyond Compare” while NexTag simply announced “Comparison Shopping.” These taglines have been omitted from the more recent logos.
See Jason Del Rey, “How Amazon Tricks You Into Thinking It Always Has the Lowest Prices,” Recode, January 13, 2015, http://www.recode.net/2015/1/13/11557700/how-amazon-tricks-you-into-thinking-it-always-has-the-lowest-prices, visited October 16, 2016. The Recode article gives an example of a Samsung television sold at a very substantial discount over rivals. Samsung, however, appears to operate a strong RPM policy to discourage such discounting.
See Catey Hill, “3 reasons to give Best Buy another chance,” http://www.marketwatch.com/story/3-reasons-to-give-best-buy-another-chance-2014-08-26, visited October 18, 2016.
See Bob Phibbs, “Showrooming: 13 Reasons Brick and Mortar Retail Stores Are Susceptible,” The Retail Doctor’s Blog, https://www.retaildoc.com/blog/amazon-showrooming-brick-and-mortar-retail-store-susceptible, visited August 23, 2016.
Ibid.
Best Buy’s net income results for 2012–6 are as follows:
$$\begin{array}{ccccc} 2012&{}2014&{}2014&{}2015&{}2016\\ -1.06\hbox {B} &{}-443\hbox {M} &{}687\hbox {M} &{}1.25\hbox {B} &{}807\hbox {M}\\ \end{array}$$See http://www.marketwatch.com/investing/stock/bby/financials, visited October 17, 2016.
Consumer electronics have long been subject to RPM policies, but those policies now appear to be quite stringent. For example, Amazon featured discounts on electronics summarized in “The best 2016 US Amazon Prime Day deals in tech,” http://www.zdnet.com/article/the-best-2016-us-amazon-prime-day-deals-in-tech/ feature few discounts on leading electronics brands.
Md. Code Ann., Com. Law. §11-204(a)(1), (b) (2013) (“[A] contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce”). See Lindsay (2014), p. 5.
Note that Priest and Klein (1984) suggest that a major shift by the Supreme Court can result in a large increase in litigated cases in the area, as litigants are uncertain about how the new ruling will be interpreted by lower courts. This argument suggests that Leegin, by tasking lower courts to apply a rule of reason for RPM, should have resulted in a large increase in litigated cases as rule of reason was sorted out. But the increase in cases was small and transitory, suggesting that the newly opened rule of reason avenue for RPM use was not widely chosen.
See U.S. Food & Drug Administration, “Buying Contact Lenses,” http://www.fda.gov/MedicalDevices/ProductsandMedicalProcedures/HomeHealthandConsumer/ConsumerProducts/ContactLenses/ucm062347.htm, visited October 19, 2016.
U.S. Federal Trade Commission, “The Contact Lens Rule: A Guide for Prescribers and Sellers,” https://www.ftc.gov/tips-advice/business-center/guidance/contact-lens-rule-guide-prescribers-sellers.
For a much more extensive discussion of the issues of RPM in contact lenses, see Gundlach and Krotz (2016).
Costco Wholesale Corp. v. Johnson & Johnson Vision Care, Inc., 2015 U.S. Dist. LEXIS 168581 (M.D. Fla. Nov. 4, 2015) (hereinafter Vision Care), p. 6.
Katie Thomas, “Contact Lens Makers and Discounters Tussle Over Price Setting,” New York TImes, March 26, 2015.
“Costco purchases a ‘large volume; of contact lenses from JJVD, and non from the other three manufacturers” Vision Care, at 6.
“JJVC discontinues UPP, looks to support contact lens advocacy,” Optometry Times, April 13, 2016, http://optometrytimes.modernmedicine.com/optometrytimes/news/jjvc-discontinues-upp-looks-support-contact-lens-advocacy.
As of October 19, 2016, Alcon’s UPP remains on its website: https://www.alcon.com/content/unilateral-pricing-policy. Bausch + Lomb reiterated its UPP soon after JJVC announced the end of JJVC’s UPP: https://www.alcon.com/content/unilateral-pricing-policy, dated April 20, 2016, as did CooperVision: http://coopervision.com/practitioner/build-your-practice/insight-newsletter/mayjune-2016-insight-issue/coopervision-policies-remain-unchanged, “With the recent announcement by another manufacturer regarding the discontinuation of its Unilateral Pricing Policy, CooperVision is taking this opportunity to reaffirm our commitment to you, our customers, and your patients. CooperVision has not made any changes to our policies.”
MM Steel, L.P. v. JSW Steel (USA) Inc., 771 F.3d 301 (5th Cir. 2014) (MM Steel.
