Yuankuo Wang· and Mark J Davison··
RESALE PRICE MAINTENANCE: IS THE
PER SE PROHIBITION JUSTIFIED?
ESALE price maintenance (rpm), as defined by the Trade
Practices Act 1974 (Cth), is the trade practice whereby
suppliers of goods control, maintain or attempt to maintain the
minimum price at which purchasers resell those goods. The
practice is fully and broadly defined in s96(3). The definition covers
agreements on resale price; inducements to retailers to comply with
required resale prices; the conditional supply of products and the
withholding of supply from those who fail to comply with resale price
requirements.
R
The prohibition of rpm is a per se prohibition, that is, it is unlawful to
engage in rpm regardless of the consequences of the particular conduct
which is impugned.! The justification for this per se prohibition is that
the potential anti-competitive effects of the conduct and the costs of
assessing the actual effects of the conduct vastly outweigh any
potentially beneficial effects. This tough legislative stance against rpm is
reinforced by the broad definition of the practice. For instance,
unilateral acts may constitute resale price maintenance under the Trade
Practices Act 1974 (Cth) whereas in the United States, the Sherman Act
1890 (US) only prohibits agreements on resale price. In addition, no
exceptions to the prohibition of rpm are provided in the Trade Practices
Act 1974 (Cth) via the authorisation and notification procedures which
are available to those engaged in other types of conduct. The manner of
*
**
+
Yuankuo Wang LLB (pR China), LLM (Mon) is a Lecturer in Law, Anhui
University, Hefei, Anhui, China.
Mark Davison LLB (Qld), LLM (Mon) is a Lecturer in Law, Monash University,
Melbourne.
The authors wish to acknowledge the valuable assistance and advice of Professor
Maureen Brunt in the preparation of the paper. However, the views expressed
and any errors in the paper are solely the responsibility of the authors.
Section 48 of the Trade Practices Act 1979 (Cth) simply says: teA corporation or
other person shall not engage in the practice of resale price maintenance".
36
WANG, DAVISON - RESALE PRICE MAINTENANCE
judicial enforcement of the rpm provisions in the Trade Practices Act
1974 (Cth) also appears to be harsh, particularly in comparison with
other practices which are subject to per se prohibitions. 2
In contrast to the strict Australian approach, there has been a movement
in the United States in the last decade to re-examine the per se
prohibition of rpm. This movement claims that what is known as the
rule of reason approach to rpm should be adopted. Such an approach
involves examining the actual effects of the particular conduct under
examination before judging the legality of the conduct. The movement
has been led by the Chicago School of Economics and has been so
influential that the Antitrust Division of the US Department of Justice
filed a number of amicus curiae briefs in 1981-1983 urging the courts to
re-assess the per se prohibition of rpm. 3 In addition, New Zealand has
recently moved to permit authorisation of rpm despite originally
choosing not to permit authorisation. 4
This article outlines the various theories concerning the possible
economic effects of rpm. Most importantly, the validity of these theories
in Australia is then evaluated in the light of an analysis of the Australian
rpm decisions from 1971 until mid-1990. By undertaking such an
analysis of the empirical data the actual effects of rpm in Australia can
be gauged and comment made on the appropriateness of the present
Australian approach to rpm.
ECONOMIC EFFECT OF RPM ON COMPETITION AND
EFFICIENCY: CURRENT DEBATE
For the purpose of forming a proper antitrust policy, rpm has been a
topic of economic analysis since the 1930's.5 Opinions on the issue have
2
3
4
5
Davison and Wang, "Resale Price Maintenance and Price-Fixing: A Puzzling
Contrast in Approaches" (1990) 64 ilJ 951.
For example, Monsanto Co v Spray-Rite Service Corp (1984) 104 S Ct 1464 at
1469.
Commerce Act 1986 (NZ) s58(7) which came into force on the July 11990.
See Silcock, "Some Problems of Price Maintenance" (1938) 48 Economic Journal
21.
(1992) 14 ADEL LR
37
been almost' always in controversy. In recent years the debate over the
economic effect of the practice has been even more intense.
In the current debate, opinions about the economic effect of rpm fall
between two extremes. At one extreme, rpm is regarded as a device
facilitating either formal or tacit price collusion6 by retailers, or
manufacturers or both. On the other extreme, it is argued that rpm is a
part of an efficient overall distribution system which can overcome the
problems resulting from market imperfections. We shall deal with the
collusion-enhancing theories first.
Market Power Explanations for RPM
RPM and Collusion by Retailers
Intuitively, retailers may be thought to be the main beneficiaries of rpm
practices. Given a fixed wholesale price, retailers' margins would
generally increase, or at least they could live a "quiet life" without being
concerned by price competition from other retailers of that product. The
retailer collusion theory of rpm suggests that rpm programs are often
manufacturers' responses to a group of collusive retailers with market
power. By coercing manufacturers into imposing rpm, the retailers can
achieve an effect similar to that of horizontal price-fixing agreements. In
order to be effective, horizontal price-fixing agreements must ensure
compliance with the agreed price by all participants and provide for the
imposition of an effective penalty in the event of non-compliance. In
addition, such agreements have the drawback that they cannot effectively
prevent new entrants from cutting prices.
By comparison, a
manufacturer using rpm can conveniently inform all retailers, including
new entrants, of a uniform minimum retailing price, and punish those
who do not comply by refusing to deal with them. Therefore, it is in the
interests of collusive retailers to coerce manufacturers into using rpm to
perform for those retailers the essential tasks of monitoring compliance
and punishing non-compliance with pricing arrangements.
6
Formal collusion involves an actual agreement or understanding between the
parties whereas tacit collusion involves the parties charging uniform prices
simply because they all consider it in their interests to do so.
38
WANG, DAVISON - RESALE PRICE MAINTENANCE
Recently, some scholars have suggested another explanation for retailersponsored rpm. Where retailers have invested significant resources in
promoting a product, they may have incentives to coerce manufacturers
into imposing rpm so as to block the entry of discounters. 7 Without such
restraints on new retailers, the original retailers may not gain a return on
their investment because the new entrant may take the benefit of that
investment. This would be the case, for example, if the original retailers
had widely advertised the product.
Where the retailing trade is experiencing a rapid change or different
retailing styles compete with each other very severely, rpm might also be
used by some retailers (usually those operating on a small scale) to
preserve their own traditional, established organization and method of
retailing. This is because
price maintenance does not eliminate the possibility of
modifications in the structure of retail trades; but it
generally works in favour of established forms by retarding
change and by eliminating price competition, the most
effective instrument of change. 8
The welfare implications of collusive retailers' use of rpm are quite clear.
No matter what the retailers seek - either supra-competitive profit, a
return on their investment in the product, or preservation of the old
retailing style - the practice is harmful to consumers and efficiency.9
The artificially maintained retail price will distort production and
demand and lead to an inefficient allocation of resources. Consumers
will have to pay higher prices than they do without rpm. Some efficient
retailers will be unable to pass their efficiency on to consumers through
price competition and there will be a transfer of wealth from
manufacturers to retailers. Also, it will result in a reduction in diversity
7
8
9
Mathewson and Winter, Competition Policy & Vertical Exchange (University of
Toronto Press, Toronto 1985) p32.
Yamey, Economics of Resale Price Maintenance (Weidenfeld and Nicholson,
London 1954) p87.
The possible exception to this is the return on the investment in the product. If
the investment is desirable, the return will be important in order to encourage the
investment. See the section below on special services.
(1992) 14 ADEL LR
39
in retailing and thereby reduce choices available to consumers because of
a diminution in incentives for innovation and new entry.
Although the retailer collusion explanation of rpm is historically very
important, it has not been universally accepted. The main question
raised is whether in a real market, retailers can successfully compel
manufacturers to use rpm. It has been hypothesized that for retailers to
compel manufacturers to use rpm, they must jointly have monopsony
power, that is there must be one buyer which can choose from a
relatively large number of manufacturers. But the large number of rivals
and potential entrants at the retail level, and differentiation of retailers
and of manufacturers' products, can make effective retailer collusion
very difficult. Meanwhile, since the maintained high price will lead to a
decrease in sales and therefore reduce the manufacturers' profit, the latter
should generally have strong incentives to resist pressures from the
retailers. 10 Finally, even if a retailer-sponsored rpm program could be
initially established, non-price competition among retailers such as
advertising or after sales service would tend to dissipate the gains from
vertical price fixing. Accordingly, a difficult and costly agreement
would be needed for retailers to control various forms of non-price
competition among themselves. 11 Under this view, the possibility of
collusive retailer-sponsored rpm is regarded as remote.
In Australia, however, these arguments have little strength. It has been
found that in the 1960's and earlier, rpm often was used by manufacturers
"at the request of the distributors", "who may be so enthusiastic in their
support of the system that they police the system for the
manufacturer" .12 It was also found that retailers' associations adopted
various techniques to enforce rpm, such as imposing penalties upon, or
requesting suppliers not to supply to those who did not observe the
minimum price. 13
10 Martin, Industrial Economics and Public Policy (MacMillan, New York 1988)
p448.
11 Ornstein, "Resale Price Maintenance and Cartels" (1985) 30 Antitrust Bulletin
401 at 413.
12 Tasmania, Royal Commission on Prices and Restrictive Trade Practices in
Tasmania Report (1965) p12.
13 At pp13-15.
40
WANG, DAVISON - RESALE PRICE MAINTENANCE
In the present legal environment in which both rpm and price-fixing are
prohibited per se, it is very difficult for any retailers' association
expressly to request suppliers to impose rpm. However, retailers
collectively, especially those with substantial buying power and a
common interest, can still greatly influence suppliers' marketing activity.
Australian retailing markets are highly concentrated at the national level.
At the local retailing market level, the present pattern is that a majority
of sales of convenience goods (food, pharmaceuticals, etc) occur at
metropolitan shopping centres and country towns. Well-established
retailing firms may possess a great competitive advantage over potential
entrants because of their location.
The location advantage possessed by established retailers together with
the operation of retail trade organizations, licensing requirements in
certain retailing sectors and even town planning considerations can
jointly build a high barrier to new entry. Even if new entry has already
been made successfully, the new entrant would be unlikely to refuse the
benefit of an rpm program, unless it (the new entrant) operates on a large
scale and deliberately aims at a new retailing style.
In short, rpm sponsored by collusive retailers is not only an historic fact
in this country but also a possibility now. It should be noted that retailer
collusion need not be, and usually is not, in the form of a cartel in the
legal sense. 14 For inducing or persuading manufactures into imposing
rpm, complaints from several major retailers about discounting seem to
be sufficient.
Collusive and Oligopolistic Use ofRPM by Manufacturers
RPM has been explained as a device facilitating manufacturers' cartel
behaviour 15 or tacit oligopolistic coor~ination.16 The former involves
14 This is also true in the USA and New Zealand. See Hampton "Resale Price
Maintenance: Economic and Policy Analysis" (Unpublished, 1987) at 23-24. The
author is a Senior Lecturer in Commercial Law, University of Canterbury.
15 Telser, "Why Should Manufacturers Want Fair Trade" (1960) 3 JLE 86 at 96105; Pitofsky, "The Sylvania Case: Antitrust Analysis of Non-Price Vertical
(1992) 14 ADEL LR
41
some express arrangement between the colluding parties while the latter
is the consequence of market forces in the particular market in
question. 17 The main benefit an industry-wide rpm program can provide
to manufacturers is said to be that it makes open dealer price-cutting
impossible.
This in turn will diminish the incentives for the
manufacturers to cut wholesale price and thereby stabilize the cartel.
This is because no member of the cartel can increase its market share by
secret price cutting since the dealers can not pass on to consumers the
low price. In addition, industry-wide rpm eliminates or at least reduces
pressure from dealers on manufacturers to depart from an agreed cartel
price.
This explanation, although generally considered as a theoretical
possibility, has also been questioned. It is argued that normal rpm
situations are those where dealers handle brands of several
manufacturers. These dealers will increase purchases of, and non-price
sales effort for, the brand of the manufacturer who offers the dealer the
lowest price. Therefore, the presence of rpm can neither reduce the
manufacturers' incentive to cheat nor make this kind of cheating any
easier to detect. 18 Furthermore, non-exclusive retailers of multiple
brands which get a price cut from one manufacturer will ask the same
from another. The news of price cutting travels quickly among
retailers. 19 Thus rpm will not be very helpful to collusive or
oligopolistic manufacturers.
Although these arguments have some strength, the reality in Australia is
that manufacturers have sometimes coordinated wholesale and retail
16
17
18
19
Restraints" (1978) 78 ColumbiaLR 1 at 15-16; Williamson, "Assessing Vertical
Market Restrictions: Antitrust Ramification of the Transaction Cost Approach"
(1979) 127 Uni ofPensylvania LR 953 at 967-968.
Areeda et aI, Antitrust Analysis (Little Brown, Boston, 4th ed 1988) p638.
The manufacturers do not formally agree on prices but they find it in their
interests to maintain a uniformly high price.
Posner, "The Rule of Reason and the Economic Approach: Reflections on the
Sylvania Decision" (1977) 45 U Chi LR 1 at 7.
Bork, "The Rule of Reason and the Per Se Concept: Price-Fixing and Market
Division" (1966) 75 Yale U 375 at 411.
42
WANG, DAVISON - RESALE PRICE MAINTENANCE
pricing. 20 . In the 1960's, for example, the retail prices of bread, electric
lamps and hot water systems in Tasmania were fixed by horizontal
agreement between the manufacturers and enforced on the distributors
and retailers. 21
In Australia generally, the structure of manufacturing industry is highly
concentrated. The Australian Financial Review commented recently that
it is a rare industry in Australia that has more than three
participants. Some of these oligopolies are intensely
competitive, but as a rule, they are not, by their nature.22
This feature of Australian manufacturing makes oligopolistic
coordination through rpm by manufacturers a real possibility. Such a
practice can have an anti-competitive effect similar to that of horizontal
restraints at the manufacturing level and therefore is undesirable.
Bilateral Market Power Explanation ofRPM
This theory proposes that in many cases rpm is jointly sponsored by
manufacturers and retailers to reinforce partial market power at each
vertical level. Manufacturers offer rpm to retailers who agree not to
patronize other manufacturers. 23 Several examples have been presented
to support the theory.24 The effect of such use of rpm is said to raise the
cost of entry at the manufacturing level. Potential entrants must either
bear the expense of entry at the manufacturing and the retail levels or
20 For American examples, see Telser, "Why Should Manufacturers Want Fair
Trade" (1960) 3 JLE 86 at 86-105.
21 Tasmania, Royal Commission on Prices and Restrictive Trade Practices Report
p12.
22 Australian Financial Review, 22 February 1989; quoting from Economic
Planning Advisory Committee, Promoting Competition In Australia (Council
PaperNo 38,1989) p7.
