Minimum Price Maintenance Agreements and the Premium Pricing Strategy

ABSTRACT There has been a significant amount of research in regard to Porter's general strategies. The research has shown that a differentiation strategy, if successfully implemented, can lead to a sustainable competitive advantage, as well as allowing the business to implement a premium pricing strategy. Much of this research, however, was conducted within the parameters of the stringent Sherman Antitrust Act, with good reason. For the past decade courts have uniformly refused to permit vertical price maintenance agreements on the grounds that they are conducive to cartels and are predisposed to exhibit anticompetitive effects. As a result, courts imposed a per se prohibition on vertical price maintenance agreements. The standard of review, however, recently changed with the Leegin decision issued in August, 2007. The holding in the Leegin case changed the standard of review from a per se violation to the more flexible rule of reason analysis. As a result, manufacturers and retailers have a greater likelihood of being able to enter into vertical price maintenance agreements, fostering an environment conducive to implementing a differentiation strategy as opposed to a cost leadership strategy. INTRODUCTION There has been a significant amount of research in regard to Porter's general strategies. The research has shown that a differentiation strategy, if successfully implemented, can lead to a sustainable competitive advantage, as well as allowing the business to implement a premium pricing strategy. Much of this research, however, was conducted with the perimeters of the stringent Sherman Antitrust Act, with good reason. For the past decade courts have uniformly refused to permit vertical price maintenance agreements on the grounds that they are conducive to cartels and are predisposed to exhibit anticompetitive effects. As a result, courts imposed a per se prohibition on price maintenance agreements. Under the per se standard, courts would invalidate any restraint in furtherance of a price maintenance agreement, without inquiring into the subject nature of the price maintenance agreement, or the actual effect of the alleged agreement. In June, 2007, however, the United States Supreme Court issues its ruling in Leegin Creative Leather Products v. PSKS, Inc. (2001), overruling the well established body of precedence, abolishing the 96 year old prohibition on minimum price maintenance agreements. As a result, courts are now required to adjudicate alleged price maintenance agreements under the more flexible rule of reason, which requires courts to utilize a balancing test to ascertain whether the vertical price maintenance agreement violates the Sherman Act. Such a ruling is beneficial to smaller retailers and manufacturers as it permits them to differentiate their product on service, fostering an environment conducive to premium pricing. Moreover, it permits the small business to compete without the detrimental effects of the economies of scale, which is critical for low cost leaders. Part II of this article will provide a comprehensive background of the legal history and development of the law pertaining to price maintenance agreements. This section will consist of a brief overview of the Sherman Antitrust Act as well as the legislative intent which assisted in establishing the scrutiny afforded to alleged violations. In addition, the concept and application of the two standards of review will be discussed. Part III will distinguish between horizontal and vertical price maintenance agreements. In addition, this section will compare and contrast the judicial scrutiny afforded to the horizontal and vertical price maintenance agreements, respectively. Part IV will focus on the Leegin case and the material reasons for applying the rule of reason in lieu of the per se standard. Part V will discuss the practical application of the Leegin case. In particular, this section will discuss the benefits afforded to businesses that are pursuing brand image or premium pricing strategies, as well as providing small business owners with a viable strategy when competing against conglomerates or wholesalers who capitalize upon economies of scale. …