Yan Yu, Oct 28, 2013
This paper revisits the economics of resale price maintenance, comments on the extent to which economic principles were embraced by the Shanghai High People’s Court in ruling the first RPM private litigation in China involving Johnson & Johnson and Rainbow, and discusses potential implications for the use of economic analysis in future RPM cases in China.
Resale price maintenance refers to a form of vertical arrangement between a producer of a product and its downstream distributor, in which the producer sets bounds on the final price charged by the distributor. There are various types of RPM, for example setting maximum retail prices or minimum retail prices. An RPM provision that either leads to a fixed retail price or restricts the minimum retail price often attracts the attention of competition authorities.
Economic theory tells us that RPM can lead to both pro-competitive efficiency benefits and anticompetitive harm. In practice, the debate among economists often lies in whether an RPM provision would result in an overall adverse effect on competition and consumer harm. Naturally, one would expect economic analysis to play an important role in antitrust cases involving RPM provisions. That said, most jurisdictions, including the European Union and the United Kingdom (although not the United States), still consider RPM to be “hard-core” price-fixing conduct. As such, the role of economic analysis has been limited in practice.
Similar to other jurisdictions, the Anti-Monopoly Law in China prohibits certain types of vertical monopoly agreements, which capture RPM. The AML defines “monopoly agreements” as agreements, decisions, or other concerted practices that eliminate or restrict competition. Up to now, there has been no clarification of the standard of proof required to show that an RPM agreement constituted a vertical monopoly agreement. This leads to a practical question: Will China follow in the footsteps of the European Union and the United Kingdom which effectively consider RPM per se illegal (although it is possible to raise a defense), or will it follow the United States which leaves more room for economic analysis? In this regard, a mixed message emerges from the ruling by the Shanghai High People’s Court on the Johnson & Johnson case, the first RPM private litigation case in China.
In the landmark Johnson & Johnson judgement, the Shanghai High People’s Court expressed the principal view that it is necessary to demonstrate that an RPM agreement would have a significant adverse effect on competition in the relevant market in order to show that such an agreement constitutes a vertical monopoly agreement. However, as the prima facie concern, the Shanghai High People’s Court alleged the adoption of the RPM provision by Johnson & Johnson reduced the ability of its distributors to set resale prices flexibly.
The judgement does not present any substantial economic evidence supporting that the price and/or non-price competition between Johnson & Johnson and its direct rivals in the relevant market have been adversely affected as a result of the alleged RPM. This seems to suggest that too much weight is being placed on competition among Johnson & Johnson’s distributors, and thus the Shanghai High People’s Court may have set a test that is almost impossible for Johnson & Johnson to meet in defending itself.
The economic arguments put forward by the Shanghai High People’s Court, together with the recent decisions by the China’s National Development and Reform Commission on certain RPM agreements, raise a question: How serious are the courts and competition authorities in China going to be when undertaking economic analysis on these types of cases going forward?
Fortunately, in the Johnson & Johnson judgement, the Shanghai High People’s Court does set out a framework that it believes allowed the economic arguments to be debated. This suggests that there is scope for putting forward credible economic arguments supported by factual evidence. It will be interesting to see whether such an opportunity will be explored in any future RPM cases in China.
Links to Full Content