By a narrow margin, the Supreme Court of the United States has overturned a 1911 decision that made it illegal for manufacturers and resellers to agree on minimum resale prices.
In a case involving an upscale shoemaker and a shoe retailer, the court overruled lower court’s application of the ban, a per se rule established by the 1911 rule, and determined that vertical price restraints (i.e., manufacturer-set minimum pricing) were not necessarily anti-competitive and that each case must be considered based on the rule of reason. In other words, courts should consider the specifics about the involved businesses before ruling on set prices.
The ruling clears the way for pet product manufacturers to set minimum retail prices for their products and thereby protect pricing integrity. Many pet product companies have recently adopted “minimum advertised price” policies as a way to maintain pricing levels in an environment of discounters, particularly Internet sites.
The court’s ruling was designed in part to end the discounters’ unfair competitive advantage. Specifically, the absence of vertical price restraints hurts those retailers that enhance interbrand competition through product education and brand-promotional efforts because discounting retailers can benefit from retailers who furnish services and then capture some of the demand those services generate.
However, the majority opinion also noted that price fixing is a potential anticompetitive consequence of vertical price restraints and should be prevented by the courts.
The majority opinion noted that manufacturers’ use of resale price maintenance can actually stimulate competition among brands, the primary purpose of antitrust legislation, by reducing “intrabrand competition among retailers selling the same brand.”
Conversely, the minority opinion noted that price restraints penalized efficient retailers (and thereby consumers) that could operate on a thinner margin and could curtail retailers ability to respond to changes in demand, for example, by cutting prices on slow moving merchandise.
Moreover, the dissenting opinion noted that broad adoption of price restraints could encourage firms to “tacitly collude, i.e., observe each other’s pricing behavior, each understanding that price cutting by one firm is likely to trigger price competition by all.” In other words, price restraints would prevent price competition.
The dissenting opinion also notes that the majority’s decision to overrule the longstanding precedent was not based on any new arguments, which the minority said is in and of itself unfair to businesses built on that precedent, like shopping centers built around discounter anchors.
“The only safe predictions to make about today’s decision are that it will likely raise the price of goods at retail and that it will create considerable legal turbulence as lower courts seek to develop workable principles,” concluded Justice Stephen Breyer in the dissenting opinion.
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