23 Bowman, "Resale Price Maintenance - A Monopoly Problem" (1952) 25 J of
Business 136 at 141-155; See also, Bowman, "Prerequisites and Effects of Resale
Price Maintenance" (1955) 22 U Chi LR 825 at 844-848.
24 Bowman, "Prerequisites and Effects of Resale Price Maintenance" (1955) 22 U
Chi LR 825 at 844-848.
(1992) 14 ADEL LR
43
distribute through retailers who remain outside the agreement. The
increased cost of entry at the manufacturing level allows existing
manufacturers to charge a greater wholesale price. Manufacturers and
retailers reinforce each other's market power and split the resulting
economic profit. They earn more with rpm than they would without it. 25
Clearly, such a use of rpm is anti-competitive.
This theory seems quite plausible for a number of reasons, especially in
the Australian context. First, rpm programmes are most often favoured
by both sides, that is by at least a single manufacturer and a group of
retailers. The situations in which one side coerces the other are
presumably not many. Neither is likely to initiate an rpm program
without some confidence in, and support from, the other. In addition,
market power .at two vertical levels is often co-related. If there is a
manufacturer with a certain degree of market power, there are often
some supporting retailers with a comparable market power, and vice
versa.
Secondly, incentives for both sides to cooperate with each other are very
strong. Retailers can get high margins, and manufacturers can assure
themselves a stable network of distribution and a high barrier to new
entry.
Thirdly, it has been pointed out that the kind of market structure most
conducive to jointly sponsored rpm is one in which there are relatively
few manufacturers and a relatively large scale of operation is required for
efficient production. 26 This is just the feature of most Australian
industries. Moreover, retail trades are highly concentrated, whether at
the national or local market level. The presence of a small number of
participants at each of the two levels make things much simpler and
easier because the smaller the number of participants, the easier it is for
them to monitor compliance with the rpm scheme.
Some obvious examples of bilateral use of rpm existed in this country in
the 1960's. It has been reported that
25 Martin, Industrial Economics and Public Policy p453.
26 Atp453.
44
WANG, DAVISON - RESALE PRICE MAINTENANCE
if a trader does not adhere to the prescribed retail prices, his
trade association may report this fact to the supplier or the
supplier's trade association requesting that no further
supplies be made available to the offending trader, at least
until he confonns to the prescribed prices. 27
Here we find a pattern in which the horizontal arrangements at two
related vertical levels combined in order to enforce rpm. This kind of
use of rpm is most undesirable.
So far, three kinds of market power explanations for rpm have been
briefly considered.
These were, and still are, very important
justifications for prohibiting rpm. However, there are also arguments
which aim at revealing another side of rpm practice, that is, the
promotion of distributive efficiency.
Efficiency-Enhancing Explanations for RPM
The Basic Logic of the Externality Theory
According to the law of demand, the relation between price charged and
quantity demanded is usually inverse. Then why does a single
manufacturer find rpm profitable?
In response to this question, some scholars have argued that it cannot be
explained by market power or monopoly. This is because, it is argued, to
think that a high retail price is in the interest of any manufacturer is
"simply incorrect".28 Mathewson and Winter's explanation for this
puzzle is, in essence, that the demand is determined by both price and
non-price factors. While an increase in price may lead to a decrease in
demand, a maintained price floor may stimulate or encourage dealers to
engage in non-price activities which can attract demand. Thus, where
the effect of a price increase on demand is smaller than that of non-price
determinants of demand, the net effect of rpm will be increased sales.
27 Tasmania, Royal Commission on Prices and Restrictive Trade Practices in
Tasmania Report p5.
28 Mathewson and Winter, Competition Policy and Vertical Exchange pI5.
(1992) 14 ADEL LR
45
These non-price factors are said to include information about the product
offered by retailers to consumers at the point of sale, post-sales service,
other quality dimensions, or simply availability of a product. 29 These
will be dealt with later one by one. Now we consider a basic question:
why do not these factors function without rpm?
The answer raised in response to this question is market imperfection. 30
The main problem is said to be that which is inherent in all principalagent arrangements.
Retailers and wholesalers function as
manufacturers' agents. But they do not necessarily have incentives to do
what manufacturers want them to do in distributing the latter's
products. 31 If manufacturers and related retailers were to be integrated,
they could act jointly to distribute products at the service and price level
which would maximize profit. Since they are separate legal entities, two
kinds of externalities32 can prevent their joint profits from being
maximized. The first is a vertical externality. Given a fixed wholesale
price, a manufacturer's profit will increase as retailers' activities attract
more demand. To the extent that the retailers cannot share this profit,
they tend to "underinvest" in activities which attract demand. This may
mean that they either overprice, or provide too little sales effort.
Offsetting this is the effect of a second and horizontal externality. An
increase in price by one retailer can increase the sales of others if those
others leave their prices unchanged. For this reason, retailers may tend
to price too low. The net effect of these two externalities is that retail
price is generally too high or too low to maximize the joint profits of the
manufacturer and the retailers. 33
Another horizontal externality is the well-known free-ride phenomenon.
Provision of services by one retailer may increase the sales of others. It
is said that at least some consumers will consume the service and then go
to buy the relevant item at another shop which does not provide the
29 Atp32.
30 Martin, Industrial Economics and Public Policy p458; Ippolito, Resale Price
Maintenance: Economic Evidence From Litigation (Fre, Bureau of Economics
Staff Report, April 1988) p12.
31 At p455 and p12 respectively.
32 Externalities are factors outside the control of the firm in question which affect
either positively or negatively its performance.
33 Mathewson and Winter, Competition Policy and Vertical Exchange p19.
46
WANG, DAVISON - RESALE PRICE MAINTENANCE
service and therefore can price the item lower than the retailer which
does provide the service. 34 This free-ride process, if not prevented, can
ultimately discourage any retailer from providing services sufficient to
maximize joint profits.
By setting a fixed floor price, the manufacturer can eliminate, or at least
reduce, price competition among retailers. Thus, in order to increase
their sales, they will have to compete in non-price aspects such as
providing services. This in tum can benefit the manufacturer by
attracting greater demand than otherwise. Now, let's deal in some detail
with each of these non-price factors.
Special Services
Broadly speaking, the so-called special services include any special
dealer activities which may increase demand for a product, such as
information, display, delivery, credit, repair, advertising and promoting.
An rpm program will benefit a manufacturer if the positive effect on
sales of these services is greater than the depressing effect of a price
increase.
Such services must have two features. One is that it be very difficult to
charge for them separately. The other is that they be specific to a
particular product, otherwise they are still free-rideable by retailers of
other brands of the· same products. 35
It has been suggested that even if a manufacturer of the particular
product engages in rpm, services subsequent to actual sales such as
delivery, credit and repair are not "special" because they are either not
free-rideable 36 or can be charged for separately with relative ease.
34 Telser, "Why Should Manufacturers Want Fair Trade" (1960) 3 JLE 86. See also
Varney, Economics ofResale Price Maintenance pp52-58.
35 Martin, Industrial Economics and Public Policy p455; see also, Telser, "Why
Should Manufacturers Want Fair Trade" (1960) 3 JLE 86 at 92.
36 Comanor, "Vertical Price-Fixing, Vertical Market Restrictions and the New
Antitrust Policy" (1984) 98 Harv L R 983 at 987.
(1992) 14 ADEL LR
47
However, an Australian rpm case37 contradicts this suggestion. A sole
importer and wholesaler of Stihl Chain Saws refused to deal with a
dealer who had extensively advertised discounting and conducted mail
order sales. The defendant importer's real concern was that Stihl Chain
Saws sold by the dealer through discounting and mail order had to be
serviced free of charge by other retailers located near purchasers. Their
obligation to do so derived from a guarantee of the chain saws given by
the importer. The 'solution' of a separate charge would not have been
appropriate because a guarantee of repair service given upon sale of the
product attracted greater demand than demand for the product at a lesser
price coupled with repair services which were charged for separately.
Not surprisingly, consumers feel more confident in a product which is
guaranteed at the time of purchase even if a high purchase price is
charged to reflect the future cost of servicing. Thus, this case indicates
that service subsequent to an actual sale can still be subject to free-riding
and come within the definition of a special service.
It appears that the possibility of free-riding on special services is
generally recognized. 38 But questions remain as to how often this
possibility is the actual reason for rpm,39 and whether there are less
restrictive ways than resorting to use of rpm to resolve the problem of
free-riding.
Quality Certification
A separate, but related efficiency-based argument in favour of rpm is that
it allows quality certification by prestigious retailers. The reputations of
prestigious retailers are valuable to manufacturers so long as consumers
regard these retailers as having superior abilities to screen and certify the
characteristics of branded products. But other retailers can take a freeride on this certification process. They can sell the same brand at a lower
37 TPC v Stihl Chain Saws (Aust) Ply Ltd (1978) ATPR 40-091 at 17,891.
38 Hampton, "Resale Price Maintenance: Economic and Policy Analysis"
(Unpublished, 1987) at 5.
39 One scholar thinks that "In a large class of cases it just does not fit the real
world": Scherer, "The Economics Of Vertical Restraints" (1983) 52 Antitrust U
687 at 694.
48
WANG, DAVISON - RESALE PRICE MAINTENANCE
price and get the benefit of the high quality certified by the prestigious,
high-priced stores which presumably have incurred cost in screening
products. By using rpm to protect quality certifiers from free-riding, a
manufacturer can attract more demand for its product.
Such
certification, it is said, need not be limited only to quality, but can also
extend to style and fashion trends of appare1. 40
However, the theory also has it weaknesses. For new products or
products of new entrants, rpm may be used by manufacturers or
wholesalers which want a relatively high, first impression price so that
consumers will accept an up-market image of these products. However,
a manufacturer's refusal to deal with discount stores because it claims
that the image of its product is cheapened by the low prices of discount
stores may be simply a reflection of pressure on the manufacturer from
influential retailers attempting to maintain their power in the relevant
retailing market.
Number of Outlets Selling the Product
The number of outlets displaying and selling a product is said to be
another non-price factor that may affect demand. It has been postulated
that the demand for a product may be positively related to the number of
stores carrying the product. This is because that number determines the
Strong price
exposure of the product to shopping consumers.
competition among retailers may result in a retail margin so low that
some retailers simply refuse to carry the product. This can reduce the
quantity demanded to a greater extent than a price increase would do.
Under this situation, it is said, rpm can be used to increase the total
demand. This increase in sales may allow manufacturers to realize cost
savings associated with economies of scale and thereby lower the
wholesale price, and ultimately, the retail price. Even if the price
increases, the net effect of rpm would be to increase the total sales. 41
40 Marvel and McCafferty, "Resale Price Maintenance and Quality Certification"
(1984) 15 Rand J Eco 346 at 348.
41 Gould and Preston, "Resale Price Maintenance And Retail Outlets" (1965) 32
Economica 302; Mathewson and Winter, Competition Policy and Vertical
Exchange pp16-21.
(1992) 14 ADEL LR
49
It is not clear how many rpm cases can be explained by this hypothesis. 42
There is some evidence in the reported cases that manufacturers or
wholesalers use rpm in the hope of maintaining custom from as many
retailing firms as possible. For this reason they will cut some retailers
who discount their products in order to protect the margins of other
retailers. But this situation does not necessarily signify a positive
relationship between the total sales and density of distribution. The more
significant factor may be the relative importance of discounting and nondiscounting retailers in a certain geographic market. If the sheer
numbers of non-discounting retailers solely or jointly have more impact
upon the total sales, or greater market share, than the discounting group,
manufacturers will find themselves under pressure to reduce wholesale
prices, and may also find rpm profitable. Otherwise the non-discounting
group may not be willing to carry their products.
The fact that some price-cutters are terminated suggests that the absolute
density of distribution is often not a factor which manufacturers bear in
mind. Rather, they care about relative market share of different retailing
groups in a real market.
Non-Free-Rideable Dealer's Activities
Unlike the special service theory which stresses the effect of the
horizontal free-rider problem, two recently developed economic theories
try to explain rpm in terms of purely vertical externality and demand
uncertainty.
Such an externality occurs where retailers can influence product quality,
or their sales effort in other respects can increase the total sales. For
example, retailers' services such as assembly of bicycles, advice on
coordinating stereo components or sports equipment, and handling of
food products, can influence the final quality of the relevant products and
the reputation of the manufacturers. Also, some kinds of sales effort by
retailers can play a great role in increasing the total sale, such as a deep
42 This point was argued in Re Books. See the decision and reasons of the
Australian Trade Practices Tribunal in Re Books (1972) 20 FLR 256 at 272 and
286-288.
50
WANG, DAVISON - RESALE PRICE MAINTENANCE
inventory and a well-organized display. Since part of the return of the
dealers' sales effort and quality inputs will go to the manufacturers due to
an increased sale, the dealers may not have incentives to provide the
level of services desired by the manufacturers, although these services
are not horizontally free-rideable. Where these services are not easy to
monitor and verify legally, separate contracts, two-pan-pricing and direct
subsidization are not feasible ways of compensating dealers for their
efforts. On the other hand, rpm may be an efficient solution to encourage
dealers to provide quality inputs and other desired sales effort. 43
This reasoning is theoretically correct. Retailers spend on quality inputs
and sales effort only to the point where their marginal cost equals their
marginal revenue. 44 But if the differences between individual dealers
are taken into account, it seems that the reasoning cannot explain why,
without rpm, some efficient retailers would not provide the same quality
inputs and sales effort. The efficiency of all retailers cannot be the same
due to differences in their size, location and expertise. More efficient
retailers will have a lower marginal cost than others. To this extent, they
should be willing to incur more costs on sales effort than those less
efficient since the services offered are not free-rideable. Even with rpm,
the question remains how high the price should be maintained in order to
encourage dealers to provide the desired level of sales effort and quality
inputs. The maintained price may be too high for one retailer but too
low for another. By comparison, if the dealers' sales effort can really
attract demand, then free price and service competition among retailers
with different efficiencies will ultimately drive those less efficient out of
business and leave those who are efficient to raise the average level of
sales effort without the detrimental effects rpm may bring about.
Finally, there might be some alternative ways for suppliers to encourage
retailers to increase sales effort and quality inputs. For example, if the
43 Ippolito, Resale Price Maintenance: Economic Evidence from Litigation ppl417.
44 "Cost" is defined in this context as the price necessary to cover the retailer's
outlays and provide a sufficient return to make it worthwhile for the retailer to
continue in the industry. "Marginal cost" is thus the "cost" of selling an
additional unit and "marginal revenue" is the price obtained for that additional
unit.
(1992) 14 ADEL LR
51
sales can really be increased by dealers' sales effort and quality input,
manufacturers can make separate payments to dealers according to each
dealer's sales. Since this kind of sales effort is not free-rideable, it is
difficult to see why manufacturers can not adopt this method. All of
these lead to the conclusion that the reasoning can explain at most a very
limited number of rpm cases.
