Stopping excessive market power before it becomes a monopoly

Politicians and commentators love to talk about the importance of small businesses to the American economy, but who really cares about small businesses? That’s the question Congress tried to answer when it passed the Robinson-Patman Act (RPA) in 1936, designed to stop price discrimination against small retailers. But since the 1970s, enforcers and academics at the Chicago School of Antitrust have sought to undermine Congress’s purpose by calling the law “inconsistent” with antitrust principles—the “Typhoid Mary” of antitrust, according to Robert Bork.

In our view, this characterization fundamentally misreads the purpose of the Act. Congress enacted the RPA to address the underlying problems of antitrust law: to prevent the development of monopoly and monopsony power. Although the Act has not been used to achieve this goal in decades, if ever, we believe that the RPA can still be a powerful tool for detecting and stopping monopoly and monopsony power before it gets out of hand—or, as Congress put it, for using the RPA to “catch the weed in the seed.”

Why was the price discrimination law passed in 1936? That year, A&P, a huge grocery chain, was spreading rapidly across Americausing its unmatched purchasing power to hurt smaller, local rivals. Critics in 1936 (and today) portrayed RPA as a “protectionist” anti-A&P bill designed to destroy one business model and protect an obsolete one. But that label is driven by political ideology and mischaracterizes Congress’s intent. RPA was as much an anti-A&P bill as the Sherman Act, a cornerstone antitrust law, was an anti-Standard Oil bill. Through RPA, Congress identified behavior, exemplified by one company, that it believed was detrimental to the nation’s well-being, and took action to stop that behavior.

Congress attempted to prohibit the coercive exercise of buyers’ market power, just as the Sherman Act attempted to prohibit the coercive exercise of sellers’ market power.

In the case of South Africa, the harmful behavior was the manipulative and coercive practices of grocery chains, exemplified by A&P. As the largest buyer of groceries, A&P demanded lower prices from wholesalers and manufacturers, often through hidden discounts, such as charging suppliers large fees simply for putting a product on the shelves. This pressure forced these wholesalers and manufacturers to compensate for lost profits by charging higher prices to independent grocers. Lawmakers saw how this coercion would reduce diversity in the marketplace and the dynamism of the economy in the long run. It would force smaller firms to close or join A&P, leaving it as the last monopolist. In other words, Congress sought to prohibit the coercive exercise of buyer market power before it led to a monopoly, just as the Sherman Act sought to prohibit the coercive exercise of seller market power.

The RPA was not the first time Congress had tried to address the issue of purchasing power by making it illegal to charge higher prices to independents. Long before A&P was founded, Congress had passed Section 2 of the Clayton Act of 1914which made it illegal to “discriminate as to price as between different purchasers of goods…where the effect of such discrimination is to substantially lessen competition or tend to create a monopoly.” This language is almost identical to that in Section 7 of the Clayton Act, which prohibits anticompetitive mergers. Section 7 remains the centerpiece of antitrust enforcement today. The Supreme Court interpreted the section as “a mandate of Congress that the tendency toward concentration in an industry be restrained in its incipient stages”—in other words, to stop excessive concentration before it becomes a serious problem. By using the same language in Section 2, Congress recognized an important economic reality: Monopsony power can be accumulated through mergers, but it can also be accumulated through conduct that forces competitors out of business.

But conservative courts in the 1920s interpreted Section 2 of the Clayton Act so narrowly that the act failed to pass. After two decades of evidence that the language was insufficient to curb the harms of purchasing power, Congress passed the RPA. Lawmakers realized they had to tell the courts exactly what kind of coercion they wanted to prohibit. So Congress passed the Robinson-Patman Act to accomplish the original purpose of Section 2 of the Clayton Act.

Why would Congress be interested in preventing monopsony power? It was concerned for the same reasons that economists understand monopsony power is undesirable today. When a monopsony can charge below-market prices, suppliers produce less. This distortion causes losses for the entire economy. Monopsony harms everyone except the monopsony: Workers see fewer jobs or less bargaining power, producers earn less and produce less, and consumers may see higher prices, lower quality, and reduced services, while the monopsony reaps greater profits.

