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Friday July 6, 2007 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. Posted by Greg Beck on Friday, July 06, 2007 at 05:45 PM