The Public Policy

Looking Out for the Big Guys

How antitrust laws can be used against small business.

By 3.9.10

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Big is bad, many on the Left believe, but only in business, not in government. Many on the Left rail against mass discounters like Wal-Mart and Target, and they blame the free market for allowing them to run smaller retailers out of business. It doesn't matter that these firms provide consumers lower prices, they often say, the "little guy" needs a chance to compete.

Yet, recently, the big discounters have been swarming the Capitol looking for special favors to help them crush their smaller rivals, and the "small is beautiful" forces on the Left are nowhere to be found. This iteration of the biblical story of David and Goliath pits the interests of large discount retailers such as Amazon.com against their smaller, service heavy competitors, with Big Government doing Big Business' bidding.

On Wednesday, January 13, the House Judiciary Committee approved the Discount Pricing Consumer Protection Act of 2009 (H.R. 3190). According to Dow Jones, this bill, which would again make resale price maintenance (RPM), which involves manufacturers setting a resale price for the retailers to whom they sell their products, illegal, was lobbied for by "numerous retailers, including Amazon and eBay." RPM was illegal for nearly 100 years in America under court interpretations of federal antitrust laws, until a 2007 Supreme Court decision (Leegin Creative Leather Products, Inc. v. PSKS, Inc.) ruled that in certain circumstances it could be used by manufacturers and retailers.

At first glance the practice seems to be either unfair or futile. A manufacturer with sufficient market power could utilize it as a tool to ensure that profit margins on goods without much competition remained high. Further, it doesn't seem like fixing prices would benefit manufacturers or retailers. After all, the lowest possible price at which the highest number of demanding consumers can be satisfied and sellers not run out of stock is the price at which sellers make the highest profit. Establishing price floors below the market clearing price would seem to only cause gluts in supply.

RPM, however, can be used as a voluntary means to solving an economic problem, as University of Chicago economist Lester Telser explained in his 1960 Journal of Law and Economics article, "Why Should Manufacturers Want Fair Trade?"

Consider a consumer shopping for a brand new plasma TV or DVD player. A consumer could ask a salesperson at a small high-end electronics store to show him exactly how it works. He would then receive a tutorial explaining all of the device's features. The retailer provides these services in order to increase the number of consumers spending money in their store.

This service costs money and time for the store. They must pay an employee who has to devote his time to educating customers rather than other tasks needed to keep the store running efficiently. Further, educating the employee on new product features costs the store time and money.

Now what happens if the customer walks out of the store, with the knowledge he has just received for free, turns on his laptop and purchases the item from an online discount store? The customer and the discount store are free riders, both benefitting from the high end store's service without have to pay for it, while the high end store loses out on the money and time they could have saved by not providing the service.

RPM, however, can thwart this free rider problem. If the manufacturer sets a minimum price for a good, competition between retailers continues, it simply takes a different form; that of a race to the top of the quality of service the retailers provide.

If the practice becomes illegal, the result will be that huge discount retailers such as Wal-Mart, eBay, and Amazon will benefit greatly from the free rider problem discussed above. Outlawing alternative pricing measures intended to ensure that people do not take advantage of the free services offered by specialty stores will ensure that discount retailers will be able to grab a larger market share than perhaps would be possible in a free market.

The battle over RPM is just another anecdote which calls into question the conventional wisdom that big business always opposes new regulations, preferring the anarchic free market. The truth is that very frequently big businesses profit from regulations. New regulations can tilt the competitive playing field their way. As Tim Carney says in his book, The Big Ripoff, "Businesses will always do whatever they can to make money. If they have government available as a tool, they will use it."

Big Government gives companies an incentive to seek politically gained profits. Big companies have the biggest incentive to try and influence the policy in their favor. They have the most money to pay the best lobbyists, and the most to gain and lose from the direction of regulatory policy. It is consumers and small businesses that get left behind in this two man game. RPM is just the latest attempt by big business to increase their profits at everyone else's expense.

Opposing big business and allowing RPM to remain legal, on the other hand, will enable all manufacturers and retailers to make the best decisions for their own businesses. The two purported threats neutralized by outlawing RPM are price fixing among competitors across an industry, also known as cartelizing, and high consumer prices. Cartelizing is already illegal under the Sherman Anti-Trust Act. And there are far more productive ways to cut prices than banning RPM, such as ending farm and ethanol subsidies, and abandoning cap and trade legislation and other proposed regulations that would drive up prices even further. The costs which will be incurred if RPM is outlawed are far greater than the benefits.

American businesses should be free to engage in RPM. Manufacturers should be free to set requirements on the exchange of their goods to retailers. Retailers should be free to accept or reject those terms, and set their own terms. And consumers should be free to accept or reject the prices set on goods. Further, the free rider problem outlined above could be avoided using the practice, if retailers and manufacturers want to avoid it.

What the existence of resale price maintenance show is that absent government intervention, there are plenty of niches for big and small businesses in a free market. Voluntary action in a market can solve many economic problems. At a time when many small businesses are struggling to get credit or make sales, the last thing we need is for the government to regulate a rational market action by manufacturers that could greatly benefit small retailers.

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About the Author

Jonathan Moore is a research associate at the Competitive Enterprise Institute.