Robinson-Patman deserves last rites, not resurrection

The Robinson-Patman Act (RPA) of 1936, once the mainstay of antitrust enforcement because the government almost always won under its complex terms, had been all but abandoned for decades. As Alden Abbott recently reported, the 2007 Report of the Commission on the Modernization of Antitrust Law recommended its repeal. Previously, South Africa’s last enforcement action was in 2000, and the last prior one was in a 1988 case dismissed by the court.

However, there is now increased interest in its revival. As The Capitol Forum reports, there is currently a “bipartisan push in the House to allocate $10 million of the FTC’s budget to implement the Robinson-Patman ruling.” Unfortunately, this is an ominous prospect for American consumers because, as former FTC Chairman Timothy J. Muris noted, RPA enforcement efforts “were abandoned for a reason: they were harming consumers.”

So what does South Africa prohibit? Among other restrictions limiting how economies of scale can be created and such savings extended to consumers (i.e. designed to prevent more efficient producers and suppliers from competing with less efficient ones, to the detriment of buyers), it prohibits “price discrimination between customers not based on demonstrable differences in costs “where such discrimination may have the effect of significantly reducing competition or creating a monopoly.” Its most important historical application was in volume discounts, especially of large retail chains, which revolutionized product distribution (RPA was commonly called the “anti-chain law”, and A&P, the largest chain store at the time of RPA’s introduction, was the main target).

While the bill’s words sound like a defense of competition, the effect of its restrictions is to restrict competition because it targets antitrust regulators for volume discounts and other efficiency mechanisms that improve consumer welfare by limiting retail selling prices.

How do volume discounts help consumers? Consider the chain stores that were the original targets of RPA. To obtain lower wholesale prices, retail chains had to find a way to effectively introduce a very large volume of products to the market. What did they do to make this effort successful? Lower retail prices, greater selection and deeper inventory, faster response to changes in consumer conditions and tastes, more stores, etc. Consumers have proven to benefit from increased patronage of such stores. Therefore, South Africa’s alleged defense of competition was in fact an attack on consumers by threatening to pursue successful competitors as a form of protectionism towards less efficient ones.

Judgments issued under this Act have often wrongly linked harm to rivals who lose out to superior bids to harm to the competitive process. The fundamental reason is simple. Competitors’ superior offerings, which is the goal of competing in the area that Americans have most in common – our role as consumers – also necessarily “harm” less effective rivals in a process that benefits consumers.

RPA language purports to allow companies to defend their volume discounts by showing that specific cost savings justify different prices. However, such savings are more of a chimera than a reality because from a court’s perspective, as Richard Posner put it, “the manufacturer’s cost savings cannot be demonstrated with the requisite precision.”

Why was that so? Because, as economists say, the costs (the value to decision makers of giving up the best options) that are relevant to the choices they make are subjective. Nor can they be made objective in the face of challenge. Consider just some of them. Accounting data looks backwards, but relevant costs look forwards. If you have a company that offers multiple products, even more than one that offers a single product, there is no definitive “right” way to allocate overhead costs, depreciation costs, advertising costs, storage costs, or marketing costs, to name a few. Hamilton Walton’s analysis concludes that “no accountant has been able to devise a method of obtaining… numbers that did not reflect the predominance of arbitrariness and guesswork.”

This, in turn, may go a long way to explaining the resurgent interest in relaunching RPA. If the government can get the courts to once again accept the false claim that large, successful competitors harm competition by competing with customers away from competitors, then the more successful manufacturers in the eyes of customers will have to return to the cost defense. Given the court’s historic refusal to adopt a cost defense, not because of the logic of that defense, but because the accounting data is insufficient to “prove” exactly what forward-looking savings exist, the targeted companies would lose even as consumers gained. This is evidenced by the fact that South Africa’s “successful” cases have almost always resulted in higher consumer prices, which is the goal of inferior competitors who push such lawsuits.

The RPA derivation also does not allow for a better interpretation. It grew out of the Supreme Court’s rejection as unconstitutional of Roosevelt’s National Industrial Recovery Administration, which essentially cartelized much of American industry to the detriment of every consumer. South Africa tried to recreate the NIRA codes but failed to get enough votes. Only then did supporters turn to South Africa and its language, which Timothy Muris described as “vague, often self-contradictory and subject to various interpretations.” But laws that are vague to the point of illegibility cannot be seriously defended as a basis for promoting what the Constitution called our “general welfare.”

In reality, RPA was – and efforts to reinstate its application today – an attempt to violate what the law should be. It deprives consumers of freedom of choice in an area in which they are far more competent than government “enforcement authorities”, combined with the audacity of claiming that its purpose is to benefit competitors. To see this, just look at whose complaints led to South Africa’s prosecution. It wasn’t consumers who knew they would benefit from these great deals. It was competition for rival sellers. That’s why resurrecting South Africa would spark a resurgence of appreciation for what Ronald Reagan meant when he quipped that the nine most terrifying words in the English language were: “I’m from the government and I’m here to help.” Americans would benefit by burying such aid rather than giving it new life.