Agreement to Terminate Discounter

Agreement to Terminate Discounter

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  Valley Liquors v. Renfield (7th Cir. 1982)
  

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  Unlawful Vertical Exclusive Selling Restraints: π must show that after balancing effect on intra-brand and inter-brand competition consumers are worse off in general
  

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  Δ must have “significant market power”; firm w/o market power is unlikely to adopt policies that disserve consumers b/c the market will react quickly
  

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  Business Electronic Corp v. Sharp (1988) – Free Rider Justification
  

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  Sharp had a suggested retail price, but d/n force adherence; Sharp appointed a second distributor, who complained of BEC’s discounting; Sharp agreed to cut off distributions to BEC
  
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  Defined as a non-price restraint so not w/in the per se rule  Rule of Reason
  

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  Price restraints v. non-price restraints
  

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  Vertical price restraints are per se illegal – easier for a small number of producers to collude on price; vertical price restraints reduce inter-brand competition b/c they facilitate cartelizing  when conduct is in the per se illegal category, we want to make sure that it always raises price, reduces output, and is never helpful to competition!
  
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  Value in protecting manufacturers from free riding – cutting off a discounter is not a clear signal on prices to inter-brand competitors  cannot assume cutting off discounter is price raising, output limiting, and harmful to competition (Prophylactic Rule)
  

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  Per Se Rule is inappropriate b/c
  

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  Inter-brand competition is a significant check on vertical non-price restraints and possible “dominant retail power”
  
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  Would be a perverse incentive to integrate vertically
  

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  Dissent – naked horizontal restraint w/o efficiency justifications – Agreements w/no other purpose but to cut off discounters harms competition and likely entails market power
  

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  S/n matter whether the agreement is horizontal or vertical
  

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  Limits of the Free Rider Justification
  

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  Eastman Kodak v. Image Technical Services (1992)
  

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  Rejected Kodak’s defense that it was trying to prevent ISOs from free riding on its investment in product development, manufacturing and equipment sales in order to take away Kodak’s service revenues  no support in the case law (?)  such action increases barriers to entry by forcing potential competitors to enter two markets simultaneously
  

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  Toys’R’Us v. FTC (7th Cir. 2000)
  

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  Non-price vertical restraints that are designed to facilitate the provision of extra services-protect from free riding—are legitimate if the firm has the requisite intent to improve efficiency  found TRU was only concerned about its economic interest in maximizing profits, not in keeping down its suppliers’ cost of doing business
  

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