Prepared Remarks of


                         Kevin J. Arquit
                            Director


                      Bureau of Competition
                    Federal Trade Commission

                           Before the

                    American Bar Association
                    Section of Antitrust Law



      "Resale Price Maintenance: Consumers' Friend or Foe?"



                         August 12, 1991
I. Introduction
     Good afternoon.  It is a pleasure to be here today to talk
with you about resale price maintenance.  RPM is back in the
spotlight.  The Commission recently has entered into two RPM
consent orders, both of which have received a great deal of
attention.  Further, the Senate has passed a bill, and a House
committee has reported a bill, codifying the per se rule against
RPM and modifying the evidentiary requirements for proving an
agreement on price in cases involving terminated dealers.  The
economic effects of RPM remain a subject of lively debate, and
opinion is still divided on whether RPM enforcement is in the
public interest.  Today I will discuss several efficiency and
anticompetitive rationales for the use of RPM, as well as the
Commission's recent activities in this area.  I should note that
these remarks represent my views and are not necessarily those of
the Commission or any individual Commissioner.
     Obviously, one reason for our interest in RPM is the fact
that the Commission is a law enforcement agency with an
obligation to enforce the will of Congress and the courts.  Where
our staff finds clear evidence of a per se violation we will, of
course, recommend to the Commission that enforcement action be
taken.  We are most interested in acting against egregious
violations, such as cases involving express agreements on price
throughout a supplier's distribution network.  But we are also
interested in finding those cases where the practice in question
is most likely to harm consumers, because we want to focus our
enforcement resources on instances in which consumer injury
appears greatest.  In addition to affecting the allocation of our
resources, the apparent degree of consumer injury may affect the
remedy we seek.
     While this speech is not intended to provide a final
resolution to the lively debate about RPM, it may suggest how we
approach our enforcement responsibilities.
     I will start with a brief description of our recent law
enforcement actions in the RPM area for those of you who may not
be familiar with them.  In Kreepy Krauly, the complaint alleged
that the respondent, a manufacturer of automatic swimming pool
cleaning machines, systematically entered into written agreements
with its dealers to maintain retail prices.  Our consent order
prohibits the firm from engaging in the practice in the future.
     More recently, the Commission accepted for public comment a
consent order with Nintendo of America to settle allegations that
the firm fixed the prices at which dealers advertise and sell
Nintendo home video game hardware to consumers.  The consent
order prohibits Nintendo from agreeing with any dealer on the
price at which the dealer may advertise or sell any Nintendo
products to consumers.  The order also prohibits Nintendo from
pressuring or coercing any retailer who chooses to discount
Nintendo products, requires the firm to tell its dealers in
writing that they can sell the products at whatever price they
choose, and, for a period of five years, prohibits the firm from
terminating any distributor because of that distributor's resale
price.
     The Commission, of course, is not alone in focusing on the
RPM area.  Recently the Senate passed, and the House Judiciary
Committee reported, bills that would ease the showing necessary
for plaintiffs to establish an unlawful resale price maintenance
agreement.  Both bills would codify the existing per se
prohibition against minimum RPM, but not the per se prohibition
against maximum RPM.  The Commission has not taken any formal
position on the legislation, and my comments are not intended to
take any stance on the legislation.
     One purpose of the proposed legislation, of course, is to
ease the evidentiary burden required to show an unlawful
agreement to fix resale prices.  Under the Monsanto and Sharp
cases, it is clear that a plaintiff must demonstrate an agreement
on price or price levels, and that the termination of a dealer
who does not comply with a supplier's unilaterally-imposed price
policy is not actionable, even if the termination is in response
to other dealers' complaints.  These cases have fortified the
Colgate doctrine, which allows a supplier to "exercise his own
independent discretion as to parties with whom he will deal."
     Some questions remain as to where the Colgate-protected
unilateral conduct ends and an agreement on price begins under
the current law.  For example, how often can a supplier remind
its dealers that they might be terminated if they discount?  We
know from Monsanto that it is not enough to show that a dealer
conformed to a supplier's suggested price.  Rather, there must be
evidence that the dealer communicated its acquiescence or
agreement, and that this was sought by the supplier.  I would
suggest that a supplier is still taking a significant risk if it
does more than communicate its price policy to dealers.  Any
action that seeks to elicit dealer acquiescence in the supplier's
pricing policy remains legally suspect.
     A showing of an agreement can be based on ambiguous
evidence.  In Monsanto itself, in finding an agreement on price,
the Court pointed to evidence that Monsanto officials threatened
not to provide adequate supplies to a discounter during the
"shipping season" for the product in question."  In addition,
the Court referred to meetings at which Monsanto officials
promised retailers to "ge[t] the market place in order" by
ensuring that retailers not "deviate downward" from the suggested
retail price."  The mechanism cited for the discouragement of
price deviations was the "risk of being deleted."  This
suggests that a supplier can threaten to terminate price cutters
when it announces its prices, but not in response to price
cutting in the market.
     I think that Judge Posner's decision in Isaksen v. Vermont
Castings, Inc. sets forth a reasoned approach to identifying an
"agreement" in the post-Monsanto era.  In Judge Posner's view, a
showing of manufacturer efforts to persuade dealers to comply
with minimum price levels, coupled with actual dealer compliance,
is sufficient to establish an agreement to fix resale prices. 
Agreement may be communicated through conduct, as well as through
words; an agreement can be "implicit, or signified by conduct in
lieu of promissory language."  Thus, a manufacturer's threat to
a discounter to "mix up orders," followed by a price increase by
the discounter because of the threat (albeit a year after the
threat was made) was sufficient for a finding of an agreement. 
The basic point is that the Colgate doctrine permits suppliers to
terminate discounters; it does not permit suppliers to persuade
the discounters, through pressure or otherwise, to stop
discounting.  Once the discounters comply with that persuasion,
we have a meeting of the minds or, in the parlance of Sharp, an
agreement on price or price level.

