The Perverse Effects of the Robinson-Patman Act
This transcript has been lightly edited for clarity.
Scott Wallsten (00:08):
Hi and welcome back to Two Think Minimum, the podcast of the Technology Policy Institute. Today is Tuesday, January 16th, 2024. I’m Scott Wallsten, president of TPI. Today we’re going to be talking antitrust. Specifically, we’ll focus on the Robinson-Patman Act. Passed in 1936, it prohibited price discrimination with a stated intent to prevent unfair competition and protect small retailers. For a long time, the Act was somewhat overshadowed as antitrust emphasized market efficiency and consumer welfare. However, the Federal Trade Commission has now said they’ll bring enforcement actions under Robinson-Patman, making it important to understand the Act and its effects. Today we’re talking with Professor Marius Schwartz, who wrote what remains the best economic analysis of the Robinson-Patman Act while he was at the Department of Justice in the 1980s and was published in the 1986 Antitrust Bulletin. We’ll put a link to the paper in the podcast description.
Dr. Marius Schwartz is Professor of Economics at Georgetown University, where he has taught since 1983. His research and teaching interests include industrial organization, competition and regulation. Professor Schwartz has hardly been hiding out in the ivory tower during that time though, he served as Senior Economist in the President’s Council of Economic Advisors. Where, by the way, is where I met him when I was a staff economist. He was also Economics Director of Enforcement and Acting Deputy Assistant Attorney General for Economics in the Department of Justice Antitrust Division, and Chief Economist at the FCC. Marius, thanks for being here.
Marius Schwartz (01:36):
Thank you, Scott. Well, thanks for the kind words. Not sure that I can claim that my article is the best on Robinson-Patman, but I’ll defer to you. So thank you.
Scott Wallsten (01:46):
Let’s start at a very high level. Just tell us what Robinson-Patman does and what the law intended to achieve and we can discuss in more detail later.
Marius Schwartz (01:57):
Sure. So as you mentioned, it was passed in 1936 and it was an amendment to section two of the Clayton Act of 1914. The Clayton Act itself is the main federal antitrust law that defines in some detail transactions and practices that will be prohibited, “where the effect may be substantially to lessen competition.” So things like mergers sometimes are prohibited, sometimes exclusive dealing, tying arrangements and so on. Robinson-Patman was added as an amendment to that and it condemns price discrimination, again, where the effect may be substantial to lessen competition. So it’s a competition-oriented statute in principle. And the impetus was perceptions that large chain stores such as A&P enjoyed unfair advantages when competing against small mom-and-pop stores in industries such as food and drug retailing. Because the chain stores obtained better prices and other terms from suppliers due to their stronger bargaining power as compared to the mom-and-pop stores. Robinson-Patman sought to prevent such discriminatory concessions to the chains that gave them supposedly unfair advantages.
Scott Wallsten (03:19):
So tell us, why would more bargaining power be considered anti-competitive?
Marius Schwartz (03:24):
The idea is that if discounts are based just on bargaining power as opposed to reflecting efficiencies in the arrangement between the two parties, that’s essentially a wealth transfer. So it’s a loss to one party and a gain to the other. It doesn’t increase overall welfare by itself, it’s a pure transfer. Resources devoted to try to make that transfer, or prevent it– a concept known as rent-seeking – are wasteful. So there is an argument to be made that discounts obtained solely due to bargaining power are not themselves efficient.
Scott Wallsten (04:01):
Since we’re on that path now, maybe explain just quickly the reasons why price discrimination can be pro-competitive as well.
Marius Schwartz (04:10):
Probably the main reason why price discrimination could be good is if it expands output by letting suppliers offer selective discounts and thereby serve additional consumer groups or markets that otherwise would remain unserved if you require a uniform price. I think that’s probably the main scenario where it’s efficient.
Scott Wallsten (04:33):
Okay. So we’ve got justifications for the law and reasons why price discrimination might be good, but then you decided to write this paper in the early eighties. What made you do that then? And then talk a little bit about why it matters today. I mentioned the FTC bringing enforcement actions, but it’s bigger than that. It’s broader than that, why we should care.
