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Antitrust Policies

| Written by ILSR Admin | No Comments | Updated on Nov 22, 2009 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/rule/antitrust-policies/

When U.S. antitrust laws were first enacted, and for many decades following, they were infused with both an economic and a civic purpose. The goal of antitrust policy was not only to protect consumers from monopoly pricing, but to foster an economy compatible with democracy.  Concentrated market power amounted to “a kingly prerogative, inconsistent with our form of government,” said Senator John Sherman, author of the first major piece of antitrust legislation in 1890. “If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of the necessaries of life.” Dispersing ownership and maintaining a decentralized economy of numerous small businesses would both ensure healthy competition and be accordant with democratic self-governance.

This broad, civic purpose faded from antitrust policy in the second half of the 20th century, as courts and federal enforcement agencies began to interpret antitrust laws with a much more narrow focus on consumer welfare. Concerns about the dangers that concentrated market power posed to democracy were eclipsed by the conviction that bigness conferred economies of scale. The two major federal enforcement agencies—the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission—grew reluctant to constrain the scale of business and to limit predatory tactics that could lead to lower prices, even at the risk of reducing competition over the long-term.

The result is an antitrust environment today in which corporate retailers can use their size and market power to undermine smaller rivals and tilt the playing field to their own advantage with little fear of prosecution. The presiding assumption is that chains are aggressive competitors; if they over-step the line and use their power to damage smaller rivals, it is of little concern, because consumers are benefiting from lower prices, at least in the short-term. Enforcement is limited, and independent retailers who feel they have been harmed by anticompetitive practices have a difficult, if not impossible, time seeking relief through private lawsuits.

Predatory Pricing

The two types of antitrust violations of most concern in the retail sector are predatory pricing and buyer power. Predatory pricing occurs when a company sells its products below its own cost, taking a temporary loss in order to drive competitors out of business and reap the rewards of having a dominant market position. Independent retailers are especially vulnerable, because they lack the financial reserves to withstand a sustained predatory pricing assault, while their competitors can operate individual outlets (or departments) at a loss indefinitely.

In a 1993 decision (Brooke Group), the U.S. Supreme Court established an almost impossibly high standard for proving predatory pricing violations, concluding that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.”

But recent scholarship has contradicted the Supreme Court’s assertion that predatory pricing is rare.  “It is now the consensus view in modern economics that predatory pricing can be a successful and fully rational business strategy,” report two economists and a leading antitrust scholar in a paper published by the Georgetown Law Journal in 2000.  Yet, the “extreme judicial skepticism” of the existence of predatory pricing continues to be the law of the land, with federal courts following the dictates of Brooke Group and enforcement agencies highly reluctant to pursue cases given the monumental evidentiary requirements. “By making it extremely difficult for a plaintiff to succeed in a predatory pricing case, one of the most important tools for protecting small businesses’ ability to compete on a level playing field [has been taken away],” notes Albert Foer of the American Antitrust Institute.

Although states could theoretically pursue a tougher line on predatory pricing than the federal government does—they have the authority to do so—in reality, most state courts tend to follow the precedents set by federal courts and very few states devote more than meager resources to antitrust enforcement.

Other countries have taken a different tack. In 2002, Germany’s highest court convicted Wal-Mart of predatory pricing in a case brought by the Federal Cartel Office, which determined that the chain was harming independent retailers and overall competition by selling key products, such as milk and butter, at a loss. Germany’s strict stance on predatory pricing, along with the fact that its retail workforce is largely unionized and better paid, probably at least partly explains why Wal-Mart’s expansion into Germany failed.

Power Buyers

The other major antitrust issue for retailers has to do with the exercise of buyer power—that is, the ability of big retailers to use their clout to bully suppliers into providing special discounts and favorable terms that are not made available to local businesses.

The Federal Robinson-Patman Act prohibits manufacturers and suppliers from providing price discounts and other forms of preferential treatment to some buyers and not to others, if the effect of such discrimination is to lessen competition or injure individual competitors. Volume discounts are allowed only to the extent that they reflect actual differences in the cost of manufacture or sale of the product.

The law was enacted in 1936 amid growing concerns that large retail firms were using their market power to exact special deals from manufacturers not made available to small, independent businesses. As federal District Court Judge Abner Mikva noted in 1988, “Congress was convinced that, by protecting small businesses, it was also protecting the operation of a competitive economy.”

In recent years, the Robinson-Patman Act has fallen into disfavor with many antitrust scholars and enforcers. They view its focus on maintaining a decentralized economy as inconsistent with the current approach to antitrust, which focuses more narrowly on consumer prices.  The Federal Trade Commission only very rarely pursues allegations of Robinson-Patman Act violations, and the Justice Department has not enforced the law for more than 30 years. Injured businesses may bring private lawsuits under the act, but such litigation is costly.

Given the limited attention that buyer power has received from government agencies, it’s anyone’s guess as to whether price discrimination is widespread. Occasional lawsuits here and investigations by foreign governments suggest that chains may routinely use their power over suppliers to put smaller rivals at a unfair disadvantage.

Evidence disclosed in two court case brought by independent booksellers, the first against major publishers and the second against Borders Books and Barnes & Noble, shows that discriminatory pricing and terms were widespread and enduring in the book industry (see “Booksellers Settle Lawsuit Against Chains” for more details.)

In Britain, a year-long investigation by the Competition Commission documented more than a dozen ways in which the country’s top chains, including Tesco and Wal-Mart, have exploited their market power to squeeze suppliers and undermine independent retailers.  Mexico imposed a code of conduct on Wal-Mart to prevent it from pressuring suppliers for favorable deals.

Ultimately, the debate over the Robinson-Patman Act is about whether a fair playing field should be a goal of antitrust policy. If not, then we are consenting to a distorted marketplace in which companies can succeed not by being better, but simply by being bigger. Such unbridled power would serve neither the interests of a truly competitive economy, nor, as the original authors of our antitrust laws understood, those of a democratic, self-governing people.

More:

  • Ending Walmart’s Rural Stranglehold
    Wal-Mart now controls nearly 25 percent of grocery sales nationally and has more than 50 percent of sales in 29 market regions. This report examines how Wal-Mart uses its market power to squeeze suppliers, undermining both farmers and agricultural workers. (United Food and Commercial Workers Union, December 2010)
  • Who Broke America’s Jobs Machine?
    Why creeping consolidation is crushing American livelihoods.
    By Barry C. Lynn and Phillip Longman, Washington Monthly, March 2010
  • Big-Box Swindle
    The book includes an in-depth discussion of antitrust issues related to mega- retailers in Chapter Seven.

Rules


Fixed Price Book Laws

Laws in some European countries, most notably Germany, require all bookstores, including online sellers, to sell books at fixed prices. Supporters say outlawing discounts protects independent bookstores and small publishers, which in turn ensures that a broader variety of books are available and that there is less focus on best-sellers. Continue reading

Robinson-Patman Act

This law was enacted in 1936 amid growing concerns that large retail firms were using their market power to exact special deals from manufacturers not made available to small, independent businesses. In recent decades, federal antitrust authorities have largely ceased enforcing Robinson-Patman. Continue reading

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