Vertical Restraints

This chapter examines the law and economics of vertical restraints, though the primary emphasis is on the law. In particular, I examine agreements covering resale prices, exclusivity, and marketing territories. Section 1 of the Sherman Act applies to these arrangements. However, for reasons that I will try to make clear below, the Section 1 doctrine governing vertical restraints is a separate and peculiar set of rules. The focus in this chapter is not so much on the economics of vertical restraints, a subject that has spawned a large literature, but on the underlying tensions and contradictions in the law governing vertical restraints. RESALE PRICE MAINTENANCE Law and Justifications Resale price maintenance refers to the efforts of a manufacturer to restrict the range of prices charged by a retailer of the manufacturer's product. Typically, the manufacturer seeks to restrain price cutting. Why? The theories examined in this chapter offer several justifications, but before we consider them, we should pause to consider a problem: if the minimum resale price a manufacturer requires does not constrain the retailer, then it has no effect; and if it does constrain the retailer, then it will encourage him to turn away from the manufacturer's product. Our first problem is figuring out why a manufacturer would want to constrain a retailer of its product. Assume the manufacturer deals with a large number of retailers. To the extent that a resale price restriction affects the manufacturer, it will do so only through altering the manufacturer's revenue.