Who asked for the price floor, the maker or the shop?
Abstract
Two explanations for minimum resale price maintenance have competed for a century: that a manufacturer imposes a price floor to stop discounters free-riding on the services of full-service retailers, and that the floor is a cartel's instrument which the manufacturer merely administers. This paper argues that the two theories differ over who initiated the restraint, that the contract looks identical either way, and that the litigation record both camps cite is selected on exactly the variable in dispute. A rule-of-reason standard therefore asks courts for a fact the evidence cannot supply.
A manufacturer tells the shops that stock its product that they may not sell it below a stated price. That is an odd thing to want. It earns a margin on each unit, so it ought to want its goods sold as cheaply as the retailer can manage, which means more units; a floor raises the price, cuts the quantity, and the manufacturer bears part of that loss. So why would a maker ask for one? Two answers have been given for over a century, and they are not variants of each other. They differ about who wanted it.
The first answer is about free riding, and Lester Telser set it out in 1960. Some retailers invest in the things that sell a product: demonstrating it, advising the customer, holding stock, advertising locally. Telser's services included selling, advertising and promotion as well as delivery, credit and repair.12 A discounter who provides none of this can take the sale after the customer has been informed elsewhere. If that happens reliably nobody provides the service, and the manufacturer loses demand it would willingly have paid for. A floor removes the discounter's weapon, and the maker gains whenever the demand the service creates outweighs the demand lost to the higher price.2
The second answer is that the floor is a cartel's instrument, and it can run in either direction. Retailers who would like to stop competing on price have a coordination problem, because an agreement among themselves is hard to police and easy to cheat on, and a floor set and enforced by their supplier solves it for them. Or competing manufacturers find that cheating on wholesale terms is invisible while retail price-cutting is not, so retail prices become the signal that holds their own arrangement together.3 On this account the maker is the agent and somebody else the principal.
Which answer is right has decided the law twice. In Dr. Miles Medical Co. v. John D. Park and Sons Co., decided on 3 April 1911, the Supreme Court held that an agreement between a manufacturer and its distributors fixing a minimum resale price was illegal in itself under the Sherman Act.4 Justice Holmes dissented; a commentary reports that he called price-cutting dealers knaves.4 Ninety-six years later, in Leegin Creative Leather Products v. PSKS on 28 June 2007, the Court overruled Dr. Miles by five votes to four and moved minimum resale price maintenance to the rule of reason, pointing to procompetitive justifications including retailer services that strengthen competition between brands.5
The rule of reason asks a court which of the two stories is true in the case before it. The evidence both camps reach for is a single study: Pauline Ippolito's examination of the resale price maintenance cases litigated in the United States between 1976 and 1982. It is careful work put to uses it cannot bear. The share of cases involving an allegation of collusion is given as 15 per cent in one Federal Trade Commission document and 13.1 per cent in another; an OECD roundtable paper puts dealer collusion at about 7 per cent and, elsewhere, cartel allegations at 5.9 per cent; one review reports 65 per cent of cases referencing free riding against 13 per cent complaining of a cartel; and the sample is given as 203 cases in most places and 206 in one.678 Most of that spread is definitional rather than careless, which is the point: the figures differ according to whether any collusion allegation is counted or only horizontal price-fixing, and whether private suits alone or all cases sit in the denominator.7 A reader who wants a number for how often price floors serve a cartel can pick one between about six and fifteen per cent and find authority for it.
The deeper trouble is the sample, and not the author's fault. These are litigated cases, and the question both camps want answered is about the population of price floors, almost all of which nobody ever sues over. The selection runs on precisely the variable in dispute. A dealer cartel that works produces no complaining plaintiff, because the people with standing to complain are inside the arrangement benefiting from it. A free-rider arrangement produces the classic plaintiff: the discounter who was cut off, who knows who cut him off and why. The record over-represents the free-rider story by the mechanism that generates it. Nor is the decisive fact visible in the documents: whether the maker wanted the floor or was recruited to administer somebody else's, the paper trail is the same, a resale price clause the maker enforces and a terminated discounter. Initiation distinguishes the two theories, and a contract does not record it.
