The Vertical Restraints Paradox: Justifying the Different Legal Treatment of Price and Non-Price Vertical Restraints

Over the past fifty years anti-trust theorists and economists have advanced several pro-competitive explanations for minimum resale price maintenance, or RPM. In addition, scholars have argued that non-price vertical restraints (such as territorial exclusivity) and RPM have similar effects on price and quantity and should therefore be treated similarly by law. Nearly thirty years ago, the US Supreme Court ruled that non-price vertical restraints should be subject to a rule of reason, acknowledging their pro-competitive potential. Since no explanation has been forwarded to justify treating RPM differently, there seems to be good reason to subject RPM to a rule of reason as well. And, indeed, a divided US Supreme Court has recently decided to overrule the longstanding per se illegality rule that was, for nearly a century, applicable to RPM. In the following I argue that the approach still upheld by policy makers in most jurisdictions, namely the per se prohibition on RPM, is economically justified. I show that all pro-competitive explanations for RPM suffer from a common flaw, the possibility of non-price competition, which challenges RPM's ability to achieve any of the pro-competitive goals attributed to it. I then show that non-price vertical restraints are capable of achieving the pro-competitive goals that RPM is incapable of achieving. This justifies both applying a per se illegality rule to RPM and applying a different rule, namely a rule of reason, to other vertical restraints.