Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 9

Do Luxury Good Manufacturers Have a Legitimate Interest in Minimum Resale Price Maintenance: Leegin v. Kay's Kloset
Conduct an in-class debate on a recent antitrust case and whether it was decided correctly. The case is Leegin Creative Products, Inc. v. PSKS, Inc., DBA Kay's Kloset, 551, U.S. (2007). Leegin of Dallas Texas makes upscale leather accessories somewhat like Coach leather goods. Kay's Kloset had a standard-form manufacturer-retailer contract to carry Leegin's products as an independent retail distributor. When Kay's Kloset persisted in discounting its leather accessories below the suggested manufacturer's price, Leegin cut it off from further shipments. After several competing lower court decisions, for the first time ever, the U.S. Supreme Court accepted the argument that a manufacturer's business model can be so dependent on upscale positioning that a rule of reason should apply to minimum resale price maintenance agreements. In other words, such a manufacturer could legitimately refuse to deal with an independent retailer solely on the grounds that the retailer was in violation of the manufacturer's minimum suggested retail price. Such a practice had previously been ruled a per se violation of the antitrust statutes-specifically, an anticompetitive restraint of trade.
Did Leegin form an illegal agreement with Kay's Kloset
No: Vertical restraints are appropriate in manufacturer-distributor relations; upscale positioning requires coordination throughout distribution channels; the agreement was initiated by the manufacturer, not other Leegin distributors seeking protection from price discounting by Kay's Kloset; no contractual agreement about minimum RPMs is in evidence.
Yes: Minimum price RPMs are highly correlated with 19-27 percent price increases; independent retailers should have incentives to provide distributional efficiency, not price protection from lower-cost outlets; volume discounters like Macy's will be less able to bargain with Leegin for lower prices.