Robinson-Patman Act Restricts Price Discrimination Summary

  • Last updated on November 10, 2022

The Robinson-Patman Act amended the Clayton Antitrust Act of 1914 to make it more difficult for firms to charge different prices to different buyers, particularly if the buyers were businesses buying to resell.

Summary of Event

The Robinson-Patman Act was passed in order to strengthen the price-discrimination provisions of the Clayton Antitrust Act of 1914. Clayton Antitrust Act (1914) Price discrimination occurs when a seller charges different prices to different buyers for the same product or service when there are no comparable differences in the cost of serving the different customers. As examples, barbershops and motion-picture theaters commonly charge children less than they charge adults, and electricity rates are often higher for residential customers than for businesses. Charging different prices to different buyers can often increase profits for the sellers, provided that the seller can separate the markets. By separating the markets, the seller ensures that favored buyers do not resell to the less-favored ones, and that demand is significantly less sensitive to price in one market than in another. [kw]Robinson-Patman Act Restricts Price Discrimination (June 19, 1936)[Robinson Patman Act Restricts Price Discrimination (June 19, 1936)] [kw]Act Restricts Price Discrimination, Robinson-Patman (June 19, 1936) [kw]Price Discrimination, Robinson-Patman Act Restricts (June 19, 1936) [kw]Discrimination, Robinson-Patman Act Restricts Price (June 19, 1936) Robinson-Patman Act (1936)[Robinson Patman Act] Price discrimination legislation Anti-Chain-Store Act (1936)[Antichain Store Act] [g]United States;June 19, 1936: Robinson-Patman Act Restricts Price Discrimination[09200] [c]Business and labor;June 19, 1936: Robinson-Patman Act Restricts Price Discrimination[09200] [c]Laws, acts, and legal history;June 19, 1936: Robinson-Patman Act Restricts Price Discrimination[09200] Logan, Marvel Mills Patman, Wright Robinson, Joseph Taylor

During the notorious “trust movement” of the late nineteenth century, many believed that aggressive and predatory firms such as John D. Rockefeller’s Standard Oil Company used price discrimination as a means of harassing rivals. The big trust might offer its product for sale at a very low price in the area served by the smaller and weaker rival, thereby “persuading” the rival firm to enter into collusion with the trust or to sell out to it on favorable terms. At the same time, the trust might be selling at a much higher price in other localities, although the price would be limited by people’s ability to buy cheaply in one area and ship for resale into a more expensive area.

Price discrimination’s ill repute caused it to be explicitly outlawed by section 2 of the Clayton Act of 1914, which forbade it in situations whose effect “may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” If price differences reflected differences in grade, quality, quantity, costs of selling, or costs of transportation, they were not discriminatory. Further, a discriminatory price offered “in good faith to meet competition” would not be illegal. The Federal Trade Commission Federal Trade Commission (FTC), created in 1914, was given the principal responsibility for enforcing the act, responding mainly to complaints from injured parties. Not many cases were brought by the FTC, and its efforts to prevent price discrimination met with a number of rebuffs from the courts.

Strong pressure to amend the Clayton Act reflected a shift in focus. During the 1920’s, the U.S. economy experienced a large increase in the activity of chain stores Chain stores such as the A&P grocery A&P grocery stores[A and P grocery stores];price discrimination chain and mass marketers such as Sears, Roebuck. Sears, Roebuck and Company;price discrimination Because of their size, these firms were often able to gain price concessions from their suppliers, price concessions that worked to the competitive disadvantage of smaller wholesalers and retailers trying to compete with such large operations as A&P or Sears. The FTC completed an exhaustive report on chain stores in 1934 and provided examples of the preferential treatment of large buyers. The FTC also issued a complaint against Goodyear Tire and Rubber Company, alleging that unlawful price discrimination was involved in its contract to sell tires to Sears at cost plus 6 percent. The commission alleged that Sears was gaining an advantage of 29 to 40 percent over its retail competitors by this discriminatory pricing arrangement.

Political efforts to limit chain store activities were undertaken by independent wholesalers and retailers on a number of fronts. A number of states, for example, levied special taxes on chain stores. The lobbying efforts intensified when the Great Depression drove many small firms out of business. The legal counsel for the United States Wholesale Grocers Association drafted a bill to amend the price discrimination law to make it a stronger protection for smaller firms against mass distributors. Senator Joseph Taylor Robinson of Arkansas and Representative Wright Patman of Texas introduced the bill in Congress, where it was commonly known as the Anti-Chain-Store Act. In Senate debate, Senator Marvel Mills Logan of Kentucky presented the major arguments for the bill.

The Robinson-Patman Act was approved on June 19, 1936. The test criterion of illegal discrimination was broadened: Discrimination was now illegal if its effect might be “to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them.” The thrust of this change was that price discrimination might be illegal if it simply caused injury to some competitor, even if the vigor of competition itself was not impaired and no monopoly was created. The law was also amended to justify quantity discounts only if they made “due allowance” for cost differences; thus firms accused of illegal price discrimination might be required to present data on the costs of handling orders and shipments of different sizes.