Demand Uncertainty
It has been argued that retailers facing uncertainty about consumer
demand will limit the amount of their purchase from manufacturers to
protect themselves in case of non-acceptance of the product by
consumers. Where the extent of this risk is not easy to identify and
explicit insurance is very costly, rpm may be used by a manufacturer to
create a dense dealer network or encourage dealers to stock greater
quantities of the product than they otherwise would. It is said that by
limiting cost cutting in the event of low consumer demand, the
manufacturer limits retailer losses. 45
This theory has its limitations. First, it is doubtful whether a
manufacturer pursuing self-interest is willing to shift a risk from others
to itself. Secondly, if the manufacturer is willing to adopt the risk, rpm
is not an appropriate solution. While it reduces one risk, another is
created because the high, maintained price and small number of outlets
carrying the product (some retailers may refuse to accept the product on
an rpm condition) may reduce the total sales.
If consumers are familiar with a product, the demand risk is usually not
very significant. The theory can, at best, explain some of those cases in
which new products or products of new entrants are involved.
Welfare Consequences of Efficient Use OfRPM
Suppose an rpm program works very well to stimulate dealers' activities,
and as a result, the total sales increase. Does this mean that social
45 Ippolito, Resale Price Maintenance: Economic Evidence from Litigation p17.
52
WANG, DAVISON - RESALE PRICE MAINTENANCE
welfare is enhanced? Or put it in another way, is a manufacturer's interest
in an increased sale consistent with the interest of consumers?
To this question, one answer is proffered by the Chicago School analysts.
They claim that manufacturers do not use rpm for the purpose of
allowing retailers to restrict output because any extra return to retailers
resulting from this would be money out of the manufacturer's pocket for
no good reason. The manufacturer shares with consumers a common
desire to have distribution done at the lowest possible cost consistent
with efficiency. Therefore, manufacturers will choose the distribution
method which best promotes consumer welfare. For this reason, rpm can
be employed by manufacturers only for the purpose of creating
efficiency. Since rpm can increase output and dealer's services, it is
socially desirable and should be lawfu1. 46 Here an increased output is
regarded as a signal that the attractiveness of the product to consumers,
interbrand competition and hence consumer welfare are all increased.
Despite its great influence, this output welfare test has been severely
criticised because
implicit in this argument is the belief that vertical
relationships can not alter horizontal market structure. In
other words, vertical integration ... does not raise capital
requirements barriers to entry or impose a higher cost of
capital on entrants.
The structure of retailing is
competitive, and product-differentiating activity by retailers
can not contribute to manufacturers' market power. If any
of these propositions fail, manufacturers have an incentive
to increase retailers' margins because retailers' activities can
reinforce manufacturers' market power.47
For this reason alone, the output test is deficient.
46 Bork, The Antitrust Paradox (Basic Books, New York 1978) pp288-290 and 297;
see also, Posner, "The Next Step In the Antitrust Treatment of Restricted
Distribution: Per Se Legality" (1981) 48 U Chi 1R 6 at 21.
47 Posner, "The Next Step ... Legality" (1981) 48 U Chi 1R 6 at 45.
(1992) 14 ADEL LR
53
But there is yet another view on the welfare consequences of rpm when it
is used to increase output through expanded dealer's activities. This view
emphasizes the different effects of rpm on two groups of consumers.
One group is marginal consumers who are attracted by the expanded
dealer services to buy the product subject to rpm at a maintained price.
These consumers value the dealer's services as much as, or more than,
the cost of providing them. This means that rpm increases marginal
consumers' welfare.
However, the other group, inframarginal
consumers, would prefer to buy the product at a lower price without the
services. RPM reduces the welfare of such consumers because they have
to pay more than they feel the services are worth. Thus the net effect of
rpm will depend on the number of the two groups of consumers and the
extent to which they value the expanded services differently.48
Initially, this analysis was developed in respect of the special service
theory of rpm in a narrow sense. It appears that it equally applies to the
theory in its developed and broader sense, such as the welfare
consequences of rpm for the purpose of increasing the number of outlets
carrying a product, assuring quality certification, and stimulating nonfree-rideable sales effort or quality inputs. This is because all such uses
of rpm involve an increased price and may involve an increased output.
This welfare analysis seems both precise and convincing. It indicates
that even if rpm is used for the purpose of increasing the total sales and it
does have this effect, it is still not necessarily desirable from the point of
view of consumers as a whole. Such uses of rpm are justifiable only
where manufacturers' motivation for increasing their outputs is consistent
with the interests of consumers as a whole.
This welfare analysis also indicates that the diversity of retailing itself
may be of value. Consumers are necessarily diverse and their demand
can be best met only by a retailing trade full of diversity. Such a
retailing trade should not be dominated by one distribution method,
namely rpm. The relationship between suppliers and retailers, therefore,
should also be diverse. In practice, there may be some alternatives which
48 Comanor, "Vertical Price-Fixing, Vertical Market Restrictions and the New
Antitrust Policy" (1984) 98 Harv LR 983.
54
WANG, DAVISON - RESALE PRICE MAINTENANCE
can less restrictively resolve the problems facing manufacturers. When
this is true, rpm should be examined with more caution than otherwise.
Conclusion
So far, several economic theories of rpm have been considered in a
theoretically abstract way. These theories suggest that rpm can be used
for a variety of reasons and with both anti-competitive and effici~ncy­
enhancing effects. In practice, however, there might be some cases in
which rpm is used for more than one reason. For example, collusive
retailers' motivation may coincide with a manufacturer's motivation to
increase output. Antitrust analysis of situations such as this is
complicated but also important. Relying on these various theories of
rpm, it may be possible to separate out and evaluate each element of an
rpm program so that a correct conclusion as to its actual effects can be
reached.
The present Australian legal approach is largely based on the traditional
view of rpm. The cases tried under this approach provide some evidence
about the correctness or otherwise of the traditional view, and to a certain
extent they can also be used to test the applicability of efficiency theories
of rpm. Now, let's go from theory to practice and see which theories get
some support from the reported cases.
RPM CASES: A GENERAL DESCRIPTION
Since 1971 there have been nearly 40 rpm cases decided by the courts in
Australia. This and the following section attempt to summarize the
factual information that can be drawn from these cases in respect of the
operation and effect of the prohibition of rpm. Actual case decisions
have been used to test the theories of rpm because little information is
available from other sources in the present legal environment. As a per
se illegal practice, rpm is a sensitive topic for businesspeople from whom
plenty of information might otherwise be expected. The decided rpm
cases are not only easily available, but also reliable in the sense that they
are an authoritative record of rpm practices in this country. For this
55
(1992) 14 ADEL LR
reason, an analysis of the cases may be the cheapest and most practical
method of testing the Australian legal approach.
This section will give a general description of the cases, and then in the
next section we will try to pick up some economic evidence so that the
plausibility of the various explanations for rpm can be examined.
Sources
The Australian rpm cases can be divided into two broad categories
according to their origin: public and private actions. Public actions are
those initiated by the Commissioner of Trade Practices (from 1971 to
1974) or the Trade Practices Commission (the TPC, after 1975). The
TPC periodically lists in its Annual Reports the court proceedings it has
initiated. These lists have been thoroughly searched.
Private actions are those initiated by private litigants. This category of
rpm cases has not been collected and listed by the TPC completely,
although the TPC's Annual Reports mention some of them. In ensuring
the widest possible coverage, the authors have mainly relied upon the
section-finding lists in CCH, Australian Trade Practices Reports from
1975 to June, 1990. Other series of law reports have also been consulted
for rpm cases decided both before and after 1975. It is thought that the
number of rpm cases neglected (if any) and their significance to the
present analysis is very limited, indeed negligible.
A General Description of RPM Cases
TABLE 1: THE NUMBER OF RPM CASES IN EACH
YEAR OF 1971-JUNE 1990
Year of Final
Decision
1971
1972
1973
1974
1975
1976
1977
Public
Number of RPM Cases
Private
All cases
3
2
5
3
5
1
1
3
56
WANG, DAVISON - RESALE PRICE MAINTENANCE
(Table 1 cont)
Year of Final
Decision
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
Total Cases
Public
Number of RPM Cases
Private
All cases
1
1
3
3
3
4
1
1
2
2
2
2
3
2
1
1
2
2
3
2
1
1
2
1
33
2
4
1
6
39
Source: A TPR, FLR and the TPC Annual Reports.
Table 1 contains all rpm cases the authors have found. Some of these
cases were decided under the Restrictive Trade Practices Act 1971 (Cth).
Although the Trade Practices Act 1974 (Cth) does not contain any
provisions governing authorization of rpm on the ground of public
interest, other aspects of the rpm provisions in the two Acts are basically
the same. For the purpose of our present analysis, there is no need to
distinguish the cases decided under the early legislation from those
decided under the Act.
In each year of 1976, 1980 and 1984, the TPC discontinued an action in
respect of alleged rpm mainly because of evidentiary problems. The
three cases discontinued are not included in Table 1.
Among the total 39 cases, 8 involved an appeal or two. A first instance
trial and subsequent appeals are, of course, counted as one case.
The outcomes of the court proceedings of these 39 cases are summarized
in Table 2.
(1992) 14 ADEL LR
TABLE 2:
57
OUTCOMES OF THE RPM CASES IN AUSTRALIA
1971-1990
Categories
Public
rpm not established
rpm established
pecuniary penalties
injunctions
undertakings
damages
injunctions & penalties
undertakings & penalties
injunctions & damages
Number of Cases
Private
2
1
5
1
32
12
8
2
Total
37
12
10
2
2
2
2
5
5
4
4
1
Source: ATPR, FLR and the TPC's Annual Reports.
Detailed information about the size of the penalties imposed and the
damages awarded is summarized in Table 3. The final outcome in TPC
v Sony (Australia) Pty LtcJ49 is not available as the reported decision was
restricted to the issue of liability only.
TABLE 3 :
PARTICULARS OF RPM CASES WITH JUDGMENTS OF
BREACH IN AUSTRALIA 1971-1990
Year of final
Decision
Respondent
72
72
72
73
73
73
73
73
74
74
74
Mikasa* (1)
Holiday Magic
Matsushita
Hoover
BASF
Dalgety
Cedel
Laycock
Amoco
BP
Caltex Oil
Injunction
yes
yes
yes
yes
yes
yes
undertakings
undertaking
yes
yes
yes
49 TPC v Sony (Australia) Pty Ltd (1990) ATPR 41-031.
Penalties
Damages
58
WANG, DAVISON - RESALE PRICE MAINTENANCE
(Table 3 cont)
Year of final
Decision
Respondent
75
78
79
79
79
80
81
80
80
Injunction
Sharp Corp Aust
Stihl Chain Saws
Madad
Malleys
Pye
90
Westeo Motors*
Kensington Hiring
Bata Shoe
Dunlop-Corp
-manager
Simpson (TPC v)
Simpson (Hubbards v)*
Simpson (parry Dept v)*
ICI(83) -1st Corp
-2nd Corp
O'Brien Glass*
Gorenje
Orlane
Mobil Oil
Bamix-Corp
-director
Lois
The Heating Centre
-Corp
-director
BP
Annand And Thompson
General Corp Japan-Corp
-manager
Commodore
Palmer
Sony
Total:
37 (2)
80
82
83
83
83
83
84
85
85
85
86
86
87
88
89
yes
undertaking
yes
yes
yes
Penalties
Damages
$5,000
$75,000
$28,000
$10,000
$120,000
$70,000
$51,000
$25,000
$4,000
$65,000
$6,051
$160,000
$20,000
$10,000
yes
undertaking
yes
undertaking
undertaking
yes
undertaking
23 (3)
$3,500
$3,000
$3,500
$50,000
$110,000
$22,000
$5,000
$35,000
$3,500
$20,000
$15,000
$130,000
$26,000
$195,000
$15,000
N/A
24 (4)
3
(1) The 5 cases marked with an asterisk resulted from private actions
which concerned four respondents. Another private action, Peter
(1992) 14 ADEL LR
59
Williamson Pty Ltd v Capitol Motors LttJ50 is not included in this
table because rpm was not established there. The decision in TPC v
Golden Fleece Petroleum LttJ5 1 is also not included in this table as
rpm was not established in that case either.
(2) The 37 first respondents were all corporations. There were also
seven second respondents involved. Five of them were either
managing directors or sales managers of the first respondent in the
corresponding cases. Two second respondents were corporations.
(3) This number includes 16 injunctions and 8 undertakings two of
which were given by the same respondent in one case, Commissioner
ofTrade Practices v Cedel Products (Australia) Pty Ltd. 52
(4) This number includes five second respondents that were fined.
Source: ATPR, FLR and the TPC Annual Reports.
Commentary
The tables reveal several interesting points. The first is that in the period
under consideration there was an average of two rpm cases finally
decided each year. This seems to indicate that while many firms have
given up the marketing strategy, some suppliers still have a strong
interest in rpm. This is also reflected by the fact that in the 37 cases in
which rpm was found, the court granted injunctions upon, or required
undertakings from, the respondents in 22 cases in order to ensure that
future contravention would not occur.
Apart from the decided cases, the TPC receives and investigates
complaints about rpm each year. For example, in the year of 1983-84
alone, the total number of restrictive trade practice complaints (other
50 Peter Williamson Ply Ltd v Capitol Motors Ltd (1982) ATPR 40-291.
51 TPC v Golden Fleece Petroleum Ltd (1985) ATPR 40-528.
52 Commissioner of Trade Practices v Cedel Products (Australia) Pty Ltd AIC VicB
10 of 1973. Information about this case is from the TPC, Annual Report 1977-78
(AGPS, Canberra 1978), Schedule 1, C, at 70.
60
WANG, DAVISON - RESALE PRICE MAINlENANCE
than s50 mergers) received and taken to the investigation threshold53 by
the TPC was 428. Among them, about 60 complaints (14%) were
concerned with rpm. 54 After investigation, the TPC either brings actions
in the Federal Court when necessary, or adopts administrative
approaches such as issuing warnings or notices to, or seeking
undertakings from, the suppliers alleged to have engaged in rpm.
Considering the decided cases in conjunction with the complained
matters administratively dealt with by the TPC,55 it can be seen that
despite its per se illegality, rpm is still operative in the Australian
economy and therefore is still a significant topic for both economic and
legal analysis. It is also a puzzle why rpm is so persistent in a harsh legal
environment given the consistent concentration of the TPC upon, and the
finn attitude of the courts towards, rpm generally.
Secondly, the outcomes of the rpm cases indicate a quite high rate of
success by applicants. Among the total 39 cases, there are only 2 rpm
cases in which the respondents were successful in defending their
cases. 56 The applicants in these two cases failed mainly because the
evidence was not sufficient to establish "a price specified by the supplier
as the price below which the goods are not to be sold" as required by
s96(3) of the Trade Practices Act 1974 (Cth).