II.  The Paradox of Resale Price Maintenance

     Now we will move on to the theoretical rationales for RPM. 
Let's start with the basics.  Resale price maintenance is a
vertical restriction by which a supplier controls the resale
prices of its dealers.  Minimum RPM, the more common form,
requires dealers to charge prices at or above a certain floor
level.  Why would suppliers want to use RPM?  It would appear
that suppliers would ordinarily be interested in maintaining the
lowest possible retail prices for their products, because low
prices maximize their sales -- a low dealer margin is the
equivalent of buying dealers' services cheaply.  Moreover, a
supplier should be able to exercise any market power it has by
charging a high wholesale price without having to resort to RPM. 
Thus, supplier imposition of minimum RPM -- that is requiring
dealers to charge premium prices -- seems peculiar at first
glance as contrary to a supplier's self-interest.
     Many theories have been advanced purporting to explain
supplier use of RPM -- some procompetitive and others
anticompetitive.  The theories that I will discuss today include
several efficiency motivations, as well as supplier collusion,
dealer collusion, and non-collusive theories of consumer injury. 
There is much disagreement in the antitrust community about the
degree to which each of these theories underlies the actual use
of RPM in the marketplace.  This disagreement has resulted in a
variety of RPM policy prescriptions, ranging from per se
illegality to per se legality.
     While the actual motivations underlying individual uses of
RPM are seldom obvious, the variety of circumstances in which RPM
has been used suggests that each theory may be applicable under
certain circumstances.  It appears that no single theory can
explain all, or perhaps even a majority, of the cases of RPM. 
Therefore, rather than attempting to determine the "real"
motivation behind all instances of RPM, it may be more
appropriate to acknowledge the possibility of several potential
motivations.
     As the F.T.C. Bureau of Economics Report authored by Tom
Overstreet notes, a per se standard could be the appropriate
rule even if there are a substantial number of instances in which
RPM is motivated by efficiency.  If the efficiency-enhancing
instances are relatively few, or if there is not a great
efficiency loss if alternative mechanisms are utilized to
accomplish the efficiencies, then net social benefits may accrue
from a per se rule.  Further, per se rules result in lower costs
of litigation than rule of reason analysis, and per se rules can
increase the predictability for businesses and enforcement
agencies.  It is beyond the scope of this speech to attempt to
weigh into the controversy over whether RPM should be considered
a per se offense, but it may make sense to step back and take a
look at the various rationales that motivate a supplier to
undertake the practice.

