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Government Regulation Of Distribution

( Originally Published 1939 )



No STUDY of distribution and its costs can ignore the effects of the increasing intervention of government in the conduct of private business. Since regulation of business necessarily affects distribution costs, at least an exploratory glance at its relation to them is essential to the purposes of this study.

Outstanding among the laws affecting distribution are the Sher-man Law, the Federal Trade Commission Act, the Clayton Act, the National Industrial Recovery Act, the Robinson-Patman and Borah-Van Nuys acts, the state fair trade laws and their federal corollary, the Miller-Tydings Act, state unfair practice laws and various chain store tax laws.

The cumulative effect of these legislative interventions, administrative orders and court decisions has been to make business behavior something different than it would otherwise have been. The sensitive item of costs has been touched again and again. Nevertheless, measurements are difficult. Conclusions about the long-term results are still speculative, while even those on today's happenings must rest on inadequate evidence.

The Effects of Legislation

Their effects must be tested not only in terms of their immediate impact on business practices, but also of their influence on the character of economic evolution. By the second test an immediate increase in cost may be justified if some ultimately sound social purpose is also served.

For example, a large company might be able to cut prices in a particular locality below an independent competing concern-especially if it can make up for the loss by charging more elsewhere, and eventually, in that identical community. To prevent this price-cutting would increase prices in that community. But the petty cash loss would be unimportant when compared with the maintenance of a healthy competitive structure.

This issue was settled long ago and the practice of destructive price-cutting is now rare. But the reasoning has been used time and time again in behalf of new schemes to protect competitors from competition. It is in the name of this same principle-maintenance of a sound competitive structure-that price discrimination, resale price maintenance and loss leader controls are defended.

That such laws accomplish the immediate purpose of lifting prices is hardly to be doubted, even though evidence on the extent of the increase is still fragmentary and often partisan. Granting that the increases on protected articles are partly offset by lower prices on merchandise or to customers not directly involved, or by decreases on these self-same articles in some types of localities, the net balance of price movement is and was expected to be up-ward. Congress is aware of this possibility, but its strongest defense is its obligation to preserve fair competition. If this is done, it is contended that prices will automatically find their right level.

In practice, therefore, prices are probably raised somewhat by the political strength of business groups demanding and getting legislative help. This is defended on the grounds that the practice of destructive price-cutting tends to substitute mere power for efficiency as the determinant of competitive survival. These are not readily measurable terms, and in later pages the circumstances offered in support of them will be examined. The fact that the cost of such measures to consumers is immediate and visible places the burden of proof on those who advocate legislative control of distribution processes.

1. PRESSURE GROUPS

Most of the business laws discussed in this chapter came out of the changing fortunes of competitive groups. At times it might al-most be said that particular groups become effective in politics to the degree that they lose effectiveness in business. The warring factions can no longer be located in terms of the old layer-cake simplicity of manufacturers, wholesalers, and retailers. With the multiplication of functions in distribution special interest groups have also multiplied. The new groups have new alignments-both vertical and horizontal.

The issue in the eighties and nineties lay principally between producers. The struggles of small concerns against the strong-arm methods of their giant competitors aroused a strong public sentiment against monopoly that is still something to conjure with politically. Small manufacturers are still arrayed against the large on many matters but this issue today is less sharply drawn than it was half a century ago.

Since the turn of the century mass distributors with their great buying power have come, and attitudes toward competition have been re-defined in terms of this new "menace." Independent distributors, sometimes assisted by manufacturers without great resources or strong consumer acceptance for their goods, have tried to pre-vent the full exertion of the competitive power of these great buying organizations by getting laws on the statute books to "preserve fair competition."

The wholesaling field has also undergone great changes. Some of the larger wholesalers in staple trades have met the threat of integrated operations by organizing their retail customers into voluntary groups. Retailers have succeeded in building up effective buying cooperatives-thus becoming mass buyers on their own account in order to offset some of the advantages of the chains.

In the same manner retailing has come to embrace a wide variety of methods of purchasing goods and of making them available to consumers, ranging from super-markets and giant department stores to neighborhood dealers and petty shops. Those able to hold their own with powerful sellers, or to dictate to the less powerful, have taken their stand in favor of "free competition." The others have grouped together to attain sufficient political strength to secure the embodiment in law of their own conceptions of fair trade and competitive opportunity.

What Is the Consumer Interest?

The consuming public, with the principal stake in this struggle, has had relatively little to say about it. Its passive attitude must be taken to mean that the issues involved seldom stir it to the point of indignation. Such public sentiment as does exist seems to derive from traditional doctrine, sympathy for the underdog in the struggle, and personal advantage.