Marius Schwartz (04:56):
It was in the early eighties and I was a part-time economist at the Antitrust Division at the time, the Department of Justice’s Antitrust Division. I had just started at Georgetown and working part-time at DOJ as a visiting academic. Assistant Attorney General Bill Baxter at the time, strongly criticized the effects of Robinson-Patman. I have to give a shout-out to Bill Baxter, who was absolutely a terrific academic and Division chief, with enormous professional integrity. He’s the man who dropped the IBM case and also launched the breakup of AT&T. In any case, Bill Baxter was strongly criticizing the effects of Robinson-Patman, and he was asked for evidence to which he replied “it’s all it’s all over the place.” When he was pushed, he in turn asked Larry White, who was the head of the Economic Policy office, the office where I worked at the time. Larry said, “oh, it’s everywhere.” Then when pushed, he asked me. So the question fell into my lap. And I can talk later if there’s time about how I went about it, but the quick answer is that…
Scott Wallsten (06:20):
So the buck stopped with you.
Marius Schwartz (06:22):
The buck stopped with me. That was the advantage of being the lowest guy on the ladder. Now turning to your question, why should we care about it today? Which is an excellent question after all, this paper is from 1986. So while it’s good to dredge up old memories, that’s not why your listeners may be interested. One reason that you mentioned, the immediate reason, is that there’s talk of increased FTC enforcement of the Act. I’ve not followed that and I’m not going to comment on it, and I don’t think that’s the main reason why we should be interested. The main reason is that the concept of non-discrimination features heavily in several ongoing and important antitrust and regulatory initiatives. And I’ll talk about those in a second. In my article you can think of it as an object lesson in how hard it is to efficiently regulate price discrimination, or really any kind of discriminatory treatment, when parties such as buyers are not similarly situated, for example, the cost of serving them may be different or they may be demanding different things from the supplier. In cases like that, operationalizing the concept of non-discrimination is actually much harder than one might first think. We can talk about a couple of initiatives where that matters if you want.
Scott Wallsten (07:50):
Right? So you’re saying you’re not addressing the reasons why they might do this, that they may legitimately be trying to deal with ways that price discrimination is not a good thing, but that objectively trying to put it into practice is problematic.
Marius Schwartz (08:08):
That’s exactly right. When I approached this issue, I came from a theory bent. Price discrimination pros and cons at the theory level and I hadn’t really appreciated as deep as I now do, the difficulties of actually implementing a rule, what kind of problems you encounter in practice when buyers are not similarly situated, small buyers, big buyers, they demand different things and so on. So the practical implementation problems is something that this article really opened my eyes to.
Scott Wallsten (08:40):
You mentioned that it’s related to other price discrimination, other discrimination issues today, but I don’t think you gave us examples of what other things are relevant.
Marius Schwartz (08:50):
Yeah, so let’s just tick off a couple. One, there were congressional bills I guess in 2022 targeting tech platforms, the big tech companies. And in there the concept of non-discriminatory access and no self-preferencing were central. So for example, the American Innovation and Choice Online Act, which had passed the Senate Judiciary Committee in January 2022, would’ve barred any conduct that advantages the covered platform’s own products, or discriminated among similarly situated business users. So you have this concept of non-discrimination. Now the question must be, well, all right, what is that going to mean in practice? Is it going to be a simple thing to police or is it going to raise a lot of headaches? And similar issues come up in the European Union’s Digital Markets Act that talks a lot about non-discrimination. Another example is the Federal Communications Commission. I’m sure you’re familiar with the FCC’s Title II regulation of broadband providers.
(09:57):
There’s a whole controversy over net neutrality, and if I can say a word about that, a naive view on the net neutrality debate is that data packets should not be prioritized, or at least the operator should not have authority to prioritize some data packets over others. Should be “neutral.” So non-discrimination. Now you think about it more closely, that’s naive. Why? Because different applications require different performance attributes from the network. For example, real-time video does not tolerate jitter or latency. Whereas if you’re doing large file transfers, say a movie overnight, you don’t care that much about latency or jitter. So if you require that all data packs be treated equally in any meaningful sense, that’s not neutrality, right? That’s net uniformity. So the deeper point here is that non-discrimination is a seductive concept. It sounds simple, it sounds attractive, but in practice when you try to implement it, it really can be quite problematic. And I think that the Robinson-Patman Act history gives a nice case study of that.