Despite the solid theoretical basis for the negative consequences of monopsony power (and leaving aside any harm to small businesses and local economies), critics of the law continue to argue that RPA’s goal of limiting buyer power is inconsistent with antitrust law. After all, don’t lower prices imposed by the buyer lead to lower prices for consumers and therefore benefit consumers?

This idea is wrong for three reasons: legally, practically, and contrary to sound policy.

First, the legal basis: Even under the most traditional antitrust theories, one cannot justify an anticompetitive harm in one market by an advantage in another. Buyer coercion results in a traditional antitrust harm: the supplier has to reduce output because of the lower prices demanded. The harm to competition in buyer markets is not an efficiency. Furthermore, it would be inappropriate balance non-market benefits for consumers, causing anti-competitive harm to small retail buyers and wholesalers.

Providing small competitors with fair prices for their goods strengthens competition in the long run and benefits communities.

Second, the practical reasons: Large corporations cannot be trusted to pass on lower costs to consumers, at least not permanently. Any student of economics 101 could tell you that cost savings are passed on to consumers only because of competition. If these large companies do not face the competition necessary to force the pass-on of these savings, the consumer will suffer. Instead, the company can simply increase its profit margins on the savings from these forced discounts. This shift from predatory pricing to monopoly-securing extraction is sometimes called recapture. Recent spikes in corporate profits provide circumstantial evidence that corporations are already doing this.

Finally, sound policy is based on the assumption that small competitors get fair prices for their goods. In the long run, this strengthens competition and benefits communities.

RPA provides a rule of conduct that prevents a supplier from passing on the negative effects of buyer power to other smaller buyers of a product. It ensures that these smaller buyers have access to fair prices that enable them to compete, even with companies that otherwise have significant market power. This competitive power is good for consumers because it encourages the powerful buyer to pass on cost savings to consumers rather than using them to increase its profit margin. And it allows competition to moderate prices over time.

By channeling coercive buying power, RPA enforcement halts the development of monopsony in retail markets. Excessive bargaining power is an indicator of the beginnings or “incipients” of monopsony power. In a monopsony, a single buyer can set prices with sellers because sellers are dependent on it. This power does not accumulate overnight; it is built through a slow process of eliminating competitors one by one.

When other antitrust laws failed to prevent the emergence of excessive purchasing power, RPA enforcement was intended to be a safeguard, stopping monopsony power in its infancy. If purchasing power is the symptom, monopsony is the disease. Failure to enforce RPA allows the monopsony disease to spread, eliminating small retailers throughout the economy.

Even in the absence of monopolies, the exercise of buying power can still harm consumers. If suppliers make up for lost profits due to forced discounts from powerful buyers by raising prices for independent retailers, consumers of those retailers, most often in rural or urban communities, pay the priceWhy should consumers in rural and urban communities subsidize low prices at big box stores in affluent areas?

The goal of South Africa was not to create a lasting Jeffersonian agrarian republic of small businesses alone. It was to preserve a diversified economy of large AND small businesses. Congress recognized that the needs of communities and people—whether consumers, business owners, or employees—are diverse and varied. A handful of large chains could never meet all of those needs in every community, especially if they were given pricing power.

History has shown that Congress was right: In low-income and majority-minority communities in urban and rural America, small independent grocery retailers are much more likely to be consumers the best or only option. This reality is becoming increasingly obvious as several large stores have opened in these communities, close en masse in these communities and locating only in the most profitable population centers.

The decision to reintroduce RPA is about more than simply stopping “price discrimination.” It’s about choosing what kind of economy we want to have. During the New Deal debate on RPA, Rep. Ford of California argued, “If these chains are allowed to continue their present course, we will not see the retail trade in this country in the hands of four, five, or six large retail institutions in the near future… We are approaching a point where the large retail chains in this country are in a position to dictate prices to manufacturers of many articles; and when they eliminate the competition, they will dictate to consumers the price they pay; and, believe me, that price will be the only price the movement will bear.”

Do we want an oligopolistic economy of four or five giant firms battling it out in a clash of titans with no hope of new entrants? Or do we want to choose a different economy—a dynamic one in which many firms grow and fail—in which there is room for firms large and small to compete consistently on the merits? Congress made that choice in 1936, and we must make it again today by vigorously enforcing the RPA.

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The views expressed in this article are those of the authors and do not necessarily reflect the views of Commissioner Bedoya or the Federal Trade Commission.