Reexamining antitrust: can "anticompetitive" business practices benefit consumers? - Law & Justice

USA Today (Society for the Advancement of Education), March, 2002 by Wayne Crews

Vertical restraints may very well enhance efficiency if quantity rises or quality and services improve. Indeed, price caps imposed on retailers from upstream limit what can be charged, and are not automatically illegal.

On the other hand, explicit agreements on minimum prices are illegal. Other less-direct policies by manufacturers, such as distributing lists of recommended retail prices or announcing consumer price preferences at the outset and then retaining retailers on that basis, may be acceptable, but not always. In 2000, Federal Trade Commission targeted record distributors for a minimum advertised pricing (MAP) program that the distributors claimed protected music-only retailers from undercutting by discounters, who would sell CDs as loss-leader products to get customers in the store.

A minimum price allows the manufacturer to assure a stream of financial compensation sufficient to assure that retailers provide quality assurance or control, repair services, additional promotional efforts, or expanded outlets. The argument is that such a policy helps protect the best interests of manufacturers and consumers, but the FTC didn't think so.

7. Exclusive dealing arrangements are those wherein a seller agrees to carry only the products of a particular manufacturer and not deal in competitors' goods. A variant is when a seller contracts to purchase all of the output of a supplier.

A common worry is that exclusive dealerships may force small retailers into exclusive arrangements at the behest of powerful manufacturers. However, Bork pointed out that, if a local store is the only seller of the manufacturer's product, it enjoys the "monopoly" and is in the better bargaining position. The retailer has alternative suppliers to which to turn--but the manufacturer doesn't.

Exclusivity can secure special effort on behalf of a product by giving the retailer something of value--low wholesale prices, for example. Any dissatisfied retailer can refuse to renew an inefficient exclusive dealership contract. Exclusive dealing may provide a retailer with specialized knowledge about a product, an unbroken inventory, and a greater ability and incentive to cater to customers. The retailer must balance those benefits against the disadvantages of offering an exclusive product and spurning other manufacturers.

8. Tying or bundling. Tie-in sales are those where a customer purchasing product A from a film with market power is required to purchase product B as a condition of the sale. Antitrust proponents charge that such actions unjustifiably extend an existing monopoly into a new product. Microsoft's bundling of the Explorer Web browser with the Windows operating system is the most prominent recent example.

The error in the tie-in logic is the failure to recognize that monopoly profit, assuming it exists, can be collected just once. If a company exploits all its monopoly power from the primary, "monopolized" product and consumers regard the tied good as worthless, they will pay only the price for the monopoly good and no more. There is nothing more to be extracted for good B. Any higher price charged for good B, if the consumer regards it as worthless, is really just a part of the price of A, rather than an addition to it.