Scott Wallsten (11:07):
Okay, so that’s a great segue into that. So let’s talk more about your analysis of the Act. What were some of the provisions of Robinson-Patman? What were the allowed defenses and what real-world outcomes did those lead to?
Marius Schwartz (11:22):
So that’s a lot of stuff there, but I’ll try to do it some justice.
Scott Wallsten (11:28):
Right? Basically, what’s your entire paper?
Marius Schwartz (11:31):
But that’s fine. We don’t have to do the whole paper. Let’s start with the provisions. There are some sections called the price discrimination clauses, and they prohibit sellers from charging different prices to different buyers of goods of “like grade and quality,” meaning similar grade and quality, where the effect may be to weaken competition, the standard Clayton Act language. If there is a prima facie charge of discrimination, different prices, then the burden is put on the seller to justify the price difference, i.e., to rebut the price discrimination appearance. Also, buyers are prohibited from knowingly inducing discrimination. So this is about prices, different prices. Then there are two other sets of provisions that really attempt to prevent discounts through non-price forms. One is the brokerage clause that basically says you’re not allowed to pay brokerage commissions to a buyer, only to independent third-party brokers on the theory that this brokerage could really just be a phony payment, not reflecting any real service. And then there’s also the promotional clauses that prohibit a seller from granting any allowance to a buyer for promotional services performed by the buyer, or from providing those services directly, unless – and this is the key part – the allowance or provision is provided to all other buyers on “proportionately equal terms.” We’ll come back to that. So the purpose of these last two sections, the brokerage clause and the proportionality clauses, was to prevent concealed discounts. And they created a lot of mischief, these two clauses.
Scott Wallsten (13:16):
Well wait, but before we talk about that mischief, two questions. So these are not making anything per se illegal in principle, but you’re guilty until proven innocent first. Is that kind of the way to think about it? And second, the independent brokerage thing is confusing because usually people talk about saving money by cutting out the middleman and everybody knows that middlemen don’t like to be cut out. But why would the government be encouraging middlemen?
Marius Schwartz (13:50):
Yeah, so your first question was, now I forgot it.
Scott Wallsten (13:54):
Guilty until proven innocent.
Marius Schwartz (13:55):
Yes, absolutely. That’s right. The burden is on the seller to justify the different prices. So you’re right, and we’ll come back to what some justifications are, the two main ones and then the brokerage clause. The idea there was that if you’re a big buyer and you are trying to get a discount just based on your bargaining power and the law prevents you from getting a lower price, you might say, well, it’s not really a lower price. It’s that I’m acting as my own broker, for example, I’m contacting the seller and saving them money because otherwise the seller would’ve to employ an independent broker to find customers. But if in reality, I’m the big buyer and am not performing these brokerage functions, but just using it as a phony excuse to justify a price concession under the guise of brokerage payments, then he law says: we’re not going to allow that, we’re not going to allow brokerage payments unless they’re made to an independent party, not to the big buyer himself. Is that clear?
Scott Wallsten (15:01):
It is. They believed the benefits of preventing the kind of behavior you’re talking about outweighs any deadweight loss the independent negotiator brings in.
Marius Schwartz (15:23):
We’ll come back to that. I don’t think they thought in terms of deadweight loss explicitly, but we’ll come back to that.
What did this prohibition do? It created some perverse effects in the distribution methods. Now, one point about these two clauses, brokerage/promotional clauses: serious legal scholars have said, look, these should not have been separate provisions. Their intent should have been subsumed under the price discrimination clauses. You can’t give discounts either through prices or any other price non-price ways without trying to start enumerating things in detail, which creates its own problems. There’s a beautiful quote from an antitrust expert, “no statute better demonstrates the legislative folly of trying to define sin in detail.” It’s a quote that could be used about a lot of other legislation…
(16:24):
So those are the provisions. And then the defenses: interestingly, even though the brokerage clause and the proportionality clauses were just intended initially to prevent concealed discounts, they evolved into per se prohibitions de facto. So the defenses available were only in price discrimination cases. There, if there’s a difference in prices that prima facie is presumed discriminatory, the seller can rebut that in one of two ways. One is the cost defense, which says, look, these price differences reflect differences in the cost of serving the different buyers. So if I give a discount to buyer A, it’s because it’s cheaper to deal with buyer A, and that cost difference pretty much explains the price difference. That’s the cost defense. The other one, very different, is meeting competition in good faith that says, I gave the buyer a discount because I believed in good faith that that same buyer was given a similar offer by my competitor. So I had to match it. They’re very different animals, and we’ll come back to the perverse effects that each of them has generated.