By contrast, the rate of success of applicants in rpm cases in the United
States is much lower than in Australia. An investigation into rpm cases
there shows that the rate of success by both public and private plaintiffs
53 This means that the TPC regarded the matters complained of as being very likely
to have constituted contraventions of the Trade Practices Act 1974 (Cth). See
TPC, Annual Report 1976-77 (AGPS, Canberra 1977) 2.3.
54 TPC, Annual Report 1983-84 (AGPS, Canberra 1984) 4.2.1 & 4.2.3.
55 The number of complaints about rpm received by the TPC in recent years is not
available. However, there is evidence that the TPC still receives such complaints
in recent years. In Appendix 3 of its Annual Report 1988-89 (Australian AGPS,
Canberra 1989) the TPC lists as examples a number of complaints it has dealt
with. One of these complaints is concerned with a liquor supplier who had
allegedly threatened to withdraw all rebates from a wholesaler if the retail
establishment associated with the wholesaler advertised discounting.
56 These two cases are: Golden Fleece and Peter Williamson Ply Ltd v Capitol
Motors Ltd.
(1992) 14 ADEL LR
61
in rpm cases is around 27.5%.57 This great difference may largely be
explained by the relevant legislation in the two countries. In the United
States, rpm is a per se violation of sl of the Sherman Act 1890 (US).
That section, and even the whole Sherman Act 1890 (US), was drafted in
very general terms and much room was left for the judiciary to interpret
it. The rpm provisions in the Trade Practices Act 1974 (Cth) are much
more specific and comprehensive. This enables outcomes of rpm
litigation in this country to be more predictable. In addition to the form
of the two sets of legislation, the substantive differences between the
laws also have a role to play. An rpm offence is more difficult to
establish under the Sherman Act 1890 (US) because the concept of rpm
includes an element of agreement under the American law. 58 Under
Australian law, no such element of agreement is required. Furthermore,
the treble damages system and the use of contingency fees in the United
States may encourage some plaintiffs whose cases are weak and who
would not bring their cases at all in the absence of these two factors.
Thirdly, the rpm provisions in the Trade Practices Act 1974 (Cth) are
mainly enforced by the TPC. As Table 1 shows, in the period of 1971 to
1974, 10 rpm cases were initiated by the then Commissioner of Trade
Practices and only one by a private litigant. From 1975 to 1990, leaving
aside the 3 cases which were later discontinued, the TPC instituted 23
rpm cases among the total of 28. In the period 1971-1990, only 6 cases
were instituted by private litigants. Even among these 6 cases, 2 were
instituted solely for the purpose of obtaining damages on the basis of a
judgment of breach delivered in another rpm case initiated by the TPC.59
57 See Ippolito, Resale Price Maintenance: Economic Evidence From Litigation
(FTC, Bureau of Economics Staff Report, April 1988) p43, where it is reported
that in the years of 1976 through 1982, only 30 of the 109 cases resulted in a
guilty verdict on the rpm charge.
58 For example, see the US Supreme Court's opinion in Business Electronics Corp v
Sharp Electronics Corp (1989) 54 Antitrust & Trade Regulation Report 797. In
this case, the majority of the Supreme Court held that a vertical restraint was not
per se illegal unless there was an agreement on price or price levels.
59 In TPC v Simpson Pope Ltd (1980) ATPR 40-167, Simpson was found guilty of
engaging in rpm practices. Later, relying on s83 of the Trade Practices Act 1974
(Cth) s83 (Findings in Proceedings To Be Evidence) and s82 (Actions For
Damages) both Hubbards Ply Ltd and Parry Department Store (WA) successfully
sued Simpson for damages on the basis of the previous findings. See Hubbards
62
WANG, DAVISON - RESALE PRICE MAINTENANCE
Thus, only 4 rpm cases were independently instituted by private litigants
during the entire period.
This is also in sharp contrast to the situation in the United States, where
more than 60% of the rpm cases were instituted by private litigants
between 1976 to 1982.60 Again the treble damages and contingency fees
systems in the United States may be strong incentives for private litigants
there. However, the high rate of success by applicants in Australia
should also have encouraged more private litigants. Another reason for
the low rate of private enforcement in Australia may be that Australian
businesspeople, especially retailers, care very much about their
commercial relationships with suppliers, especially with big suppliers.
Court proceedings may damage these relationships and cause trouble in
future transactions. Unlike the United States, where the market is much
larger, a small population and relatively small market in Australia can
provide only a limited number of practical trade partners. Many
Australian industries have a relatively high market concentration of
suppliers and are often dominated by a few giants. 61 All these factors
make it necessary for a firm to be very cautious in considering any legal
action. This kind of caution is clearly demonstrated by the fact that the 3
cases discontinued by the TPC had to be discontinued because the
witnesses called by the TPC substantially changed their statements at a
late stage in the court proceedings. 62
Pty Ltd v Simpson Ltd (1982) ATPR 40-295 and Simpson Ltd v Hubbards Pty Ltd
(1982) ATPR 40-319, also see Parry Department Store (WA) Ply Ltd v Simpson
Ltd (1983) ATPR 40-376.
60 Ippolito, Resale Price maintenance: Economic Evidence From Litigation p40,
Table 1: Distribution of Vertical Price-Fixing Cases by Origin.
61 "Concentration levels in Australia are high by international standards ... and
many Australian industries have become increasingly concentrated, with a
tendency in a number of industries towards the emergence of one or two very
large firms surrounded by a fringe of (often considerably) smaller firms." EPAC,
Promoting Competition in Australia (Council Paper No 38, 1989) plO.
62 See Part 4 of the TPC's Annual Report for the years of 1975-76, 1979-80 and
1983-84.
(1992) 14 ADEL LR
63
Coupled with these disincentives for retailers to bring actions against
suppliers is the possibility that an rpm program may be the product of an
rpm agreement, in which case neither retailers nor suppliers are likely to
complain or otherwise draw the attention of the TPC to the problem.
It is also clear that there is either very little incentive or capacity for
consumers or consumer organisations to institute rpm actions. All six
private rpm cases were brought by retailers. 63
One reason for this may be that consumers, either individually or
collectively, do not have adequate information about the real cause of the
uniformity of the prevailing retail price. Uniform retail prices in the
marketplace may well be competitive prices or the product of an
oligopolistic market structure rather than the price specified by suppliers.
Another reason is that there is usually no direct economic incentive for
consumers to bring actions under Part IV of the Trade Practices Act
1974 (Cth). Competition protected by Part IV benefits consumers as a
whole but does not provide, or provides only very small, immediate
financial gains to each of them. Theoretically, a consumer can easily
prove before the court that due to a supplier's rpm conduct they have paid
a higher price for an item than the price which would prevail if the
supplier had not specified a minimum retail price for the item. But in
most cases the difference between the two prices will not be great
enough for individual consumers to go to court or even to complain
about it to the TPC.64 Because of these problems about evidence and
63 The number of rpm cases initiated by consumers in the USA is also very small.
During 1976-1982, only 4 of the total 203 cases with a charge of rpm were
brought by "customers", another 5 were class actions. See Ippolito, Resale Price
Maintenance: Economic Evidence From Litigation p40. It is not clear whether
these 'customers' were individuals or consumers organization.
64 It is not easy to ascertain a reasonable competition price afterwards. For the sake
of convenience, the discount price intended or actually advertised by some
retailers may be taken as the competitive price. Using this rough test, the
difference between the discount price and the specified retail price has been found
by the writer not to exceed $50 in almost all cases and not to exceed $1.00 in the
majority of the cases observed. This seems mainly because the price range of
consumer goods itself is not great enough to allow for a big retail price difference.
In the cases concerning white goods and TV sets, the difference between the
discount price and the specified price was about $10 - $50, while in the cases
concerning small items and petrol, the difference was very small.
64
WANG, DAVISON - RESALE PRICE MAINlENANCE
incentives, it is expected that rpm litigation is still unlikely to be brought
by consumers in a significant way. It is not certain whether an extended
class action system, if introduced, would effectively increase the number
of private rpm actions, since the lack of evidence and incentives would
still remain, although to a smaller extent than present.
The consequence of all those factors is that the responsibility for
bringing rpm cases has fallen and will probably continue to fallon the
TPC. As the TPC's enforcement work is necessarily restrained by its
budget, the degree of emphasis placed by it upon breaches of the rpm
provisions will probably depend on the prospects of success of rpm
actions and the extent to which rpm has an anti-competitive effect.
As previously indicated, litigation in respect of rpm in Australia is
generally quite simple and cost-efficient. Except for one case,65 the
cases are purely concerned with rpm. Since rpm is a per se illegal
practice, the court does not have to deal with the complex task of finding
a proper market and evaluating the anticompetitive effect of the
challenged conduct. Compared with other antitrust cases decided under a
competition test, the judgments of rpm cases are usually much shorter, in
some cases only one or two pages. The TPC also reported that after
being taken to the investigation threshold, complaints about rpm can be
investigated more quickly and easily than complaints about horizontal
price fixing. 66 Also, because of the clarity and harshness of the rpm
provisions, the respondents in some rpm cases simply admitted the
offence. 67 This not only constituted a factor mitigating the penalties
imposed on the respondents but also simplified the whole court
proceedings. These facts indicate that with the present legal approach,
rpm cases are easily litigated at a reasonable cost.
From this perspective, pursuit of rpm by the TPC is worthwhile. The
real issue is whether the conduct is so heinous from an economic
65 Cool & Sons Ply Ltd v O'Brien Glass Industries Ltd (1981) ATPR 40-220 and
(1983) 40-376. In this case the respondent was found to have contravened ss47,
48 and 49.
66 TPC, Annual Report 1974-75 at 2.12; TPC, Annual Report 1978-79 at 4.9.
67 These cases were all brought by the TPC. The respondents in these cases are
Madad, leI, Lois and Annand & Thompson.
(1992) 14 ADEL LR
65
perspective as to justify the vigorous pursuit and prosecution of those
who engage in it.
ECONOMIC EVIDENCE IN RPM CASES
The Cases Analysed
For the economic analysis in this part, it is possible to study 27
independent rpm cases. Although 39 rpm cases have been observed
altogether, the 2 cases in which rpm was not established will be largely
ignored. Secondly, in the 37 cases in which rpm was established, the
defendants are the same in several cases. The first group of cases of this
kind are 3 cases in which Simpson was involved, as already mentioned.
These three cases will be counted as one case. Another ·group of this
kind are 2 cases concerning Westco Motors. 68 They will also be counted
as one case. Thirdly, the judgments delivered in 7 rpm cases decided
before 1974 are not available69 and these cases will have to be ignored in
some parts of the following analysis. However, enough is known of
these cases to incorporate them in our analysis for some purposes.
This leaves us with 27 rpm cases with independent causes of actions,
available judgments and affirmative findings of rpm contravention.
Although most judgments delivered in these cases do not directly deal
with questions such as relevant markets and anticompetitive effects of
the practice, they do provide some valuable information which can be
used to test various economic theories of rpm. In conjunction with this,
information from other sources will also be used whenever possible.
68 Ron Hodgson sued Westeo Motors for an injunction to restrain it from engaging
in the practice of rpm. After the injunction was granted, the TPC sued the same
respondent successfully for pecuniary penalties largely in respect of the same
contravention.
See, Ron Hodgson (Holdings) Pty Ltd v Westco Motors
(Distributors) Pty Ltd (1980) A TPR 40-143; TPC v Kensington Hiring Co Pty Ltd
(Formerly Westeo Motors) (1981) ATPR 40-256.
69 Most of these eases are unreported.
66
WANG, DAVISON - RESALE PRICE MAINTENANCE
RPM Cases and the Market Power Explanations
The Suppliers' Market Power
While there are no express findings in the judgments that suppliers
collectively exercised their joint market power in imposing rpm upon
retailers, there is some evidence that a few major suppliers in some
oligopolistic industries concurrently used rpm. The most obvious
examples are the white goods industry70 and the petrol industry. Among
the total 39 rpm cases from 1971 to 1990, 6 involved petrol71 and 4
involved white goods. 72 In 1984 and 1986, Mobil Oil and BP Australia
were each found to have engaged in rpm by using similar dealer
assistance schemes which "had the effect of controlling retail price"73 of
petrol products. 74 As two authors put it, the facts revealed by these two
cases
indicate that the practice was part of an industry-wide
endeavour by refiners to put a floor under retail prices.
Both refiner - respondents had schemes to assist their
dealers to meet prices at which Shell petrol was being
retailed in their locality but withdrew their assistance from
dealers who beat Shell's price. The conclusion that r.p.m.
was being employed in this oligopolistic industry to
maintain price stability through leadership is inescapable.75
70 The white goods involved in the cases include refrigerators, washing machines,
dryers, freezers, dishwashers and stoves.
71 The respondents in these cases are: Amoco Australia Pty Ltd, BP Australia Ltd
(charged with rpm twice in 1974 and 1986 respectively), Caltex Oil, Golden
72
73
74
75
Fleece Petroleum Pty Ltd (rpm not established because of insufficient evidence)
and Mobil Oil Australia
The respondents in these cases are: Malleys Ltd, Simpson Pope Ltd (involved in
three cases), Gorenje Pacific Pty Ltd and General Corporation Japan (Aust) Ply
Ltd.
TPC v BP Australia Ltd (1985) ATPR 40-638 at 47,182, per Beaumont J.
TPC v Mobil Oil Australia Ltd (1984) ATPR 40-482; TPC v BP Australia Ltd
(1985) ATPR 40-282; see also BP Australia v TPC (1986) ATPR 40-701.
Hanks & Williams, "The Treatment Of Vertical Restraints Under The Trade
Practices Act" (1987) 15 ABLR 147 at 151 (emphasis supplied).
(1992) 14 ADEL LR
67
This conclusion is supported by the following general findings of an
investigation into petrol prices in 1983:
Major oil companies tend frequently to attempt to increase
the general level of prices in the market by price increases
at company/agent operated sites and by reducing the levels
of price support offered to dealers.76
Another example is the Australian white goods industry which has a
record of enforcing a "Minimum Advertising Price" (MAP) policy.77
This is again an oligopolistic industry.78 In 1979 and 1980, Malleys
(with "approximately 20% of the "white goods" market in Australia" at
that time) and Simpson ("a large supplier to distributors and retailers in
various States in Australia") were each found to have used similar
advertising assistance schemes in inducing dealers not to advertise
discounting. 79 When two retailers did not observe the MAP policy,
Simpson refused to supply its products to them seemingly without fear
that its market share could be invaded by other major suppliers of white
goods. Presumably this is because Simpson knew that other suppliers
adopted a similar policy.
