The Volokh Conspiracy

Here is one story.

The case for pure illegality of resale price maintenance (RPM) has never been very strong. Since we don't understand price stickiness well, it is no surprise we also don't understand RPM very well either. At least on the surface that is an argument for a case-by-case approach if not something even looser.

My casual guess is that > 50% of RPM represents a desire to collude and raise prices. Nonetheless allowing RPM, even when it is collusive, just doesn't matter very much. RPM enforcement has been weak for various periods of time, most of all under the Reagan Administration, without retail disaster striking.

Market-oriented economists exaggerate the "ancillary services" hypothesis developed by Lester Telser, namely that RPM keeps services flowing ("informative stereo salesman" is the paradigmatic example). Supposedly, without RPM everyone would get sales help at the expensive store but buy at the discount store; in the equilibrium all stores would be discount stores and poor consumers would wander through the world without sales help. In reality RPM has often been used for lots of the small or even trivial items you see for sale in drugstores.

I attach greater credence to the Ben Klein hypothesis that RPM represents a kind of "efficiency wage" to discipline retailers and force them — through threat of product cut-off — to present the item in a desirable fashion. (In Telser's hypothesis the services flow automatically after RPM is instituted, through a desire to capture customers and extra profits, but why should the extra services supplied then be the ones subject to the free-rider problem, rather than some other side benefits?)

Even when cartelization is the motive, I don't worry that Colgate will monopolize the market for toothpaste. Most or all retail products face lots of competition from the products of other manufacturers. I also don't think that so many business decisions should become primarily legal decisions; our government has enough real crimes to look after. So in my view RPM should be close to per se legal (certainly not per se illegal), with some possible exceptions for resource-based monopolies, not that I can think of any relevant exceptions in the retail context. Arguably government should not enforce RPM agreements, though product pulling is in any case the major means of implementation.

Here is Greg Mankiw on resale price maintenance. Here is an Econoblog on resale price maintenance. Here is Wikipedia. Here is some Supreme Court discussion.