Resale price maintenance

Resale price maintenance (RPM) is a business practice where a manufacturer or supplier sets the minimum or maximum price at which its products can be resold by distributors or retailers. These arrangements are a component of antitrust law, falling under the broader category of vertical agreements, which are agreements between firms at different levels of a supply chain. The objective of resale price maintenance can vary, from protecting brand image and encouraging quality service to, controversially, limiting competition.

History and Origin

The legality and economic implications of resale price maintenance have been debated for over a century, particularly in the United States. Historically, RPM was often viewed with skepticism by antitrust regulators. A landmark U.S. Supreme Court case, Dr. Miles Medical Co. v. John D. Park & Sons Co. (1911), initially established a "per se" rule, meaning that minimum resale price maintenance was automatically considered illegal under federal antitrust law. This stance reflected a concern that such agreements were inherently anti-competitive, akin to horizontal agreements between competitors.

However, the legal landscape evolved significantly. In 1997, State Oil v. Khan shifted the treatment of maximum resale price agreements to a "rule of reason" standard, requiring a case-by-case analysis of their effects on competition.⁴⁴ A pivotal change occurred in 2007 with the Leegin Creative Leather Products, Inc. v. PSKS, Inc. decision, where the Supreme Court overturned the Dr. Miles precedent, ruling that minimum resale price maintenance should also be evaluated under the rule of reason.⁴², ⁴³ This means that instead of being automatically illegal, RPM agreements are now assessed based on their actual impact on competition and consumer welfare.⁴¹ Despite this federal shift, some U.S. states and other jurisdictions globally may still maintain stricter laws or even per se bans against certain forms of RPM.³⁹, ⁴⁰

Key Takeaways

• Resale price maintenance involves a manufacturer or supplier dictating the minimum or maximum prices for its products at the retail level.³⁸
• It is considered a vertical agreement within antitrust law, as it occurs between entities at different stages of a supply chain.
• In the United States, after the Leegin Supreme Court decision in 2007, both minimum and maximum resale price maintenance agreements are generally evaluated under the "rule of reason" standard, assessing their pro-competitive and anti-competitive effects on a case-by-case basis.³⁶, ³⁷
• Proponents argue RPM can enhance brand image, incentivize retailer services, and promote interbrand competition, while critics contend it can reduce intrabrand competition and lead to higher consumer prices.³⁴, ³⁵
• Compliance with antitrust regulations regarding resale price maintenance is crucial for businesses to avoid legal penalties.³², ³³

Interpreting Resale price maintenance

Interpreting resale price maintenance involves understanding the economic rationale behind its implementation and its potential effects on market dynamics. While seemingly restrictive, RPM can be used by manufacturers to encourage retailers to provide pre-sale services, such as product demonstrations, knowledgeable sales staff, or comfortable showrooms, which enhance the perceived value of the product and benefit the brand's reputation.³¹ Without RPM, discounters could "free-ride" on the efforts of full-service retailers, potentially leading to a decline in service quality across the board.³⁰

However, the interpretation also scrutinizes whether such agreements restrict competition and harm consumers. Regulators and courts apply the "rule of reason" test to weigh these potential benefits against anti-competitive concerns like higher prices for consumers or reduced choices.²⁹ The context of the market, including the presence of market power by the manufacturer or retailers, is critical in this assessment.²⁸

Hypothetical Example

Consider "Apex Sports," a manufacturer of premium running shoes, that wants to ensure its shoes are sold with expert fitting services and a strong brand image. Apex Sports enters into a resale price maintenance agreement with its authorized retailers, stipulating that the "Apex Pro Runner" model cannot be sold for less than $150.

A customer, Alex, visits "RunFast Gear," an authorized Apex Sports retailer. A knowledgeable sales associate at RunFast Gear spends 30 minutes with Alex, analyzing their gait, discussing their running style, and recommending the Apex Pro Runner based on its features. Alex tries on the shoes and appreciates the personalized service. Alex then checks online and finds another online-only retailer, "DiscountShoes.com," selling the same model for $130. However, under the resale price maintenance agreement, DiscountShoes.com would be obligated to sell the shoe for at least $150. This allows RunFast Gear to invest in higher-quality service, knowing its efforts won't be immediately undercut by discounters who don't provide such services but benefit from customers "showrooming." This pricing strategy aims to preserve the profit margins that enable retailers to offer these value-added services.

