The Internet phenomenon and free rider issues BY MARINA LAO* This article looks at Internet retailing and the free rider justification often asserted for resale price maintenance (RPM). It argues that the case for RPM as a means to control free rider problems is not strengthened by the advent of Internet retailers. While the Internet may increase the occurrence of free riding for some products, it may also reduce it for others. In fact, recent marketing studies tend to dispel the popular perception that Internet retailers are frequent free riders and that free riding is necessarily harmful. These new insights call into question the general assumption that free riding must be discouraged. But even if we view free riding from a conventional perspective, RPM may not be the most effective way to induce retailer services. In view of the many benefits of Internet retailing, antitrust law should disfavor a trade restraint that inhibits its growth, such as RPM, if there are alternative means of promoting retailer services that do not present similar risks. Promotional allowances could be such an alternative. The article concludes by explaining why a full rule of reason analysis is unworkable and suggests a rebuttable presumption of illegality as an alternative approach.
for their helpful comments and suggestions. I am also grateful to the Northwestern Law Searle Center on Law, Regulation, and Economic Growth for its selection of this paper for the upcoming Fourth Annual Conference on Internet Search and Innovation. My thanks also go to Colin Fraser (Seton Hall, class of 2013) and Drew Tidwell (Seton Hall, class of 2014) for their invaluable research assistance. Finally, I would like to thank Google Inc. for research funding, and the Maury Cartine Faculty Research Endowment for its continued financial support. The views and conclusions expressed here are solely mine, as are any errors.
This paper begins with an analysis of Leegin followed by an examination of the free rider theory, which concludes that the free rider explanation for vertical restraints has been greatly overused; the expansive variants of the theory, in particular, are flawed on their own terms. It argues for a more positive or neutral perspective of free riding as positive externalities. So viewed, free riding should not be considered a problem that must be countered (with RPM) whenever it exists. Under this view, free riding is probably infrequently harmful and therefore minimum RPM seldom provides the competitive benefits proponents of RPM claim for it. The paper briefly discusses the potential anticompetitive effects of minimum RPM. It then considers the policy implications of Leegin and argues for a quick-look rule of reason standard for minimum resale price maintenance in the wake of Leegin.
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