The Robinson-Patman Act and Its Applicability in the Modern Age - Research Paper Example

? The Robinson-Patman Act and Its Applicability in the Modern Age The Great Depression was a period of intense global economic meltdown. Since it affected almost every country on the globe, it is difficult to precisely state when it occurred. In the United States, the Great Depression began in the early 1929 and lasted until 1940s (McElvain 5). The Great Depression brought about unequal business practices as large corporations began to use their economy of scale to influence the prices of goods and services, monopolizing the markets. There were instances when big businesses were allowed to purchase goods at relatively cheaper prices than the small retailing firms. This unfair business practice created a price discrimination problem that threatened the survival of small companies or retailers (McElvain 35). Then the Robinson-Patman Act was implemented during the Great Depression when these large businesses that had emerged then were having competitive advantages over smaller retailers. There is no doubt that Robinson-Patman Act doused this economic problem by fighting against price discrimination. And the critics believe that the Act was most effective during this time period when price fixing posed a serious threat on competition and the economy. As a matter of fact, Robinson-Patman Act tended to reduce criminal business practices during the Great Depression. Therefore, four major requirements must occur for a claim to arise under the Robinson-Patman Act. There must be: 2 1. a sale of products that are of like “grade and quality” 2. from the same vendor to different purchasers in which there 3. is a discrimination in the prices of the products sold 4. that causes a restraint in competition. This necessitates that if a big company offers to sell a product of similar “grade and quality” at an expressly cheaper price, the small retailer affected by this action may seek legal recourse for redress and compensation. This action would discourage big businesses from using their economies of scales to have an advantage over the small businesses. Potentially, if the price of a good is reduced, a company can sell as many pieces of the product to several purchasers at a price that is far cheaper than the offering price by a smaller retailer. This discrimination in price kills competition, and it was discovered to be an inhibition to the economic growth during the Great Depression. The Court's opinion in FTC v. Morton Salt, 334 U.S. 37 (1948), illustrates how it was applied during the age of booming large businesses. Interestingly, the Supreme Court ruled that Morton Salt had acted illegally by selling its finest “Blue Label” salt to large chain-stores at a relatively cheaper price instead of making the same product available for customers nationwide at the same price. The Federal Trade Commission made sure that the Robinson-Patman Act was enforced to discourage the criminal trade practice of selling goods at a discount price to large stores simply because they could afford to purchase large quantities of the products at a time. One of the possible effects of this practice is that small retailers would be pushed out of business as consumers could not afford to buy the same product or good that are offered at a competitive price by the 3 large stores. This instance of price discrimination was what Robinson-Patman Act fought against in the earliest time. The Congress then perceived the act of price fixing as an inhibitive and unhelpful to the American economy that had already been battered by the Great Depression. Critics have always pointed to the fact that the World World I contributed to the emergence of the Great Depression, and that the sharp practices by big retailers to cheat the smaller ones was caused by the need to earn higher profitability at the expense of other retailers (McElvain 48). Therefore, enacting the Robinson-Patman Act served as a salvaging force to discourage large businesses from making life unbearable for ordinary Americans who had already had enough hardship due to the effects of the Great Depression. The Federal Trade Commission was able to win this case based on the fact that price discrimination produces unfair advantage that kills or totally discourage competition. In a capitalist economy like that of the United States, businesses must be given the chance to compete against one another; there should fairness when it comes to the issue of price, trading practices and customer relationship. If not for the intervention of the Robinson-Patman Act, the large retailers would have been able to capture the minds of all the customers, thereby letting the small businesses suffer and suddenly dry up owing to fewer or no customers to purchase their goods at a relatively higher prices than that of the chain stores. There are grave concerns whether the Act could be applied to the modern market because of its anti-competition stance. The facts below demonstrate that the Robinson-Patman Act could as well be helpful in creating a competitive market structure as seen in the modern market today. The Robinson-Patman Act reportedly did three things for the small businesses in those days: 4 (I) It creates a fair atmosphere for business operation whereby both the large and small businesses could compete with one another without the fear of price fixing or discrimination. (ii) It helped the small businesses to survive the great impacts of the Great Depression. (iii) and it gives the operators of small businesses the confidence to carry on with their businesses believing that the Robinson-Patman Act would shield them from the evil practices of large corporations. Therefore, since the implementation of the Robinson Patman