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F.M. Scherer on Resale Price Maintenance

The U.S. Supreme Court has struck down an antitrust law flatly prohibiting manufacturers and retailers from setting minimum retail prices on consumer products. Critics of the ruling claim that consumers will end up paying more for certain products, but supporters say the ruling will help promote competition in the marketplace. Frederic M. Scherer, Aetna professor of public policy emeritus, who filed an amicus curiae brief in the case, argues that the true impact of the ruling is more complicated, and will vary on a case-by-case basis. Scherer is a former chief economist at the Federal Trade Commission. His writing and research focuses on industrial economics and the economics of technological change.

Q: You argue in the amicus curiae brief that the 'rule of reason' should be applied to specific cases of resale price maintenance. Please explain.

Scherer: There has been a very up-and-down history of what is called resale price maintenance (RPM). In 1911 the Supreme Court declared it illegal per se; that is to say, it just cannot be done legally, no defenses whatsoever. In the 1930s the Congress changed 180 degrees and essentially made it legal, and in 1975 the Congress turned 180 degrees and made it illegal per se again. The controversy in recent years is over whether it should be illegal per se, that is to say, no defenses, or whether a rule of reason should be pursued, that is to say, one can find illegality only if it is shown to injure consumers or otherwise not to have valid defenses. That is what the argument is all about. I have long been in favor of a rule of reason approach. However, I have also long thought that resale price maintenance can do considerable harm to consumers, and therefore you need a toughly structured rule of reason.

Q: You also argue in your brief that appropriate standards will have to be designed in order to properly judge the merits of each RPM case. What are the standards you might suggest?

Scherer: My friend Bill Comanor and I filed an amicus curiae brief with the Supreme Court. We argued that rule of reason cases are very difficult to pursue unless you have clearly articulated criteria that trigger the case. Resale price maintenance becomes a real problem when it becomes ubiquitous, when consumers don't have low price discount alternatives. Our argument was that litigation should be triggered when resale price maintenance comes to encompass more than 50 percent of the trade in some product line. The Supreme Court did not accept that, and I was afraid they would not, because that is more in the nature of legislation than adjudication. But that was the argument we pursued.

Q: You teach a module on industrial structure, strategy, and public policy. What are the most illustrative case studies which best demonstrate how these constructs coalesce?

Scherer: Until recently, we have not covered resale price maintenance issues in the course because it was a non-issue. The industry where it is of greatest relevance, and I do have my students read something about it, is pharmaceuticals and pharmaceutical retailing. The retail pharmacy trade was one of the strongest examples of resale price maintenance, and it was one of the last to get rid of resale price maintenance. This is indicated, among other things, by the fact that in 1974, when Congress turned 180 degrees again and eliminated the legality of resale price maintenance, the average margin between the wholesale price and the retail price for pharmaceuticals was 40 percent. More recently with the total abolition of resale price maintenance it's come down from 40 percent to about 20 percent. If you figure out the numbers, you find that amounts to about 40 billion dollars a year out of the consumers' pocket, or to put it another way, if there were still retail price maintenance on pharmaceuticals it would cost consumers roughly 40 billion dollars more a year for their drugs.

Q: So overall it's been a good move for consumers in terms of the pharmaceutical industry?

Scherer: Especially there, and that was one of the last bastions of resale price maintenance. But there has been a good deal for consumers in other areas too. RPM was fairly strong among other things in cosmetics and in some electronic goods, and consumers have certainly benefited from its abolition. My position, and that of my co-author Bill Comanor, has been that we do not want it to return on a widespread basis, but in selected instances it's fine.

Q: And it seems as if the Supreme Court decision went along with your sentiments?

Scherer: Well, yes and no. The Supreme Court did approve a movement to a rule of reason, which was something we had advocated. It did not accept our quantitative criteria for telling when one should have a rule of reason case, nor did it accept our suggestion that when retailers initiated the movement towards RPM, and that's the history of the retail drug industry, that a per se rule be adopted. What the court did do however, and this pleased me greatly, was to indicate that a tough line should be taken against cases where resale price maintenance had palpable negative effects on consumers.

Q: Please discuss how industrial policies in other parts of the world might either lag behind or exceed those in the United States.

Scherer: The United States has had a very up and down history, as I indicated earlier. In the rest of the world the story on resale price maintenance has been more either-or. Most nations didn't have antitrust laws until after World War II, and they were then relatively slow to adopt them and to bring resale price maintenance under them. Most nations now have made resale price maintenance illegal, but some did so quickly - the United Kingdom and Germany, for example - while others did so very slowly - France, for example.

In Sweden the story is particularly interesting. It's very clear from the evidence that resale price maintenance delayed the appearance of supermarkets and hypermarkets in Sweden. Once resale price maintenance was made illegal there, you had in Sweden the kind of revolution in retail distribution that other nations such as the Untied States had experienced earlier.

In France, a still more complicated situation prevailed. In its antitrust laws, France eliminated resale price maintenance, but then the French Parliament, under the influence of small French retailers, passed what was called the Le Loi Royer which essentially gave control over the decision whether a large store could be opened in any locality to a committee, the plurality of which comprised local merchants. De Gaulle had to enter the battle to get rid of that one.

Q: Are there still countries where RPM is prevalent?

Scherer: Not to my knowledge.