The early trust-busting campaigns established in the public mind the doctrine that monopoly and conspiracy are bad. As for sympathy, it is human nature to favor the little fellow. But the personal advantage of buyers leads them to favor low prices-which they generally feel they have received from the mass distributors. In spite of this, the public has not expressed itself vigorously against price-fixing or price-supporting laws. Resale price maintenance laws, for example, have undoubtedly brought visible rises in the price of well-known staples, without regard for the moment to equally visible decreases in other prices. Yet quite a number of manufacturers and retailers report that consumer protest over such increases has been unexpectedly light.

Consumers are probably scarcely aware of what has happened. Chain store tax laws submitted to popular referenda have been upheld in some states and defeated in others; and the outcome seems to depend more on political manipulation than on consumer self-interest. Professor Paul D. Converse recently made an inquiry into chain and independent prices which included a cross-sectioning of consumer opinion,' and discovered that relatively few consumers were either definitely favorable or unfavorable to chain stores.

In passing laws regulating distribution, Congress must do its best to reconcile the conflicting interests of its constituents with each other and with inherited principles. Whatever the real effect of such laws may be, however, and whatever special group they may protect, they are always passed in the name of competition-competition as free as emergencies and urgent human needs will permit. The anti-trust laws were passed to prevent large producers from stifling the small. Anti-price discrimination and price maintenance laws have been passed to prevent large distributors from stifling the small. Whatever the results the preservation of a clear field for individual initiative has always been the announced objective.

2. THE LAWS

The original anti-trust laws were stimulated by a wave of mergers, combinations and agreements and alleged monopolistic controls of prices, production and markets. Today the attack is against the giants in distribution, for the purpose of holding up prices. The public attitude on plain morality in business, already ex-pressed in common law, has projected itself increasingly into all manner of legislative and administrative assaults on fraud and misrepresentation.

Early measures were designed as structural barriers against excessive growth. Today's laws deal increasingly with business policies. The 1914 prohibition of tying contracts and of certain forms of price discrimination set an early precedent. Instead of seeking to check size directly, recent legislation aims to curb internal practices such as price discrimination and loss leaders, through which the power of vast size is supposed to exert itself in uneconomic forms. A return to the earlier principle of direct attack on size is suggested by the current effort to enforce the anti-trust laws and to penalize big distributors through taxation.

a. THE SHERMAN AND FEDERAL TRADE COMMISSION ACTS

Under the Sherman Act of 1890 contracts, combinations, or conspiracies in restraint of trade, as well as actual monopolies or attempts to monopolize, were declared illegal. In 1914 Congress set up the Federal Trade Commission in an act outlawing "unfair methods of competition in commerce." The Commission was given power to put an end to such methods through so-called "cease and desist" orders which, however, were to be subject to judicial review. The Commission was also expected to help in various ways in enforcing the antitrust laws. The original act was amended in the spring of 1938 to overcome difficulties that had developed and to cope with new problems which Congress decided to place under the Commission's jurisdiction.

The Commission was given the right to proceed against deceptive or other unfair practices whether or not competitors were injured. Its cease and desist orders were made final if court review was not sought by the respondent within sixty days after issuance; a $5,000 civil penalty was provided for each violation of a cease and desist order after it became final; and the Commission's control over false advertising of food, drugs, devices and cosmetics was elaborately strengthened. Certain minor corrections were made in the law to improve the Commission's legal footing in its skirmishes with suspected wrongdoers.

b. THE CLAYTON ACT AND THE NRA

Hard on the heels of the Federal Trade Commission law came the Clayton Act in 1914. One of its most notable features was the famous Section II forbidding certain types of price discrimination. The Clayton Act also banned tying contracts, under which buyers were in effect required to purchase a seller's supplementary lines in order to get the item or items they wanted. Restrictions were placed on the acquisition by a corporation of the stocks of its competitors and on interlocking directorates in competing corporations. Enforcement of these provisions was made the responsibility of the Federal Trade Commission.

In 1933 these relatively mild controls were overwhelmed by the National Industrial Recovery Act. But NRA was essentially a depression phenomenon; while it borrowed some of the phrases of earlier laws it was essentially a release from them. Every part of it had a root somewhere in the history of compromise between free and regulated competition, but the growth was wild. In its more publicized aspects, it was falling back toward original principles long before the Schechter decision put an end to it. Its principal sponsors, however, while approving and even directing this retreat to earlier principles, never ceased to believe in the need for discretion in handling diverse industrial problems. After the death of NRA, the old struggles were resumed in their separate and original arenas.

C. THE ROBINSON-PATMAN ACT

The first legislative attempt to deal with price discrimination (Section II of the Clayton Act, 1914) met with indifferent success. Dissatisfaction of many wholesale and retail dealers, with whom a large number of manufacturers passively sympathized, finally led to sweeping modifications in the summer of 1936 in the form of the Robinson-Patman and Borah-Van Nuys acts. The principles of these acts were reproduced in many of the states in the guise of anti-discrimination or unfair practice acts.