III. Efficiencies

     While it is the anticompetitive use of RPM that underlies
the current per se rule, I want first to discuss the efficiency
theories, which have received the lion's share of the attention
in recent years.  Most commentators agree that RPM, at least in
certain circumstances, can result in some efficiencies.  The
debate is over the degree to which efficiencies result, the
instances where efficiencies appear more likely than
anticompetitive results, the extent to which alternative means
can achieve these efficiencies, and the appropriate legal rule
given the possibilities of both efficiencies and anticompetitive
effects.
     Proponents of RPM argue that the restraint is used to induce
dealers to provide services.  The RPM-imposed margin, they argue,
is not a "profit" margin, but rather a payment from suppliers to
dealers that enables dealers to cover their costs of providing
sales and support services.  For example, detailed product
demonstrations by well-informed salespeople may in some instances
be encouraged through RPM, and the provision of such services may
be in the interest of both the supplier and the consumer.  But
why not simply contract with the dealers for such services?  RPM
proponents claim that in many instances such contracts may be
costly to create, monitor, and enforce, and that service
competition among dealers will generate the appropriate services
more efficiently than explicit contracting.   Difficulties in
drafting and enforcing complex contracts requiring dealers to
provide what often can be nebulous services (such as "attentive
salespeople" or "attractive shopping environment") may strike a
familiar cord with many of you.  On the other hand, it is not
intuitively obvious how providing a minimum dealer margin gives a
dealer clairvoyance to divine the desired level of services. 
Perhaps, in some instances, dealers will have better knowledge of
the necessary details of effective promotion than suppliers.
     But if service competition is the goal, why not simply allow
dealers to compete with each other, and charge the margin that
the market will bear for these added services?  Economists,
beginning with Lester Telser, claim that without RPM, dealers
that do not provide these services may "free ride" on those that
do.  For example, a customer may go to a full-service dealer,
take advantage of detailed product demonstrations, receive well-
informed answers to technical questions, and be taught how to use
the product.  The customer then is free to go across town (or to
a catalogue) to purchase from a discounter.  Without vertical
restrictions such as RPM, the theory goes, the full-service
dealer cannot protect himself from such free riding, and thus may
not have the incentive to continue to provide these costly
services.  Suppliers who consider such services important in
order to raise the value of their products argue that it may not
be possible to provide what they believe to be the best
combination of price and service for their product without RPM.
     This free-rider theory may not have broad applicability, as
many have noted, because outside of technical goods such as
computers and stereo equipment, pre-sale services can be
relatively unimportant.  Nonetheless, RPM has been used in a wide
variety of products including many in which costly pre-sale
services appear less critical, such as apparel and drug store
products.  The use of RPM in such sectors may suggest
anticompetitive motivations, although the economists tell us that
this is not necessarily the case.
     Efficiency theories with broader applicability than the
Telser theory have been offered.  For example, Marvel and
McCafferty have argued that "nontangible" services are offered
by many upscale retailers, and that discounters could free ride
on these services absent RPM.  As they put it, many customers
rely on upscale retailers to "certify" high quality and or high
fashion.  That is, the customer infers from the carrying of a
certain line by an upscale retailer that the product has been
pre-screened and concluded to be desirable from a quality or
fashion standpoint.  Such certification is arguably costly to
retailers because they must hire sophisticated buyers and sample
a broad range of potential sources in order to provide the latest
in fashion to their customers.  Absent RPM, customers could
browse through an upscale store to get acquainted with the latest
fashions, then make their purchases at discount stores.
     Although each case has to be analyzed in terms of its facts,
it would appear, as a general matter, that big-ticket items with
extensive pre-sale services such as consumer electronics are more
susceptible to consumer free-riding than high fashion goods. 
Professors Scherer and Ross also express skepticism about the
quality-certification theory.  They point out that if such free-
riding is limited in scope, high-amenity retailers will be able
to charge prices sufficient to cover the costs of these amenities
without the necessity of resale price maintenance.
     There exist, however, still other theories of efficiency-
motivated RPM.  One such theory argues that RPM creates
incentives for dealers to provide services, but not by
eliminating the ability of discounting dealers to free-ride on
full-service dealers.  According to this theory, dealers may
not have adequate incentive to engage in activities, such as
after-sale servicing, that the supplier considers important. 
Because the interest of dealers and suppliers do not coincide,
the competitive process among dealers, absent RPM, may not result
in certain important services being provided.  Consider the
incentive to provide after-sale service.  Dealers that have not
made long-term investments in establishing the quality and
reputation of a particular supplier's product may not have a
strong incentive to protect the goodwill of the supplier through
