Free Riding: An Overstated, and Unconvincing, Explanation for Resale Price Maintenance

Abstract

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.

Resurrecting 'A Comprehensive Charter of Economic Liberty': The Latent Power of the Federal Trade Commission

“…It sets a floor on retail prices and prevents retailers from competing freely on price. 203 The harms extend beyond higher retail prices in the short run. With diminished price competition at the retail level, retailers are likely to put less pressure on upstream distributors and manufacturers to cut wholesale prices.…”