We thank Professor Winter for his comment on our article and his rejoinder to our reply. We
take this opportunity to summarize the key points on which we agree and identify the remaining areas
over which we differ.
We agree that the welfare effects of vertical restraints are theoretically ambiguous. Further, we
agree with Professor Winter that economic theory “is not just valuable but essential in interpreting the
facts in a particular case.” Indeed, we believe challenging the use of vertical restraints in any particular
situation necessarily requires a logically coherent economic theory that is consistent with the casespecific evidence. We are less optimistic than Professor Winter, however, that the application of theory
in any particular case will warrant a significant revision in one's prior beliefs about the competitive
effects of vertical restraints.1
Our technical discussion of the economic interpretation of margins underscores the difficulty
typically encountered when economists attempt to use theory to infer the effects of vertical restraints.
As Professor Winter observes, margins are determined endogenously.2 Equilibrium margins, as well as
the retail margins that induce the optimal level of promotion (which may or may not be equilibrium
margins) depend on cost and demand conditions, the nature of input contracting, and the nature of
strategic interactions among firms.3 Likewise, the policy inferences one can draw from observed
margins about the underlying motivation for vertical restraints depend on the very same conditions.
We pointed out in our article that these conditions are often unobservable in many important respects;
and we argued that this inherent unobservability makes it difficult to use case-specific evidence to
update with one's prior beliefs about the effects of vertical restraints. Because the theory of vertical
control is as sensitive as it is to variances in underlying assumptions, a similar difficulty arises in the
interpretation of many simple observables, not just margins.
We of course agree with Professor Winter that antitrust economists should make every effort to
use “case evidence that allows testing of pro-competitive versus anti-competitive theories of the
restraint at issue.” However, we contend that evidence that relies heavily on a particular theory (or a
particular set of assumptions within a given theory) for its economic interpretation is less likely to be
useful than evidence that can be interpreted without appeal to a narrow theory. That is why we propose
an evidentiary standard that places more emphasis on natural experiments, such as time series evidence
We agree with Professor Winter that the evidence on vertical restraints that we described in our
article supports the proposition plaintiffs in vertical restraints cases should bear a high burden of proof.
1
We agree with Professor Winter that attempting to be more precise about the role of margins in
distorting in retailers’ incentives is unproductive precisely because margins are endogenous.
2
3
In our article, we noted that if the retail margin is too low absent of vertical restraints, the
retailer (typically)will choose a level of promotion lower than the manufacturer's preferred level. In his
rejoinder, Professor Winter points out that an exception occurs when perfectly competitive retailers sell
to customers with identical preferences over quality. In that special case (which Professor Winter notes
is not realistic), retailers choose the manufacturer's preferred level of promotion even when their
margins are zero. In more realistic situations (i.e., imperfect competition among retailers), there is
generally some positive retail margin that induces retailers to choose the manufacturer's optimal level
of promotion. If the retailer's equilibrium margin in the absence of vertical restraints differs from this
level, manufacturers may have incentives to use vertical restraints. The use of minimum RPM is
typically associated with situations in which retail margins are too low to foster the optimal level of
promotion. We do not believe there is any disagreement about these points.
in the particular market, or cross sectional evidence across similar markets.