DOES THE PER SE RULE DETER VERTICAL PRICE-FIXING?

I. INTRODUCTION Beginning with the wide-scale introduction of branded goods in the late nineteenth century, manufacturers have often tried to dictate minimum resale prices to the retail outlets carrying their products. And since roughly the same time, antitrust experts have debated why they would do so.(1) Less attention has focused on what manufacturers do when they can not impose minimum prices, even though legal obstacles have forced them to look for alternatives. So what do manufacturers do when they cannot legally set the prices their outlets charge?(2) Many antitrust officials believe they go right on setting prices, either flaunting the law or finding some means to circumvent it. Barrett [1991] quotes former New York state antitrust chief Lloyd Constantine as saying that the practice is ubiquitous, but based upon "winks and nods" rather than written agreements that could be used in court. New York Attorney General Robert Abrams [1991] argues that vertical price fixing is endemic, claiming that "antitrust officers can recount scores of tales of retailers calling our offices too scared to give their names, telling of coercion and intimidation by manufacturers' representatives and rival dealers because their prices were too low." Former FTC Commissioner Terry Calvani argues that a manufacturer practicing resale price maintenance "would have to have 'an I.Q. two points lower than a carrot' to get caught."(3) The prospects for "wink and nod" resale price maintenance are not hard to appreciate. For example, suppose a manufacturer wants to impose a $500 sanction on any discount outlet. If it cannot do so overtly, it may instead impose a lump-sum charge of $500 on all outlets and ex post "reward" non-discount outlets with a $500 rebate. Given this scheme's transparency, courts, legislators, and antitrust officials should not be fooled. Yet the rebates could be indirect and discreet: they could be spread over several periods and parceled out in small quantities as compensation for point-of-sale services, to defray overhead, to pay for advertising or training, and so forth. Hence, it may be hard for outsiders to prove a link between what the manufacturer pays each retailer and that retailer's price. Moreover, in some instances antitrust officials may want an excuse to loosen the legal restrictions on resale price maintenance and may themselves wink and nod at these practices. Finally, antitrust officials cannot always (and perhaps not often) distinguish legitimate cost-sharing arrangements from maneuvers to influence resale prices. As such, they must proceed carefully. Manufacturers can employ two other legal means to fix resale prices. First, manufacturers can coordinate retailers' meet-the-competition guarantees. Antitrust experts have long believed that on occasion retailers can independently offer meet-the-competition guarantees to their customers to discourage price competition.(4) Here a manufacturer coordinates retailers' efforts by financing some or all of the meet-the-competition-related rebates they make, so in equilibrium all retailers adopt the "suggested" price. While previous models of meet-the-competition guarantees focus on tacit horizontal price-fixing, this paper examines explicit vertical price-fixing. Second, the manufacturer can persuade retailers to charge its suggested price by guaranteeing the margins of those victimized by price-cutting rivals. In equilibrium, no outlet wants to cut price first, so discounting does not occur at all. Manufacturers have various other means to influence their dealers' resale prices. In addition to such well-known instruments as consignment sales and exclusive territories, manufacturers can agree to buy back dealers' unsold inventories or parcel out merchandise only as demand for it materializes. They can also use devices such as markdown allowances to influence when and by how much dealers discount if demand turns out low. Presumably, this list does not exhaust the possibilities for innovative manufacturers seeking to subsidize dealers that cooperate and to discriminate against those that do not. …