after-sale service.  This "bias" in the dealer's incentive is
fueled by the fact that much of the adverse customer reaction to
inadequate servicing may fall on the supplier.
     The distinction between this theory articulated by Klein and
Murphy and the Telser theory is somewhat subtle.  One way to
think of the distinction is that the Telser story is a
"horizontal" free-riding story, because RPM prevents certain
dealers from free-riding on other dealers, while the Klein and
Murphy theory is a "vertical" free-riding story, because RPM
prevents dealers from free-riding on manufacturers.  For example,
if a product breaks down and the dealer does not adequately
repair it, the theory goes, many customers will blame the
manufacturer for producing a shoddy product, not the dealer for
having poor servicing capabilities.  If dealers are provided with
an RPM-imposed margin, and are subject to being terminated if
they do not provide adequate servicing, they may be induced to
provide a greater supply of such costly services.  However,
dealers that provide inadequate service clearly will hurt their
own business to some extent, and this incentive may be expected
to be sufficient to induce adequate servicing in many cases.
     The vertical free riding theory may not be limited to just
after-sale service, but may also be relevant for inducing
promotional activities, such as providing additional sales effort
or preferred shelf space.  Given an RPM-imposed margin, dealers
may be more willing to incur the costs of promoting a supplier's
goods.
     For example, this theory has been said on occasion to
underlie the use of RPM in the sale to wholesale distributors of
certain perishable products, where refrigeration and product
rotation can lead to spoilage and a loss of goodwill for the
supplier.  Dealers could "free ride" on the supplier by not
handling it properly, and thus save the expense of such handling. 
RPM could provide dealers with compensation for the handling
costs, and the threat of termination would further motivate the
dealers to handle the product as specified by the supplier.
     One difficulty that I have in completely accepting this
theory is that it conceivably could be applied to a broad range
of industries, indeed any market in which dealer sales,
promotion, pre-sale or after-sale servicing activities are
valuable.  Thus it appears to be a theory that would be easy for
defendants to raise in instances where the true motivation for
RPM is anticompetitive.
     This theory assumes that margins plus the threat of
termination are necessary to induce adequate service.  Query why
in many instances the threat of termination alone doesn't suffice
to achieve the desired level of service.  Where it does suffice,
imposition of RPM would appear less likely to have an efficiency
rationale.
     The difference between this "vertical" free-riding theory
and the quality certification theory illustrates how RPM may have
efficiency justifications in industries with very different
characteristics.  Quality certification implies a dealer signal
of quality which is valuable to manufacturers, while the vertical
free-riding story implies a manufacturer signal of quality which
is valuable to dealers.  For some products, such as component
stereo systems, manufacturer reputation serves as a strong signal
of quality, but for others, such as fashionable dresses, dealers
serve a relatively strong role in certifying quality.  RPM, at
least in theory, could increase efficiency in both types of
markets.
     In addition to the services potentially associated with RPM
discussed thus far, one dealer service of interest to
manufacturers is carrying a large inventory of a supplier's
goods.  Dealers may not be willing to carry a large inventory of
certain goods, such as new styles, when demand is highly
uncertain.  Suppliers may induce dealers to carry a large
inventory -- with accompanying high costs of storage space,
handling, financing, and risk of low demand -- by "guaranteeing"
a certain margin through RPM.  The costs of demand uncertainty
is thus shifted from the dealer to the supplier, who may be more
willing to take on such risks.  In this way, product
introductions, including procompetitive new entry, conceivably
could be facilitated by this practice.  While it is an
interesting argument, I must admit I am skeptical about accepting
it as a general proposition.  Alternative means of compensating
dealers for the risk of stocking newly introduced products that
have less anticompetitive potential, such as a liberal returns
policy, must be available in some instances.
     Another efficiency story has been advanced more by
businessmen interested in instituting RPM than academics, but
whether this increases or decreases the theory's credibility you
can decide for yourself.  The theory is that suppliers do not
want their goods used as loss leaders, and prevent this by using
RPM.  But loss-leading would seem to increase the supplier's
sales at no extra cost to the supplier, so one might think that
loss leading is in the supplier's interest.  The response is that
such gains to the supplier are transitory; the practice
ultimately leads many dealers that compete with the loss leading
supplier to discontinue carrying the supplier's product, because
they cannot sell it at a high enough price to make it worth the
selling effort and shelf-space it requires.  Reduced retail
availability for the supplier's product may result, along with an
accompanying loss of sales and reputation.  Further, loss leading
retailers may be low-quality retailers that are in effect "free
riding" on the supplier's reputation, and this may result in the
supplier's reputation being eroded because of its association
with the low-quality retailer.
     I find this theory somewhat unconvincing because it requires