Act, the market has shifted to being more reliant on the mega-department stores into a competitive one. Competition has given way to the slow demise of the small businesses. Since small businesses are always the largest employers of labor in the United States, their survival at that also contributed to the decrease in unemployment rate towards the end of the World War II (McElvain 88). As small retailers could operate freely like their big counterparts, their own profitability also increases over a long period of time and they also expanded their business operations, thereby creating more jobs and livelihood for a greater part of American populace. Invariably, the situation of America would have worsened during the Great Depression if the Robinson-Patman Act had not been enacted to handle the circumstances surrounding unfair trade practices. The most surprising occurrence was that despite the gains the small businesses had made due to the enactment of the Robinson-Patman Act, ordinary consumers still relied hugely on the large stores to purchase their goods because of the cheaper prices they offered for similar goods sold by the smaller retailers. This has made the economy to continue to rely on popular department stores. Large quantities are bought at the large stores compared with the little quantity that is bought at the small 5 stores. This realization has given the critics of the Act the chance to argue that the statute can no longer be applied as it was when it was first implemented. In the past years, several theories have been put forward by experts of different professions proving that the Robinson-Patman Act has outlived its usefulness. Some of the arguments against the Robinson-Patman Act are highlighted below: 1) Act discourages competition :- Some pundits believe that the Robinson-Patman Act discourages true competition. In a market economy, the demand and supply forces are expected to dictate the pricing regime in the economy. In other words, businesses should be allowed to give their own appropriate prices to their goods irrespective of the prices others are offering for the same line of products. The Act is said to discourage the big businesses from reaping from their economy of scale, through which they could save more money through large-scale purchase. True economic competition requires that both big and small businesses can compete evenly in a market without the influence of the Federal Trade Commission removing the seemingly monopoly that the big businesses are enjoying. As a matter of fact, the Robinson-Patman Act works to reduce the extent of monopoly enjoyed by the big corporations or stores over the smaller retailers. 1. Act does not make economic sense:- Some schools of thought also believe that the Robinson-Patman Act does not make economic sense at all. In economics, a true market economy does not require external influence that the Act provides for small businesses. The demand and supply forces determine what the price of a good or product is going to be. And there is no justification that some of the small businesses during the Great Depression escaped the economic problem of those days. The reasoning is this: if the Act had not been able to save many small retailers from folding up during the Great Depression, what is the purpose of 6 believing that it was established to protect small retailers from evil business practices by the bigger retailers? 3) Utah Pie v. Continental Baking Co., 386 U.S. 685 (1967):- One of the earlier applications of the Robinson-Patman Act that had drawn much criticism from the experts is the case of Utah Pie v. Continental Baking Co. The economic activities of Utah Pie was analyzed from 1958 when the company’s market share was 66.5%; but it slid down to 45.3% in 1961, indicating that the company was facing a kind of competition from its rivals. But when the company sues Continental Baking Co. for unfair trade practices in 1967 , the application of the Robinson-Patman Act caused some disaffection among economic experts as some deemed the Act as a protector of competitors rather than competition itself. What irked many observers then was that the Court found Continental Baking Co. guilty of price discrimination without any analysis of the impact of Court’s action on competition. The argument then was that the Act frustrated pure market competition in the name of protecting the competitors. And that the action could even jeopardize large stores that are struggling to stay in business and provide employment for the Americans. This kind of argument proves that Robinson-Patman Act has outlasted its usefulness and should be scrapped. As the economy of the United States becomes quite liberalized and assuming the position of pure market economy, businesses, both small and large should be allowed to compete freely with one another. It is through this mechanism that the true market economy can be established and the competition can exist in the market. Protecting the competitors through the Act has been discovered to also hinder true competition. As a result of this, it is possible to state that instead of encouraging market growth, the Act inadvertently works against large businesses and frustrate the plan to remain a competitive player in American markets. Critics believe that the Act could no more be regarded as a viable force in 7 the modern market economy where competition is so strong and continuous. The current market nature calls for rapid amendment of the Act or its complete abolishment to create a level-paying field for all businesses to compete. Without this, if competition is controlled in an economy, this could lead to poor performance of such an economy. The adverse effect of this is that unemployment would rise; people would be thrown out of