CONTROVERSIES OVER ANTITRUST POLICY

Over time, much controversy has centered on the question of what kinds of behavior the antitrust laws should prohibit. Most commentators agree that price-fixing agreements among competing firms should be illegal. Yet the antitrust laws have been used to condemn some business practices whose effects are not obvious. Here we consider three examples.

Resale Price Maintenance One example of a controversial business practice is resale price
maintenance, also called fair trade. Imagine that Superduper Electronics sells DVD players to retail stores
for $300. If Superduper requires the retailers to charge customers $350, it is said to engage in resale price
maintenance. Any retailer that charged less than $350 would have violated its contract with Superduper.

At first, resale price maintenance might seem anti competitive and, therefore, detrimental to society. Like an agreement among members of a cartel, it prevents the retailers from competing on price. For this , reason, the courts have often viewed resale price maintenance as a violation of the antitrust laws.

Yet some economists defend resale price maintenance on’two grounds. First, they deny that it is aimed at reducing competition. To the extent that Superduper Electronics has any market power, it can exert that power through the wholesale price rather than through resale price maintenance. Moreover, Superduper has no incentive to discourage competition among its retailers. Indeed, because a cartel of retailers sells less than a group of competitive retailers, Superduper would be worse off if its retailers were a cartel.

Second, economists believe that resale price maintenance has a legitimate goal. Superduper may want its retailers to provide customers with a pleasant showroom and a knowledgeable sales force. Yet without resale price maintenance, some customers would take advantage of one store’s service to learn about the DVD player’s special features and then buy the item at a discount retailer that does not provide thisservice . To some extent, good service is a public good among the retailers that sell S uperduper products.
As we discussed in Chapter 11, when one person provides a public good, others are able to enjoy it without paying for it. In this case, discount retailers would free ride on the service provided by other retailers, leading to less service than is desirable. Resale price maintenance is one way for Superduper to solve this free rider problem.

Predatory Pricing Firms with market power normally use that power to raise prices above the competitive level. But should policymakers ever be concerned that firms with market power might charge prices that are too low? This question is at the heart of a second debate over antitrust policy.

Imagine that a’ large airline, call it Coyote Air, has a monopoly on some route. Then Roadrunner Express enters and takes 20 percent of the market, leaving Coyote with 80 percent. In response to this competition, Coyote starts slashing its fares. Some antitrust analysts argue that Coyote’s move could be anti competitive: The price cuts may be intended to drive Roadrunner out of the market so Coyote can recapture-its monopoly and raise prices again. Such behavior is called predatory pricing.

Economists continue to debate whether predatory pricing should be a concern for antitrust policymakers. Various questions remain unresolved. Is predatory pricing ever a profitable business strategy? If so, when? Are the courts capable of telling which price cuts are competitive and thus good for consumers and which are predatory? There are no simple answers.

Tying A third example of a controversial business practice is tying. Suppose that Makemoney Movies produces two new films-Spiderman and Hamlet. If Makemoney offers tlieaters the two films together at a single price, rather than separately, the studio is said to be tying its two products.

When the practice of tying movies was challenged in the courts, the Supreme Court banned it. The court reasoned as follows: Imagine that Spiderman is a blockbuster, whereas Hamlet is an unprofitable art film. Then the studio could use the high demand for Spiderman to force theaters to buy Hamlet. It seemed that the studio could use tying as a mechanism for expanding its market power.

Many economists are skeptical of this argument. Imagine that theaters are willing to pay $20,000 for Spiderman and nothing for Hamlet. Then the most that a theater would pay for the two movies together is $20,000-the same as it would pay for Spiderman by itself. Forcing the theater to accept a worthless movie as part of the deal does not increase the theater’s willingness to pay. Makemoney cannot increase its marketpower simply by bundling the two movies together.

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