Monday, March 26, 2007

Miles to go?

The SCOTUS revisits retail prices:, the Supreme Court will hear arguments that it should do away with its nearly century-old opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co., a decision that has meant retailers are free to price products at less than what the manufacturer thinks they should. Miles Medical, which later changed its name to Miles Laboratories, wanted to set a minimum price for its elixirs.

Although Miles Medical lost its case, the decision allowing price discounts came to be known by Miles' name.

Some economists argue that the Dr. Miles rule has outlived its usefulness and is unnecessary as an antitrust weapon in a modern economy. Consumer groups counter that the restriction has saved shoppers hundreds of billions of dollars.

....The issue at stake is the court's decision in 1911 that a manufacturer's requirement that a reseller not price the company's goods below a set minimum violates the Sherman Antitrust Act. Proponents of a change argue that such requirements should not be categorically deemed violations but should be evaluated case by case, under a "rule of reason," to decide whether they interfere with market competition.

The current case is about handbags.

Leegin Creative Leather Products is a California company that makes purses, belts and other accessories under the brand name Brighton. It said it would refuse to sell its goods to any retailer that didn't comply with its "Brighton Retail Pricing and Promotion Policy," which mostly bans discount prices for Brighton products.

....But Kay's Kloset, a women's boutique in the Dallas suburb of Flower Mound, refused to abide by the rules and placed all of its Brighton products on sale. Leegin stopped selling to Kay's Kloset, the store's business suffered, and Kay's parent company, PSKS, sued.

A jury, finding that Leegin's actions were automatically a violation of the Sherman Act, awarded Kay's Kloset $1.2 million, damages that were tripled because the actions violated antitrust laws.

....Leegin contends in its brief to the court that the Dr. Miles decision is "premised upon the antiquated common-law rule" and that it "squarely conflicts with the modern economic understanding that resale price-maintenance agreements can have significant procompetitive effects."

Such a free-market economic analysis holds that minimum resale pricing ensures retailers would make enough profit to provide better service to customers and promote the manufacturer's products. It would eliminate so-called free riding, in which a consumer might try out the latest tennis racket at the pro shop down the street and then hit the Internet to find the cheapest price.

Even if setting a minimum price hurts "intrabrand" competition by forbidding stores to set their own prices, free-market thinking holds, it doesn't affect "interbrand" competition. Not every manufacturer would take advantage of such a rule, they say, nor would any manufacturer price itself out of business.

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