Vertical Restraints and the Retail Free Riding Problem : An Austrian Perspective

ertical restraints are restrictions that manufacturers place on the retailers who carry their products regarding vto whom those dealers may resell the goods, or on the retail prices they may set. Although there exists a variety of economic explanations as to why rational manufacturers might wish to impose such downstream restrictions under different market conditions, perhaps the one which garners the most attention within the economics profession is that vertical restraints can help combat free riding problems within the retail sector. The examination of vertical restraints a s important pieces of the manufacturer's arsenal against free riding, however, like much of industrial organization based on neoclassical price theory, is steeped in equilibrium analysis. Ignored almost entirely in the literature is the dynamic nature of the free riding problem, and the critical roles that knowledge and discovery play in its evolution. Moreover, because the leading analyses consider a closed world of manufacturers and retailers in an isolated state of equilibrium, there exists no room for entrepreneurial activity. In this article, I apply standard Austrian economic concepts-including the competitive market process and the roles played by knowledge, discovery, and the entrepreneur-to the analysis of vertical restraints in combating the retail free rider problem. The exposition is emphatically not meant as a thorough and exhaustive analysis of all vertical restraints from an Austrian viewpoint. Nor do I propose any new theoretical rationales for the employment of vertical restrictions. Rather, the paper