that dealers be willing to discontinue carrying the very high-
profile products that are attractive to use as loss leaders. 
Would a grocery be willing to discontinue carrying Oreo cookies
or Kellogg's Corn Flakes even if sales of these products became
unprofitable in a narrow sense?  Surely dropping such high-
profile products would adversely affect the grocery's sales more
broadly.
     A similar sounding theory is that suppliers impose RPM as a
way to encourage less efficient dealers to carry products in
order to increase the retail availability and exposure of the
product.  While suppliers presumably have an interest in
providing their products through the most efficient distribution
channels, there may be additional channels that are less
efficient, yet provide additional desirable exposure and
availability to products.  For example, a toothpaste manufacturer
may most efficiently distribute its product through mass
merchandisers and large chain drug stores.  But making the
product available at less efficient (at least with respect to the
distribution of that particular product) corner drug stores and
convenience stores may add substantially to the exposure of the
product and thus its sales.  Without RPM, according to this
theory, these outlets may be unwilling to stock the toothpaste,
because the higher prices they must charge compared to other
retailers will lead to limited sales.  By leveling the playing
field for the different categories of retail competitors, RPM can
provide a stronger incentive for these less efficient outlets to
carry the product.  Thus in effect, RPM results in a marketing
service for the manufacturer, which may increase his ability to
compete with other toothpaste manufacturers.
     These last two stories seem necessarily to imply higher
prices for consumers without any apparent additional customer
service, unlike the other theories, which are based on the idea
that the manufacturer is buying services for its customers from
its dealers.  But the theories also imply wider availability of
the product.  The wide availability and exposure of the product
(which could be services valued by consumers) are a means of
marketing the product, and perhaps such marketing efforts can be
procompetitive.  Yet the wider availability comes at a cost. 
More efficient dealers are prevented from passing on cost savings
to the customer.
     One problem with many of these efficiency stories is that
RPM, by itself, does not provide a direct incentive for dealers
to provide the particular services that suppliers want, whereas
explicit contracts with dealers would.  For example, a supplier
may wish for its dealers to demonstrate products, but with RPM,
dealer competition may result in dealers "spending" their RPM-
induced margin on discounted accessories instead.  Only if
nonprice competition can occur solely through the means that
suppliers want to encourage would RPM alone necessarily result in
the desired services.  Thus in addition to RPM, suppliers must
continue to monitor dealers' provision of services, and perhaps
threaten dealer termination if services aren't adequately
provided.  RPM's ability to reduce costly contractual problems
between suppliers and dealers appears less impressive when viewed
in this context.
     While many of the efficiency stories have intuitive
credibility, they are generally not well-documented and efforts
to apply them to some industry contexts seem strained.  For that
reason, many remain skeptical of the prevalence of RPM-induced
efficiencies.  The story we hear most often from RPM proponents
in response to expressions of skepticism about these efficiency
stories is that if RPM is not used as a part of a horizontal
collusive agreement, it must be efficiency motivated, or else it
would not be in the interest of a supplier to impose the scheme
unilaterally.  Why would suppliers impose a margin on their
distributors if not to obtain some service benefits?  Higher
retail prices will reduce sales without generating profit for the
supplier.  Thus, if the supplier can exercise unilateral market
power, it will be preferable to raise the wholesale price rather
than in effect to "give" the monopoly profits to dealers through
an RPM scheme.
     To my mind, this argument still leaves unanswered the
question of just what services are being provided for, say, a
pair of Jordache blue jeans at Saks Fifth Avenue that aren't also
provided at K-Mart?  As Bob Pitofsky has asked, don't blue jeans
in both stores get laid on a table, picked up by customers and
taken to the dressing room, tried on and purchased?
     I will venture an answer, admittedly with some skepticism in
my own mind, at least to its general applicability.  You can
judge for yourself its degree of plausibility.  Perhaps at Saks
the salespeople are more numerous and courteous, as well as more
knowledgeable about fashion.  Perhaps Saks keeps a broader
inventory of each style, size and color in the Jordache line, so
that they almost always will have the Jordache item that a
customer wants.  Perhaps the lines at the cash register are
shorter at Saks, because they are heavily staffed so that
customers will not have to wait as long.  Perhaps the dressing
rooms are more pleasant than those at K-Mart.  Perhaps even the
table on which the jeans are laid at Saks is more expensive than
the table at K-Mart.  And perhaps Saks keeps only the latest
fashions on its shelves, so that customers obtain some assurance
of high fashion by shopping there, even if they haven't studied
the latest fashion magazines.
     Even so, however, the question remains as to how RPM in fact
achieves the desired level of service.  The fact that both high
and low end retailers sell many types of products at near uniform
price suggests that setting the resale price is not of talismanic
significance in causing all retailers to provide a uniform level
of services.