Scott Wallsten (17:44):
Aren’t those defenses both just supply-based, meaning that people putting different values on whatever the good or service is not a justification. So only the supply side counts as a defense.
Marius Schwartz (17:59):
That’s right. We know that in fact, efficient pricing known as Ramsey pricing says that if you’re a regulator trying to maximize overall welfare, you would not just base prices on cost, you’d also base them on willingness to pay [demand]. That’s a well-known theory. In the Robinson-Patman context, enforcers focus narrowly on just wanting to stop price differences that are due to bargaining power. There’s some paraphrasing a little bit here. And so if we see price differences, the only defenses you’re allowed are differences in the cost of providing, so it’s not really discrimination it’s cost-based price differences; or I had to give this price discount because my competitor did. So you’re right, there wasn’t any issue of value of service or things of that sort.
Scott Wallsten (18:49):
So another question that maybe you don’t have an answer for this, and maybe it’s a little too clever by half, but if you’re meeting somebody else’s discount, doesn’t that mean you’re implying that they broke the law?
Marius Schwartz (19:01):
Well, maybe not necessarily, right? Because suppose the other seller is selling only to this buyer, then the other seller is not discriminating because he’s not
Scott Wallsten (19:14):
There aren’t discounts to be had. It’s just one customer, right? Yeah.
Marius Schwartz (19:17):
So you’re right, it’s more clever.
Scott Wallsten (19:21):
Okay, so with all of that, what happened?
Marius Schwartz (19:25):
So the cost defense in principle, if you could easily go take a look and say, okay, these are cost differences, fine, you’re acquitted, it could have gone a long way towards alleviating the problems. In fact, it’s quite difficult in practice to ascertain the different costs of serving different buyers, especially because we don’t have good data. But also some of the costs are not easy to measure. They include some fixed costs, transaction costs and so on. So it’s not easy to measure these costs. And now as an agency or the courts, you have a choice. If you take a very lenient approach, say, “oh, well, if you just claim cause differences, we’ll believe you,” then pretty much any price differences are going to be acquitted. So we’re going to call that acquit-the-guilty, Type Two error. They chose instead to adopt the opposite approach, which is a very stringent standard for cost justification. And I think at one point it was like, unless you can justify at least 90% of the price difference based on cost differences, we’re going to strike down the whole discount. The practical effect of this is the cost justification defense ended up essentially voided. And so the price differences essentially became synonymous with discrimination.
Marius Schwartz
I like to think of two big buckets. Two or four depending on how you count … Let’s go through them. One is did it promote competition? Because after all, the language of the Clayton Act is “where the effect may be substantially to lessen competition.” There are a couple of ways in which the Robinson-Patman actually weakened competition. One is, it stabilized collusion among sellers. The idea here is if sellers are colluding, a big threat to their scheme is if a large buyer comes along and approaches one of the colluding sellers and says, give me a discount and I’ll shift a lot of volume to you. If you’re a colluding seller that can get a lot of extra volume by giving a discount, that’s a strong incentive to cheat on the collusion.
(21:52):
If the Robinson-Patman Act says, you sellers are not allowed to give a discount just based on volume, then that helps the colluders collude because a colluder tells the buyer, I’d love to give you a discount, but I can’t. Robinson-Patman prevents me. To see that this is not just an idle concern, there are a couple of cases where in fact, colluding manufacturers urged the FTC to stop volume discounts. One case I’m thinking of was in 1963. But earlier, in 1941, there was a case where under a different antitrust law, prohibitions on volume discounts had been ruled unlawful as impeding competition. So prohibitions of volume discounts were frowned upon under one law. But under Robinson-Patman, they were supported and colluders said, wonderful, FTC, please help us end volume discounts.