Practical Applications

Resale price maintenance is primarily observed in industries where product differentiation and pre-sale services are crucial. Manufacturers of luxury goods, electronics, and specialized equipment often utilize RPM to maintain brand exclusivity and ensure a consistent customer experience. By setting a minimum price, manufacturers aim to prevent price erosion that could devalue the brand or discourage retailers from investing in showcasing and supporting the product.²⁷

For instance, a manufacturer might implement RPM to encourage its wholesalers and retailers to provide extensive product training to their sales teams, offer attractive displays, or provide after-sales support. This ensures that the manufacturer's products are sold in an environment that reflects their intended value. Globally, the approach to vertical restraints, including RPM, varies. The European Commission, for example, has specific guidelines on vertical agreements, distinguishing between agreements that may restrict competition and those that contribute to economic efficiency. Understanding the legal framework for RPM is vital for legal compliance for businesses operating internationally.

Limitations and Criticisms

While proponents argue that resale price maintenance can foster interbrand competition by ensuring retailers have incentives to promote a product, critics often highlight its potential to reduce intrabrand competition, which is competition among retailers selling the same brand.²⁶ This can lead to higher prices for consumers, as retailers are prevented from competing on price, potentially limiting consumer welfare.²⁴, ²⁵

Some economists and antitrust authorities raise concerns that RPM can facilitate collusion among retailers or manufacturers, allowing them to collectively maintain artificially high prices.²³ It can also be used by a manufacturer with significant market power to exclude competitors or to protect inefficient retailers. The Competition and Markets Authority (CMA) in the UK, for example, emphasizes that RPM can harm consumers through increased prices and damages business reputation.²² Regulators scrutinize RPM agreements carefully, especially if they appear to lead to a significant lessening of competition in a market.²⁰, ²¹

Resale price maintenance vs. Price fixing

Resale price maintenance and price fixing are both practices related to setting prices, but they differ fundamentally in the nature of the agreement and their legal treatment.

While RPM involves a vertical relationship, horizontal price fixing is an agreement among competitors to set prices, eliminate competition, or allocate markets. The legal distinction is crucial; horizontal price fixing is almost universally condemned as "per se" illegal due to its inherent anti-competitive nature.¹², ¹³ RPM, in contrast, may have pro-competitive justifications, leading to its more nuanced "rule of reason" treatment in many jurisdictions.

FAQs

Is resale price maintenance always illegal?

No. In the United States, minimum resale price maintenance agreements are no longer "per se" illegal (automatically illegal). Instead, they are typically evaluated under the "rule of reason," which assesses their overall effect on competition and consumer welfare on a case-by-case basis.¹⁰, ¹¹ However, some individual U.S. states and many other countries still treat RPM very strictly or consider it illegal.⁸, ⁹

Why would a manufacturer want to control resale prices?

Manufacturers may implement resale price maintenance to protect their brand's image, prevent their products from being devalued by aggressive discounting, or ensure that retailers provide a high level of pre-sale service and customer support. This can also help solve the "free-rider" problem, where some retailers benefit from others' investments in promoting the product without incurring similar costs.⁶, ⁷

What are the potential negative impacts of resale price maintenance?

The primary criticism of resale price maintenance is that it can reduce intrabrand competition (competition among sellers of the same brand), potentially leading to higher prices for consumers and less choice in retail options.⁵ It can also facilitate collusion among retailers or manufacturers and may be used by firms with market power to exclude smaller competitors.⁴

How does resale price maintenance affect consumers?

The effect on consumers is debated. Some argue that consumers benefit from higher quality service and stronger brands due to RPM.³ Others contend that consumers are harmed by the elimination of price competition, which can lead to higher prices and limit their ability to find the best deals.¹, ²