Assessing Vertical Market Restrictions: Antitrust Ramifications of the Transaction Cost Approach

Abstract

Whether troublesome antitrust issues are posed when vertical restraints are placed on distributors by manufacturers has long been disputed. Although economic analysis is needed to assess the ramifications of such restraints, this analysis comes in a variety of forms and does not speak with one voice to these issues. Defective economic reasoning predictably leads to results that are inimical to economic efficiency and sound public policy. Such was the case when franchise restrictions were held anticompetitive in United States v. Arnold, Schwinn & Co.' This Article develops the argument that failure to make express allowances for transaction cost considerations is responsible for mistaken public policy in this area. The transaction cost approach applies symmetrically both to an assessment of the efficiency gains, if any, arising from vertical restraints and to an evaluation of the strategic purposes and effects, if any, that accompany such restraints. After developing the justifications for, and occasional anticompetitive effects of, vertical market restrictions, I will suggest guidelines for federal antitrust policy. Part I outlines the general transaction cost approach and concludes that antitrust enforcement agencies and the courts should assume that vertical market restrictions are efficiency-enhancing unless certain structural conditions exist within the industry. Part II discusses strategic behavior and the structural characteristics of industries needed to support strategic outcomes. Vertical restraints pose troublesome antitrust issues only when these