How the Leegin Decision Will Hurt Consumers on the Internet

by Greg Beck

In Leegin Creative Leather Products v. PSKS, the Supreme Court last week overturned the nearly century-old rule in Dr. Miles Medical Co. v. John D. Park & Sons Co. that an agreement between a manufacturer and a distributor to set minimum prices is a per se violation of antitrust law. In doing so, the five-justice majority was persuaded by the amici curiae brief of twenty three economists, who argued that, at least in some cases, the availability of less expensive products on the Internet may be bad for consumers. The Supreme Court found persuasive the economists' argument that minimum-price agreements can help avoid the so-called "free-rider problem," which comes up when consumers shop at traditional retailers to make their decisions about what to buy but then use the Internet to find the cheapest available price. As the economists wrote:

A customer may take advantage of one retailer's informed sales staff, hands-on demonstrations, and convenient shopping locations and hours. Having received the value of those services, the customer may then purchase the product from another retailer that does not provide the same level of service and, therefore, can afford to sell the product for less. See Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ. 86 (1960); G. Franklin Mathewson & Ralph A. Winter, The Incentives for Resale Price Maintenance Under Imperfect Competition, 21 Econ. Inquiry 337 (1983). For example, a customer may inspect, try out, and learn about a particular type of digital camera at a highend retailer but then purchase the product from a discount retailer, through mail order, or over the internet.

So high-end retailers, the argument goes, face a threat from cheaper Internet competitors.  Allowing minimum price agreements will supposedly eliminate the free-rider problem by preventing discounters from undercutting the prices of these retailers. Since consumers won't be able to buy the camera cheaper on the Internet, they might as well buy it at the expensive retailer, allowing the retailer to survive and benefit other consumers with its services. However, as Justice Breyer points out in his dissent, there doesn't appear to be any empirical evidence that this free-rider problem is in fact a problem, and, in any case, the so-called benefit to consumers comes only at the cost of higher prices. One of the only safe predictions about the decision, Justice Breyer writes, is "that it will likely raise the price of goods at retail."

One of the great benefits of the Internet is the ability it gives consumers to compare products and find the cheapest prices online. Leegin will make it easier for companies to ensure that goods for sale online are priced the same across all websites and between websites and traditional retail stores. Those consumers who have become used to finding Internet bargains will be rightly skeptical of the Supreme Court's assurance that higher prices are good for them.

Comments

[Brian Okin]

In addition, the evidence on price shopping doesn't hold that customers do research offline as much as they do research online. Online retailers are providing valuable ways for consumers to research online, yet only 1-2% of online shoppers to internet retailers buy from those internet retailers. Therefore, 98% of the people who browse websites actually are free riding on those websites. Forrestor research and other companies have conducted studies that show that for every time a consumer "free rides" on an offline retailer's assets, there are twice the amount of times that other consumers will "free ride" on internet retailer websites only to buy offline. It may sound counter-intuitive, but research shows that it happens more in this manner. People do more research online and then are uncomfortable buying online for many reasons including entering credit cards online, and other reasons.

[Greg]

Good point. Given the wealth of information that is available online, consumers' need for informed sales staff has been significantly reduced. But, establishing minimum prices could end up hurting online retailers and thus reducing the information available to consumers online.

[jack]

I shop backwards. I research price and features on the Web. Then I go to local stores, and if the item is carried at a price that is not too much higher than from an Internet store, I buy it. Convenience and time-saved are valuable products. So the local stores benefit from the Web. Many shoppers do what I do. I hate the practice of making up data and selling them to the Supreme Court.

[fed up]

Note to Brian Okin: You own homecenter.com, a website which SCAMS people. Avoid www.homecenter.com at all costs.........just google it and read the poor reviews or check out the Better Business Bureau.

[Brian Okin needs to read this]

Brian Okin has the nerve to write any comment regarding hurting business on the Internet. Just read about his companies and how much of a scam they are. Thousands of money he owes people and each time they catch up to him he changes the name of his company and starts all over. We need to get rid of this kind of low life before he infects everything on the web.