Notes

Outline

Vertical restraints. Price discrimination. Tying and bundling. Exclusive dealing. Resale price maintenance.

Vertical restraints. The “inhospitability” tradition. Solving economic problems not contemplated in perfect competition.

Tying arrangements. Examples: Copiers and paper. Computers and punch cards. Distinguish from bundling. Products offered (only) as a package. Are products available separately? Diamonds, movies, and software.

Tying arrangements. Court has a hostile attitude. Henry v. A. B. Dick  (1912). IBM v. U. S. (1936). Northern Pacific v. U. S. (1958). Tying illegal per se.

Tying arrangements.

Tying arrangements. Two products, A and B. Total price to consumer: PA + PB Firm sets optimal monopoly price for A; price of B is competitive. If monopolist ties A and B and raises price of B, then total price of system higher than optimal monopoly price.

Tying arrangements. There is only one optimal monopoly price for a system. Monopolist can shift price between A and B. But monopolist can never get more monopoly than it originally had.

Tying arrangements. Price discrimination. Quality control. Joint distribution efficiencies. Evasion of price controls. Rent control example.

Tying arrangements. Price discrimination. Seller cannot measure intensity of use of a durable good. Tying a complement (like paper, ink, or punch cards) allows metering. Example: razors and blades. Welfare enhancing. Are there other ways to meter? Doesn’t explain full-line forcing.

Tying arrangements. Quality control. Seller may be able to assure quality more cheaply than buyer. Example: cheap cards or paper cause machines to jam, thus harming seller’s reputation. Court insists on list of approved suppliers, and Magnuson-Moss Act (1975) makes it illegal to condition warranty on use of approved complements. But tying may be low-cost way of guaranteeing performance.

Tying arrangements. Can tying channel innovation in a direction that enhances the firm’s future profits? Tying products to close the standard?

Bundling.

Bundling. Block booking. U. S. v. Paramount Pictures (1948) [theatrical]. U. S. v. Loews (1962) [television]. Court held that block sales extend monopoly granted by copyright.

Bundling.

Bundling. Price discrimination. Firm can extract more surplus with an all-or-nothing offer and pricing at­lowest reservation price. But does this explain motion picture example? Films sold at competitive auction.

Bundling. Risk shifting or spreading. Compare insurance: If low-risk agents allowed to exit pool, market dries up. “Adverse selection.” Block booking a way of keeping large insurance pool. Shifts some of risk of film-making to exhibitors.

Resale price maintenance. Distinguish private RPM from government-enforced RPM.

Resale price maintenance. A manufacturer of patent medicines had agreed with its dealers on minimum retail prices. Supreme court held contract unenforceable since it violated public policy declared in Sherman: "that these agreements restrain trade is obvious." Court admits that profit would go to dealers.  But why then does Dr. Miles want RPM? End­result:  RPM illegal per se.

Resale price maintenance. United States v. Colgate & Co. (1919). A manufacturer is free (1) to announce a policy of refusing to sell to dealers who fail to charge suggested RP and (2) to terminate nonadhering dealers. United States v. General Electric Co. (1926). Dealer is a consignee of the manufacturer and therefore the manufacturer's agent rather than a purchaser.  Not technically a "restraint on alienation," since dealer never owned the goods.

Resale price maintenance. United States v. Parke, Davis & Co. (1960). A manufacturer may not threaten to cut off wholesalers for selling to retailers who fail to adhere to SRP. Thus, Colgate only available to manufacturers who sell directly to retailers. A competitive advantage to manufacturers large enough to sell directly. Simpson v. Union Oil Co. (1964). Court rules that producer can't fix retail prices of consignments of gasoline, and struggles hard to differentiate from General Electric.

Resale price maintenance. Setting a price ceiling instead of a floor. Albrecht v. Herald Co. (1968). Newspaper publisher terminated distributor for exceeding retail price set by publisher. Court sets hostile precedent. State Oil v. Khan (1997). Supreme Court overturns Albrecht.

Resale price maintenance. Why would a manufacturer want to create a cartel among dealers or distributors? Would transfer rents from manufacturer to dealers or distributors.

Resale price maintenance. Free-rider externality. For complex (or new) products requiring information services or customer support, manufacturers want to provide a bundled good: product plus info and/or services. Could integrate vertically into distribution, but that may be costly if there are diseconomies of management or scope. By preventing price competition, RPM forces competition among dealers onto other margins, notably point-of-sale­services.

Resale price maintenance. Quality signaling through price. Sellers can use price to signal quality. If dealers or distributors can discount, manufacturer can’t transmit information to customers.