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

Exercise 12

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.
When defendant Leegin threatened and then refused to deal with Kay's Kloset, should that constitute a per se violation of the Sherman Act's prohibition against anticompetitive practices
No: A rule of reason should apply; legitimate manufacturer interest considers the customer target, the brand, and product positioning here for a luxury good; pointof- sale value-adding services are discouraged by renegade discounters; no motivation to high-end retail service can survive if free-riding is rampant.
Yes: Minimum price RPMs contractually restrain retail trade; minimum price RPMs foreclosure those seeking a discount shopping experience for inventory overruns; legitimate manufacturer interest in motivating upscale retail service can be accomplished in other ways without lessening price competition; the practice will not remain isolated to luxury goods if per se prohibition is replaced by a rule of reason.