In Albrecht v. Herald Co., the Supreme Court in 1968 decided a case involving the publisher of a St. Louis newspaper and
Posted: Thu May 19, 2022 10:41 am
In Albrecht v. Herald Co., the Supreme Court in 1968 decided a
case involving the publisher of a St. Louis newspaper and one of
the carriers that delivered the newspaper to individual households.
The publisher had established a system in which each carrier was
granted an exclusive territory that was subject to termination if
the carrier charged a retail price for the newspaper exceeding the
maximum price suggested by the publisher. In 1961, the carrier for
Route 99 raised the price for its customers to a level that
exceeded the suggested maximum retail price. The publisher took
retaliatory actions that eventually caused the carrier to lose the
route, and the carrier sued for treble damages under Section 1 of
the Sherman Act. The Supreme Court decided that enforcing resale
price restrictions in this manner constituted per se illegal
price-fixing. To model this situation, let the inverse demand
function for newspapers on Route 99 be P = a − Q, where a > 0,
and Q denotes the number of newspapers sold in the route. The
publisher’s marginal cost of producing newspapers is a constant
denoted by c, and the marginal advertising revenue per newspaper is
a constant denoted by e, so the “net marginal cost” is c − e.
Suppose that the carrier incurs a constant marginal delivery cost
denoted by d. The carrier pays a wholesale price w and sells papers
at a retail price P. Both the carrier and the publisher are profit
maximizers.
Suppose that resale price restrictions could be enforced
legally, so the publisher chooses the prices w and P. Give an
expression for the publisher’s profit. Find an expression for P and
show graphically how the optimal levels w∗ and P∗ are chosen. Would
the carrier prefer a retail price that is greater than or less than
P? Illustrate your answer graphically
Now suppose that resale price restrictions cannot be legally
enforced, so the carrier is free to choose P. Let w and P denote
the equilibrium prices without the resale price restriction. Will P
be greater than or less than P∗? Find an expression for P and
illustrate your answer graphically.
case involving the publisher of a St. Louis newspaper and one of
the carriers that delivered the newspaper to individual households.
The publisher had established a system in which each carrier was
granted an exclusive territory that was subject to termination if
the carrier charged a retail price for the newspaper exceeding the
maximum price suggested by the publisher. In 1961, the carrier for
Route 99 raised the price for its customers to a level that
exceeded the suggested maximum retail price. The publisher took
retaliatory actions that eventually caused the carrier to lose the
route, and the carrier sued for treble damages under Section 1 of
the Sherman Act. The Supreme Court decided that enforcing resale
price restrictions in this manner constituted per se illegal
price-fixing. To model this situation, let the inverse demand
function for newspapers on Route 99 be P = a − Q, where a > 0,
and Q denotes the number of newspapers sold in the route. The
publisher’s marginal cost of producing newspapers is a constant
denoted by c, and the marginal advertising revenue per newspaper is
a constant denoted by e, so the “net marginal cost” is c − e.
Suppose that the carrier incurs a constant marginal delivery cost
denoted by d. The carrier pays a wholesale price w and sells papers
at a retail price P. Both the carrier and the publisher are profit
maximizers.
Suppose that resale price restrictions could be enforced
legally, so the publisher chooses the prices w and P. Give an
expression for the publisher’s profit. Find an expression for P and
show graphically how the optimal levels w∗ and P∗ are chosen. Would
the carrier prefer a retail price that is greater than or less than
P? Illustrate your answer graphically
Now suppose that resale price restrictions cannot be legally
enforced, so the carrier is free to choose P. Let w and P denote
the equilibrium prices without the resale price restriction. Will P
be greater than or less than P∗? Find an expression for P and
illustrate your answer graphically.