(22:55):
So that’s one example of stabilizing collusion. Another example in the same flavor is encouraging what we think of as customer allocation. Remember, there were two defenses. One was cost defense and the other was meeting competition. The meeting competition for a time, and this may have changed eventually, but for a time was interpreted to mean that you can only use it to retain old customers but not acquire new ones. And to meet, but not beat a competitor’s price. That sounds awfully like, “I’m not allowed to offer lower prices in order to obtain new customers.” If I’m to stay within Robinson-Patman, I can cut price provided I’m matching another competitor’s price and provided I’m doing it to retain my old customers, which sounds a lot like, “let’s keep the customer allocation as is as opposed to allowing firms to give discounts to attract new customers.”
(24:08):
The other weird thing is you are allowed to meet but not beat a competitor’s price provided you think that that price is lawful, you believe it’s lawful in good faith. But as one commentator said, “meeting lawful prices presupposes prophets, not competitors.” How do I know whether the other guy’s price is lawful? This is actually something you raised Scott earlier on and so clearly that’s a problem. In fact, the mischief went further because the sellers would sometimes use this language to say, well, gee, I’m going to call up my competitor and say, is it really the case that you offered buyer X a discount? He’s asking me for that discount. I want to make sure I’m not violating Robinson-Patman. I want to make sure I’m meeting the price in good faith. So what do you, in fact, charge this guy? Now, in a normal antitrust case, you’d be quite suspicious of competitors calling each other up and saying, what are you charging the other guy?
Scott Wallsten (25:20):
You can imagine that being introduced as evidence in a normal antitrust case.
Marius Schwartz (25:23):
Right. And here they’ll say, well, gee, I’m just trying to meet competition in good faith. So that was another set of weird effects. Third on the competition aspect was that Robinson-Patman overprotected competitors. Remember in theory, Robinson-Patman itself – because it’s lifting the Clayton Act language of prohibiting practices where the effect may be substantially to lessen competition – is in theory interested in protecting competition, not competitors, the familiar distinction. But the way it was enforced, it did overprotect competitors. I’ll give you two examples. There’s a notorious case called Utah Pie Co. from 1967, where the defendants were three national firms competing against a small family-run firm in Utah. That family firm cut prices, the defendants cut prices in response, and they were convicted of geographic price discrimination. That they cut prices in Utah, not elsewhere, even though they were responding to the price cut by Utah Pie. Utah Pie, after all the dust settled, still remained the largest firm in that region. This is the kind of case where if you were to try to bring it under the Sherman Act Section Two as monopolization or predatory pricing, you’d say no way these three tried to drive out Utah Pie: Utah Pie remained, and had the largest market share there. Robinson-Patman, somehow used different standards, oh boy different geographic prices might injure a competitor… That’s just one example.
Scott Wallsten (27:17):
Well, just to ask you a little more about that, the first examples with prices and acquiring new customers, that seems easy to imagine the FTC as the colluder’s best friend. OPEC would’ve loved it, but in this case with Utah Pie, don’t you think people who believe in the theory of protecting competitors more than protecting consumers would think that that was the outcome they wanted? Utah Pie stayed in its market, it stayed strong. So why is that wrong?
Marius Schwartz (27:53):
Because if you are coming out and saying, look, my goal is just to protect small firms, then fine. We don’t need to waste a lot of time discussing. But that wasn’t the stated purpose of Robinson-Patman, right? It was to eliminate artificial advantages of the big firms, coming from bargaining power over suppliers. Utah Pie is a very different kettle of fish. You’ve got big firms operating nationally, but they’re not the biggest in that local area, and they’re responding to price cuts by the dominant local firm, and yet somehow that’s called a violation. So I think I’ve answered your question, right?
Scott Wallsten (28:36):
Definitely. Absolutely.
Marius Schwartz (28:38):
Now, the other set of issues where it overprotects the competitors has to do with forcing firms to use independent brokers or independent middlemen as opposed to vertically integrating themselves. So that’s also overprotecting these independent middlemen. And that’s actually the next set of examples that I can turn to.
Robinson-Patman perversely weakened competition in important ways. I just discussed how the other big bucket is that Robinson-Patman distorted distribution methods, it created all kinds of inefficiencies in the distribution chain. One important way is by discouraging buyers from performing functions, middleman functions, that they could perhaps perform more efficiently than relying on independent middlemen. The FTC and the courts considered only whether the buyer that’s getting the discount competed at some level of resale with a buyer who did not get the discount, even though the two buyers may be quite different in their degree of vertical integration, and therefore in the range of middleman functions that they performed.
