Resale Price Maintenance

The Supreme Court also ruled in LEEGIN CREATIVE LEATHER PRODUCTS, INC. v. PSKS, INC and Reuters has a nice summary:

The Supreme Court on Thursday overturned a nearly 100-year-old precedent that some price-setting agreements between manufacturers and retailers are automatically illegal under federal antitrust law. By a 5-4 vote, the justices overturned a 1911 Supreme Court ruling that minimum prices set by manufacturers on what dealers can charge customers for their products are unquestionably illegal … Antitrust authorities at the Justice Department and the Federal Trade Commission also had urged the top court to overturn the precedent, while 37 states and a leading consumer group had urged that the precedent be preserved. The ruling stemmed from an appeal to the Supreme Court by a company called Leegin Creative Leather Products Inc., the manufacturer of the Brighton brand of women’s accessories. In 1997, it adopted a policy stating it would do business only with retailers that followed its suggested retail prices and would not sell to retailers that discounted its products.

While I should thank our favorite troll, his premise that I don’t care about the underlying issue is just insulting (but what else is new). His take is that this decision is some victory for economists, which is just stupid. I guess trolls are not aware of the vast literature on something called resale price maintenance (RPM). As I searched for a definition of this concept, I came across a really stupid version:

These rules prevent resellers from competing too fiercely on price and thus driving down profits. Some argue that the manufacturer may do this because it wishes to keep resellers profitable, and thus keeping the manufacturer profitable.

While manufacturers might wish to keep its profits high, it is not clear that the real reason for RPM is to enforce a cartel. And to suggest the manufacturer cares about the profits of the distributors is bizarre. An alternative argument why RPM exists is that it overcomes a failure in the market for distributional services by ensuring that distributors who invest in promoting the manufacturer’s product are able to recoup the additional costs of such promotion in the price they charge consumers. Greg Mankiw explains the latter line of thinking. Recently, WSJ’s Econoblog had a discussion of this litigation from two of the best.