Klein and Lerner, “The Expanded Economics of Free-Riding: How ...

ANTITRUST LAw JOURNAL[Vol. 74purchase the particular product and were price-sensitive. However, ifuncontrolled, this price competition between retailers would eliminateStandard Fashion's compensation of retailers for supplying the desiredextra promotional services necessary to increase incremental sales to marginalconsumers. 63Whether a manufacturer provides its dealers with significant promotionalinvestments and also pays its dealers for supplying additional complementarybrand-specific promotional services, as in Beltone and Ryko, oruses an arrangement where it does not provide any investments to dealersbut solely compensates dealers for undertaking additional brandspecificpromotional efforts, as in Standard Fashion, the essential natureof the arrangement is the same-the manufacturer is compensating itsdealers to supply additional promotion. In Beltone and Ryko the expectationwas that each dealer would use the promotional leads provided bythe manufacturer in combination with its own promotional efforts to sellBeltone hearing aids or Ryko car-washing equipment in return for theadditional compensation yielded by a valuable exclusive territory. InStandard Fashion there was a similar expectation that the dealer wouldprovide additional promotion to sell Standard Fashion patterns in returnfor manufacturer compensation with resale price maintenance. Giventhat manufacturers compensate their dealers for providing additionalbrand-specific promotion, we now turn to the question of why exclusivedealing also is used in these arrangements." This problem where price competition for infra-marginal consumers competes awaythe manufacturer's compensation of retailers for supplying increased promotion occurseven if discounting retailers are supplying desired promotional services and infra-marginalconsumers do not go to a full-service retailer before purchasing the product at discount,low-service retailers, as in standard inter-dealer free-riding described in Sylvania,supra note 15. Dealers that supply the desired quantity of promotional services but lowerprice are free-riding on the manufacturer's compensation arrangement and on otherdealers because they increase their sales to infra-marginal consumers who would havepurchased the product from other dealers. Dealers that reduce price, therefore, are overcompensatedfor supplying the desired level of promotion, while other dealers that havelost these infra-marginal sales will be under-compensated for supplying the desired promotion.Therefore, dealers are free-riding on other dealers not in the Sylvania sense ofusing the services provided by other dealers without paying for them, but by taking thecompensation the manufacturer has provided to other dealers for supplying services,leading other dealers to either reduce their promotional efforts below the desired levelor to stop marketing the manufacturer's products. This likely explains the use of resaleprice maintenance in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 171 F. App'x 464(5th Cir.), 2006 WL 690946 (unpublished opinion), cert. granted, 127 S. Ct. 763 (2006)(U.S. Dec. 7, 2006) (No. 06-480). Resale price maintenance had the effect of preservingLeegin's extensive distribution network. The preservation of an adequate retail distributionnetwork, and the fact that a majority of retail druggists had dropped (or ignored) itsproducts as unprofitable, was a primary stated rationale for Dr. Miles' institution of resaleprice maintenance. Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 375(1911).HeinOnline -- 74 Antitrust L.J. 496 2007