Whereas the Clayton Act permitted discriminatory pricing “to meet competition,” the Robinson-Patman Act restricted this provision; firms could make price cuts “to meet the equally low price of a competitor” but presumably not to undercut that price. The FTC was given authority to set limits on quantity discounts if it found that “available purchasers in greater quantities are so few as to render differentials on account thereof unjustly discriminatory or promotive of monopoly.” In other words, a price reduction might be illegal—even if it could be shown to reflect proportionately lower costs—if it appeared to give monopoly power to one or two very large buyers, such as Sears or A&P. The FTC, however, has never invoked such restrictions.

Large purchasers were often able to dispense with the services of brokers in dealing with suppliers. They would sometimes pressure their suppliers to give them price concessions in lieu of the brokerage charges those suppliers might have paid under different conditions. The 1936 law prohibited such brokerage allowances when no independent broker was involved. Special provisions such as promotional allowances, advertising allowances, and services or facilities provided by sellers were required to be available to all businesses that bought a company’s products, on “proportionally equal” terms. If Coca-Cola Company, for example, was willing to subsidize Kroger’s advertising of Coke, it had to make similar subsidies available to smaller retail firms, proportional perhaps to their purchases of Coke during the previous year.

In the first twelve years following the Robinson-Patman Act, the FTC issued 186 cease-and-desist orders involving price discrimination. Of these, 104 were based on the prohibitions against paying brokerage allowances where no brokers’ services were involved. Immediately after passage of the act, the A&P grocery chain began to insist that its suppliers provide price concessions equal to former brokerage allowances; the concessions were to take the form of quantity discounts. The FTC moved quickly to block this and was upheld in the courts. In some other brokerage allowance cases, prohibitions appear to have been unfairly directed against independent purchasing agencies and cooperative buying agencies serving small firms.

The next most frequent type of complaint concerned promotional allowances, subsidies and services made available to large buyers on a discriminatory basis. The FTC issued 54 such cease-and-desist orders up to the beginning of 1948. For example, Corn Products Refining Company was ordered to stop paying to advertise products of the Curtiss Candy Company, since it was not comparably advertising for smaller customers. The Elizabeth Arden cosmetics firm was ordered to stop its policy of supplying demonstrators to help its large retail customers sell its products, because smaller retailers were not offered similar opportunities.

The FTC also dealt with a number of cases involving quantity discounts. Firms offering discounts on individual orders sometimes successfully showed cost justifications, but price concessions based on cumulative orders over a sustained period were usually banned. Morton Salt, for example, was permitted to sell more cheaply for carload shipments than for less-than-carload shipments, but it was not allowed to offer further discounts based on the number of cases purchased over a twelve-month period. Ironically, there have been very few cases of local price cutting like those attributed to the old predatory trusts. Some such considerations were involved in a case involving the Utah Pie Company, a small local enterprise that lost significant sales in its home territory when major national firms made discriminatory price reductions for sales in Salt Lake City. The Supreme Court found the discrimination illegal in Utah Pie Company v. Continental Baking Company (1967) even though Utah Pie continued to be profitable during the price war.

The FTC was able to use the Robinson-Patman Act as the basis for an attack on systems of delivered pricing for certain heavy products such as steel, cement, and corn syrup. These involved the so-called basing-point system, in which customers in a given locality would find all suppliers quoting identical delivered prices, regardless of how close the supplier might be. A seller shipping from a longer distance would realize a smaller net price after paying shipping charges. The pricing system was employed as a way for sellers to avoid direct price competition with one another. A series of cases in 1945 and 1948 found that such pricing systems violated the Robinson-Patman Act.

Enforcement of the Robinson-Patman Act, like that of the original Clayton Act, was primarily the responsibility of the FTC, which was authorized to issue orders to “cease and desist” when it found evidence of illegal price discrimination. These orders carried no direct penalty, and if the firms continued their violations, the FTC had to go to court to enforce its orders. The 1936 law also provided that injured parties could sue for damages. The issue of price discrimination reached the Supreme Court in the 1993 case Brooke Group v. Brown and Williamson Tobacco, but the FTC has not had any notable victories in price-discrimination issues since.

Significance

The Robinson-Patman Act has not been well regarded by economists studying antitrust policy. Firms competing actively for business may often charge different prices to different customers, and such practices need not lead to oppressive monopoly. Wholesale and retail trade, on which much of the litigation has focused, is generally characterized by easy entry for new firms and absence of sizable economies of large-scale operation. Those characteristics make it unlikely that a dangerous monopoly will arise. The A&P grocery chain, which was a primary target of the law, faded into insignificance; apparently, it did not benefit greatly from any monopoly power. A large proportion of FTC orders relating to price discrimination involved the highly competitive food products industry. Critics of the law hold that it had the purpose and effect of reducing the vigor of competition. They argue that the test of illegality has often been whether some competitor was injured by a low price rather than whether the vigor of competition itself was impaired. Competition has the potential to injure competitors, but it is desirable (according to economists) as a way of improving efficiency and securing high-quality products at low prices for consumers.