It appears that the use of rpm in the oligopolistic situations abovementioned can benefit oligopolists in at least two ways. The first is that
it can avoid, eliminate or reduce pressure from retailers for lowering
wholesale price. Such conduct may stimulate intensive competition
among the few giants themselves. The second way is that it can be a tool
76 Fels, "Divorcement And Petroleum Marketing" (Unpublished, 1984).
77 See, TPC v Malleys Ltd (1979) ATPR 40-118 at 18-282.
78 "The whitegoods industry provides an example of growing concentration of
ownership. In 1973 this industry had nine manufacturers of refrigerators, nine
manufacturers of washing-machines and eleven manufacturers of stoves ... As a
result of rationalization, takeovers and mergers since then, the total whitegoods
industry in Australia now consists of only two major companies ..." EPAC,
Promoting Competition In Australia (Council Paper No 38,1989) p12.
79 TPC v Malleys Ltd (1979) ATPR 40-118 at 18,282 and 18,290; TPC v Simpson
Pope Ltd (1980) ATPR 40-169 at 42,327 and 42,330.
68
WANG, DAVISON - RESALE PRICE MAINTENANCE
facilitating oligopolistic cooperation in pricing or even an industry-wide,
tacit price-fixing agreement. 80
There is also evidence which tends to suggest a close relationship
between individual suppliers' strong position in the markets and the use
of rpm. This is demonstrated in Table 4.
TABLE 4:
SUPPLIERS' MARKET POSITION AND OPERATION OF RPM
IN AUSTRALIA 1974-199081
Respondent
Court's Comment On
Position In The Market
Bamix
"had a monopoly"
Stihl Chain Saws
"a sole importer and distributor"
with 75 % of the chain saw
market
with a licence from an American
Co to manufacture a branded
market
"a market leader" in SA
"a large supplier" in Australia
with 30-40% of NSW
wholesale market
"a successful company" with 15%
of the wholesale market
"a substantial supplier" "of
considerable size"
a co of "significant size"
with 20% of the Australian market
Madad
Simpson
O'Brien Glass
The Heating Centre
General Corp Japan
BP Aust
Malleys
Product Subject To
RPM
a particular brand
of distinctive
household blender
chain saws
mattresses
white goods
windscreens
fuel burning
heaters
consumer
electrical goods
petrol
white goods
80 In 1983, an Australian-wide supplier of car windscreens, O'Brien Glass Industries
Ltd, was found to have, inter alia, engaged in the practice of rpm in New South
Wales. See, O'Brien Glass Industries Ltd v Cool & Sons Pty Ltd (1983) ATPR
30-376. In 1988, the same respondent and others were found to have entered into
price-fixing agreements in relation to supply of car windscreens in the Australian
market. See TPC v Australian Autoglass Pty Ltd (1988) ATPR 40-881. It is not
known whether the rpm practice was related to the price-fixing agreements in the
car windscreen industry. However, these two cases suggest a possibility that rpm
and price-fixing agreements could be used by some firms concurrently.
81 See also Table 5 below.
69
(1992) 14 ADEL LR
(Table 4 cont)
Respondent
Pyelnd
leI
Court's Comment On
Position In The Market
"in business in a large way"
"a major company in the market"
of chemicals
Product Subject To
RPM
TV sets
pool treatment
chemicals
Source: ATPR.
Table 4 contains the trial judge's comment on the respondents' position in
the market in 11 of the 27 rpm cases analyzed. Further details about the
market situations are not provided in the other judgments. This renders
it impossible to assess fully the respondents' real position in the relevant
markets at the time when rpm was being used. However, it still can be
seen that the respondents in the cases mentioned above had some degree
of market advantage ranging from a monopoly to a significant market
share. Although the advantage possessed by the respondents did not
necessarily give them a substantial degree of market power in the sense
the tenn is used in s46 of the Trade Practices Act 1974 (Cth), this
advantage could have given the respondents more discretion in their
marketing activities than otherwise.
Was the suppliers' market advantage connected to the use of rpm? The
answer seems to be affirmative according to the evidence. In 6 of the 11
cases listed in Table 4, respondents are recorded as having withheld
supplies to the target retailers or treated them less favourably. This
indicates that these respondents, while doing so, did not think that the
lost custom from the target retailers would affect their own business
adversely.
It is interesting to note that the evidence seems inconsistent with the
theory that rpm benefits single manufacturers with market power only
through expanding the total output. It is said that an individual
manufacturer with market power will fully capture the profit from its
product by setting an appropriate wholesale price without the need to use
70
WANG, DAVISON - RESALE PRICE MAIN1ENANCE
rpm to enable retailers to get extra profit. 82 However, In TPC v Bamix
Australia Pty Ltd,83 it was found that the second respondent (who was
the managing director of the first respondent) had said the following
words at a national conference of the company's dealers, "price rises will
be organized periodically by Melbourne and you will be advised what to
charge".84
The evidence in this case does show that both wholesale and specified
retail prices were "periodically" increased. Bamix, the first respondent,
was referred to as having a "monopoly" over the product in question in
the judgment85 although a detailed market analysis was not undertaken.
In TPC v General Corporation Japan (Aust) Pty Ltd,86 the respondent
was also found to have raised both wholesale and specified retail prices
from time to time. Again, this respondent was referred to as being "a
substantial supplier" and "of considerable size".87 This kind of price
increase did not seem to reduce the respondent's market share. When a
retailer asked whether a discount should be offered to bulk purchase
consumers, the second respondent in the Bamix case replied; 'They will
buy it anyway at the full price. There is no need to discount'.88
Reflected in this reply was the respondent's confidence that its pricing
policy could be determined independently of market pressure and its
market share would not be affected by higher prices charged.
It appears that this kind of use of rpm is mainly a tool to prevent pressure
from retailers and to secure supra-competitive profits. Where all retailers
observe a uniform retail price specified by a supplier with a substantial
degree of market power, it is much easier for the supplier to raise both
the wholesale and specified retail prices. This is because price
competition among retailers will inevitably create pressure upon
manufacturers to reduce or at least not to increase the wholesale price.
82
Mathewson and Winter, Competition Policy & Vertical Exchange p15; Bork, The
Antitrust Paradox p290.
83 TPC v Bamix Australia Pty Ltd (1985) ATPR 40-534.
84 At 46,300.
85 At 46,308-46,309.
86 TPC v General Corporation Japan (Aust) Pty Ltd (1989) ATPR 40-922.
87 At 49,977.
88 Bamix at 46,300.
(1992) 14 ADEL LR
71
In this way, the supplier using rpm can, as if it owned its own retail
outlets, effectively extend its market power into the retail area through
retailers subject to its rpm program and thereby buttress its supracompetitive profits. This dynamic effect of rpm on the price is simply
explained in a letter signed by the second respondent in the Bamix case
as follows:
The structure of things must have a point of direct
demonstration to keep the price at a constant level. Always
upward, not decreasing or discounted.89
Also, the retailers' increased profits resulting from rpm is not money out
of the manufacturers' pockets without good reason. 90 They are the price
paid by the manufacturers to retailers for their patronage and cooperation
in collectively bargaining with consumers or coercing them to accept a
constantly increasing retail price. As one supplier put it when persuading
a retailer not to discount, "There is only one person who benefits from
discounting, that is the public".91
Retailers' Market Power
A close relationship between retailers' market power and rpm can also be
found in the cases. Among the 27 reported rpm cases examined,
retailers' pressure, complaints and even threats not to deal are expressly
mentioned in 8 cases. 92 In another 4 cases, the retailers other than the
one being targeted were expressly observed to have adhered to the retail
price specified by the suppliers. 93 In Commissioner of Trade Practices v
Caltex Oil (Australia) Pty Ltd,94 the supplier's specified price was
actually recommended and published by a retail trading association, and
89 At 46,303.
90 Bork, The Antitrust Paradox p290.
91 Commissioner of Trade Practices v Caltex Oil (Australia) Pty Ltd (1974) 23 FLR
457 at 480.
92 These cases are: Mikasa, Pye Industries, Ron Hodgson v Westco Motors, Bata
Shoe,ICI, Orlane, The Heating Centre and Annand & Thompson.
93 These cases are: Caltex Oil, Stihl Chain Saws, Lois and BP Australia.
94. Commissioner of Trade Practices v Caltex Oil (Australia) Pty Ltd (1974) 23 FLR
457.
72
WANG, DAVISON - RESALE PRICE MAINTENANCE
quoted by the supplier and the retailers as a "normal retail price".95 In
Festival Store v Mikasa (NSW) Pty Ltd, it was found that retailers
generally relied upon each other confidently in observing the specified
retail price. 96 In TPC v Pye Industries Pty Ltd, a sales representative of
the defendant company complained to a discounting retailer that a lot of
television dealers in the Gosford area were driving him mad and ringing
up everyday. Then he said that "you will find most of the retailers in the
Gosford - it does not matter which one you go to - are all on about
$799".97
When the discounter still advertised and sold TV sets" at a price of $749,
other retailers complained most strongly and threatened not to support
Pye any more if the discounting continued. 98
It should be mentioned here that the retailers' complaints and the
suppliers' requests mentioned above were not concerned with any freeriding problem except in one or two cases which will be discussed later.
No express evidence has been found that all retailers in a market
organized a formal cartel and coerced a manufacturer into imposing rpm.
However, evidence does show that some major retailers in a local market
effectively created so much pressure that the supplier had to approach the
complained of discounter and induce him to stop discounting. For
example, in TPC v Orlane Australia Pry Ltd, a pharmacist, in competing
with a Myer Store and another retail establishment in Launceston,
advertised Orlane cosmetic products for sale at a discount up to 25% off
the normal retail price. The other two retailers complained about this to
the general manager of Orlane, who later closed the phannacist's
account.99 In the marketplace, a supplier will usually sacrifice the
interests of small retailers for the patronage of the big ones whenever the
two groups conflict with each other. In this case Myer's and the other
95 As above, Cn 94.
96 Festival Stores v Mikasa (NSW) Pty Ltd (1971) FLR 260 at 266.
97 TPC v Pye Industries Pty Ltd (1978) ATPR 40-088 at 17,854. See also Pye
Industries Ltd v TPC ATPR 40-124.
98 (1978) A TPR 40-088 at 17,854-17,856.
99 TPC v Orlane Australia Ply Ltd (1983) ATPR 40-348 at 45,017. For the
subsequent appeals, see (1983) ATPR 40-375, (1984) ATPR 40-437.
(1992) 14 ADEL LR
73
department store's services such as stocking and displaying provided
obvious reasons for Orlane to choose them.
Bilateral Market Power
It appears that the bilateral market power theory applies to most cases
where both the supplier's degree of market power and the strong
adherence of retailers to a specified price can be observed. Retailers'
complaints or threats can also be a signal of bilateral co-operation under
certain circumstances. Hence, some of the cases mentioned in the
preceding paragraphs may alternatively be explained by this theory.
For the bilateral market power theory to apply, it is not necessary that a
supplier and related retailers act on the basis of an express agreement. It
is enough that an rpm program benefits both of them and none of them
dislikes or opposes the practice. However, this requirement must also be
met by any significant potential entrants.
Re Books, although a Tribunal case, provides an obvious example of
bilateral use of rpm. Major book publishers and retailers applied to the
Trade Practices Tribunal for exemption for rpm in the book trade. 1oo
This seems to have been mainly for the purpose of maintaining a stable
and comfortable industry structure for publishers and retailers.
Another case, TPC v David Jones (Australia) Pty Ltd,101 can also fit the
bilateral theory very well. After a five-month price war in the market of
Sheridan brand manchester in Adelaide, a director of the supplying
company promoted a meeting between representatives of a number .of
retailers. The director distributed a list of suggested retail prices for
Sheridan products and later the list was quoted as "the agreed prices".
Soon after the meeting, the price structure of the retailers demonstrated a
dramatic uniformity, all being at 70% above the wholesale price. Fisher
J held that the director and the retailers reached an understanding to fix
prices contrary to s45 of the Trade Practices Act 1974 (Cth). This
finding was made as a matter of inference drawn from the circumstantial
100 Re Books (1972) 20 FLR 256.
101 TPC v David Jones (Australia) Pty Ltd (1986) ATPR 40-671.
WANG, DAVISON - RESALE PRICE MAINTENANCE
74
evidence which revealed both an incentive and opportunity to arrive at
such an understanding as well as subsequent concurrent acts of and lack
of sworn evidence from the respondents. 102 His Honour did not find that
the director's conduct had contravened the rpm provisions of the Act.
This seems mainly because of the different requirements of s45 and
s96(3) and that "[t]here is no evidence of pressure by Zellen [namely the
director] or Corcoran [the supplying company] on the retailers" and
therefore inducement or attempted inducement could not be
established. 103 However, from an economic point of view, what matters
is the market situation where the retail price "suggested" by a supplier
was observed by all retailers. In this sense, this case can well be seen as
an rpm case, although it was dealt with as a case of horizontal price
fixing.
The most interesting and relevant part of the decision in that case is
Fisher J's analysis of the motivation of both the supplying company and
the retailers. In respect of the supplying company, his Honour found that
Corcoran was particularly concerned that if discounting
continued, the retailers would reduce their purchase of
Sheridan products because of inadequate profit margins.
Zellen was clearly a party to the understanding with a
significant role to play in giving effect to one provision
thereof, namely the approach to the discounters. 104
In respect of the retailers, it was found that "it was the retailers or some
of them who took the initiative and prior to the meeting complained to
Corcoran concerning the discounting" .105
Both the director and the retailers were found to have been prompted by
"a common desire to curtail the practice of discounting" .106 The supplier
obtained a guaranteed source of distribution and laid a basis for
102 At 47,398.
103 At 47,418.
104 At 47,416.
105 At 47,417.
106 At 47,413.
(1992) 14 ADEL LR
75
stabilizing and increasing the wholesale price in the future and the
retailers got more profits.
It can be expected that many businesspeople would adopt the same
thinking in similar circumstances. So the "common desire" found in this
case may well have been shared by retailers and suppliers in other rpm
cases where retailers' pressure and suppliers' market power can be
observed. But it should be noted that in some cases, as will be seen later,
suppliers may also worry about the damage an extremely low retail price
would cause to the product image or to the general activity of dealers.
Retailers may also complain about discounting because of "unfair"
competition presented by free-riding discounters. Only where all these
factors are irrelevant can we be sure that the concurrent retailers'
complaints and supplier's refusal to deal possibly signify a bilateral
cooperation in using rpm.
RPM Cases and Efficiency-Enhancing Explanations
It will be remembered that the efficiency-enhancing explanations regard
rpm as being able to stimulate extra dealers' services, quality inputs or to
ensure the viability of a sufficient number of retail outlets. In this way, it
is said, rpm can have the effect of increasing the total output and thus
benefit individual manufacturers using it.
RPM and Special Services
Theoretically, free services offered by dealers may increase the demand
for certain products. Among these services are display, demonstration,
repair, catalogues, fitting, trial, advice and information, etc. Offering of
these services may attract demand mainly because these will give
consumers greater convenience, confidence and detailed knowledge
when buying the product. Other activities of dealers which especially
contribute to the quality image of the products supplied will be discussed
later.