See MM Steel, which concludes that MM Steel did not show that defendant “Nucor’s three refusals to deal ... with MM were made independent of the existing horizontal conspiracy between the distributors.”
See, for example, the plate markets described by ArcelorMittal, which include construction; machinery; oil and gas; rail transportation; shipbuilding and marine equipment; automotive; mining, quarrying and lumbering; agriculture; electrical equipment; military; pipe and tube; and aircraft and aerospace. ArcelorMittal, “Markets for Plate Steel,”’ http://www.usa.arcelormittal.com/~/media/Files/A/Arcelormittal-USA-V2/what-we-do/steel-products/plate-products/201501_Plate-markets, visited September 6, 2016.
See Cut-to-Length Carbon Steel Plate from China, Russia, and Ukraine (2009, I-42). That source reports market shares of U.S. producers and imports as follows:
Year
2003
2004
2005
2006
2007
2008
Share of quantity (%)
U.S. production
93.1
91.1
89.4
85.0
87.9
90.3
Imports
6.2
8.9
10.6
15.0
12.1
9.7
Share of value (%)
U.S. production
91.9
90.5
88.9
86.3
88.1
89.5
Imports
8.1
9.5
11.1
13.7
11.9
10.5
Brief for Appellee, MM Steel, L.P. As noted above, the market for steel plate is at least nationwide (See Maasoumi et al. (2002) for a claim that the market is best described as international). If the market is considered limited to the Gulf Coast, imports are a larger factor, according to Cut-to-Length Carbon Steel Plate from China, Russia, and Ukraine (2009, p. II-1): “... CTL plate produced in the United States was shipped nationwide; imports likewise entered the United State through a variety of ports, but were concentrated in the Central Southwest ports of Houston, TX and New Orleans, LA.”
See Reliance Steel & Aluminum Co.’s and Chapel Steel Corp.’s Offer of Proof Regarding Defendants’ Expert Dr. Shehadeh, MM Steel, LP, v. Reliance Steel & Aluminum, et al., Case No. 4:12-CV-01227, S.D. Texas, March 21, 2014, p. 3.
Ibid., p. 4.
Brief of Appellant Nucor Corp., MM Steel, L.P., v. JSW Steel and Nucor, Appeal No. 14-20267, 5th Cir., November 20, 2014, p. 6.
Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717.
See “MCN Top 50 Service Center Industry Giants,” www.metalcenternews.com/portals/51/top50_servicecenter2014, visited October 21, 2016. A search of the Metal Center News archives found no reference to either AmAlloy or American Alloy Steel.
Expert Report of E. Allen Jacobs for Nucor, September 16, 2013, quoting IBISWorld Industry Report—Metal Wholesaling in the US, August 2013, www.ibisworld.com.
MM Steel Appellate Brief, p. 14.
MM Steel, L.P. v. JSW Steel (USA) Inc., 806 F.3d 835, 845 (5th Cir. 2015).
Meyer v. Kalanick, 2016 U.S. Dist. LEXIS 43944 (S.D.N.Y. Mar. 31, 2016) (Uber).
Indeed, the case caption names Travis Kalanick, CEO and co-founder of Uber Technologies, Inc., as defendant, rather than Uber itself. Kalanick has served on occasion as an Uber driver and thus has a (strained) horizontal relation to other Uber drivers. Uber, p. 3.
See Memorandum of Law in Support of Defendant Travis Kalanick’s Motion to Dismiss, Meyer v. Kalanick, Case No. 1:15-cv-9796 (JSR), http://blogs.reuters.com/alison-frankel/files/2016/04/meyervkalanick-mtd, pp. 14ff.
Ibid., p. 13.
Uber and its largest rival, Lyft, refer to themselves as ride-sharing services, but each of the companies provides consumers with a car and driver that provide transportation from a pick-up point of the customer’s choosing to a destination chosen by the customer, so we use car-hailing service as a more appropriate term.
John Patrick Pullen, “Everything You Need to Know About Uber,” Time, Nov. 4, 2014, http://time.com/3556741/uber/, visited August 28, 2016.
Uber, “Finding the way: creating possibilities for riders, drivers, and cities,” https://www.uber.com/our story, visited August 25, 2016.
The term “antitrust” appears only once in Matchmakers, and is used only to describe the expertise of one of the book’s authors, each of whom is a respected antitrust expert.
See Sundararajan (2016, 62). The “small” fees that are charged by Uber and by franchisors can be significant. Uber’s compensation consists of a fixed booking fee (which differs across markets) and a commission or service fee of 20% of the fare net of the rider fee. McDonald’s, by comparison, charges a franchise fee and a royalty rate of 12% (See http://www.bloomberg.com/news/articles/2013-08-06/mcdonald-s-franchisees-go-rogue-with-meetings).