(30:30):
So the idea is you have two sets of buyers, with different degrees of integration, different range of middleman functions, and therefore they’re relieving the manufacturer of different costs. To figure out whether different prices are really discrimination is going to be complicated. But because the FTC and the courts adopted a harsh standard on cost justification de facto, it became very difficult to compensate buyers for performing middleman functions that they could perform more efficiently than if they relied on independent third parties. Middleman functions could include, for example, brokerage – matching buyers with sellers. A manufacturer wants a broker to find customers for the manufacturer; or wholesale functions like buying in bulk, holding inventory and delivering that inventory to the wholesaler’s retail customers. So brokerage, wholesale functions, et cetera.
(31:45):
Some retailers may perform these functions themselves. They may be vertically integrated into wholesale. The large chains will be an example. Some may not. They may rely on third parties for these middleman functions. Now, let’s look at the following scenarios. One, the middleman functions are performed entirely by the manufacturer, and the manufacturer sells directly to Retailer A. So the manufacturer basically does everything, the brokerage function, the wholesaler, and everything just serves the retailer. Scenario two, those same functions are performed by an independent middleman. There’s some middleman broker and also wholesaler. The manufacturer sells to the middleman who in turn sells to Retailer B. Retailer B competes with Retailer A. Scenario three, those same middleman functions this time are performed by the retailer itself, call it Retailer C, that’s integrated backwards into brokerage and wholesale.
(32:46):
So there are three scenarios that vary in terms of who performs the middleman functions. In the first case, the manufacturer. In the second case, it’s an independent. In the third case, it’s the retailer itself. In case two, where the middleman functions are performed by an independent, the manufacturer is permitted to offer a discount to the middleman compared to the price that the manufacturer charges the retailer in the first scenario, where the manufacturer is performing the wholesale functions. The reason is obvious: In scenario two, where the middleman is relieving the manufacturer of doing the middleman functions, and therefore the middleman should be entitled to a discount. Now, you’d think the same thing would be true in case three, where the middleman functions are performed by the retailer, and it would be if the retailer could demonstrate, yes, here are the cost savings to the manufacturer from the fact that I’m performing those functions. But as we mentioned, the FTC and the courts were wary that big buyers could just use it as an excuse or a smokescreen that, oh, I am performing important wholesale and brokerage functions that are saving the manufacturer costs, and that’s why I’m getting a discount.
(34:05):
So because that integrated retailer is competing with a retailer that’s not integrated, in my nomenclature, Retailer C is competing with Retailer A, the FTC worries that maybe Retailer C is just getting an artificial discount. The wholesale functions alleged that C is performing are just phony. Unless you can really cost-justify this, we’re just not going to let this happen. We’re not going to let you get a discount. The inefficiency examples that this harsh treatment of the cost defense created – let me give you a couple. A&P, the big chain store, used its own field buyers to purchase. The field buyers would approach manufacturers and buy from them as opposed to manufacturers having to hire independent brokers to find customers. So A&P’s field buyers saved the manufacturers costs, the cost they would’ve spent on brokers. A&P used to share in those cost savings through discounts.
(35:19):
Manufacturers would give A&P discounts saying, when I deal with you, I don’t need to hire a broker. When I deal with a smaller buyer, I do need a broker. So A&P got a discount. Once those discounts were prohibited on the theory that well, maybe they’re brokerage payments or maybe just they’re discounts masquerading as brokerage payments, in 1949, A&P changed its buying practices dramatically. It reduced inventory, it started buying in smaller quantities, started demanding immediate delivery and so on. In other words, instead of acting as its own broker and wholesaler it said, if I’m not going to get a discount for performing these functions, fine, let me delegate them to some third party. That may well be some third-party independent middleman that’s presumably less efficient than I would’ve been. So that’s an example.
(36:14):
Another example has to do with so-called backhaul allowances. Small retailers often form co-ops that will do some wholesale functions for them. Many grocery chains, like A&P, but also cooperatives of small retailers that perform a wholesale function, both of these entities have large private truck fleets that serve their affiliated stores –these trucks distribute from the wholesale operation to the retail. Now, these trucks, after delivering to the retail stores will often on their way back, pass by a manufacturer’s warehouse. So it would make a lot of sense when those trucks are empty to pick up goods from the manufacturer and deliver them to the warehouse.
