Comments on: Bye Bye, Dr. Miles. http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/ Academic commentary on law, business, economics and more Mon, 15 Mar 2010 19:12:12 -0700 http://wordpress.org/?v=2.8.5 hourly 1 By: TRUTH ON THE MARKET » A Response to Commissioner Harbour’s “Open Letter” on Leegin http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-79184 TRUTH ON THE MARKET » A Response to Commissioner Harbour’s “Open Letter” on Leegin Tue, 27 Feb 2007 22:40:51 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-79184 [...] to agree on minimum retail prices for the manufacturers’ products. I have previously argued (here and here) that such “vertical resale price maintenance,” or “VRPM”, should [...] [...] to agree on minimum retail prices for the manufacturers’ products. I have previously argued (here and here) that such “vertical resale price maintenance,” or “VRPM”, should [...]

]]> By: TRUTH ON THE MARKET » Antitrust Superprecedent http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-53913 TRUTH ON THE MARKET » Antitrust Superprecedent Wed, 17 Jan 2007 23:10:56 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-53913 [...] Contrary to Sokol’s suggestion, Dr. Miles has been the subject of gobs of academic criticism, primarily because it ignores the substantial procompetitive benefits vertical minimum price-fixing may confer (most notably, the elimination of free riding among dealers). Moreover, as I explain in this post, the set of circumstances in which minimum resale price maintenance may be anticompetitive is both narrow and fairly easy to identify, suggesting that a more probing rule of reason analysis is appropriate. [...] [...] Contrary to Sokol’s suggestion, Dr. Miles has been the subject of gobs of academic criticism, primarily because it ignores the substantial procompetitive benefits vertical minimum price-fixing may confer (most notably, the elimination of free riding among dealers). Moreover, as I explain in this post, the set of circumstances in which minimum resale price maintenance may be anticompetitive is both narrow and fairly easy to identify, suggesting that a more probing rule of reason analysis is appropriate. [...]

]]> By: Joshua Wright http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-40234 Joshua Wright Mon, 11 Dec 2006 21:47:07 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-40234 The logic is that manufacturer and retailer would like to exploit the gains from specialization by vertical separation, but the same separation creates opportunities for the retailer to free-ride or "cheat" by not supplying promotional services in any number of ways (which, by the way, are not limited to the discount dealer situation described by Thom above and most familiar to antitrusters). The manufacturer and retailer thus come up w. all sorts of contractual instruments to exploit these gains together while minimizing the incentive to free-ride and creating a self-enforcing arrangement. See, e.g., Klein and Murphy (1988). Most of these involve vertical restraints which give something of value to the retailer, i.e. a premium created by RPM scheme, a fixed payment, various franchise agreements, an exclusive territory, etc. Retailer cheating is prevented by the threat of termination of this premium stream. It is not irrelevant, in this sense, to talk about simply eliminating dealers. Contracting for retail distribution gives a number of advantages, but comes at a cost. Equally, vertically integrating into retail may solve some of these problems, but perhaps at the cost of the gains from delegating the retail function. Manufacturers and retailers economize on these costs, which vary across different settings, and help to predict contractual form in different settings (including vertical integration). Even simply assuming that RPM helps to solve only discount-dealer free-riding problems supports a rule of reason approach. The economic logic, however, is more powerful than this. The case here for the rule of reason then, is overwhelmingly persuasive. The logic is that manufacturer and retailer would like to exploit the gains from specialization by vertical separation, but the same separation creates opportunities for the retailer to free-ride or “cheat” by not supplying promotional services in any number of ways (which, by the way, are not limited to the discount dealer situation described by Thom above and most familiar to antitrusters).

The manufacturer and retailer thus come up w. all sorts of contractual instruments to exploit these gains together while minimizing the incentive to free-ride and creating a self-enforcing arrangement. See, e.g., Klein and Murphy (1988).

Most of these involve vertical restraints which give something of value to the retailer, i.e. a premium created by RPM scheme, a fixed payment, various franchise agreements, an exclusive territory, etc. Retailer cheating is prevented by the threat of termination of this premium stream.