Defenders of the Robinson-Patman Act argued that large firms have strategic advantages that do not reflect superior quality or efficiency and that it is appropriate to counterbalance these. For example, large firms may be in a better position to lobby for preferential treatment by government units or to engage in costly lawsuits against smaller rivals. Still, only a small minority (approximately 5 percent) of price-discrimination complaints filed with the FTC typically involve firms with more than one hundred million dollars in annual sales. Many relatively small firms face the possibility of being cited for violations, and the law has given rise to a large and confusing body of litigation. The consensus among economists is that the Robinson-Patman Act is one of many well-intentioned pieces of economic micromanagement that has ended up generating more costs than benefits. Robinson-Patman Act (1936)[Robinson Patman Act] Price discrimination legislation Anti-Chain-Store Act (1936)[Antichain Store Act]

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Adelman, Morris A. A&P: A Study in Price-Cost Behavior and Public Policy. Cambridge, Mass.: Harvard University Press, 1959. The A&P grocery chain was a major target of the Robinson-Patman Act and other antitrust action. Adelman examines these issues in detail and comes out largely in defense of the company.
  • citation-type="booksimple"

    xlink:type="simple">Benson, Bruce L., and M. L. Greenhut. “Special Interests, Bureaucrats, and Antitrust: An Explanation of the Antitrust Paradox.” In Antitrust and Regulation, edited by Ronald E. Grieson. Lexington, Mass.: Lexington Books, 1986. Looks at the competing pressures of special interests on the Federal Trade Commission that led to policies aimed at protecting competitors against competition. Includes interpretation of the Robinson-Patman Act by the FTC.
  • citation-type="booksimple"

    xlink:type="simple">Blackburn, John D., Elliott I. Klayman, and Martin H. Malin. The Legal Environment of Business. 6th ed. Boston: Pearson Custom Publishing, 2003. College-level text presents an up-to-date view of the Robinson-Patman Act, with extensive quotations from court cases.
  • citation-type="booksimple"

    xlink:type="simple">Blair, Roger D., and David L. Kaserman. Antitrust Economics. Homewood, Ill.: Richard D. Irwin, 1985. Textbook treatment explains the economic reasoning behind price discrimination and reviews the law and cases, including relatively recent ones. Critical of the law.
  • citation-type="booksimple"

    xlink:type="simple">Crews, Wayne. “Reexamining Antitrust: Can ’Anticompetitive’ Business Practices Benefit Consumers?” USA Today (Society for the Advancement of Education) 130, no. 2862 (March, 2002): 1-28. Advocates a skeptical approach to study of antitrust policy, particularly with regard to modern corporations like AOL/Time Warner and Microsoft.
  • citation-type="booksimple"

    xlink:type="simple">Dirlam, Joel B., and Alfred E. Kahn. Fair Competition: The Law and Economics of Antitrust Policy. Ithaca, N.Y.: Cornell University Press, 1954. Stylish, opinionated analysis that is very critical of the Federal Trade Commission’s presentation of price discrimination cases but praises the law’s tendency to restrict the power of dominant firms.
  • citation-type="booksimple"

    xlink:type="simple">Gellhorn, Ernest, William E. Kovacic, and Stephen Calkins. Antitrust Law and Economics in a Nutshell. Series. St. Paul, Minn.: Thomson/West, 2004. Consistently accurate guide to the confusing world of antitrust law gives special attention to the roles of evidence, the granting of immunity, and government intervention.
  • citation-type="booksimple"

    xlink:type="simple">Patman, Wright. Complete Guide to the Robinson-Patman Act. Englewood Cliffs, N.J.: Prentice-Hall, 1963. One of the creators of the law describes its purposes and effects. Biased, but has an interesting chapter titled “Supporters and Opponents of the Act.” One appendix lists all the cases brought to date, and another presents the legislative history, with committee reports and debates. A valuable, comprehensive source.
  • citation-type="booksimple"

    xlink:type="simple">Purdy, Harry L., Martin L. Lindahl, and William A. Carter. Corporate Concentration and Public Policy. 2d ed. New York: Prentice-Hall, 1950. This older college text gives a good brief survey of the chief provisions and major early cases involving the Robinson-Patman Act.
  • citation-type="booksimple"

    xlink:type="simple">Scherer, Frederic M. Industrial Market Structure and Economic Performance. 2d ed. Boston: Houghton Mifflin, 1980. The most comprehensive economic examination of the law and its effects. Very critical of the anticompetitive tendencies of the law and its administration by the FTC.

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