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

20071EXPANDED ECONOMICS OF FREE-RIDINGIV. DEALER FREE-RIDING IN THE ABSENCE OFMANUFACTURER-SUPPLIED PROMOTIONAL INVESTMENTSA. DEALER FREE-RIDING TYPE Two: USING MANUFACTURERPAID-FOR PROMOTION TO SELL ALTERNATIVE PRODUCTSIn Beltone and Ryko the potential exists for dealers to free-ride by usingmanufacturer-supplied promotional investments to sell alternative products.However, in these cases, as well as in Standard Fashion, another formof potential dealer free-riding exists where dealers may use the extra promotionpaid for by the manufacturer to sell alternative products. Theprofit incentive for dealers to engage in this type of free-riding is thesame as the profit incentive to engage in the standard free-riding onmanufacturer-supplied promotional investments, namely, that alternativeproducts are likely to have higher dealer profit margins. In particular, asdescribed in Part II, dealers will be able to purchase alternative productsfor lower wholesale prices because manufacturers of such substitute,lower-brand value products do not bear the costs of either supplyingdirect promotion or purchasing increased dealer promotion. Therefore,a dealer may be able to earn more if it .can convince consumers to purchasethe alternative products.For example, retailers selling Standard Fashion patterns would havehad a profit incentive to use the sales staff, floor space, and other inputspaid for by Standard Fashion to switch consumers to a competing patternthat the retailer makes more profit on and can describe to consumers as'just as good." Although the dealer free-riding motivation is the same asin the standard type one free-iding case, dealer behavior does not appearto fit the standard free-riding framework because there need not be anymanufacturer-supplied investments that dealers are using to sell alternativeproducts. However, although the promotional investments are providedby the dealers and not the manufacturer, it still amounts to dealerfree-iding because the dealers' promotional investments have been paidfor by the manufacturer. 64Since the manufacturer compensates dealers for promotion contingenton the dealer's sales of the manufacturer's products, a dealer thatswitches consumers to another manufacturer's products may not appear64 Howard Marvel justifies exclusivity in Standard Fashion by focusing on the intellectualproperty investments made by Standard Fashion in the initial creation of dress patterndesigns. Marvel, supra note 13. If popular designs easily could have been copied byrival manufacturers that had not made these investments, this explains why lower costalternative products would have been available to retailers that engaged in free-riding,either type one or type two free-riding. Exclusive dealing prevented retailers that wereHeinOnline -- 74 Antitrust L.J. 497 2007