Case Assignment: State Oil v. Khan Economics 33

For class discussion Friday, May 21^st Prof. Stephen Schmidt

Read the case “Revisiting Maximum Resale Price Maintenance: State Oil v. Khan” in Antitrust Revolution (pages 334-349). There is no written assignment for this case. Be prepared to discuss the following questions in class. Also prepare two questions of your own regarding the case to ask in class discussion.

1. Who is the upstream firm in this case, and who is the downstream firm? What exactly is the vertical arrangement being challenged in this case? What is the plaintiff’s grounds for believing that the arrangement is illegal?

2. Read carefully the terms of the contract between State Oil and Khan on page 336-7. Suppose the “recommended retail pump price” is $1.50. If Khan sets his price to $1.50, what price will Khan pay to State Oil for the gasoline he buys from them? If he sets his price to $1.55, what price will he pay to State Oil then? What if he sets his price at $1.48? State Oil and Khan disputed whether this constituted a maximum price setting arrangement or not. In what sense does it fix a maximum price, and in what sense does it not do so? Do you think it should be deemed as fixing a maximum price? Why or why not?

3. The district court dismissed Khan’s suit – the court of appeals overturned the district court and reinstated the suit. On what legal point, or points, did the two courts disagree? Why did these disagreements mean that the appeal court would order the district court to reinstitute the suit?

4. Why are the cases of Schwinn and Sylvania relevant to this case? What point was established by introducing them as precedents?

5. Why does it appear, on first consideration, that maximum price restrictions (as opposed to minimum price restrictions) could never be deemed anticompetitive? What is unconvincing, in the case’s view, about the Supreme Court’s arguments that maximum price restrictions could perhaps be anticompetitive?

6. What is the “successive monopoly” argument (see pages 345-346) and how does it explain the use of maximum price restrictions? Does this argument imply that the restrictions help competition, or hurt it?

7. Do you think that the contact between State Oil and Khan should have been ruled legal or illegal? What are your grounds, both legal and economic, for thinking so?