In GTE Sylvania, the Supreme Court acknowledged what a group of law and economics scholars had been arguing for the previous two decades: vertical restrictions that limit intrabrand competition can have a desirable effect on interbrand competition. The Court approvingly accepted the argument that the free rider problem might justify a manufacturer's use of vertical restrictions. The argument, in its simplest form, is that if a retailer provides services such as advice and demonstrations to consumers, a consumer could make use of the service and then buy the product from a "no- frills" retailer. If the manufacturer cannot control the free riding proclivities of other retailers, no retailer would find it in his interest to provide the consumer services. Vertical restrictions shield a retailer from free riding and make provision of the services profitable.
Law | Law and Economics
Center for Law and Economic Studies
The Charles Evans Gerber Transactional Studies Center
Victor P. Goldberg,
The Free Rider Problem, Imperfect Pricing, and the Economics of Retailing Services,
Nw. U. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/685