If a legal system cannot find the fact, it has two coherent options, and different jurisdictions have taken both. One is to name the theory you believe, by product, which is what fixed book price laws do. France's Lang law, in force since 1 January 1982, requires the publisher to set a book's price and caps the retailer's discount at 5 per cent, with a wider allowance for libraries and public bodies added in 2003 and the regime extended to electronic books in 2011.9 A legislature there decided that the network of bookshops a floor protects is worth a higher price for bestsellers, and said so where voters could read it. The other option is case-by-case adjudication.
The strongest objection to this pessimism comes from the book trade itself. Rhys Williams's study of European fixed book price policies between 2008 and 2019 finds no clear effect on prices, with some indication that they fell slightly, alongside higher sales and more bookshops, which he attributes to changes in retailers' bargaining power and to competition shifting onto things other than price.10 Two things temper it. The finding cuts against the free-rider camp's own logic as much as the cartel camp's, since on Telser's account the floor has to raise the price in order to fund the service. And the author is careful that the result is specific to books and to the few countries that changed policy.10
What remains is a question about institutional design rather than retailing. When the fact that would decide a case is unobservable in principle, a standard asking for it gets decided on priors, and a rule at least makes the prior explicit. Maryland amended its antitrust statute in 2009 to make minimum resale price maintenance unlawful in itself under state law, and on a November 2023 account remained the only state whose statute says so explicitly.11 In the European Union a fixed or minimum resale price is a hardcore restriction under the block exemption regulation in force since June 2022, which strips an agreement of the exemption altogether.12 So the same clause is illegal in itself in Maryland, assessed under the rule of reason in a federal court, fatal to an exemption in Brussels, and required by statute for books in Paris. That spread is not confusion. It is four jurisdictions answering a question about who wanted the floor, and only the ones that answered it in advance can say why.
Notes
1Lester G. Telser, "Why Should Manufacturers Want Fair Trade?," Journal of Law and Economics 3 (1960), pp. 86-105, for the free-rider account of resale price maintenance and for the breadth of what Telser counted as services. The outbound network this paper was drafted on refused every request, so the article could not be opened; the account of its argument rests on search results quoting it and on the secondary summary at note 2. Repository record of the article and the publisher's page
2For the summary of Telser's argument relied on above, including that by services he meant not only delivery, credit and repair but also selling, advertising and promotion, that the manufacturer benefits whenever the stimulative effect of the services on demand exceeds the depressing effect of the higher price, and that resellers providing services can be undercut by those providing none, see the discussion of vertical restraints in the Canterbury Law Review. Journal article
3Federal Trade Commission staff report, "Resale Price Maintenance: Economic Theories and Empirical Evidence," for the setting out of both families of explanation, the efficiency theories and the collusion theories, including the use of resale price maintenance to support a dealers' cartel and to stabilise agreement among manufacturers. Staff report
4Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), decided 3 April 1911, for the holding that an agreement between a manufacturer and its distributors fixing minimum resale prices was illegal in itself under section 1 of the Sherman Act and an unlawful restraint at common law, and for the fact of Justice Holmes's dissent. The report that Holmes described price-cutting dealers as knaves, at 220 U.S. 412, comes from a commentary on the case rather than from the opinion, which could not be opened; it is given above as a report rather than as a quotation from the original for that reason. Full text of the decision, encyclopaedia entry on the case and the commentary reporting the knaves remark
5Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), decided 28 June 2007 by five votes to four, for the overruling of Dr. Miles, for the move of minimum resale price maintenance to the rule of reason, for the majority's reliance on procompetitive justifications including the assurance of retailer services that enhance competition between brands, and for the continued per se illegality of resale price maintenance imposed as a result of agreement with competing suppliers. Dissenting opinion at the Legal Information Institute, a Congressional Research Service report on the decision and a contemporaneous law firm analysis