jobs as big companies find it difficult to do business freely in America. Considering all the facts highlighted above, it is important to investigate the possibility of the application of Robinson-Patman Act in the modern market. The major characteristic of the modern market is its competitive nature—the modern economies thrive on allowing free competition among all businesses. However, the freedom of competition is not always total—there are business laws against intentional monopoly or other practices that It is possible for the Robinson-Patman Act to be applied to the situations in the current market. However, it should be to protect sellers from being pressured by large business to lower prices of their products. A typical application of this is seen in the case ABA et. Al v. Barnes and Noble (1998) in which fair business practice is emphasized. ABA sued Barnes and Noble for pressuring publishers to offer prices that are lower than the ones given to ABA and other bookstores. In this case, the Act works to prevent undue advantage for Barnes and Noble at the expense of ABA. This application of the Robinson-Patman Act is effective in the sense it would prevent other bookstores from forcing the publishers to exclusively sell to them at a cheaper rate than other bookstores. In the absence of this undue advantage, firms can compete on an equal footing as expected in a competitive market economy. This point reveals that the competition has not been removed, even though the competitors have been restrained. In other words, all both bookstores can receive goods at the same price and engage in explosive marketing to sell their 8 books and other paper products to their customers. Through this process, fair business practice is maintained and the competition is not frustrated. However, care should taken in applying the Robinson-Patman Act. There are certain instances that there are no evidence that competition has been restrained. In this case, it would be inappropriate to apply the Act in such a circumstance. For example in the case of Volvo Trucks North America, Inc. v. Reeder Simco GMC, Inc. (2006), Reeder, a dealer for Volvo vehicles sued Volvo for giving other dealers cheaper prices while refusing to grant it similar discounts on all the vehicle units of Volvo sold to its customers. Hence, Reeder claimed that this practice has robbed it of enough profits and made its vehicles to be more expensive than that of other Volvo dealers. While there is no direct implication or evidence that Volvo has restrained competition through the action, applying the Act in this case may be deemed inappropriate. In the two case studies analyzed above, it is clear that intentional act of instigating price discrimination, as seen in the action of Barnes and Noble is criminal and should be subjected to the applicability of Robinson-Patman Act. Such an action could spark price war among bookstores and make books unaffordable to ordinary consumers. It is important to state that Robinson-Patman Act had helped American economy to survive the Great Depression by removing undue price advantage enjoyed by the big businesses over small businesses in those days. The questions experts may be asking now about the usefulness of the Act are that: (I) if the Act was enacted to protect the competitors, how would it protect the same small businesses when they expand their operations as a result of higher profitability and increase in size? (ii) Are all large businesses capable of wielding their sizes and power to always create a price discrimination against the smaller businesses? Finding the direct answers to these two questions may prove quite difficult; however, the Robinson-Patman Act can continue to protect competitors while keeping the market in a fairly competitive mode. 9 Another important issue about the application of the Act is in its interpretation at Court to describe its statutory function. In the modern market, any business has the right to how much it is going to sell a particular product or good; and this is decided by the forces of supply and demand and market dynamics. It would be erroneous for Courts to overlook the market dynamics and judge all cases as that of unfair price discrimination. It is glaring that that the case of ABA v Barnes and Noble is a typical price advantage one, and applying the Robinson-Patman Act to the case was a right step in solving such an evil practice. Practically, the Robinson-Patman Act can have three significant impacts on the modern market: (I) it could create a better environment for competition among players in the same business. For example, a bookseller who buys books cheaply from a publisher can cause another bookseller to abandon the same publisher if he/she refuses to extend similar discount sales to the second bookseller. Through this approach, it is possible for the publisher to have a re-think and decide to give all booksellers similar price advantage; (ii) it could also completely solve the problem of monopoly—in this situation any firm that tries to control a larger part of a market’s share by offering cheapest products (even though they are of the same quality) would be sued to Court for doing so; lastly, the Robinson-Patman Act can force manufacturers to produce goods in different forms so that when prices are offered for the same good but in different forms, such manufacturers could escape from being sued to Court and continue their businesses in a legal manner; (iii) the Act could slow down the growth of economy if multiple legal suits are brought against companies that have been involved in price discrimination. In all the three cases described above, the Robinson-Patman Act seems to work as a control for price regime within an economy; in the sense that if businesses are