July 2, 2007 -- University of Virginia economics professor Ken Elzinga played a key role as the lead economic expert for the winning side in last Thursday's landmark Supreme Court opinion that struck down a 96-year-old rule that resale price maintenance agreements are an automatic (per se) violation of the Sherman Antitrust Act. Instead, judges can now consider possible antitrust violations in such agreements on a case-by-case basis, known as a "rule of reason."
"Vertical agreements establishing minimum resale prices can have either pro-competitive or anti-competitive effects, depending upon the circumstances in which they are formed," wrote Justice Anthony M. Kennedy in the majority ruling.
The court’s 5-4 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. will have far-reaching effects on the manufacturing and retail industries. The ruling affects all sectors of retail — from car dealerships to department stores — and how companies choose to price their goods.
Elzinga's winning economic argument (his third time as an economic expert for the winning party in an antitrust case decided by the Supreme Court) holds that mandatory minimum retail prices can have pro-competitive effects in some cases, and thus should not be per se illegal. Such minimum pricing agreements, explained Elzinga, can ensure that retailers make enough profit to provide better service to customers and promote the manufacturer’s products. Minimum pricing also eliminates "free riding," in which a consumer might visit a brick-and-mortar retail store to go through all the sizing and fitting necessary to select a pair of ski boots, and then buy the very same boots online at a cheaper price.
Based in City of Industry, Cal., Leegin Creative Leather Products owner Jerry Kohl and his wife have built their company into a multi-million-dollar operation, said Elzinga, but it is still a very small player in the market for women's fashion accessories, where elite designers like Gucci and Coach have large market shares. Kohl bought the Leegin company in 1972 from its founders, a young California couple named Lee and Ginny (thus the name), who sold belts, handbags and sandals out of a warehouse in Redondo Beach, Cal.
Kohl built up sales for his Brighton line of leather goods by selling them through small, privately owned stores, explained Elzinga. Kohl set minimum pricing agreements for a couple of reasons, said Elzinga. He wanted customers to feel comfortable purchasing a handbag they liked while knowing that they couldn't find it anywhere else at a lower price. Kohl also wanted to incentivize the salespeople to know the Brighton product and its features, including a Brighton guarantee that a customer could return it at any Brighton retailer at any time and have it repaired free of charge or get a full refund for the full retail price, said Elzinga.
"These minimum price agreements allowed Jerry [Kohl] to enter the market for leather goods as a small player who couldn't afford either national advertising or owning his own retail outlets, two tactics available to large national companies like Coach and Gucci to control their retail prices," said Elzinga. "Antitrust laws typically face a tradeoff between promoting efficiency versus promoting small businesses. But in this ruling, I think both have been advanced."
There are now Brighton leather good retailers throughout the U.S., including in Charlottesville and Richmond:
212 East Main Street, Charlottesville
5915 West Broad Street, Richmond
9200 Stony Point Parkway #181, Richmond
Myrna's Boots N Bits
1112 Carmina Way, Richmond
9687 West Broad Street, Glen Allen