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Revealing the Reality of Antitrust

Tags Legal SystemU.S. EconomyInterventionismPolitical Theory

12/15/2010Dominick Armentano

The rhetoric and imagery of American antitrust law has always been procompetition and proconsumer. However, the reality has always been the opposite. As demonstrated by Dominic Armentano, Tom DiLorenzo, and others, it has been not only a pervasive violation of property rights but also anticompetition and anticonsumer.

Antitrust keeps superior products and marketing strategies from harming rivals, but since every innovation that benefits consumers takes business away from rivals, halting such innovation harms consumers. It inhibits superior firms from passing on their efficiencies to consumers in lower prices; it does so by restricting their ability to cut prices for some (without enabling them to raise prices for others), or by invoking the mythical bogeyman of predatory pricing. It also restricts their growth, even when consumers will be better served by moving more production into the hands of lower cost firms. And the list goes on.

While historical examples of such antitrust mistakes and abuses abound, illustrations are not relegated to the distant past. The aftermath of the Supreme Court's 2007 Leegin decision is a good example.

In Leegin, the Supreme Court overturned what Robert Bork called "one decisive misstep that has controlled a whole body of law," the 1911 Dr. Miles precedent, which made it per se illegal (illegal without needing to prove consumer harm) for a manufacturer to require its retailers to maintain a certain price for its products.

Dr. Miles rested on the idea that prohibiting retail-price reductions must necessarily harm consumers, eliminating any need to prove such harm. Implicit in the precedent was the belief that such a policy must necessarily reflect an abusive use of monopoly power.

Antitrust and Consumer Harm

However, economists have long recognized several ways that price maintenance can benefit consumers, so that, even if we accept current antitrust law as written, proof of consumer harm should be necessary before it is penalized.

In Leegin, Justice Anthony Kennedy wrote for the majority that the practice can "give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between." In other words, a producer in a competitive market could utilize price maintenance to distribute its products without being punished, because it would have no monopoly power to harm consumers, and the practice would merely allow the seller to expand the range of consumer choices. The judgment did not allow consumer harm, because collusive price maintenance remained illegal and instances of potential consumer harm were readily ascertainable (highly concentrated markets; cooperative, industry-wide use; and substantial barriers to entry).

Producers generally want retailing services to be provided as inexpensively as possible (given their wholesale price) since lower retail prices increase sales, other things being equal. They have no reason to subsidize retailers through excess markups, which would lower their profits. Producers only impose minimum retail prices when they expect to benefit, which is only true when they believe that consumers value the extra retail services bought with the higher markup more than they value the money they must spend on the increased retail price (no different in kind than any other offer of higher-quality goods at higher prices). If they are correct, consumers will buy more as a result, demonstrating the falsity of the supposed consumer harm.

This is why price maintenance is not more widespread. It is used where producers believe that intensive in-store retail-sales promotion (e.g., large displays of inventory, demonstrations, technical advice, training, or a highly-motivated sales staff) is essential to most effectively market their product. Those services are costly, requiring a price sufficient to pay for them.

Unless producers have the ability to stop price-cutters, some retailers will steal sales from "full-service" retailers by lowering prices instead of offering those services manufacturers believe are most effective for their products. This free-riding on other retailers undercuts their viability and the intensive-service-promotion strategy as well. If consumers valued those services more than they cost, they have lost a valuable option; if not, their approach would be outcompeted by rivals' more effective price and promotion strategies, and no antitrust case would be necessary to eliminate it, because producers' self-interest would lead them to the same result.

The questionable logic of the per se prohibition of resale price maintenance also ignores the fact that achieving similar results is legal if a producer retailed its own product directly (it can simply not sell for less through its own retailers) or through other nonprice restrictions. The same result cannot be anticonsumer in one case but not in another.

Responses to the 2007 Leegin Decision

The first notable response to Leegin's move toward antitrust sanity, at least if antitrust's proconsumer rhretoric is to be accepted, came in Maryland. On October 1, 2009, that state undid the expansion of consumer choices created by Leegin, reimposing the prior federal proscription for sales in Maryland, including internet sales.