(37:23):
That’s so-called backhaul. Now there’s some extra cost involved in the trucks traveling that extra distance to the manufacturer’s location. And if the manufacturer was allowed to give a discount for this backhaul function, it would be win-win. Those trucks, instead of returning empty, would swing by the manufacturer’s plant, pick up merchandise and deliver to the warehouse. But again, the fear that these discounts really may not reflect true wholesale functions but just phony bargaining-based discounts de facto prohibited this kind of backhaul pickup. So Robinson-Patman prohibited manufacturers from compensating both chains and retailer co-ops from picking up merchandise at the manufacturer location and delivering it to the wholesale location. The inefficiencies from having trucks come back empty were quite substantial. It was estimated that in the food industry alone if you could have the trucks not return empty, but instead perform this pickup function, that would’ve saved in today’s dollars, about $1.8 billion just in the food industry alone. That’s a scenario that’s convoluted, but ended up being important.
Scott Wallsten (38:49):
In these cases, some shifting certain functions to brokers who were almost certainly less efficient, that seems like one would be able to predict that since it’s essentially what the law was calling for. The second example takes a couple more steps of thinking, and maybe people more legitimately think of that as an unintended consequence. But did courts ever consider the opposing effects of the law or were they just, this is the law and this is how we have to enforce it?
Marius Schwartz (39:22):
I think in general, a court says, look, that’s the law and I’ll stick to the law, I’m not the policymaker, I am enforcing the law. But as to your point that the law’s purpose was to shift to independent brokers, that’s not obvious. An example here is small retailers that are forming a co-op to do their wholesale operations because they think that’s more efficient than relying on some third party wholesale.
Scott Wallsten (39:56):
That’s often the reason for the co-op.
Marius Schwartz (39:58):
That’s right. And the law was not intended to go after small retailers. It was intended to go after the A&Ps of this world and prevent them from getting artificial discounts. But the way it ended up being enforced is that a lot of the enforcement was against retailer co-ops, that when retailer co-ops tried to get discounts from the manufacturers for performing genuine wholesale functions, they fell into, well, can you cost-justify these things? And if you can’t do it to the penny, we’re going to strike down the whole discount. So an important perverse effect, even if you’re trying to protect small firms, is that for some of the small firms that formed co-ops, that type of arrangement got discouraged. And paradoxically, that could disadvantage those small retailers in competition with the chains. Because if a chain store is unhappy with the Robinson-Patman Act, they could say, you know what?
(40:59):
We’re just going to integrate backward into wholesale and perhaps into manufacturing. So if I’m doing my own manufacturing, I can sell to myself at a transfer price, and there’s no issue of discrimination. The small retailers that formed co-op, don’t have nearly as good an option to integrate backward into manufacturing. So they may not be able to get discounts for the wholesale functions they perform, whereas a chain can get around this more easily. The bottom line is that some of the aspects of Robinson-Patman may have put small retailers at a disadvantage compared to chains in the way I’ve just described, which certainly wasn’t the intent.
Scott Wallsten (41:40):
Right.
Marius Schwartz (41:41):
I’m not saying that’s a net effect, I’m just saying that’s one effect that people have cited. In fact, a famous economist, Fred Scherer, one of the top industrial organization economists at the time, testified that that was an important shortcoming of Robinson-Patman – it discouraged co-op formation by small retailers and shifted them towards using independent middlemen that may have been less efficient for them.
Scott Wallsten (42:06):
Let’s talk a little bit about the promotional activities. That’s interesting. I don’t know if it’s an unintended consequence or…
Marius Schwartz (42:14):
Presumably unintended. Remember, the law says the manufacturer will only grant promotional assistance if it’s granted to all buyers on “proportionately equal terms.” Now, when you have small buyers and big buyers and they have different types of retail operations, trying to figure out what’s meant by “proportionately equal” terms can be quite problematic. One approach the manufacturer may end up doing is, we’re just going to scale back all these promotional activities. It’s just too hard. A good example of this is the Elizabeth Arden case where Elizabeth Arden used to supply cosmetic demonstration services to some department stores big buyers, but not to mom-and-pop stores, that sell maybe two or three tubes of nail polish a day. It’s not worth doing a full demo for that. So what does it mean to do these demonstrations service on proportionally equal terms? If the mom-and-pop store is 1/10th the size of the department store in terms of volume, does that mean that we should send the rep to the mom-and-pop store for 1/10th of the day, or should we send 1/10th of the rep for the whole day? That’s too gruesome to contemplate…
Scott Wallsten (43:46):
Probably wouldn’t do much for the brand either.