IV.  Anticompetitive Theories

     Most commentators also agree that resale price maintenance
can be used to facilitate collusion, either among suppliers or
among dealers.  Indeed, it is because of the collusive use of RPM
that the Supreme Court, in its Sharp decision, rationalized
continued per se treatment of RPM, and distinguished non-price
vertical restraints which are viewed under the rule of reason.
     Let us look at supplier collusion first.  How can RPM
facilitate collusion?  For a collusive agreement among suppliers
to be successful, it must be possible for the conspirators to
detect cheating.  When suppliers sell to dealers who then resell
the goods, it often may be easier to monitor the retail price
than the wholesale price.  By fixing a minimum retail price
through RPM, a supplier's incentive to cheat on the agreement by
cutting the wholesale price is reduced, because the dealer, not
the supplier, will reap the profits from the price cutting. 
Simply stated, RPM can aid in the detection of supplier cartel
cheating, as well as reducing the incentive to cheat, and thus
can facilitate the maintenance of collusive pricing.
     But it should also be noted that RPM does not necessarily
offer a panacea that enables suppliers to collude in spite of
other industry characteristics that inhibit collusion.  For
example, if dealers can affect a supplier's sales substantially
through their actions -- for example by giving the supplier's
product preferred shelf space or adding value to the product -- a
supplier could still profit by cutting price to a dealer, and
ultimately such actions may undermine the collusive agreement. 
In many cases, however, these actions of the dealer will also be
detectable by the supplier's competitors, and thus continue to
signal to them that a rival may be cheating on the cartel
agreement.
     Now let us turn to the possibility of RPM facilitating a
collusive agreement among dealers, either at the retail or
wholesale level.  Dealer competition often is characterized as
fiercely competitive, and thus a facilitating device such as RPM
may be necessary in attempts to collude.  If dealers cannot
police an agreement among themselves, they may induce suppliers
to impose RPM, and thus to act as the cartel "enforcer."
     One variant of dealer collusion we would look for entails
dealers, facing the prospect of a new form of competing and more
efficient distribution, inducing suppliers to impose a minimum
price through RPM.  Any entrant would then be prevented from
being able to pass on its efficiencies and the incumbents would
be insulated from competition that ultimately would benefit
consumers.  For example, it has been noted that the rise of mass
merchandisers, supermarkets, and department stores seems to be
responsible for a rise of support for RPM from more traditional
retailers.
     Empirical studies suggest that some dealers in the past have
joined together, often through trade groups, to pressure
manufacturers to institute RPM.  Thus, although dealer cartels
may appear at first blush to be uncommon, because retail and
other distribution markets tend to be more atomistic and entry
generally is easier into retail markets, the empirical evidence
suggests that dealer cartels are a valid concern.
     As noted at the outset, it would not appear to be in the
interest of suppliers to have their dealers collude, because
higher dealer profit margins imply lower sales and lower profits
for the supplier.  Thus, it appears that dealers must have a
credible economic threat over suppliers, such as the threat of a
boycott.  If suppliers have alternative distribution channels
available to them, dealers will have little economic leverage
over suppliers.  Further, an RPM scheme imposed by a dealer
cartel may not work if some suppliers that sell competing
products do not participate in the agreement.  Thus with this
collusion theory, "cheating" at both the supplier and dealer
level is possible.
     These theories of supplier and dealer cartels may appear to
beg the question, "Why is a legal rule against RPM necessary when
the underlying collusion already is illegal?"  Let me offer two
answers.  First, the collusive pressures leading to the RPM in
many instances may not be detectable or actionable, but RPM
frequently is both.  As Professor Areeda has argued, informal
pressures and "quasi-collective" actions can bring about
anticompetitive RPM in instances in which a strict conspiracy
standard may not be met.  Parallel action by powerful retailers
that falls short of a legally-cognizable conspiracy may produce
the same results as a horizontal cartel -- the unjustified
elevation of retail prices obtained through pressure on the
supplier.  Second, non-collusive theories of consumer injury, to
be discussed next, may have some validity.
     Theories of how RPM can be harmful to consumers when not
used as a means of facilitating a dealer or supplier cartel have
not been as widely discussed or accepted as the collusive
theories.  But these theories appear worthy of consideration.
     William Comanor has argued that while RPM may well induce
the provision of services, many customers may be stuck with
paying a higher price for services they don't want.  Even if
these customers do not consume these services, they are "forced"