The Clayton Act had forbidden price discrimination in commodities of the same grade, quality, or quantity, where such discrimination was capable of lessening competition, except for due allowance for differences in the cost of selling or of transportation. The first major contribution of the Robinson-Patman Act was a new emphasis on quantity. It was made very clear that a small difference in quantity could not justify an unlimited differential in price. In computing such differentials only due allowance could be made for differences in the cost of manufacture, sales, or delivery, resulting from the different methods or quantities involved. The second radical change was to make exceptional discounts (as thus defined) unlawful if it could be shown that individual competitors were substantially injured, whether or not the effects were general. This at any rate was probably the intention of the law's sponsors, although in most of the cases heard to date the Federal Trade Commission has continued to look for evidence of a fairly wide import.

Payment of brokerage by sellers or buyers to the other party in the transaction, except for services rendered, was forbidden. Advertising allowances and special sales aids had to be dispensed on proportionally equal terms. "Knowing" buyers were made equally guilty with sellers in case of violation. These specifications were qualified in various ways and supplemented by other provisions.

d. THE BORAH-VAN NUYS ACT

The Borah-Van Nuys Act was passed as a part of the Robinson-Patman Act and with the same general intent, principally as a political compromise between opposing beliefs as to how the problem should be handled. In reality it constitutes separate legislation and thus far has seldom been invoked.

This act forbids discriminatory discounts, rebates, allowances or advertising service charges on goods of like grade, quality, or quantity. It prohibits both geographical discrimination and unreasonably low prices, if for the purpose of destroying competition.

Despite the similarity in approach there are several sharp distinctions between the Robinson-Patman and the Borah-Van Nuys acts. The Robinson-Patman Act amends Section II of the Clayton Act while the Borah-Van Nuys Act is independent legislation. The first creates a civil liability, the second a criminal liability. The first forbids discrimination on goods of like grade or quality while the second clings to the language of the original Clayton Act and forbids discrimination on goods of like grade, quality, and quantity. Presumably so long as there is a difference in the quantity purchased by competing customers the first clause of the Borah-Van Nuys law will not apply.

The Robinson-Patman Act condemns a discrimination only if the effect is to injure competition in the ways above specified, while the Borah-Van Nuys Act makes the kinds of discrimination with which it deals unlawful under any circumstances.

The Robinson-Patman Act says nothing about sales at unreason-ably low prices. The Borah-Van Nuys Act makes no specific reference to so-called dummy brokerage commissions, but may include them by implication. There are also a number of procedural differences.

e. RESALE PRICE MAINTENANCE LAWS

Resale price maintenance legislation differs from the foregoing measures in two important respects: (1) it withdraws a specified area from the jurisdiction of the anti-trust laws rather than adds to it, and (2) it originated with the states and culminated in federal law instead of being primarily a Washington conception. Fair trade laws with the general purpose of permitting sellers to name the prices at which their goods may be sold or resold have been passed by forty-four states.

In the main they follow two basic and related forms, although with many individual variations. Outstanding characteristics are: (1) merchandise so privileged must be trade-marked and must be in free and open competition with other commodities of the same general class; and (2)-their most radical departure from previous legal concepts-distributors and dealers who do not themselves contract to observe a designated resale price are bound nevertheless if duly informed of the existence of such a contract in their state. Pains were taken in virtually all of the state laws to bar price agreements between or among direct competitors.

The Miller-Tydings Act effective August 17, 1937, is a federal statute. It was passed to exempt from the federal anti-trust laws such maintenance of resale prices as might be "lawful as applied to intrastate transactions, under any statute, law or public policy now or hereafter in effect in any State . . . in which such resale is to be made, or to which the commodity is to be transported for such resale. . . ."

Floor-price laws are also state creations. They are nominally an inheritance from the loss leader provisions of the NRA. In reality their history reaches far back to the early days of chain store growth when the still older practice of selling popular goods at attractive prices was systematized on a wide scale and backed by heavy, but dexterous, advertising. Twenty-one states have now put curbs on the use of this device, usually by forbidding sales below invoice price plus varying mark-ups figured in various ways.

f. CHAIN STORE TAX LAWS

In point of intensity, the chain store tax movement seems to climax the independents' legislative onslaught on their favorite adversary. It dispenses with the protective coloring of such terms as fair and unfair, and virtually challenges the right of the chains to exist.

Chain store taxes have already been imposed in twenty-two states, although even this substantial figure does not include a number of states whose general business taxes, such as licenses and warehouse fees, happen to have a particularly sharp incidence on chain stores. The diversity in methods and rates among these states is so great as to preclude any itemized account. As a rule, however, chains are taxed by these laws on a steeply graduated scale in accordance either with the number of stores in the state or with the total number in the United States.

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