Violation of Uber “Rider Standards” can result in a permanent loss of access to the Uber platform. See “Legal,” https://www.uber.com/legal/community-guidelines/en/, visited August 25, 2016.
First Amended Complaint, Spencer Meyer, individually and on behalf of those similarly situated, v. Travis Kalanick, Case 1.15-cv-09796-JSR (S.D.N.Y. Jan. 1, 2016).
Note that Meyer v. Kalanick, 2016 U.S. Dist. LEXIS 43944, 2016-1 Trade Reg. Rep. (CCH) P79,565 (S.D.N.Y. Mar. 31, 2016) finds plaintiffs’ horizontal price-fixing conspiracy allegation plausible, with Uber in the same role of orchestrating a conspiracy as Apple in United States v. Apple, Inc., 791 F.3d 290, 314 (2d Cir. 2015).
While general consideration of the supposed horizontal aspects of this case lies outside the scope of this article, the Uber plantiff class would appear to face a number of obstacles to establishing that class menbers incurred antitrust injury from horizontal price fixing. For example, “[p]laintiff also identifies a “subclass” of riders who have paid fares based on surge pricing. [Complaint,] ¶114. Plaintiff alleges that he and the putative class have suffered antitrust injury because, were it not for Mr. Kalanick’s (Uber’s) conspiracy to fix the fares charged by Uber drivers, drivers would have competed on price and Uber’s fares would have been ‘substantially lower.’ See [Complaint] ¶109. Plaintiff also contends that Mr. Kalanick’s design has reduced output and that, as ‘independent studies have shown,’ the effect of surge pricing is to lower demand so that prices remain artificially high. Am. Compl. ¶110.” (Meyer v. Kalanick, at 7.) To the extent that Uber’s surge prices induced some riders to seek alternative transportation, service would have been better for the Uber customer who managed to book Uber service. The surge prices are calculated to clear the market, so wait times and other non-price rationing would be reduced. Output would be higher, not lower, than in the alternative, since Uber drivers would be attracted by the higher prices on offer during periods of surge pricing.
Complaint, id, at ¶2. See also Meyer v. Kalanick, 2016 U.S. Dist. LEXIS 43944, 2016-1 Trade Reg. Rep. (CCH) P79,565 (S.D.N.Y. Mar. 31, 2016): “Uber facilitates payment of the fare by charging the user’s credit card or other payment information on file. Uber collects a percentage of the fare as a software licensing fee and remits the remainder to the driver. Drivers using the Uber app do not compete on price, and cannot negotiate fares with drivers for rides. Instead, drivers charge the fares set by the Uber algorithm” (referenced to complaint omitted).
See https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/481450/CMA_response_to_TfL, visited August 26, 2016.
See IGM Forum, Taxi Competition (University of Chicago Booth School of Business), http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_eyDrhnya7vAPrX7, visited August 26, 2016.
Airbnb, Inc., About Us, https://www.airbnb.com/about/about-us, visited August 26, 2016.
Dan Hill, The Secret of Airbnb’s Pricing Algorithm, IEEE Spectrum, http://spectrum.ieee.org/computing/software/the-secret-of-airbnbs-pricing-algorithm, posted August 20, 2015, visited August 26, 2016.
Ibid.
Note that an Uber driver whose price was unconstrained could behave opportunistically against the customer to whom s/he was referred by Uber. The short-term monopoly power of the driver could be reduced by presenting multiple driver options, but doing so would both increase complexity considerably and lead to inefficiency as prices would be sought from less well-located alternatives for the customer in question.
Ibid.
The custom-pricing model has been tried, by a company named Sidecar. Drivers were asked to name their own prices and then consumers were given a choice of driver with a photo of the car to be provided and information about the driver. See “Ride-sharing Service Sidecar Lets Drivers Name their Own Prices,” CNET, https://www.cnet.com/news/ride-sharing-service-sidecar-lets-drivers-name-their-own-prices/, visited October 23, 2016. This approach was unsuccessful. Sidecar shut down at the end of 2015.
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Acknowledgements
I thank Ken Elzinga, Gregory T. Gundlach, Kivanç A. Kirgiz, and Robert Lande for helpful comments and discussions. I am grateful to Lawrence J. White for a very detailed reading of a draft and for the questions raised during that reading.
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Marvel, H.P. Leegin and the Economics of Resale Price Maintenance. Rev Ind Organ 50, 221–244 (2017). https://doi.org/10.1007/s11151-017-9570-3
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DOI: https://doi.org/10.1007/s11151-017-9570-3