to pay for them if an unbundled package is not available.  For
example, a large number of computer aficionados may need little
or no pre-sale service because of their expertise.  Computer
novices, on the other hand, may place high value on these
services.  If personal computers are not available without RPM-
induced services, the aficionados (the so-called inframarginal
consumers) must pay for services they don't want.  The economic
cost to the aficionados may more than offset the benefits
provided to these other customers who value these services.  But
while RPM conceivably can have a welfare-reducing effect in this
way, Comanor's argument has come under some criticism.
     First, if a large number of consumers do not demand the RPM-
induced services, and the supplier faces competitors, those
competitors can be expected to provide low price/low service
alternatives.  Second, this theory begins with the presumption
that the services induced by RPM are valuable to some consumers,
thus leaving us with the difficult task of judging in which cases
the services are excessive.  Further, Comanor's theory is
potentially not limited to RPM, but is applicable to a broad
range of business decisions about product features and quality. 
For example, a supplier of luxury automobiles may include as a
standard feature in all its cars a powerful stereo that is not
valued highly by some of its customers.  The provision of such
"excessive quality" is difficult to distinguish from RPM-induced
excessive services.  Comanor's theory is therefore intriguing,
but I am not entirely sure how much practical antitrust
application it has.
     Bob Pitofsky has argued that the intra-brand competition
prevented by RPM may be more critical to consumers than any
services encouraged by RPM, at least in some cases.  Suppose
that K-Mart and Saks both carry Jordache jeans; K-Mart's pricing
should apply some competitive pressure on Saks.  RPM would reduce
the degree of competitive pressure that K-Mart could exert on
Saks.  Furthermore, Pitofsky argues that this intra-brand pricing
pressure at the retail level can place pressure on Jordache to
lower its wholesale price.  It is difficult for many skeptics of
the RPM efficiency stories to believe that such intra-brand
competition is not more valuable than the services that might be
encouraged through RPM.  Indeed, Pitofsky also points out that an
additional competitive benefit that may be suppressed by RPM is
the ability to pass on to consumers any efficiencies realized by
more efficient dealers.
     But is intra-brand competition needed to prevent
anticompetitive pricing by Jordache?  Wouldn't inter-brand
competition, from such sources as Calvin Klein and Gloria
Vanderbilt, if not also Levis, Wrangler, and Lee's, exert
substantial pressure on Jordache's prices?  Even so, there could
still be a price premium that might be eliminated by intra-brand
competition.  In highly differentiated and highly advertised
product markets, it is certainly possible that suppliers are
distant enough substitutes from each other that some premium can
be charged.  But then if this is the case, why would a supplier
with market power in effect give some of its profits to dealers
through RPM?  Perhaps the dealer has some market power itself
with respect to the supplier, and the two negotiate a "bilateral
monopoly" agreement whereby they share the monopoly profits
through RPM.  Professor Areeda discusses how powerful dealers may
individually be able to induce RPM from suppliers.
     But why would a dealer with power over its supplier choose
RPM rather than simply negotiating lower wholesale prices with
the supplier?  Note that a dealer would not want RPM to be
imposed just on itself without the restraint also being imposed
on its rivals, or else it would be at a pricing disadvantage. 
The dealer must have sufficient power to induce the supplier to
impose RPM throughout its market.  It might appear that a
powerful dealer could induce a larger margin if it negotiated for
a discounted wholesale price only for itself, rather than
requiring that an RPM-imposed margin be placed on its competitors
as well as itself.
     Areeda answers that a dealer may realize that some of its
competitors may have a similar ability to obtain lower wholesale
prices.  For that reason, competition in the retail market might
prevent the dealer from realizing profits from the lower
wholesale price.  With RPM, the dealer margin is protected. 
Dealers therefore might prefer RPM to lower wholesale prices. 
Note how this theory, though it does not require explicit dealer
collusion, is driven by the actions of dealers who have some
degree of market power.  Some amount of dealer power thus appears
to be a common denominator for many of the anticompetitive
theories of RPM.
     Lastly, perhaps a supplier may in some instances guarantee
an RPM-imposed profit margin to a dealer in exchange for the
dealer not carrying competitors' products.  Perhaps the
dealer's services are crucial for suppliers in the market.  RPM
could be the quid pro quo for an exclusive dealer agreement that
makes entry into competition with the supplier more difficult.
     In conclusion, it appears that consumer injury may occur
from both collusive and non-collusive uses of resale price
maintenance.

