The popularity of online retailers threatens the profitability of traditional retailers. This is because traditional retailers generally have greater overhead than online retailers. To compensate for this competitive disadvantage, traditional retailers may be pressured to implement measures that assure them of higher profit margins. Publishing is a good example of an industry that has been profoundly affected by online retailing. Online retailing has significantly increased the number of competitors in the publishing industry. Traditional retail channels in the publishing industry consist of book stores and big-box retailers. Online retailing has created several other channels for consumers to purchase books. Most publishers sell directly to consumers through their websites. Publishers also sell wholesale to other online retailers. Online retailing even enables consumers to be competitors by selling their used books. The increase in competition presented by online retailing has made it difficult for traditional retailers to remain competitive, as illustrated by the bankruptcy of Borders. In religious publishing, “brick and mortar” Christian bookstores have almost disappeared.
Given such an environment, it may be appealing to implement measures to raise the cost of business of online retailers. It may even seem fair to raise business costs for online retailers since they often benefit from the marketing efforts of traditional retailers. A publisher could increase the costs of online retailing by establishing a minimum price at which an online retailer must sell to consumers. However, this is a form of price-fixing that could be illegal under antitrust law.
A relatively recent U.S. Supreme Court decision has created the misconception that vertical price-fixing is legal as a strategy to mitigate the competitive advantages of online retailers. Vertical price-fixing is an attempt by an upstream supplier, such as a publisher, to set the price at which a downstream purchaser, such as an online retailer, sells a product. The U.S. Supreme Court considered the issue of vertical price-fixing in Leegin Creative Leather Products, Inc. v. PSKS, Inc. Prior to Leegin, vertical price-fixing was per se illegal, meaning that all instances of vertical price-fixing would automatically violate antitrust law. The Court’s decision in Leegin changed this framework by applying “rule of reason” analysis to vertical price-fixing. Under rule of reason analysis, vertical price-fixing does not violate antitrust law if the overall effect is pro-competitive.
Lay persons could mistakenly read the Leegin holding and conclude that all vertical price-fixing is legal. The Leegin decision does not support such a broad conclusion. Instead, under Leegin pro-competitive factors may be considered to determine if vertical price-fixing violates antitrust law. Many of the vertical price-fixing methods that were illegal prior to the Leegin decision could still be illegal. However, now, those participating in vertical price-fixing may be able to escape antitrust liability by showing that the overall effect is pro-competitive.
It is important to note that the Leegin decision does not apply to horizontal price-fixing, which occurs among competitors at the same level of distribution. Horizontal price-fixing is per se illegal.
The foregoing article was provided for general information and must not be relied upon as legal advice for any specific situation. The attorneys of David L. Bea & Associates are experienced in publishing law. If you have any questions, please do not hesitate to contact us.
© 2011 David L. Bea & Associates