However, the reporting about Maryland's new law revealed a damning detail: the reason for reinstating the Dr. Miles precedent was not that it benefitted consumers, but that it benefitted the antitrust bar (while harming consumers).

Requiring plaintiffs to demonstrate consumer harm paralyzed successful lawsuits against the practice. No longer could the mere fact that a firm was a "monopolist" of its own brand be used to imply power to harm consumers. And plaintiffs were simply unable to demonstrate consumer harm. Antitrust attorney Allan Hillman, who helped draft Maryland's law, admitted as much in print, making clear that the law's real intent was reviving baseless antitrust cases (each of which employs two sets of lawyers and stimulates the overall demand for legal services to design policies to avoid liability), rather than protecting consumers.

Given the lawyer lobby's clout, similar legislation is being promoted in other states and at the federal level, signaling similar indifference to consumer well-being.

Even more recently, the New York Times reported last month that the plaintiff in Leegin — Phil Smith, the owner of Kay's Kloset, which has gone out of business absent its strategy of undercutting Leegin's promotion strategy — has filed an appeal to the Supreme Court, claiming that lower courts have made it too hard to demonstrate consumer harm. The owner's incentive is obvious — to reinstate the $4 million judgment overturned by the Leegin decision (whose magnitude shows what a great shakedown racket-price-maintenance lawsuits were for both free-riding retailers and lawyers).

The most interesting aspect of the appeal, however, involves the lawyer. According to the Times, Harvard law professor Einer Elhauge was "so concerned with the lower court decisions that he took the case pro bono." His concern? When the appeal lost at the Fifth Circuit Court of Appeals, it held that that practice "does not create concern unless the relevant entity has market power." Elhauge's claim is that such a holding acts to "drastically restrict" challenges to allegedly anticompetitive actions. In other words, his objection is that actually demonstrating consumer harm is too high a standard for the antitrust bar, and he is trying to find a way to weasel out of the requirement and reinvigorate the very profitable lawsuits that have been stopped.

Phil Smith's words even telegraph the rhetorical subterfuge that is being attempted. He says that Brighton, Inc., the defendant in Leegin, "is the only manufacturer that makes an accessory line that matches from head to toe." Therefore, Brighton's product line should qualify as a unique product. In the language of real people, that means Brighton offers a superior product line to rivals in some customer's eyes; and the fact that those customers choose its products demonstrates that they are better off as a result. But in the convoluted language of antitrust, that would make Brighton a monopolist and reinstate the presumption of monopoly power to harm to consumers. And creating a precedent that any uniqueness of a producer or its product line is sufficient to create monopoly power (with the implication of the ability to harm consumers) would bring back all the lawsuits that Leegin has frozen.


Rather than defending competition, Dr. Miles's per se ban on price maintenance really just prevented producers from using a higher-service, higher-price strategy when they believed customers would prefer it, by making enforcement against free-riding retailers illegal. That is, it violated freedom of contract and prevented benefits to consumers. But rather than accept Leegin's efficiency-enhancing ruling (which consumers' own actions demonstrate benefits them), the antitrust bar and politicians they support are doing everything they can to circumvent it.

Unfortunately, this result is all too typical of the reality of antitrust, the history of which is full of firms who are being outcompeted — by companies that are benefitting consumers more — suing to put a stop to it. The response to Leegin's rare, sensible antitrust ruling just reiterates the fact that while antitrust has been a boon to inefficient and ineffective firms and antitrust lawyers (and the politicians they control), it has been decidedly harmful for consumers. And it reminds us of just how important competition and the consumer benefits it generates really are when it comes to America's supposedly procompetition laws.


Dominick Armentano

Dominick T. Armentano is professor emeritus in economics at the University of Hartford in Connecticut and an Associated Scholar of the Mises Institute.

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