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The Robinson-Patman Act and Cases Regarding Price Discrimination in the United States

Anheuser Busch, Antitrust, Discrimination

The Robinson-Patman Act (1936)

The highly controversial Robinson-Patman Act stated, in Section 2(a), that “it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality,… where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or 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, PROVIDED, that nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered.”

The way this legislation has been typically interpreted by the courts is: “if a firm’s price discrimination drives a competitor out of business, then the firm is violating the Robinson-Patman Act.”

But this interpretation flies in the face of the alleged purpose behind antitrust laws in general. The very act of competition, after all, is rivalry, in which firms try to drive out the competition and capture more sales for themselves. The point of competition is not to play nice or try to split the market, but the drive the competitor out of business. Ironically, firms that are successful in competing can be found to violate the Robinson-Patman Act.

Furthermore, the Robinson-Patman Act has not performed well at attacking genuine attempts at predatory price discrimination. Rather, the act is mostly used against standard rivalrous behavior. The Robinson-Patman Act has been interpreted to protect not competition, but competitors themselves.

In Antitrust: The Case for Repeal, Dominick T. Armentano argues that antitrust laws have usually been used to help producers, not consumers, and have acted to reduce competition. The Robinson-Patman Act is the most obvious example of this.

See also  Disparity and Discrimination

Court Cases Regarding Price Discimination

There exist two kinds of court cases regarding price discrimination under the Robinson-Patman Act: primary line and secondary line cases.

In primary line cases, the price discrimination is alleged to damage the direct competitor of the firm engaging in it.

In secondary line cases, the price discrimination is alleged to injure a competitor of the customer of the price-discriminating firm. For instance, if a tire manufacturer only sold extra-high-quality tires to one automobile manufacturer, this could be grounds for a secondary line caseregarding price discrimination.

Examples of Secondary Line Cases

Morton Salt Case (1948)

The government sued the producers of Morton Salt, who were engaging in 2nd-degree price discrimination and gave quantity discounts based on schedules into which customers selected themselves. The government prosecuted Morton because many small retail store owners complained that they were put at a competitive disadvantage by Morton’s practices. Morton argued that the discounts were available to everyone and that consumers could choose what they paid based on the quantity they purchased. But the courts decided against Morton, establishing two precedents as a result.

1. Price discrimination can only be justified on the basis of some kind of cost differential, which did not exist in this case.

2. One had to show actual injury to competitors to find against the price discriminator.

Many have critiqued this decision, because consumers were worse off as a result. The decision raised prices of salt and reduced overall sales.

Standard Oil of Indiana Case (1958)

This case set up another line of defense for price-discriminating firms: a good-faith effort to meet the competition. If, in order to be competitive in a local market, one must charge a lower price than in another market, price discrimination is acceptable. This is the best way to currently justify price discrimination in the courts.

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The entirety of the United States is not a single market; rather, it is a collection of small markets, each of which determines the price customers pay.

Examples of Primary Line Cases

Anheuser-Busch Case (1961)

Anheuser-Busch lowered prices for Budweiser beer in the 1950s, but only in St. Louis, thereby capturing a large share of the market there. The company was accused of illegal price discrimination, and the case eventually went to the Supreme Court, which threw it back to the Circuit Court of Appeals. The Circuit Court of Appeals ruled in favor of Anheuser-Busch, because the firm was simply engaging in normal competition; Anheuser-Busch was meeting the price in the St. Louis market. The court reasoned as follows.

1. There was no injury to competitors, who were doing extremely well in the aftermath of Anheuser-Busch’s price decreases. More beer overall was consumed in St. Louis – and even the competitors of Anheuser-Busch had increased sales. Much later, such a phenomenon would come to be known as the “Starbucks Effect,” as it has been observed that whenever Starbucks moves into an area, coffee sales overall increase, and local coffee shops – Starbucks’ competitors – end up doing better than they were before Starbucks’ arrival.

2. Anheuser-Busch’s price discrimination was beneficial for consumers, who were paying lower prices overall.

The Anheuser-Busch case solidified the idea that price discrimination is acceptable as long as the firm is meeting the local competition.

Utah Pie Case (1967)

Utah Pie entered the market in frozen pies and captured about 66% of it. Several other frozen pie makers started engaging in price discrimination to meet competition in that are. The courts found that one of them charged prices lower than its average total cost and was selling pies at a loss. This, the courts concluded, was a case of predatory price discrimination – despite the fact that Utah Pie did not suffer substantially as a result and consumers got cheaper pies.

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This case rejected the precedent set by the Anheuser-Busch case; it has also come under substantial criticism from economists. Areeda and Turner, in reaction to the Utah Pie case, developed the Areeda-Turner Rule for determining if a firm is engaging in predatory pricing. Instead of ruling as the courts have done that pricing below average total cost is an indication of predatory pricing, the Areeda-Turner rule states that pricing below marginal cost ought to be the benchmark. Since marginal cost is difficult to determine, the Areeda-Turner rule uses average variable cost as a proxy for marginal cost. Just because a firm is charging below its average total cost does not mean that it is engaged in predatory pricing.

Today, the Robinson-Patman act is not enforced, but it remains in the books nonetheless. Virtually all lawmakers, judges, and economists recognize that price discrimination tends to be pro-competitive and that predatory price discrimination is both rare and almost impossible to successfully implement. All that remains is to officially repeal this deleterious law and thereby to render price discrimination legal de jure as well as de facto.

Source

Pongracic, Ivan. Lecture on the Competitive Effects of Price Discrimination and Antitrust Cases Dealing With Price Discrimination. Hillsdale College. Hillsdale, MI. November 20, 2007.

All lecture material is used with explicit permission.