To assess the applicability of the special service theory, it is necessary to
test the theory by facts found in the rpm cases. We will first consider
76
WANG, DAVISON - RESALE PRICE MAINTENANCE
features of the products subject to rpm in the cases and then examine a
few cases in which dealers' services have been claimed to be important.
It appears that for the dealers' services to attract extra demand, the
product to which the services are related may tend to be complex and
new to consumers. The demand for simple products or products with
which consumers are familiar may not be increased by dealers' services
stimulated by rpm. This is because consumers can "serve" themselves by
their own knowledge of simple products. For this reason, the products
subject to rpm in the decided cases should be considered first in order to
assess the applicability of the special service theory.
TABLES:
Respondent
PRODUCTS SUBJECT TO RPM IN 36 RPM CASES 1971-1990
Product
Mikasa
tableware
Holiday Magic
cosmetics & toiletries
Matsushita
TV sets
Hoover
electrical products
BASF
cattle tickicide
Dalgety
air-conditioners
Cedel
health and beauty aids
Laycock,Son & Co
blankets
Amoco
petrol
BP AustLtd
petrol
Caltex Oil
petrol
Sharp
electronic calculators
Stihl Chain Saws
chain saws
MadadLtd
mattresses
Malleys
white goods
Pye Indus
TV sets
Westeo Motors
cars
(later Kensington Hiring)
Bata Shoe Co
leather footwear
Dunlop Aust
sporting clothing
Simpson
white goods
ICI
swimming pool treatment
chemicals
O'Brien Glass
car windscreens
Indus Ltd
Gorenje Pacific
refrigerators
Orlane Aust
cosmetics
Mobil Oil
petrol
Brand
Particular
Mikasa
N/A
National
N/A
BASF
Bonaire
Cedel
Laconia
Amoco
BP
Caltex
Sharp
Stihl
Sealy
Whirlpool
Pye
Mazda
s
s
c
c
c
c
s
s
s
s
s
c
c
s
c
c
c
Bata
Adidas
Simpson
N/A
s
s
c
c
N/A
s
N/A
Orlane
Mobil
c
c
s
77
(1992) 14 ADEL LR
Respondent
Product
Bamix Aust
distinctive type of
Bamix
household
and kitchen appliance (food
machines slicers, salad makers,
tea and coffee makers, jugs etc)
jeans and jackets
N/A
Kent Tile
heaters
BP
petrol
Dunlop
motor cycle tyres
electrical prod (TV sets, VCR, General
air-conditioner, cash registers)
BMW
cars
Golden Fleece
petrol
Amiga
computers
Jag
clothes
Sony
el,ectronic products
Lois
The Heating Ctr
BP Aust
Annand & Thompson
General Corp Japan
Capitol Motors
Golden Fleece
Commodore
Palmer
Sony
Brand
Particular
c
s
c
s
s
c
c
s
c
s
c
*N/A = not available; c = complex; s = simple.
Note:
The total number of rpm cases observed is 36. For the purposes of this
table, the three cases involving Simpson are treated as one case. Another two cases
involving Westco Motors are dealt with in the same way. The two cases in which rpm
was not established, Peter Williamson Pty Ltd v Capitol Motors Ltd and TPC v
Golden Fleece Petroleum Ltd have been included in this table.
Source: ATPR and the TPC, Annual Report, 1977-78, Schedule 1.
As can be expected, almost all products listed in Table 5 were branded.
This satisfies a presumption of the special service theory that individual
manufacturers using rpm only want to increase the demand for their own
brands and avoid free-riding by others. In the 36 cases, complex
products were involved in 19 cases. While it is certain that the special
service theory can not explain the 17 cases in which simple products
were involved, it can not be certain that this theory can explain the other
19 cases in which complex products were involved.
First, the
categorisation in Table 5 was conducted by the authors, and therefore is a
quite subjective assessment of the complexity of these products.
Secondly, the fact that some products were complex does not mean that
they were also new to consumers when they were subject to rpm.
Finally, even if they were both complex and new to consumers, it does
not necessarily follow that the respondents' engagement in rpm in these
78
WANG, DAVISON - RESALE PRICE MAINTENANCE
cases was really for the purpose of stimulating extra dealer's services.
The complexity of products is only one precondition of the theory.
However, the great number of the cases in which complex products were
involved does provide some suggestion that the special service theory
may explain some rpm.
On the other hand, in some rpm cases in which complex products were
concerned, evidence has been found that rpm had little to do with dealer's
service. This can be seen partly from Table 6.
TABLE 6: RPM CASES IN WHICH ADVERTISING DISCOUNTING WAS
EXPRESSLY OBJECTED TO BY SUPPLIERS 1971·1990
Respondent
Product Involved
Caltex
Sharp Corp
Pye Indus Ltd
Kensington Hiring (Westeo Motors)
Simpson
Gorenje Pacific
General Corp Japan
Bamix
Commodore
Sony
petrol
electronic calculators
TV sets
cars
white goods
white goods
electronic products
household and kitchen appliance
computers
electronic products
Source: ATPR and FLR.
In the 10 cases listed in Table 6, complex products were involved in 9
cases. Evidence shows that the respondents in these cases objected
specifically to advertising discounting by all retailers and were not
concerned how the retailers did their business otherwise. Also, special
services were not mentioned in these respondents' explanation for their
use of rpm. A good example is some white goods suppliers strongly
adhering to a "Minimum Advertising Price" policy.107 These suppliers
allowed dealers to offer secret discounts but strongly objected to dealers
107 See TPC v Simpson Pope Ltd (1980) AlPR 40-169; TPC v Gorenje Pacific Pty
Ltd (1983) ATPR 40-430.
79
(1992) 14 ADEL LR
advertising discounts. In TPC v General Corporation Japan l08 in which
household electronic products were involved, a regional manager of the
respondent told a retailer:
Remember, you can sell whatever price you like on the
shop floor, within reason. By that I mean within $10 of the
prices I have given you. But on no account are you to go
advertising at a discount. These prices I have given you are
the prices at which you can advertise. 109
In situations such as this, it is most unlikely that suppliers' motivation for
using rpm is to prevent free-riding and stimulate extra dealer's services,
although it may be relevant to preservation of the product image.
It is not clear whether the special service theory can explain the other 10
cases in which the complex products listed in Table 5 were subject to
rpm. The judgments of 3 of these cases are not available. 110 In the 7
cases left, dealer's service was raised as an issue or a reason for using
rpm only in 2 cases. Dealer's service was raised as an issue in 2 other
cases which were concerned with simple products. This is summarized
in Table 7.
TABLE 7 :
RPM CASES IN WHICH DEALER'S SERVICES WERE
CLAIMED TO BE IMPORTANT
Respondent And Product
Services Required
Evidence
Mikasa (tableware)
Stihl Chain Saws
(chain saws)
Bata Shoe Co (leather shoes)
displaying
free repairing
under warranty
seating and fitting
displaying and repairing
instruction and advice
contradicted
not contradicted
ICI (pool treatment chemicals)
not contradicted
not contradicted
Source: ATPR and FLR.
108 TPC v General Corporation Japan (1989) ATPR 40-922.
109 At 49,972.
110 These cases were brought by the then Commissioner of Trade Practices under the
Restrictive Trade Practices Act 1971 (Cth). The respondents in these cases are
Matsushita Elec Co Aust Ltd, Hoover Aust Ltd and BASF Aust Ltd.
80
WANG, DAVISON - RESALE PRICE MAINTENANCE
Infonnation in Table 7 is collected from the 27 rpm cases for which
judgments are available. In Festival Stores v Mikasa (NSW) Pty Ltd,111
the respondent refused to supply a special line of branded tableware to a
group of retail discount stores allegedly because these stores lacked space
to display the tableware in a way satisfactory to the respondent. The
respondent's claim was found to be unconvincing because it turned out
that the respondent supplied the product in question to many hardware
stores where the standard of display and services was not as high as that
demanded by the respondent of the applicant. This case will be
discussed further when diversity of retailing is considered below.
Stihl Chain Saws has already been mentioned in the section on special
service. In respect of the service issue in that case, Smithers J stated:
In the course of the proceedings, an attempt was made by
the defendant to establish that the motivation for its conduct
in relation to the MBS [MBS was the target retailer who
conducted extensive advertising discounting and provided
mail order services] advertisements was that MBS had
failed to perform their obligations to purchasers under the
terms of the warranty applicable in respect of sales of Stihl
products. I do not believe there was any significant failure
in this respect.
The real concern of the defendant
concerning warranty was different, namely that country
purchasers sometimes applied to the nearest country Stihl
dealer for service under the warranty in respect of saws
purchased from MBS.112
Although recognizing that the conflict between the discounter and other
retailers worried the defendant, his Honour did not find this to be a
lawful reason for contravening the rpm provisions. It appears that this
decision is economically sound because the defendant could have given a
special rebate to those retailers who could have easily proved that they
had provided the service under the warranty by presenting receipts
signed by consumers receiving the service. The defendant could have
also employed territorial division amongst its retailers. This practice is
111 Festival Stores v Mikasa (NSW) Pty Ltd (1971) 18 FLR 260.
112 TPC v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR 40-091 at 17,891.
(1992) 14 ADEL LR
81
not unlawful per se and, in any event, authorization could have been
sought for it by the defendant. The fact that this alternative was not used
seems to support a conclusion that the defendant's real motivation was
mainly to maintain a high retail price so that the pressure from retailers
for reducing the wholesale price could be eliminated. This conclusion is
supported by the fact that only 5 % of chain saws sold by MBS were by
mailorder. 113
In TPC v Rata Shoe Co of Australia Pty Ltd,114 the respondent's New
South Wales agent discontinued supplies of Bata leather footwear to
Woolworths. The reason given by the respondent was that it was its
policy not to sell its products to retailers who did not have proper
facilities and staff for fitting shoes or adequate after-sales service to deal
with enquiries or complaints from customers. However, the facts were
that the respondent supplied various non-leather shoes to virtually all
retailers without mentioning this policy, and no complaints had been
received from a customer about service received when purchasing Bata
footwear from a Woolworths store. But complaints were received in
relation to services provided by other retailers to whom the respondent
supplied its products. Lockhart J stated a number of facts and then
concluded:
Notwithstanding the limited steps taken by the respondent
to pursue, implement and supervise this policy, in my
opinion the policy exists and played a part in the
respondent's decision to not supply Woolworths with Bata
leather footwear after May 1977. 115
However, his Honour also found another substantial reason for the
respondent's conduct, that is, Woolworths had discounted or was likely to
discount the footwear. 116 The managing director of the respondent
clearly
113 At 17,889.
114 TPC vBata Shoe Co ofAustralia Pty Ltd (1980) ATPR 40-161.
115 At 42,271.
116 At 42,275.
82
WANG, DAVISON - RESALE PRICE MAINTENANCE
did not want a price war on his hands between the
traditional retail outlets and a large discount organization
such as Woolworths. Also, if Woolworths was supplied
with Bata leather footwear, other large discounters, like
Coles and K-Man would have to be supplied too. This
would only compound the problem. 117
In fact, a large retailer (Myer Western Stores Ltd) complained to the
respondent and this prompted the respondent's conduct. So the rpm
practice in this case can be seen as a result of the respondent's choice
between two groups of retailers: one group comprised the so-called
traditional footwear retailers and the other comprised the discounters.
The respondent made such a choice not only because of its marketing
policy, but also because Woolworths' low price marketing policy would
soon create pressures from retailers to reduce the wholesale price. RPM
in this situation reduces diversity of retailing, prevents structural change
of retailing trades and limits choices available to consumers. The special
service issue in cases such as this is not a major concern of the suppliers.
This is demonstrated by the fact that consumers did not complain about
the services offered by Woolworths but complained about the services
provided by other retailers. It is also unlikely that consumers would go
into a traditional footwear retailing store and consume the sitting and
fitting facilities there and then buy the shoes they have tried there in
another discount store to save only 50 cents. II8
The last case listed in Table 7 is TPC v ICI Australia Petrochemicals
Ltd. 119 In 1976, ICI produced a chemical product named Baquacil for
cleaning pools and marketed it through retail outlets normally serving the
swimming pool trade. After a successful advertising campaign, ICI
began to expand its business and supply Baquacil to any retailer seeking
supplies.
Disadvantage in that system soon became apparent. Many retailers did
not have the expert knowledge to advise customers on the proper use of
117 At 42,272.
118 At 42,272. Woolworths sold the shoes 50 cents below the traditional footwear
retailers price.
119 TPC v ICI Australia Petrochemicals Ltd (1983) ATPR 40-364.
t
(1992) 14 ADEL LR
83
the chemical, to provide after-sale service or to advise customers on
problems arising from the use of the chemicals. As a result, many
complaints about the chemicals were received by ICI and the product
began to get a bad name. The complaints resulted from improper use of
Baquacil and absence of proper advice and servicing from retailers. 120
Facing this problem, leI introduced a new distribution system in 1978.
Certain "retailer criteria" were adopted and a number of seminars were
organized. Although price adherence was deleted from the final
document setting out ICI's distribution criteria, its representatives still
made speeches at a seminar inducing or attempting to induce the retailers
present not to sell the chemicals at less than the price specified by ICI.,
In his affidavit the general manager of ICI hypothesized how the
contravention occurred:
[R]etailers would only provide effective service and
technical support for Baquacil if they made good profits
from its sale; and this would only occur if retailers charged
sensible prices, protected their margins, and did not engage
in price cutting. 121
Despite the fact that this logic was not contradicted, ICI was still ordered
to pay a pecuniary penalty of $20,000. Northrop J appeared to think
that, if carefully planned, the implementation of the new distribution
policy could have avoided contravening the rpm provisions. 122 But in
the face of the facts revealed by the judgment, it might be extremely
difficult, if not impossible, to find an alternative way to resolve the
problem facing ICI. The prohibition of rpm in this case may have made
it difficult for ICI to market Baquacil successfully.
In summary, dealers' services seem to be only a minor factor in the
decided rpm cases in Australia. Although about one half of the cases
observed involved complex products in relation to which dealers'
services might be important, the evidence about some respondents' strong
objections to advertising discounting by retailers and the absence of
120 At 44,366, per Northrop J.
121 At 44,369.
122 At 44,369 - 44,370.
84
WANG, DAVISON - RESALE PRICE MAINTENANCE
mentioning the service required tends to exclude the possibility that the
use of rpm in a majority of these cases was for the purpose of stimulating
extra dealer's services. Among the total 27 cases for which judicial
decisions are available, dealers' services were expressly claimed to be
important in only 4 cases. According to the detailed analysis above, only
one case, namely leI, can be well and completely explained by the
special service theory .123
It should be noted, however, that this finding may not fully reflect the
applicability of the special service theory and therefore should ~
construed with caution. First, the analysis above is based only on the
facts and arguments mentioned in the judgments. Secondly, the special
service theory, as expanded and developed later in a broad sense,
includes the emphasis on, and analysis of, various aspects of retailing
activities. A conclusion about the strength of this theory can only be
drawn in light of some other factors with which we will deal below.
