An examination of vertical territorial and vertical price restraints under the outlets hypothesis

Abstract

With the exception of a brief legislative stay of execution, resale price maintenance (RPM), has been illegal per se in the United States since a 1911 Supreme Court decision. The Court has however, afforded vertical territorial restraints the protection of the rule of reason. A growing body of economic literature has proposed numerous pro-competitive uses of RPM by manufacturers. In addition, the literature indicates that vertical territorial and vertical price restraints are both different means of achieving the same end i.e., both are economic tools employed by manufacturers to achieve efficiencies in their distribution system. Opponents of RPM counter this assertion by arguing that if both are identical economic phenomenon, then manufacturers have no need to employ RPM since they can use vertical market division in its place. In this paper I will show that under demand conditions characterized by the outlets hypothesis, RPM is Pareto-superior to vertical market division. It is equally possible to imagine market conditions under which the opposite is true. Since the court room is an ill-suited home for such business decisions, the law should not continue to maintain its present artificial distinction between RPM and vertical market division. The economic consequences of both are essentially the same, hence, I advocate that RPM also be brought under the protection of the rule of reason.