Knowledge And Decisions

Despite the original thrust of antitrust legislation toward preventing high prices from being charged by monopolistic firms, it has increasingly been used to prevent low prices from being charged. A landmark in this development was the passage of the Robinson-Patman Act in 1936. The ostensible purpose of this act was to prevent price discrimination of a kind that would ‘‘substantially lessen competition.” The immediate political impetus behind the law was the growth of high-volume, low-markup retail chains which bought from wholesalers in huge quantities at discount prices and then undersold the smaller merchants with whom it competed for retail sales to the public. Some cynics called it the anti-Sears, Roebuck law. Price discrimination complaints under the Robinson-Patman Act are usually made in transactions involving wholesalers.

Robinson-Patman Act cases, which depend on how competition is affected by a given action, provide especially dramatic examples of the ambiguity involved, throughout the antitrust laws, between (1) the systemic characteristics which constitute “competition” and (2) the incumbent firms which at any given time constitute the competitors of a defendant. Innumerable economists have complained that the administrative agencies and the courts have protected competitors instead of protecting competition. Courts have recognized such distinctions verbally,⁷⁷ but in case after case the issue has been whether the defendant’s low price adversely affected some competitor(s). Wholesalers’ discounts for very large purchases have been declared illegal because smaller retailers “suffered actual financial losses” which were equated with “injury to competition.”⁷⁸ So were reduced “competitive opportunities of certain merchants who are injured” by having to pay ten cents a case more for table salt when bought in amounts less than a railroad carload.⁷⁹ Theoretically, price differences are legally permissible when they can be proved to represent cost differences in serving different customers. However, retrospective cost statistics are subject to highly variable interpretation, so that in practice a seller usually cannot prove anything — and the burden of proof is on the defendant, once it is established that he charged different prices to different customers. The Supreme Court itself has acknowledged that “too often no one can ascertain whether a price is cost justified.”⁸⁰

The Supreme Court has included fixed overhead costs in claiming that a wholesaler was selling below cost (“suffered substantial losses”)⁸¹ which changed “market shares”⁸² — from 1.8 percent of sales in a local market to 8.3 percent!⁸³ Moreover, the Federal Trade Commission has the power to put a limit on quantity discounts, regardless of cost justifications.⁸⁴ In addition the courts have not allowed wholesalers to charge different prices to different categories of buyers — such as supermarket chains versus individual “mom and pop” grocery stores — even though the supermarkets are cheaper to serve, unless there is “such self-sameness” among all those in each category as to carry the burden of proof.⁸⁵ Even though the Court acknowledged that “a large majority” of independent stores required services that supermarkets perform for themselves, “it was not shown that all independents received these services.”⁸⁶ In short, sorting-and-labeling costs were ignored by insisting that every store be considered individually and only afterwards classified among those sufficiently similar — as this might be subsequently determined by a court.

The government does not “always win” in Robinson-Patman cases, but the cases where the defendant wins reveal very much the same pattern of economic (or noneconomic) reasoning. Despite the usual verbal obeisance to the idea of protecting competition as a systemic condition, the defendants who escape legal penalities do so because — in the Court’s words — they showed “proper restraint”⁸⁷ in their price cutting, evidencing no “predatoriness”⁸⁸ toward competitors, whose prices they chose to “exactly meet” instead of undercutting.⁸⁹ This is in keeping with the legislative history of the Robinson-Patman Act, whose philosophy Congressman Patman expressed as one of “live and let live” and “everybody is entitled to a living”⁹⁰ — presumably at the consumer’s expense.