Finally, the number of rpm cases in which complex products were
involved may suggest that there might be a potential greater than that
found here for the special service theory to apply.
Number ofRetail Outlets
The maintenance of a sufficient number of retail outlets was directly
raised as a reason for employing rpm in Books and this has been
discussed above. Since the failure of that case in 1972, no respondent in
the rpm cases analyzed has raised that argument again.
The outlet hypothesis was initially developed from the facts of Net Book
Agreement in the United Kingdom. Thus, the unique character of the
book trade may limit the applicability of the theory. However, despite
the fact that the outlet theory was not expressly invoked in other cases,
some respondents in the rpm cases did show strong concern over their
dealers' profit margins.
123 M ikasa may also be explained by the special service theory, see below.
(1992) 14 ADEL LR
TABLE 8:
85
DECIDED CASES IN WHICH RPM HAS BEEN ALLEGEDLY
USED TO PROTECT DEALERS' MARGINS 1971-1990
Respondent
Product
Dalgety Aust
Madad
Malleys
Pye Indus
Westeo Motors
Bata Shoe Co
Simpson
ICI
Gorenje Pacific
Orlane Australia
Mobil Oil
Bamix
General Co Japan
Sony
air-conditioners
mattresses
white goods
TV sets
cars
leather shoes
white goods
chemicals
white goods
cosmetics
Petrol
home and kitchen appliances
electrical products
electrical products
Retailers Pressure
evidence given
evidence given
evidence given
evidence given
evidence given
Source: ATPR and FLR.
In the 14 cases listed in Table 8, respondents were recorded as having
mentioned their dealer's margin as a reason for using rpm. In some of
these cases there is direct evidence to the effect that the absolute number
of retail outlets was not the concern of the respondents. For example, in
ICI, the respondent actually reduced the number of its dealers in
implementing the new distribution policy. It was concerned with its
dealers' margin because it required dealers to provide more technical
support for its product. In another 5 cases,124 retailers' pressure was
expressly mentioned. They either complained about discounting or
threatened not to support the respondents any more if discounting
continued. So the suppliers' concern over dealers' margins in these cases
could well be responses to the dealers' pressure rather than the initial
desire to attract more retail outlets. The situation in the other 8 cases is
not clear. One possibility is that suppliers use rpm to protect dealers'
margin in the hope that the latter will promote their products effectively.
This in tum can possibly achieve a promotion effect better than that
124 These cases are: Pye Industries, Bata Shoes, ICI, Orlane and Westco Motors.
86
WANG, DAVISON - RESALE PRICE MAINTENANCE
achieved through advertising or promotion of the products by the
suppliers themselves.
Diversity ofRetail Outlets
While there is no evidence that the respondents' concern over their
dealers' margin was related to their desire to maintain a sufficient number
of retail outlets, the diversity of retail style seems to have worried
suppliers very much.
TABLE 9:
RPM CASES IN WHICH DIFFERENT RETAILING STYLES
WERE INVOLVED 1971·1990
Respondent
And Product
Discounting Retailers
Complaining Retailers
Mikasa (tableware)
Stihl Co Aust
(chain saws)
Caltex Oil (petrol)
a group of discount stores
a dealer emphasizing mail
order sale and discounting
two privately owned stations
tradition~l outlets
country dealers
Bata Shoe Co
(leather shoes)
Orlane Aust
(cosmetics)
BP Aust (petrol)
Woolworths (a big discounter)
a petrol station lessee
Palmer (clothes)
a retailer selling at a market
a small pharmacist
Coowned and operated
stations
Myer and some traditional
footwear retailers
Myer and another dept
store
all other stations in the
area (not clear)
not clear
Source: ATPR and FLR.
Infonnation in Table 9 is based upon views expressed in the judgments
of the 27 rpm cases. It can only partially reflect the degree to which
different retailing styles worried suppliers. This is because some
judgments are quite short and simple, and retailers other than those being
directly targeted are mentioned in only a few cases. It is judged that
different retailing styles could be present and relevant in many other rpm
cases.
(1992) 14 ADEL LR
87
One case, Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd,125 vividly
illustrates how diversity of retailing typically causes trouble for
suppliers. Bursill, the respondent, was the Australian distributor of
sporting equipment manufactured by a French company. It was granted
an import monopoly for Salomon brand alpine ski boots, a market leader
which almost all retailers stocked. The applicant was a Sydney-based ski
equipment retailer who not only operated ski shops but also organized
sales in warehouses, townhalls and other short-leased, public halls
(warehouse sales) of discounted ski equipment. Because discounting was
an essential element of the warehouse sales, other retailers consistently
complained about "unfair competition" presented by these sales, given
their overhead costs in maintaining a continuing service to the public.
The respondent then refused to supply the applicant with the in-line ski
boots which were then in fashion. The respondent explained that this
was because the sale of these in-line boots needed special services which
could not be properly provided at warehouse sales, and also that the
warehouse sales were not good for the image of Salomon products.
These reasons for the refusal, however, were rejected by Wilcox J
because of inconsistency in the evidence. 126 The respondent was found
to have contravened both s46 and s47 of Trade Practices Act 1974 (Cth).
In respect of the motivation of the respondent for its refusal to deal,
Wilcox J stated that
it is clear that the purpose which actuated Mr Bursill's
decision to refuse the supply of in-line ski boots to Mark
Lyons for the 1987 season was the desire to protect his
established retailers from the competition presented to them
by Mark Lyon's sale. Some people may regard that as a
laudable motive but such a purpose clearly offends against
s46(1)(c).127
125 Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd (1987) ATPR 40-809
126 At 48,795. For example, the respondent did not object to the applicant selling
other Salomon products at warehouse sales and the services provided by the
applicant were at least not worse than those provided by other retailers.
127 At 48,802.
WANG, DAVISON - RESALE PRICE MAINTENANCE
88
The respondent also directly related its conduct to the conflict between
different retailers. The representative of the respondent argued that
retailers
will not give you the support that you require for the
marketing image, especially the marketing image of
Salomon boots, if somebody is roving around the
countryside with hit and run style tactics, dumping 100 to
200 pairs of boots in two days on the market. That is the
decision. That decision is based on economics. It is based
on the image that is being projected for the ski boot and the
image will not be supported by the retailers if we allow that
type of merchandising to take place. 128
Perhaps because the respondent did not specify a minimum retail price to
the applicant, this case was not concerned with the rpm provisions of the
Trade Practices Act 1974 (Cth). But the marketing problem facing
Bursill was identical to that facing the respondents in some rpm cases,
especially those listed in Table 9. Those cases indicate that rpm is most
likely to be found in relation to established brands and in the markets
where two group of retailers exist: one is comprised of aggressive
discounters, the other non-aggressive, traditional retailers. In Table 9 it
can be seen that this has happened mainly in relation to simple products
such as petrol, leather footwear, tableware and cosmetics. This seems to
suggest that rpm tends to be used in relation to those simple products for
which retailing styles are still changing.
Where these simple products are established brands, such as Mikasa
tableware and Orlane cosmetics, suppliers have a genuine interest in
maintaining a relatively high retail price. The high retail price is
perceived by the suppliers as being not only conducive to the high status
of the product, but also necessary to maintain a high wholesale price so
that there will be a reasonable return on the investment in projecting the
image of the product. At this point, some prestigious retailers have the
same interest because they, together with the manufacturers, contribute
most to the image of the product. Perhaps it is for this reason that the
128 At 48,801-48,802.
(1992) 14 ADEL LR
suppliers will naturally tend to choose the high-pricing retailers when
they conflict with discounters.
There is another related point which should be stressed here. Where
diversity of retailing styles is present, some suppliers may not object to a
low standard of display and other services offered by some retailers,
provided that these retailers do not discount the products. On the other
hand, these suppliers may strongly oppose retailers' discounting or
advertising discounting although some services may be provided by the
discounters.
This is quite understandable because, from the
manufacturers' point of view, discounting will discourage prestigious
stores from promoting the product strongly, and will also cheapen the
image of the product in the consumers' minds. It is not necessary for a
supplier to require all retailers to provide very good services in order to
project a good image for its product. For a good image of the product to
be built up, it is enough that some prestigious retailers promote the
product most strongly and other retailers do not discount the product.
But, if a manufacturer of an established brand refuses to supply a
discounter but supplies to some other retailers who neither discount the
product nor provide good services, this will be evidence before the court
that the real motivation of the manufacturer for the refusal is not related
to the service issue. For example, in Mikasa, the respondent refused to
supply the applicant discount chain stores with an established brand of
tableware, but supplied the tableware to a number of hardware stores
where the display of the product was not very good. This was found to
be inconsistent with the respondent's claim that its refusal had been for
the purpose of preserving the image of the product and ensuring a good
display of the product. 129 However, the real concern of the respondent
might have been to ensure that the good display of the tableware by some
retailers was not to be discouraged by discounting, although not all
retailers the respondent dealt with displayed the product very well.
In short, where different retailing styles are present and the products are
established brands, rpm is very likely to be used by suppliers to protect
the image of the products and active promotion by some prestigious
stores. The evidence about the suppliers dealing with different retailers
129 Mikasa (1971) 18 FLR 260.
90
WANG, DAVISON - RESALE PRICE MAINTENANCE
should be construed with caution and in light of the whole marketing
strategy of the suppliers so that the genuine interest of the supplier can be
taken into account.
Quality Certification
This issue has been briefly touched on in the discussion of different
retailing styles in the preceding section. This section deals solely with
the quality dimension of the rpm practice. Among the 27 rpm cases
examined, only 4 were expressly concerned with the image of the
respondents' product.
TABLE 10: RPM CASES IN WHICH PRODUCT IMAGE WAS A CONCERN
OF THE RESPONDENTS 1971-1990
Respondent
Product
Evidence
Mikasa
Westeo Motors
Lois
Palmer
tableware
Mazda cars
jeans and jackets
clothes
not contradicted
not contradicted
not contradicted
not contradicted
Source: ATPR and FLR.
In Festival Stores v Mikasa (NSW) Pty Ltd,130 the trial judges of the
Industrial Court noticed that the respondent company
has expended considerable energy and money in building
up for this tableware a reputation that it is a high quality
product appropriate for the requirements of the statusconscious hostess, and persons generally who desire to
possess and use high quality tableware. 131
In Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty
Ltd,132 it was found that the respondent had made repeated requests to
130 As above.
131 At 263, per Spice CJ and Smithers J.
132 Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd (1980)
ATPR40-143.
91
(1992) 14 ADEL LR
dealers not to cheapen the image of Mazda vehicles by advertising
discounts. 133 One of the requests included the following:
Westeo Motors as with other Mazda distributors throughout
Australia have spent many hundreds of thousands of dollars
to project an image of quality over the years and do not
intend to have this standard lowered with blatant price
discount advertising. 134
The respondent's concern over the image of Mazda cars was also
reflected in the fact that the applicant had not presented Mazda vehicles
in a way equal to the presentation of General Motors vehicles. Indeed,
this is one of several factors which Franki J summarized as "adequate
commercial reasons" for the respondent to terminate the applicant's
franchise. 135 This fact suggests that the case may also be partially
explained by the special service theory.
Another case, TPC v Lois (Australia) Pty Ltd 136 has been thought "to
neatly fit the quality and style certification theory" .137 The respondent in
that case, Lois, was incorporated in 1980, but did not commence
operations until 1982. In 1983 when it carried on business in Western
Australia as a "relatively small" wholesaler of high quality jeans and
jackets, it refused to supply its branded products to a fashion clothing
retailer who failed to agree to "a verbal gentlemen's agreement" not to
discount the products. The respondent admitted liability in action and
was ordered to pay a penalty of $5,000. Based on this set of facts, one
commentator has written as follows:
To successfully compete in the high fashion quality jean
and jacket market, a small, relatively unknown wholesaler
like Lois would need to distribute its garments through
stores with reputations as sellers of high fashion quality
133 At 40 089-40,090.
134 At 42 090.
135 At 42,088 and 42,089.
136 TPC v Lois (Australia) Pty Ltd (1986) ATPR 40-645.
137 Hampton, "Resale Price Maintenance: Economic
(Unpublished 1987) at 13.
t
t
t
and Policy
Analysis"
92
WANG, DAVISON - RESALE PRICE MAINTENANCE
merchandise. Consumers would perceive the decision of
such stores to carry Lois products as an independent signal
of the style and quality of the products ... Lois, faced with
the problem of the discounting practices of the two
partnerships, no doubt reasoned that it was better to lose the
custom of those two stores rather than risk alienating its
style-certifying retailers. 138
Foster J, when commenting on the advantage which might be gained by
the respondent by the contravention, appeared to recognize the
importance of the high quality image of the product to the respondent.
His Honour stated that
the advantage, if any, was a rather more intangible one of
preserving its image in the market which no doubt it hoped
would lead to some future financial benefit. 139
Similar considerations applied in TPC v Palmer Corporation Limited140
where the respondent was the manufacturer of "Jag" clothes which were
described as "up-market" clothes.
It is notable that many products subject to rpm were of high status or
imported or both.
TABLE 11:
RPM CASES IN WHICH THE PRODUCTS WERE OF "HIGH
QUALITY" 1971·1990
Respondent
Product
Other Particulars
Mikasa
Stihl Chain Saws
Madad
Westeo Motors
Simpson
Lois Aust
The Heating Centre
Gorenje Pacific
tableware
chain saws
mattresses
Mazda cars
white goods
jeans and jackets
heaters
white goods
imported
imported
imported licence
a market leader
high quality claimed
imported, a market leader
imported
138 Lois at 13-14.
139 At 47,227.
140 TPC v Palmer Corporation Limited (1990) ATPR 40-995.
(1992) 14 ADEL LR
(Table 11 cont)
Respondent
Sony
Palmer
Source: ATPR and FLR.
93
Product
electrical goods
clothes
Other Particulars
imported
"up-market"
The evidence outlined above tends to show that the quality certification
theory has a potential to explain the motives of at least some respondents
in the rpm cases.
Summary
The economic evidence summarized above tends to support the
following points. First, it has not been found that since 1971 rpm has
been used as a device to facilitate explicit price-fixing arrangements
either by groups of manufacturers or by groups of retailers, although
both rpm and price-fixing have been frequently found. 141 Compared
with the situation in the 1960's when rpm was often used in conjunction
with price-fixing,142 the conclusion seems to be that the Trade Practices
Act 1974 (Cth) has effectively cut the close relation between rpm and
price-fixing, and therefore has to this extent reduced the anticompetitive
effect of the two practices. This result is achieved mainly by
simultaneous enforcement of the rpm provisions and ss45 and 45A of the
Trade Practices Act 1974 (Cth). The per se illegality of both practices
considerably increases the possibility that engaging in the two practices
concurrently will lead to prosecution for one or the other offence.
