Price Discrimination and Power Buyers: Why Giant Retailers Dominate the Economy and How to Stop It
Over the last 40 years, much of the American retail marketplace has consolidated into the hands of a few firms. In supermarkets, for instance, 60% of sales occur at just five chains, and hundreds of smaller chains have gone out of business, with Walmart alone controlling 30% of the market. A supermarket can, with a single decision, “grant or deny a food supplier’s access to 30 percent of American households.” In the world of books, “Amazon accounts for over half of all print book sales and over 80% of e-book sales.” These retailers’ dominance gives them extraordinary buying power, which they use to extract discriminatory pricing arrangements from suppliers, distorting competition and hamstringing smaller businesses’ ability to compete.
Much of the American economy is beset with these middlemen who are both “power buyers” and “power sellers” that control entire industries up and down the supply chain. The traditional narrative as to why these giant firms exist is technology and globalization, induced by technical economies of scale. In truth, a major underpinning of dominant middlemen and retailers is policy, namely government enforcers’ and federal courts’ embrace of a consumer welfare stan- dard that wholly undermined a law Congress passed with the goal of protecting small businesses against the threat of power buyers.
The Robinson-Patman Act (the “RPA”) was passed in 1936. Originally called the Wholesale Grocer’s Protection Act, it bars sellers from “discriminat[ing] in price between different purchasers of commodities of like grade and quality” and buyers from knowingly inducing or receiving discriminatory prices. The RPA was, per the Supreme Court in 1960, designed to “to curb and prohibit all devices by which large buyers gained discriminatory preferences over smaller ones by virtue of their greater purchasing power.” Thus, “[s]ellers may not sell like goods to different purchasers at different prices if the result may be to injure competition in either the sellers’ or the buyers’ market unless such discriminations are justified as permitted by the [RPA].” To understand why this law matters, it helps to start with the testimony of small-business owners who bear the brunt of these retailers’ buying power vis-à-vis common suppliers.
Independent grocery chain owner Anthony Pena spoke before antitrust enforcers in late March of 2022. Pena owns nine grocery stores across the State of New York. He employs hundreds of people, and his strategy is to cater to different groups with differentiated products. For instance, Portuguese customers at his store in Indian Orchard can find bacalao, a salted fish unavailable elsewhere, while his store that serves college students stocks foods for those on a budget. Pena, however, faces a significant problem competing with Walmart and other dominant firms. The reason is not technology or scale, but buying power. Here’s what he said.
In some cases, these stores are selling identical products for lower prices than I can buy them for at wholesale. Let me give you an example; orange juice, for example. It’s a must-have commodity in grocery stores. Just months ago, I was buying a 59-ounce orange juice just north of $4 a unit, where we couldn’t get the supplier to sell it to us simply because there are none or their limited quantities are available to us. Meanwhile, I go to the bigger box like a Walmart or a club store. Not only do they have it fully stocked, but they have it about half the price that I would buy it for at cost.
Pena noted that during the pandemic, Walmart demanded that its suppliers stock their stores first, leading to shortages of basic goods among independent retailers. What supplier could say no to Walmart, given that firm’s bargaining advantage? It is extremely difficult for independent merchants to compete with colossal big-box stores when the latter get input prices for the same products at a better rate.
Gayle Shanks, the owner of two award-winning bookstores in Arizona, spoke at another FTC listening forum about the importance of bookstores to democracy, and the damage Amazon has done to her business. These local institutions are learning spaces for children and adults that “introduce readers to writers and are repositories of the art of literature.” Her experience with Amazon mirrors that of Mr. Pena’s with Walmart. Amazon sells books to consumers for less than the wholesale prices she pays. She told enforcers:
For decades, we have been trying to level the playing field, not asking publishers for anything more than allowing us to compete fairly and competitively with the same terms that other businesses selling books receive. Amazon’s size gives it terrifying leverage over the publishing industry. It has bullied publishers in the past for better discounts, early releases of titles before brick and mortar stores get them, lower prices on e-books and audiobooks. And if the publisher stood up to them or pushed back, they removed the buy buttons, telling the consumer the books were out of stock or unavailable.
Businesses like Ms. Shanks’s create jobs, support local classrooms and charities, and seek out new voices. Businesses like Amazon and the publishing cartel only care about the bottom line.
Walmart and Amazon abuse their market power by extracting discriminatory prices from their suppliers. This price discrimination is one of the key tools that dominant firms use to undermine rivals and extract excess profits. It is an old technique, and a powerful one. One hundred years ago, Standard Oil, railroad barons, and chain stores like A&P all used their buying power to secure favorable input prices, keep suppliers in line, and control markets, just as pharmacy benefits managers and online and retail goliaths do today.
