Vertical Relations Antitrust Laws

Vertical integration that occurs through internal expansion is generally beyond the reach of the antitrust laws, as is discussed in more detail in Chapter 19. [United States v. Alcoa, 148 F.2d 416 (2d Cir. 1945) is an exception. The court found that Alcoa's internal expansion into bauxite and electric power amounted to an exclusionary practice.] Vertical integration achieved through merger can be challenged under the antitrust laws if the effect is to lessen competition.

Under the antitrust laws, most nonprice vertical restrictions are judged under a rule of reason: a possible violation that must be considered separately on its merits. That is, vertical restrictions are not per se illegal (always illegal). The courts attempt to weigh the procompetitive features of the restriction against the anticompetitive ones in deciding whether to prohibit the restriction. The distinction in antitrust treatment between vertical restrictions achieved through contract and those achieved through vertical integration from internal growth rests in part on the notion that mistaken interference wtih activities within a firm have the potential to cause more harm than interference with the activities between firms.

The courts sometimes phrase the evaluation of a vertical restriction in terms of the promotion of interbrand competition (competition between brands) versus the restriction of intrabrand competition (competition in the selling of one brand), but this distinction can be a misleading characterization. Sales efforts can stimulate sales and benefit consumers even if there are no competing brands.

Vertical restrictions do not necessarily increase a manufacturer's market power. A manufacturer always can affect the retail price by setting the wholesale price. A manufacturer may rely on vertical restrictions because it cannot otherwise control promotional efforts. Vertical restrictions do not necessarily give a manufacturer greater control over retail price, but they do give it greater control over sales efforts, which may benefit consumers.

Political pressures to forbid certain types of vertical restrictions are strong. In some states, for example, auto dealers lobbied successfully for laws that limit the control that auto manufacturers have over them. In some states existing franchisees can influence the location of new franchisees that the franchisor wants to place near them.

Although most nonprice vertical restrictions and restrictions on the maximum price are subject to a rule of reason, vertical restrictions on minimum prices are per se illegal. That is, the courts consider the facts of the case to determine whether a particular nonprice vertical restriction or maximum price restriction is harmful, but they view any vertical restriction on minimum prices as illegal and do not consider any mitigating circumstances or offsetting benefits. There is no economic reason to distinguish minimum resale price maintenance from other types of vertical restrictions.

Resale price maintenance is now against the law. Until federal repeal on January 1, 1976, under the Miller-Tydings Act of 1937 and the related McGuire Act of 1952, however, states could give manufacturers the right to set prices for their products at retail levels. In the early 1950s, resale price maintenance laws or fair trade laws were enforced in all states except Alaska, Missouri, Texas, and Vermont. By the time of repeal, only 36 states had fair-trade laws, and the laws were not actively enforced in many. As a result, Consumers Union estimated that the proportion of retail sales subject to fair trade fell by half between 1959 and 1974 (Shepard 1978).

In Monsanto v. Spray-Rite (465 U.S. 752 [1984]), Spray-Rite, a distributor, complained about the control that Monsanto exerted over its prices (Warren-Boulton 1994). Because of an explicit congressional prohibition, the U.S. Department of Justice, which filed a brief in the case, was not allowed to argue in favor of resale price maintenance. Opponents of resale price maintenance (for example, discount stores) persuaded Congress to enjoin the Department of Justice from supporting resale price maintenance. In its decision in the case, the U.S. Supreme Court failed to rule that resale price maintenance could be legal sometimes.

Thus, resale price maintenance remains a per se violation of the antitrust laws. For example, in 1989, although denying any wrongdoing, Panasonic Co. agreed to refund as much as $16 million to consumers to settle charges that consumers paid 5 to 10 percent too much because of price fixing. Panasonic was alleged to have threatened to discontinue supplying retailers that sold for less than the suggested retail price.

SOURCES:

Shepard, Lawrence. 1978. "The Economic Effects of Repealing Fair-Trade Laws." Journal of Consumer Affairs 12:220-36.

Warren-Boulton, Frederick R. 1994. "Resale Price Maintenance Re-examined: Monsanto v. Spray-Rite (1984)," in John E. Kwoka, Jr. and Lawrence J. White, eds., The Antitrust Revolution: The Role of Economics. New York: HarperCollins Publishers.