The resale price maintenance struggle: a comment - response to article by Anthony J. Greco, The American Journal of Economics and Sociology, vol. 173, p. 86, April 1992

American Journal of Economics and Sociology, The,  Oct, 1993  by David W. Boyd

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Introduction

PROFESSOR ANTHONY J. GRECO, in a recent issue of this Journal (April, 1992, 173-86), provided a much needed update on recent attempts by the United States Congress to enact legislation aimed at further curbing the practice of resale price maintenance (RPM), whereby a manufacturer dictates retail prices to dealers. The most common scenario, and the situation at which the legislation is aimed, is that of a manufacturer setting a retail price floor below which no dealer may sell the product in question. Professor Greco analyzes the arguments for and against Senate bill S.430, "The Retail Competition Enforcement Act of 1987" and a subsequent compromise bill, S.865, "The Consumer Protection Against Price-Fixing Act of 1989," ultimately arguing in favor of the legislation. Unfortunately, at the time of the final article submission, the fates of these bills were still undetermined. The purpose of this comment is to update the status of the legislation, and, in light of other recent research findings and an important additional Supreme Court decision, to argue against the enactment of these and similar bills.

II

A Legislative and Judicial Update

THE LEGISLATION OF CONCERN HERE, Senate bills S.430 and S.865, was introduced largely in response to the Supreme Court's 1984 decision in Monsanto Company v. Spray-Rite Service Corporation, in which the Court ostensibly upheld its long-standing decision in Dr. Miles that vertical price restraints are per se violations of the Sherman Antitrust Act.(1) However, in Monsanto, the court reduced significantly the scope of per se illegality, ruling that a per se violation could not be inferred solely from evidence that a manufacturer had terminated a price-cutting distributor after having received complaints from the distributor's competitors. Rather, to show per se illegal behavior, the terminated distributor must present evidence that the manufacturer "had a conscious commitment to a common scheme designed to achieve an unlawful objective." The proposed legislation seeks first to rectify this onerous evidentiary standard created by Monsanto and, second, to codify into law the judicial standard as created by Dr. Miles. Ironically, since the introduction of S.430 in 1987, the Supreme Court has further narrowed the scope of per se illegal RPM activity with another elevation of the evidentiary standard. In its 1988 Sharp decision, the court held that an agreement between a manufacturer and a dealer whereby the manufacturer would terminate any price-cutting dealer was not the same as an illegal RPM agreement.(2) Rather, per se illegality required evidence of an agreement between the manufacturer and all dealers.

Notwithstanding the decision in Sharp, the legislation as introduced in S.430 and modified by S.865 has not become law. The legislation was reintroduced by Senator Metzenbaum, an original sponsor of both S.430 and S.865, along with 31 cosponsors (27 Democrats and 4 Republicans) on Feb. 20, 1991. The Senate passed the bill by voice vote on May 9, 1991. After passage in the Senate, the bill was received in the House of Representatives on May 14, 1991. Soon thereafter, a similar piece of legislation, H.R. 1470, "The Price Fixing Prevention Act of 1991" sponsored by Representative Brooks was incorporated into the bill. On October 10, 1991 the measure passed the House by a voice vote. The House conference committee filed its report (H. Rept. 102-605) on June 22, 1992. Eight days later, on June 30, the entire House rejected the conference committee report by a 175-225 vote.

As of this writing, there is currently no committee action scheduled on any of this legislation. According to communications from Senator Metzenbaum's office, if the bill were to move before the end of the 1992 Congressional session, it would have to be added as an amendment to another, as yet unspecified, bill.

III

Further Arguments Against RPM Legislation

IN HIS ORIGINAL ARTICLE, Professor Greco thoroughly examined the arguments for and against RPM legislation as presented in bills S.430 and S.865. In this section, I take exception to a small number of those arguments in favor of S.430 and, additionally, offer evidence from recent theoretical and empirical research findings which suggest that legislation against minimum RPM is, in the vast majority of instances, economically inefficient.

Those in favor of S.430 and other measures to limit or eliminate RPM argue that the practice restrains competition and raises retail prices.(3) Minimum RPM, however, merely deflects intrabrand price competition into intrabrand nonprice competition. By preventing retailers from lowering retail prices below those mandated by the manufacturers, the dealers are forced to compete against one another by offering increasing levels of demand-enhancing retail services. Moreover, as shown in Marvel and McCafferty (1986), the conclusion that RPM raises retail prices stems from comparisons involving mixed jurisdictions, i.e., from comparing prices in markets where RPM is practiced to those in adjacent markets where it is not. Marvel and McCafferty show that retail prices under universal RPM are no higher than they are when RPM is entirely absent. Thus, the imposition of global RPM need not necessarily raise retail prices.(4)