ProMarket: The Needless Desertion of Robinson-Patman

October 11, 2022 Anti-Monopoly Policies & Enforcement

Over the last 40 years, much of the American retail marketplace has consolidated into the hands of a few firms. Walmart alone, for instance, controls 30% of the grocery market, meaning it 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 bargaining power not just as sellers, but as “power buyers.” They use that bargaining position to extract deep discounts from suppliers that are not offered to their smaller competitors. But power buyers are not just a problem for competitors. They also have a negative effects on workers in the supply chain: with an increasingly fissured workplace, the suppression of wages at companies dependent on power buyers accounts for about 10% of wage stagnation since the 1970s.

At the center of this issue is the Robinson-Patman Act (RPA), a law which has not been enforced for decades. The RPA prohibits price discrimination, which is the charging of different prices to different buyers for the same product. It also prohibits buyers from knowingly inducing or receiving discriminatory prices. Originally called the Wholesale Grocer’s Protection Act, it was passed in 1936 to protect smaller grocers from the increasingly dominant chain store A&P. 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.” Yet this is exactly what we see today. Small businesses are paying wholesale prices that are higher than the retail prices offered by power buyers like Amazon and Walmart, in flagrant violation of the law and without recourse, pushing them out of the marketplace and eviscerating the mom-and-pop stores that are cornerstones of communities.

So how did we get here? The adoption of the consumer welfare standard by antitrust scholars, enforcers, and judges is the main culprit. The consumer welfare standard’s proponents see few issues with power buyers, viewing them as procompetitive and lowering supplier prices, and correspondingly viewing laws and regulations to rein in power buyers as unnecessarily protectionist of small businesses. Accordingly, antitrust professionals reached the consensus decades ago that the RPA is an anticompetitive statute and that vigorous enforcement of it results in higher prices for consumers.

In the inflationary environment of the 1970s, agencies were looking for any tools available to hold prices in check. In 1977, the DOJ released a report criticizing the RPA, which is often credited for its fall from favor among regulators, arguing that it likely increases prices and should be repealed or not enforced. Its reputation as anticompetitive has endured. Robert Bork called the RPA the “Typhoid Mary of Antitrust.” Herbert Hovenkamp has called the law “irritatingto almost anyone who is serious about antitrust.

The issue, however, is that there is no systematic empirical evidence that RPA enforcement will lead, or ever has led, to higher prices for consumers. The 1977 DOJ report, for example, had effectively no empirical evidence that the RPA increased prices, and acknowledged that they had no systematic way to research that question. Papers and other research on price discrimination or the RPA continue to note that “[a] formal study of the effects of the Robinson-Patman Act on prices has not been conducted.” Other recent reviews note that “no empirical studies find unambiguous positive effects of price discrimination on consumer surplus.” In short, 40 years of professional consensus was built around untested assumptions with no evidence behind them.

Only one systematic, empirical study of the RPA’s economic effects has been carried out, in 1984, and that author noted that “The [RPA]’s poor reputation owes more to theory than to evidence, however. There has been very little empirical work on the effects of the act, and what there is has been largely concerned with the effects of individual prosecutions.” Furthermore, the study only focused on profits, not prices, and found that the RPA’s effects on profits were largely what was intended: after its passage during the New Deal, it redistributed profits away from power buyers.

Even notwithstanding the dearth of empirical evidence against RPA enforcement, existing theoretical work reaches inconsistent conclusions, at best, that price discrimination is good for consumers. In fact, some theoretical work indicates that price discrimination harms consumers. As far back as the 1980s, leading economist Michael Katz suggested that price discrimination by intermediary firms could harm consumersRecent updates to this research by Daniel P. O’Brien have reached mostly indeterminate conclusions about the effects on consumer prices. Two different papers by economists Roman Inderst and Tommaso Valletti provide reasons to rein in power buyers and ban wholesale price discrimination, namely because price uniformity allows weaker buyers to take advantage of the outside supplier options of power buyers, and price discrimination stemming from power buyers may increase prices for weaker buyers and their consumers. Using data from coffee markets in Germany, Sofia Villas-Boas simulates the effects of banning wholesale price discrimination and concludes it is likely to lower consumer prices, but less so if there is less competition among suppliers or if there are smaller cost differences among retailers.

The RPA was not always so flagrantly disregarded. It was a favored weapon in the FTC’s arsenal from its passage until the rise of the consumer welfare standard, and the Supreme Court upheld the FTC’s enforcement efforts during that time. This showed adherence to Congress’s intent in passing it, independent of any theorized economic effects. In its now infamous Utah Pie decision, the Supreme Court recognized that, “[s]ince … an independent and important goal of [theRPA] is to extend protection to competitors of the discriminating seller, the limitation of that protection by the alien factor of competition among purchasers [e.g. how the discriminatory practice affects consumer prices] would constitute a debilitating graft upon the statute.” In other words, whether consumers are harmed is irrelevant to a price discrimination lawsuit. Instead, as the Supreme Court stated in its seminal Morton Salt decision, the relevant question is whether there was “‘injury to the competitor victimized by the discrimination.’”

Unfortunately, over time, the consumer welfare standard eroded this principle. As the consumer welfare standard grew in popularity among academics, it also spread to the courts. Instead of looking to legislative history and the plain language of the statute, judges essentially made themselves policy makers. The courts ignored their own precedent and grafted an“injury to competition” requirement onto the RPA. At the same time, the FTC and DOJ stopped enforcing it, and the burdens on private plaintiffs grew steeper, creating a nearly impossible uphill battle for victims of RPA violations. Defendants have robust affirmative defenses, and plaintiffs have no claims for discriminatory pricing in the service sector.

The Supreme Court’s 1993decision in Brooke Group basically folded the RPA into the Sherman Act’s prohibitions on predatory pricing, holding that a plaintiff needed to prove that the defendant was pricing below cost and that they had a reasonable prospect of recouping those losses. Hostility toward the RPA reached what may have been its peak in 2006 when the DOJ and FTC filed an amicus brief in support of the defendant in an RPA case before the Supreme Court, Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. The result was a majority opinion, authored by Justice Ruth Bader Ginsburg, ruling that a truck dealer plaintiff had to show not just that it was competitively disadvantaged but also that it lost the business of specific customers because of illegal price discrimination that was undisputed. Because RPA cases have become so rare, the consequences of this decision are mixed. But two statistics make clear the difficulty RPA litigants face. Prior to the Brooke Groupdecision, private plaintiffs bringing RPA actions succeeded 35% of the time. After Volvo Truck, that number dropped to less than 5%.

And what has this real-world experiment in allowing price discrimination wrought? Contrary to the prognostications of consumer welfare adherents, prices for consumers have not dropped, and small businesses, consumers, competition at every level are suffering. The power buyers of today—like Walmart, Amazon, national grocers, and PBMs—pose the same threats as Standard Oil and A&P 100 years ago. The Internet expands their reach and makes them even more powerful. The RPA can and should be used against them, allowing ordinary Americans, as well as businesses large and small, to procure goods and services on equal terms. They will revitalize the Main Streets of America, their brick-and-mortar stores, small suppliers, and the local communities that they employ and serve.