6Pauline M. Ippolito, "Resale Price Maintenance: Empirical Evidence from Litigation," Journal of Law and Economics 34, no. 2 (October 1991), pp. 263-294, together with her related Federal Trade Commission staff report of 1988, for the study of the resale price maintenance cases litigated between 1976 and 1982 that is discussed above. The article could not be opened, and every figure attributed to it in this paper is taken from a secondary source quoting it, as notes 7 and 8 set out. Repository record of the article, bibliographic record and the Federal Trade Commission staff report
7For the divergent figures reported from Ippolito's study, and for the definitional reasons behind the divergence, see the Federal Trade Commission paper on the economics of resale price maintenance, which gives collusion at 15 per cent, and the OECD roundtable volume, which gives dealer collusion at about 7 per cent in one passage and cartel allegations at 5.9 per cent in another. The 13.1 per cent figure for any horizontal collusion allegation, and the 9.8 per cent figure for horizontal price-fixing allegations in private cases, appear in Commission material; those two are different denominators rather than conflicting counts. Federal Trade Commission paper, OECD roundtable volume and a Commission submission on resale price maintenance
8For the report that 65 per cent of the cases referenced free riding or related applications while 13 per cent complained of a cartel, and for the sample being described as 206 rather than 203 cases, see the American Antitrust Institute working paper reviewing the resale price maintenance literature. The government brief filed in Leegin, which quotes Ippolito to the effect that collusion theories cannot explain at least 85 per cent of the cases, is linked as a further instance of the same study being cited for a differently defined figure; the text above does not rely on it. American Antitrust Institute working paper and the brief filed in the Supreme Court
9Law 81-766 of 10 August 1981 on the price of books, the Lang law, for the fixing of a book's price by the publisher and the cap of 5 per cent on retail discounts, for the law taking effect on 1 January 1982, for the 2003 amendment setting a 9 per cent maximum discount for libraries, the state and local authorities, and for the 2011 extension of the regime to electronic books. The consolidated statutory text was not reachable, so these points rest on the French publishers' federation's own description of the regime and on secondary accounts, which agree on the 5 per cent cap and the commencement date. The publishers' federation on the current regime, the French Senate's account of the law and an encyclopaedia entry
10Rhys Williams, "Empirical Effects of Resale Price Maintenance: Evidence from Fixed Book Price Policies in the European Book Sector," Journal of Competition Law and Economics 20, nos. 1-2 (2024), p. 108, for the panel analysis covering 2008 to 2019, for the finding of no clear effect on prices with some indication that the policies lowered them slightly, for higher sales and an increase in the number of bookshops, for the explanation in terms of retailer bargaining power and non-price competition, and for the author's own caution that the results are limited to books and to a small number of countries that changed policy. Publisher's page, the author's own record of the paper and a summary of the findings
11Maryland Commercial Law Article, section 11-204(b), enacted 14 April 2009 and effective 1 October 2009, for the provision making a minimum resale price agreement an unreasonable restraint of trade and so unlawful in itself in state-law suits. For the statement that Maryland remained the only state whose statute says so explicitly, and that California's position is unsettled, see the November 2023 law firm alert cited here; the position after that date could not be verified, which is why the claim is given with its date in the text. Law firm alert of November 2023, a second account
12Commission Regulation (EU) 2022/720 on vertical agreements, in force since 1 June 2022, for the treatment of a fixed or minimum resale price as a hardcore restriction under article 4, which removes the benefit of the block exemption from the agreement as a whole, and for the continued permission of recommended and maximum prices provided they are not combined with incentives, disincentives or retaliation. Secondary accounts state that the regulation runs for twelve years to 31 May 2034; the Official Journal text was not reachable and that date was not verified against it. The European Commission's page on the vertical block exemption, an analysis of the resale price rules under the regulation and a competition authority's summary