Marius Schwartz (43:48):
That’s right. Or for the rep. Right. So the point is it sounds simple, but it’s not. Some retailers wanted only a few sets of offerings. Some wanted a fuller line. Well, if the law says you have to offer things on proportionally equal terms, manufacturers say I’m not quite sure what that means. You know what? I’m going to scale back and move towards one size fits all. So the net effect was to reduce the variety of offerings even when that variety was in response to different demands by different types of retailers.
Scott Wallsten (44:34):
Since we’re kind of running out of time, talk a little bit about what Robinson-Patman meant to sort of the, for lack of a better word, the business environment and certainties and uncertainties regarding the markets.
Marius Schwartz (44:48):
Because of the difficulty of figuring out what’s a lawful price difference, what’s proportionally equal and so on, at the end of the day, it ended up creating rigidity in prices both across buyers and over time. You worried if we change a price, oh, that may violate something. There’s a nice quote from Corwin Edwards who’s one of the experts on Robinson-Patman, that says, “there is a consensus”– I’m quoting – “among both buyers and sellers that the result has been to diminish the flexibility of prices. Indeed, many of the persons interviewed viewed this as the chief virtue of the statute.” Not necessarily how economists would see it…
Scott Wallsten (45:32):
So in thinking about Robinson-Patman, now, Robinson-Patman was more of a let’s err on the side of convicting the guilty, and we then moved more towards erring on the side of not catching some who are guilty, and we may be moving back in that direction in the Robinson-Patman direction. Now, what are your thoughts on policy focusing on type I versus type II error?
Marius Schwartz (45:59):
I think it’s pretty intractable. I think this is an example where believing is seeing, if you’re predisposed to thinking intervention is good, you’re more worried about type II errors. If you think intervention typically is bad, you’re worried about type I. And I’m not sure that this is resolvable. My own take on this is I’m conflicted. As you mentioned, I’ve served at the DOJ’s antitrust division and the FCC, and so I do have an enforcement aspect to me. I also went to UCLA, which is free market-oriented, sometimes known as the University of Chicago at Los Angeles…
(46:38):
So my overall take is support enforcement, but I have respect for markets and I recognize the pitfalls of trying to fine-tune business behavior. My bias is we should focus on the welfare of consumers or more generally trading partners, including suppliers, not of competitors, simply because if you focus too much on competitors’ welfare, you really do risk chilling competition. I think that’s a super high risk. That said, even from the point of view of consumer welfare / trading partner welfare, there’s a pretty good case to be made that we’ve had under-enforcement in certain areas like horizontal mergers and predatory pricing; but it’s not obvious to me that there was a lot of under-enforcement against price discrimination à la Robinson-Patman. So that’s I think where I come out on Robinson-Patman.
(47:46):
So on the Robinson-Patman Act itself, my view reflects the title of my article [The Perverse Effects of the Robinson Patman Act]. I didn’t try to do a full analysis, to be fair, and I said in the article that it is not designed to look at the benefits, whatever they are. It’s just designed to focus on unexpected perverse effects that probably are not isolated to Robinson-Patman. It’s clear that Robinson-Patman has produced numerous perverse results, and even sympathetic commentators have said, “there is a real danger that an account of the case-law under the Robinson-Patman Act … will be met with frank unbelief.” More broadly, I think the lesson is whenever you hear somebody invoking non-discrimination as a tool for policy intervention, whether it’s big tech platforms, whether it’s net neutrality and so on, this should raise red flags because we’re going to be in for a bumpy ride and the cure may be worse than the disease. That’s my big takeaway from all this.
Scott Wallsten (48:59):
I think that’s a great place to leave it, and I commend everybody to read this article, which we will link to in the description of the podcast. Marius, thank you so much. I still believe it’s the best paper that’s been written on Robinson-Patman, maybe we can challenge someone to write a better one.
Marius Schwartz (49:17):
I hope so. Thanks a lot, Scott. Much appreciated.
Scott Wallsten (49:20):
Thanks, Marius.
