Economic Theory and Common Law Evolution
By Keith N. Hylton
Publisher: Cambridge University Press
Print Publication Year: 2003
Online Publication Date:November 2009
Chapter DOI: http://dx.doi.org/10.1017/CBO9780511610158.007
This chapter examines the boundaries of the rule of reason. On one end is the so-called per-se rule, and in theory there is another endpoint where all practices are per se lawful. Before examining the doctrine, I will take a detour to discuss some economic reasonableness arguments in favor of price fixing.
THE CASE FOR PRICE FIXING
Is price fixing always socially undesirable? The simple answer is no, as the following example illustrates.
Suppose you develop a process innovation. It lowers the cost of producing widgets from $3 per unit to $2 per unit. Using the new process, you can produce widgets and charge $2.80, undercutting the competition and still make a profit of $0.80 per widget.
Now suppose another producer can make widgets at $1 per unit if he could license the innovation from you. Of course you should license it. But suppose he undercuts your price, and puts you out of business. That may lead to the efficient result, but probably not what you intended when you licensed the competitor to use the innovation.
One could argue that there is a potential arrangement that would leave both you and the licensee better off (i.e., after your exit), specifically, an agreement in which the licensee pays $0.90 per widget and pockets the extra $0.90. You earn more than if you had remained in the business alone, and the licensee earns a profit.