aware of the judgment awaiting their criminal practices, they would be careful not to be involved in price fixing or any other activities that would give one business a price advantage over the other. This makes the Act to be of 10 utmost relevance in this modern market, where competition is an integral part of the business culture in the United States and other countries. And if applied properly, the Robinson-Patman Act is not an anti-competition mechanism, but anti-monopoly system. It is difficult to imagine what would happen to the Robinson-Patman Act in the future. Would it be abrogated or amended? The current development in American market or business activities pose a great danger to the future applicability of the Act. Take for instance, E-commerce has liberalized the mainstream market that a vendor can offer different price for a similar product that is sold for another price. In other words, how could the Act be appropriately applied to a condition like this? Another confusing area is the problem of applying the same Act to foreign businesses that are operating in the United States. While they would have had the right knowledge about how to operate their businesses in the United States, price discrimination may not be a serious crime in their home countries. Reviewing all the legal cases cited in this paper, it is clear that it is always large companies creating price chaos for the smaller companies. And why is this so? Volvo North America providing discount sales to other car dealers but not to Reeder Simco; Barnes and Noble pushing the publishers to offer cheaper sales that are not extended to ABA; Continental Baking Co. causing price issue for Utah Pie. All these examples point to a particular observation: that big companies have access to funds and they could also use their economy of size to purchase large quantities of goods. And when they could make more profits as a result of their bulk purchase, which comes at the expense of the smaller retailers. And this is where the Robinson-Patman Act comes in to resolve the whole impasse this may have created in the market. In conclusion, America is currently going through an economic problem, but which is not as bad as the Great Depression. And there is no doubt that the Robinson-Patman Act can still 11 provide some solutions to the current problem by protecting competitors through the process of urging companies to maintain fair pricing regime. The Act could be wrongly applied if it serves to curb competition among businesses—this is aberration to the modern market dynamics which strongly encourage stiff competition among companies. And this competition could include differential pricing, product designs and struggle for market share. In a free market structure, the price of a good is expected to be determined by market forces, not by any unilateral manipulation by large businesses receiving special favors from their suppliers or partners. It would be an overstatement to believe that the Act is perfect in its current form, the requirements from modern market seeks that some amendments be carried out so as to let it be functional for the new millennium. While the Congress do not see any reasons to quickly amend the Robinson-Patman Act now, but there are definitely going to clamor for it from business quarters in the United States as businesses compete intensely to claim the largest share of the market. Some businesses have found ways to engage in price discrimination but escape from being sued. Some of the processes used by these dubious companies include setting up a liaison company that acts as go-between them and the manufacturers so that their rivals could not detect that they had engaged in criminal act of price fixing. Having proxy companies have been able to shield the large stores from being penalized for their wrongdoings. Surprisingly, there are very few cases judged with the Robinson-Patman Act. In other words, only a few of these cases are reported or brought to the law court for solution. Hence, these few instances of litigation against price discrimination makes the case to be rampant in the society. And many businesses are still covertly engaged in the evil of price fixing to gain undue advantage against their competitors. Until many off the price fixers are brought to book, many business owners would continue to overlook the applicability of the Act, and hence create an endemic that the Government of the US and Congress have to deal with by repealing or amending the Act from its current form. 12 To successfully do this, both small and large businesses should work together to stem the tide of price fixing in order to enjoy fair competition. Until this collaboration is carried out, there are going to legal suits between the small and large businesses in the United States. And as usual, the Act would support the small businesses that are mainly affected by the dastard act of price discrimination. While this problem cannot be solved in a few weeks, conscientious efforts towards achieving this purpose may be achievable within a short period of time if the Congress are ready and willing to amend the Act. This is to say that the Act is not perfect in its current condition, and should be amended to accommodate the constant changes in the market dynamics. So far, the Robinson-Patman Act has helped the small companies to stop large companies from unilaterally control the pricing regime in the market; and this has also helped to stabilize the prices of goods in the market. When the prices of goods are stabilized over a long period of time, inflation would be controlled and the cost of living would be kept at the barest minimum. Works Cited McElvain, Robert. The Great Depression: America, 1929-1941. New York: Times Books, 1993. Print. Read More