Secondly, while rpm has been mainly used by individual suppliers, there
is also evidence that a few oligopolists in one industry concurrently used
141 According to recent research, the number of both public and private price-fixing
cases instituted from 1975 to 1980 is 9; from 1974 to 1988, the TPC instituted 16
price fixing cases altogether. See Brunt, "The Role Of Private Actions In
Australian Restrictive Practices Enforcement" (paper delivered at Inaugural
Meeting of the Competition Law and Policy Institute of New Zealand, September
1989) Table 2 at 22 and Table 4 at 24.
142 For example, see "Resale Price Maintenance" and "Collective Boycott" in
Tasmania, Royal Commission on Prices and Restrictive Trade Practices in
Tasmania, Report (1965) pp 12-15.
94
WANG, DAVISON - RESALE PRICE MAIN1ENANCE
similar rpm schemes in order to maintain or push upward the general
price levels, such as in the cases involving petrol and white goods.
These facts seem to suggest that, although there is no express finding in
any case that a few suppliers jointly maintained the retail price industrywide, this could readily happen if the per se ban on rpm were to be
removed.
Thirdly, nearly half the individual suppliers using rpm had various kinds
of market advantage, and one of them was found to have had a
"monopoly". Although these market advantages did not necessarily give
the suppliers possessing them a substantial degree of market power, these
advantages did give them some degree of discretion to market their
products independently of market pressure. In some extreme situations,
such as in Bamix and General Corporation Japan, suppliers with strong
market advantages were able to use rpm as an instrument to raise both
the wholesale and retail prices periodically. In this way, they effectively
extended their market advantage into the retail area and cooperated with
retailers in bargaining with consumers.
Fourthly, retailers still have a significant role to play in the operation of
rpm. Among the 27 rpm cases examined, retailers' complaints, pressures
and even threats not to deal are expressly mentioned in 8 cases. These
complaints, threats and pressures were not related to free-riding problems
in most cases. In another 4 cases, retailers were mentioned as having
strongly adhered to the retail price specified by the suppliers.
Unfortunately, details about the retailers' market positions are usually not
available in the judgments. To the extent they are, some evidence
suggests that big retailers with relatively stronger buying power in a
close local market could create pressure upon the supplier to withhold
supplies to small discounters. Orlane is an example of this.
Fifthly, the bilateral market power theory has a great potential to explain
a significant number of the rpm cases. Re Book and David Jones are
obvious examples. It is believed that in cases where there is pressure
from both retailers and a supplier has a certain degree of market
advantage and free-riding problems do not exist, some retailers and the
supplier are likely to share a common desire to stop discounting by using
rpm.
(1992) 14 ADEL LR
95
Sixthly, while market power theories have strong support from the
analysis of the cases, it appears that the efficiency-enhancing theories can
also apply to a few cases, either completely or partially. Three kinds of
evidence are most relevant in this regard. One is that since 1971, rpm
has been used mainly by individual suppliers. This satisfies a very
important assumption of the efficiency-enhancing theories, that is, the
theory applies only to individual suppliers' use of rpm. Another kind of
evidence is that in 19 of the 36 143 cases the products subject to rpm were
complex or of high status or both. This constitutes another precondition
for the theory to apply: the more complex the product is, the more
important the dealers' services are. The final category of the evidence is
more direct. In 4 cases, the dealers' services were expressly mentioned
as a reason for using rpm. In another 4 cases respondents were found to
be genuinely concerned about the image of their product when using
rpm. Some suppliers' concern over their dealers' margin may also
partially reflect their desire to rely upon retailers to promote their
products by offering good services.
However, it should be noted that although rpm might have been used in a
few cases to stimulate dealers' services or protect the image of the
product, there could be some alternative and less anticompetitive
techniques for resolving the problems facing the suppliers.
It should also be noted that in some cases the efficiency-enhancing
motivation could exist together with some anticompetitive motivation.
In a few cases the trial judges actually found mixed reasons for the
refusal to deal by the respondent. An example of this is Westco Motors.
As for the newly developed theories such as demand uncertainty, quality
inputs by retailers and non-free-rideable special services, nothing
significant has been found in the cases.
Finally, it is necessary to point out the limitation of the case analysis
here. It ignores the fact that not all rpm practices have been found and
judicially dealt with and these unknown rpm practices might bear
143 These 36 cases include the unreported decisions and the dismissed actions. The
multiple actions against Simpson are counted as one as are the actions against
Westeo Motors.
96
WANG, DAVISON - RESALE PRICE MAINTENANCE
different features from those analyzed. Also, due to the per se nature of
the ban on rpm, the judgments of rpm cases do not reveal all relevant
matters. These factors may, to a certain extent, limit the correctness and
applicability of the analysis above.
POLICY IMPLICATIONS
The detailed study in the previous sections has found little of
significance to rebut the traditional treatment of rpm. RPM in most cases
lessens competition with little redeeming benefit and the arguments from
the Chicago School of Economics that it is pro-competitive are largely
inapplicable in Australia for a number of reasons.
First, these theories apply only where rpm is initiated by a single
manufacturer. This is not the position in many cases in this country.
RPM can be used by manufacturers in response to some major retailers'
complaints about price-cutting.
The true motivation of the
manufacturers may be very complicated. It can be either to prevent freeriding or to maintain the custom of some important retailers with
substantial market power, or even a combination of both. RPM can also
be, and was, used by a few major suppliers in one industry concurrently.
Different retailing styles may also stimulate retailers to require rpm from
suppliers. In many of these situations, the efficiency explanations seem
inapplicable.
Secondly, and more importantly, even if rpm is initiated by a single
manufacturer and does attract extra demand as claimed by the efficiency
theory, increased output so obtained may not signify an increased
welfare on balance. The net welfare consequences of efficient use of
rpm may be a loss to consumers as a whole. Practically, unless obvious
public interests are present, it will be very difficult and costly to weigh
marginal consumers' increased welfare and realized economies of scale
against welfare losses of infra-marginal consumers. However, there
might be a small number of cases in which parties can convincingly
prove this. Under such exceptional cases, the per se ban on rpm might
lead to undesirable results.
(1992) 14 ADEL LR
97
In summary, the per se illegal approach seems to be supported by the
case analysis above. It shows that the prohibition of rpm in most of the
decided cases is economically justifiable. It is unlikely that a continued
prohibition of rpm would cause any significant harm, inconvenience and
inefficiency except in a very few exceptional cases. It should be noted
that the present per se illegal approach also has the benefit of simplicity
and economy. Compared with other alternative legal treatments, it
minimizes enforcement costs and shortens the time spent on litigation.
Exceptions to the Per Se Prohibition
Given that a general per se prohibition of rpm is justified, are there any
circumstances in which an exemption from the operation of the per se
prohibition should be granted and, if so, what should be the extent of that
exemption?
One possibility in the light of the fact that some rpm programs may be
efficiency enhancing is to introduce authorisation of rpm. Under the
Restrictive Trade Practices Act 1971 (Cth), exemption from the
prohibition on rpm was possible but only one application for exemption
was ever made and it was rejected. 144
In contrast, New Zealand legislated in 1990 to allow authorisation of rpm
after originally imposing a blanket prohibition on rpm.145 Given the
push for closer economic relations between these two nations, there is
something to be said for uniformity in approach towards such matters.
Although uniformity in itself would not constitute an appropriate reason
for permitting authorisation.
Despite the recent change in the New Zealand attitude to authorisation
and the evidence from the analysis above that rpm may be efficiency
enhancing in some circumstances, there are some sound reasons for
continuing with a blanket per se prohibition of rpm. It should be recalled
that the prime reason for having per se prohibitions is their
144 Re Books (1972) 20 FLR 256.
145 Commerce Act 1986 (NZ) 858(7).
WANG, DAVISON - RESALE PRICE MAINTENANCE
98
administrative simplicity.146 The introduction of an authorisation
procedure for rpm would diminish the present administrative simplicity
surrounding the enforcement of the prohibition of rpm. Scarce resources
of the COlIlmission would have to be devoted to considering the actual
effects of particular rpm schemes for which authorisation would be
sought. This is at a time when some authorisation applications already
take more than two years to process 147 and the Commission intends to
extend its role in the area of authorisation by reviewing 'old'
authorisations in order to assess whether sufficient public benefit
continues to flow from the conduct which is authorised. 148 Adding to
this task by pennitting applications for authorisation of rpm would not be
appropriate unless there was a number of cases in which there was a very
clear cut and easily identified public benefit. 149
This viewpoint can be supported by looking at the pre-conditions for a
per se prohibition. Those conditions have been considered by Kaysen
and Tumer: 150
[O]ne of three ... conditions must be met:
(1) The condemned practice is always harmful, whatever
the circumstances of its use ...
(2) The practice is sometimes harmful and sometimes
neutral, but never contributes positively to the working
of the market ...
(3) The practice is sometimes harmful, sometimes neutral,
and sometimes beneficial, but the aggregate of harm in
situations in which it is harmful far outweighs the
aggregate of benefit in situations in which it makes a
146 Kaysen and Turner, Antitrust Policy (Harvard University Press, Cambridge 1965)
p142.
147 Pengilley, "Editorial" (1991) 7 Australian and New Zealand Trade Practices Law
Bulletin 62.
148 Trade Practices Commission, Annual Report 1990-91 (Australian Government
Publishing Service, Canberra 1991) p20.
149 As noted by Pengilley, "Editorial" (1991) 7 Australian and New Zealand Trade
Practices lAw Bulletin 62 at 64 there is always a possibility that the
Commission's decisions on authorisation applications may be incorrect.
150 Kaysen and Turner, Antitrust Policy p143.
(1992) 14 ADELLR
99
beneficial contribution to the working of the market ...
In general, the frrst of these three conditions is never
met; it is the second and the third - especially the third
- which are practically relevant.
The analysis of rpm which was undertaken above suggests that rpm falls
into the third category mentioned by Kaysen and Turner in that in
Australia the aggregate of harm flowing from rpm outweighs the
Admittedly,
aggregate of benefit which might flow from it.
consideration of authorisation applications concerning particular rpm
practices is a slightly different proposition from a rule of reason
approach to every case of rpm but the issue of administrative simplicity
remains. The number of rpm practices which will unequivocally
promote a public benefit would not justify the resources which would be
devoted to consideration of those practices.
In addition, many of the pro-competitive aims of rpm practices can be
achieved by means other than the use of rpm. For example, free-riding
problems can be reduced by imposing non-price vertical restraints such
as geographical restrictions in retailing areas or practical measures such
as re-imbursing individual retailers for their after-sales services. The
ability to resort to such conduct to achieve the goals often sought by
using rpm further weakens the suggestion that the prohibition on rpm
should be watered down by permitting authorisation of rpm.
Interpretation of the Term 'Cost'
The one defence to engaging in rpm is the loss leader defence contained
in s98(2) which specifically permits
the withholding by the supplier of the supply of goods to
another person who, within the preceding year, has sold
goods obtained, directly or indirectly, from the supplier at
less than their cost to that other person(a) for the purpose of attracting to the establishment at
which the goods were sold persons likely to purchase
other goods; or
100
WANG, DAVISON - RESALE PRICE MAINTENANCE
(b) otherwise for the purpose of promoting the business of
that other person.
The defence is designed to enable a manufacturer to protect the image of
its product from a retailer which deliberately sacrifices that image in
order to attract purchases of other products.
Yet this defence has been invoked only twice 151 since 1971 when it was
frrst provided for in the legislation. 152 This may partially reflect the fact
that loss-leader selling has not been conducted frequently and extensively
in this country. The narrow interpretation of the term "cost" in s98(2) of
the Trade Practices Act 1974 (Cth) by the Full Court of the Federal
Court in Orlane may also be one of the reasons for the rare use of this
defence.
According to s98(2), the most important element of the loss leader
defence is to have re-sold the goods at less than "their cost to" the
reseller. At first instance in Orlane, Northrop J construed the word
"cost" as meaning the net acquisition costs plus at least the marginal
expenses on reselling which are referable solely and directly to the goods
resold. 153 On appeal, however, the Full Court of the Federal Court
overruled that construction and accepted a TPC submission that the word
'cost' in s98(2) meant net acquisition cost or landed or delivered cost of
the goods. 154 This interpretation considerably narrows the scope for use
of the defence.
In commercial reality, retailers resell the goods obtained for the purpose
of making a profit, otherwise they cannot continue their business
successfully. Thus from a theoretical, economic perspective, Northrop
J's interpretation of the term 'cost' is possibly preferable to that of the
Full Court of the Federal Court.
151 Commissioner of Trade Practices v Dalgety Australia Ltd (1973) FLR 62; TPC v
Orlane Australia Pty Ltd (1983) ATPR 40-347 at 40-375, (1984) ATPR 40-437.
152 See 868(2) of the Restrictive Trade Practices Act 1971 (eth).
153 TPC v Orlane Australia Pty Ltd (1983) ATPR 40-348 at 44,192.
154 At 45,017-45,021.
(1992) 14 ADEL LR
101
The consequence of the Full Court's interpretation of 'cost' is that it is
entirely possible for a retailer to use a manufacturer's product for loss
leadering without the manufacturer acquiring the right under s98(2) to
withhold further supply to that retailer.
However, any alternative interpretation would lead to a diminution of the
advantages of the per se prohibition of rpm. As noted by Kaysen and
Turner, the administrative logic of a per se prohibition requires that
the class of practices (or line of conduct) which is
forbidden must be readily identifiable. Both the firm acting
in the market and the administering tribunal should be able
to decide without difficulty, in a high proportion of the
situations which are likely to arise, whether or not
particular conduct is in the forbidden class. 155
The use of any interpretation of 'cost' other than that adopted by the Full
Court in Orlane's cost would result in considerable difficulty for the TPC
or any manufacturers in determining whether a retailer had sold at less
than cost.
Determining issues such as marginal expenses on reselling would be a
long and complex task which would substantially detract from the
administrative simplicity of the per se prohibition. In addition, those
companies which would be most likely to engage in rpm for anticompetitive reasons are those which have some degree of market power
and this market power might be reflected further by a willing financial
ability to engage in complex litigation on issues such as 'marginal' cost.
Consequently, there seems to be little choice but to accept the present
interpretation of s98(2).
We are left then with the ultimate conclusion that in spite of the views of
the Chicago School of Economics on rpm and recent alterations to the
law in New Zealand, the Australian rpm laws should be retained in their
present form. Further, enforcement of those laws should be a high
priority for the TPC.
155 Kaysen and Turner, Antitrust Policy p142.