Pining for the bygone days of independent stores in America can often seem like nostalgia for a technologically backward era, before the cool efficiency of a Walmart or Amazon. But as Mr. Pena and Ms. Shanks noted, the emergence and dominance of chain stores is not a result of technology but of law. The Department of Justice (DOJ) and Federal Trade Commission (FTC) have, as a matter of policy, failed to enforce the RPA and allowed behemoths like Walmart and Amazon to buy and resell consumers goods at a cost below what independent retailers pay, even before wholesaler fees. That is, because of price discrimination in wholesale markets, your independent retailer has to pay more for a product than you might if you went to Walmart. These bargains come at a cost that includes inferior goods, less variety, and the erosion of community support systems. Consumers are biased away from superior small businesses they may otherwise want to frequent because price discrimination favors the power buyer. And in the end, if Ms. Shanks’ and Mr. Pena’s stores go under because they are forced to pay more for orange juice or a book than Walmart and Amazon, the communities served by their stores will suffer.
The historical roots of the debate over concentrated power buyers run deep. Americans always understood the importance of local institutions and structured a legal apparatus to protect them.
The RPA banned a system of price discrimination that the A&P supermarket chain enforced on its suppliers. A&P, like Amazon and Walmart today, used a variety of tactics, including selectively underpricing rivals and inducing discounts from packaged goods producers, to ensure dominance in local markets. The RPA put a stop to this behavior by A&P and dominant firms in general. From the 1930s to the 1960s, the FTC and private litigants used the RPA to constrain discounters, chain stores, and large manufacturers. The goal of the law was to protect independent stores and manufacturers by preventing dominant distributors and producers from using their market power to extract discriminatory prices from suppliers. Small businesses relied on the RPA to ensure that Main Streets across America were populated with local stores, and those local stores helped enabled manufacturers and producers to regularly introduce new products without having to go through a centralized chain store procurement department. Despite the antitrust bar’s consistent hostility toward the RPA from the 1950s onward, the “preponderance” of all antitrust cases brought by the FTC from the 1930s until the 1970s were directed at Robin- son-Patman violations. When the RPA went away, large and centralized power buyers once again took control of American society.
Oddly though, the RPA did not disappear through repeal by Congress. Elite antitrust scholars essentially jeered it out of existence. Conservative antitrust scholar Robert Bork dubbed it the “Typhoid Mary of Antitrust,” and Herbert Hovenkamp called the law “irritating to almost any- one who is serious about antitrust.” Then, enforcers simply chose to stop enforcing it. In 1977, the DOJ’s Antitrust Division issued a report that reads like a defense bar manifesto and essentially promised to abandon RPA enforcement entirely. That was based largely on the unsupported premise that the economy faced “higher price levels brought about by the Act’s inhibitions on the competitive price-setting process and its encouragement of price fixing activity,” while simultaneously observing that the economic effects of the RPA had not and could not be quantitatively studied.
The RPA’s fall from grace flowed from the effective rewrite of antitrust law in the 1970s, shortly after Bork invented the“consumer welfare standard” that dominates antitrust policy in the United States today. By elevating the welfare of consumers over that of independent merchants it was designed to protect, the consumer welfare standard effectively subverted the RPA’s purpose, emphasizing allocative efficiency as a goal over rivalry. This standard held sway among enforcers and courts until recently. The Supreme Court used it to depart from the RPA’s original intent and find that an RPA plaintiff must show injury to competition (e.g. the buyer), not injury to the competitor (e.g. the retailer), to succeed. And the FTC issued a consumer-welfare heavy “Statement of Enforcement Principles” in 2015, constraining the FTC’s ability to use its authority to police unfair methods of competition.
Over the last 10 years, advocates have challenged the consumer welfare standard, casting doubt on the appropriateness of cabining antitrust into such cramped quarters. Recent scholarship has shown the prevalence of concentrated market power across American industries. In 2021, President Biden criticized the consumer welfare standard in his speech announcing an executive order on competition, and the Assistant Attorney General for the Antitrust Division Jonathan Kanter downplayed the very coherence of the concept in 2022. Not coincidentally, President Biden’s executive order called for a revival of the RPA, noting that the law might “enhance access to retail markets by local and regional food enterprises.” However, even though the law remains in place and the consumer welfare standard is under attack, government enforcers and private litigants face steep challenges under the RPA, erected through decades of hostility toward the law. And after more than 40 years of dormancy, the RPA is unrecognizable to the lawmakers who adopted it and nearly forgotten by those tasked with enforcing it.
This memorandum first explores how the Supreme Court’s view of U.S. antitrust laws, shaped by the consumer welfare standard, has left a treacherous road for plaintiffs pursuing RPA claims. It then explores the policy decisions of the DOJ and the FTC surrounding price discrimination and why those choices were misguided. Finally, it examines how the executive and legislative branches can repair the RPA and restore competition amongst small businesses. Recent actions by the FTC give hope that these proposals will be well received and that the law will in fact be revived. Enforcing the RPA in the way Congress intended would produce far better outcomes for consumers, workers, and small businesses and restore a healthier balance of power in the U.S. economy.