V.  Maximum RPM
     Before closing, I want to raise one additional issue
regarding RPM for which the proper policy prescription is much
less controversial.  The Supreme Court's recent decision in
Atlantic Richfield Co. v. USA Petroleum Co. suggests that the
day may not be far off when we witness the demise of the per se
prohibition against maximum RPM established in Albrecht v. Herald
Co.  Moreover, the proposed legislation concerning RPM that
would, among other things, codify the per se rule against RPM by
its terms, would not apply to maximum RPM.  These are not
trivial developments given that approximately 30% of private RPM
litigation in a recent sample were maximum RPM cases.
     The Court directly observed in the Arco case that maximum
RPM may be used to counteract any market power that a distributor
may gain from exclusive territorial agreements.  As the Court
noted, in those circumstances, maximum RPM tends to "drive prices
toward the level that would be set by intense competition." 
Maximum RPM may also be useful to manufacturers for ensuring that
their promotional discounts are passed on to consumers.  One
point, however, bears further mention.  Maximum RPM may be
anticompetitive when it is used as a subterfuge for minimum RPM. 
It is the economic effect of a pricing policy that should
control, not the label chosen by the one imposing the restraint.
     But this caveat should not undercut the basic thrust of
Arco.  And it appears that Arco signals a willingness to analyze
maximum RPM under the rule of reason.  Perhaps the most
significant hint of the Court's readiness to do so was its
statement that the "procompetitive potential of vertical maximum
price restraint is more evident now than when Albrecht was
decided, because exclusive territorial arrangements and other
nonprice restrictions were unlawful per se in 1968."  This
statement seems to demand reconsideration of the per se
prohibition in light of the new learning.  Moreover, this is an
issue on which there seems to be wide agreement embracing both
proponents and opponents of the other flavor of RPM -- minimum
price restraints.
     Lastly, an insight of Judge Posner in a maximum RPM case
that predated -- and perhaps also presaged -- Arco, seems worthy
of note.  In this case, a manufacturer, who had given its deal-
ers exclusive territories, ran special promotions several times a
year, when it offered and advertised special deals on its
product.  During these promotions, it would give its dealers a
price break.  To make sure that the dealers passed on the price
break to consumers, it threatened to terminate dealers who sold
the product at a price higher than the advertised price. 
According to Judge Posner,
          If it is lawful to advertise a retail price, it
          should be lawful to take at least the minimum
          steps necessary to make that advertising benefi-
          cial.  It would be pretty embarrassing for a manu-
          facturer who had advertised a special retail price
          to be bombarded by complaints from consumers that
          dealers were refusing to sell to them at that
          price.  Such refusals would make the advertising
          misleading and might even expose the manufacturer
          to sanctions under the Federal Trade Commission
          Act or counterpart state regulations.  So if re-
          tail price advertising by the manufacturer is to
          be feasible the manufacturer must be allowed to
          take reasonable measures to make sure the adver-
          tised price is not exceeded.

Judge Posner offers a highly persuasive and eloquent explanation
of the procompetitive uses of maximum RPM.  The short of the
matter is that maximum RPM, to go back to the title of this
speech, is much more likely to be consumers' friend than their
foe.  It offers a mechanism for ensuring that manufacturer
discounts are passed on to consumers.  Thus the mounting
indications that maximum RPM should not be automatically
condemned portend a positive development for consumers.

VI.  Final Comments

     In these remarks, I have outlined a variety of theories
concerning resale price maintenance, both procompetitive and
anticompetitive.  There seems to be agreement that both
efficiencies and anticompetitive effects result from RPM in some
instances.  But proponents of efficiency theories argue that RPM
is predominantly beneficial to consumers and proponents of the
anticompetitive theories argue that RPM is predominantly harmful. 
Not sharing the confidence of either camp, I will not venture a
similar leap of faith today.
     Thank you for the opportunity to discuss resale price
maintenance with you.  I will be happy to take some questions.