It is not irrelevant, in this sense, to talk about simply eliminating dealers. Contracting for retail distribution gives a number of advantages, but comes at a cost. Equally, vertically integrating into retail may solve some of these problems, but perhaps at the cost of the gains from delegating the retail function. Manufacturers and retailers economize on these costs, which vary across different settings, and help to predict contractual form in different settings (including vertical integration).

Even simply assuming that RPM helps to solve only discount-dealer free-riding problems supports a rule of reason approach. The economic logic, however, is more powerful than this. The case here for the rule of reason then, is overwhelmingly persuasive.

]]> By: Michael Webster http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-40201 Michael Webster Mon, 11 Dec 2006 18:50:28 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-40201 "Several theories have been asserted for why RPM is anticompetitive. Some complain that it interferes with dealer freedom. That’s a non-starter. Manufacturers could eliminate dealers altogether and sell their own goods directly, and they’ll be more likely to engage in such “vertical integration” if they can’t exercise meaningful control over how dealers promote and sell their products. It’s therefore in dealers’ interests to permit manufacturers to tailor the dealer relationship — a creature of contract — as they see fit." 1. I don't follow the logic here. Dealerships exists because the manufacture believes that the local sales force knows more about how to attract sales than a corporate manager. So it irrelevant to talk about the manufacturer simply eliminating dealers. 2. If the local dealer is free to set minimum prices, then locally the consumers benefit from their aggregate choice. That is what we want a market to do. “Several theories have been asserted for why RPM is anticompetitive. Some complain that it interferes with dealer freedom. That’s a non-starter. Manufacturers could eliminate dealers altogether and sell their own goods directly, and they’ll be more likely to engage in such “vertical integration” if they can’t exercise meaningful control over how dealers promote and sell their products. It’s therefore in dealers’ interests to permit manufacturers to tailor the dealer relationship — a creature of contract — as they see fit.”

1. I don’t follow the logic here. Dealerships exists because the manufacture believes that the local sales force knows more about how to attract sales than a corporate manager. So it irrelevant to talk about the manufacturer simply eliminating dealers.

2. If the local dealer is free to set minimum prices, then locally the consumers benefit from their aggregate choice. That is what we want a market to do.

]]> By: M. Hodak http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-40008 M. Hodak Sun, 10 Dec 2006 20:49:11 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-40008 I'm gratified that the court seems to be moving toward an economic analysis of regulations on business in this case. Unfortunately, the courts appear to be only looking at first order effects, e.g.: "Is this practice actually 'anti-competitive'?" or perhaps the far more relevant, "Does this practice actually reduce consumer welfare?" It seems to me (an economist, not a lawyer) that they are still not inquiring into the second order effects, i.e., the potential costs to consumer welfare associated with the mere existence of certain administrative rules regarding business practices. If you're a small company contemplating a "below cost" pricing campaign to build volume, you need a war chest to fight off the "predatory pricing" accusations of your larger competitors. How many products never see the light of day because of the fixed costs of legal support associated with novel products or business processes? Maybe that's a question for the legislature rather than the court. I’m gratified that the court seems to be moving toward an economic analysis of regulations on business in this case. Unfortunately, the courts appear to be only looking at first order effects, e.g.: “Is this practice actually ‘anti-competitive’?” or perhaps the far more relevant, “Does this practice actually reduce consumer welfare?”

It seems to me (an economist, not a lawyer) that they are still not inquiring into the second order effects, i.e., the potential costs to consumer welfare associated with the mere existence of certain administrative rules regarding business practices. If you’re a small company contemplating a “below cost” pricing campaign to build volume, you need a war chest to fight off the “predatory pricing” accusations of your larger competitors. How many products never see the light of day because of the fixed costs of legal support associated with novel products or business processes? Maybe that’s a question for the legislature rather than the court.

]]> By: The Fire of Genius » Supreme Court’s Growing Antitrust Docket http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/comment-page-1/#comment-39656 The Fire of Genius » Supreme Court’s Growing Antitrust Docket Sat, 09 Dec 2006 18:12:29 +0000 http://www.truthonthemarket.com/2006/12/09/bye-bye-dr-miles/#comment-39656 [...] from Thom Lambert at Truth on the Market. Filed under: Antitrust , Supreme Court Permalink | Trackback URL| [...] [...] from Thom Lambert at Truth on the Market. Filed under: Antitrust , Supreme Court Permalink | Trackback URL| [...]

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