Laws Restricting Interstate Trade
( Originally Published 1939 )
The power of regulating interstate commerce, granted to the federal government by the Constitution, has been challenged in recent years by a multitude of state laws which constitute serious barriers to trade among the states. Most of these laws, passed since the low point of the depression in an effort to protect home industry, have taken the form of prohibitions, taxes and regulations imposed on the use or employment within the state of products, services and even persons from other states. These restrictive laws have taken a variety of forms, most of them clearly based on the rights of the states to regulate business within their own borders, but some of them of doubtful constitutionality.
The adoption of sales taxes by many states during the depression resulted in a loss of retail business to retail merchants in cities near the borders of other states with lower taxes. This situation led the State of Washington to impose a "use tax" on "foreign" products equivalent to its sales tax, and this legislation, after being up-held by the Supreme Court, was copied by several other states. Many states have passed laws prohibiting the use of products from other states in public purchases or providing preference for home products, and these laws have led to retaliatory legislation in neighboring states. Several states tax out-of-state corporations at a higher rate than the tax imposed on domestic business.
"Foreign" products competing with local industries have some-times been taxed prohibitively, and quarantine regulations against plant and animal diseases have been converted into what amount to embargoes against the produce of other states. Motor vehicle regulations and tax laws and the establishment of "ports of entry" in some states have raised serious obstacles to interstate trucking. These restrictive laws have taken many other forms, including restrictions and special taxes on liquor produced in other states, requirements that even finished products locally produced contain a minimum percentage of local materials, and in some cases prohibitions against the export of products such as electric power in an effort to induce the migration of industry to the state.
Although this drift toward state-ism has to make its way against American traditions and Constitutional limitations, state legislatures have professed to find authority for their restrictive measures in the taxing and police powers, general regulatory powers in the interest of public safety and morals, and proprietary powers touching conservation of resources and ownership of public works. The courts have not yet fixed definite limits to their use of these powers. The Twenty-First Amendment has been construed to give the state complete control over the liquor business. The compensatory use tax has been upheld by the Supreme Court. The Nebbia decision declared the milk industry to be affected with a public interest and within the regulatory powers of the states. Preferential treatment of resident workmen and materials has been found legally proper. The Commerce Clause has not been construed to prevent the states, owners of their own highways, from requiring special compensation for their use by residents of other states. Powers of exclusion have been affirmed to permit individual states to establish ports of entry. In sundry other respects the courts have found themselves obliged to tolerate discriminatory acts that the Constitution had not been popularly regarded as sanctioning.
3. GOVERNMENT REGULATION ISSUES, CONTROLS, AND EFFECTS
How have business and the consumer been affected by the welter of laws passed during the last half-century? It is impossible to relate the history of each attempt to regulate business in terms of a specific statute. One practice may be regulated by several laws, and succeeding statutes have been forever catching up with the effects of earlier regulation. For example, the monopoly problem is attacked through the Sherman Act as a product of "combinations in restraint of trade" ; through the Clayton and Robinson-Patman acts as a product of "tying contracts" and "stock acquisitions" and "price discrimination" ; and through the Federal Trade Commission Act as a product of unfair practices. On the other hand, the adoption of the Miller-Tydings Act was furthered by the overly rigid ban of the Sherman Act on resale price maintenance.
Then too, these laws cannot be read apart from the judicial interpretations that over the years supply them with content. Congress cannot always foresee the effects of simple rules on a bewildering variety of special situations. It therefore takes refuge at times in the enunciation of general principles and figuratively hands the pen to administrative agencies and the courts-by which the writing goes on and on.
Even where Congress attempts to be specific, someone must exercise discretion. For the discharge of this duty Congress originally set up a body responsible to itself-the Federal Trade Commission-but with the power of final review vested in the courts. As matters developed, the interpretative powers of the Commission itself were subjected more and more to judicial scrutiny. There is more actual anti-trust law in court archives today than on the statute books and for an understanding of events it is necessary to examine both records.
Thus business practice and business policy have been pulled and hauled for the past forty years by legislative intentions, judicial opinions and, in spite of both, perhaps by some sort of predestination. All of these laws have had an effect-sometimes direct, more often indirect-on the prices the consumer has to pay. If a trans-action was between producers the price became a primary cost in the next process. If in the channels of distribution, it perforce filtered through to consumers and left them with more-or less-cash on hand for the satisfaction of other needs. Each practice with which the laws dealt was leaving some kind of mark so that either the success or failure of these laws was certain to change the configuration of the business world. But it is easier to see the inevitability of these effects than to measure them.
The best way to study the effects of these laws is to consider the practices which the laws sought to regulate or control. The following sub-sections briefly review the consequences of government control over various phases of distribution-as far as the available evidence permits.
a. BUSINESS SIZE
In the Sherman Act Congress set its hand against immensity in business, or more specifically against monopoly, conspiracy, and restraint of trade, which were believed frequently to be the instruments or consequences of excessive size even though not confined to it. Its sponsors felt that among the evils of size was undue control over prices. But whether prices have been raised or lowered by large-scale operations has been bitterly debated from that day to this.
Possibly the main cause of administrative concern at the moment, as expressed in the creation of the Temporary National Economic Committee, is the prevailing heavy industrial unemployment. It is argued in some quarters that bigness is largely responsible for rigid prices and that rigid prices are responsible for stagnant production in a period of declining demand.
Rigid prices it is claimed result when a small number of concerns control the bulk of the market, and when price leadership on the part of one or more of them is so pronounced as virtually to set or influence the price policies of all other units in the industry. With administered prices kept rigid by artificial means the only free factors in periods of economic strain are production and employment.
The friends of bigness do not agree that mere size is responsible in any major sense for price rigidities. They contend that the prices of durable goods, for example, have always been more or less rigid and that at least one of the major sources of price inflexibility is in the inflexible demand for such goods in periods of declining business. It is further maintained that increasingly inflexible elements of cost such as high taxes, rigid wages and social security charges, must bear a considerable share of the responsibility for rigid price structures. With respect to the narrow question of rigidity, as such, they point out that many of the supposed rigid prices are really no more than formal or dummy quotations and that a great deal of trading and shading goes on beneath the surface; also, reversing the argument, that the price schedules of the larger concerns actually serve as an umbrella for small competitors and so help to preserve rather than destroy economic opportunity.
Perhaps the greatest resentment is against the effort to confine the bigness issue to prices. Big business asks to be judged on the basis of its social contributions in the form of increasing output, improved quality of goods and services, better treatment of labor, and greater efficiency. It is convinced that the costs of production and distribution have been substantially reduced by large-scale operations and that this contribution to the public welfare is infinitely more important than such share of the price rigidities of any given moment as may be legitimately charged to bigness.
The Laws Against Size
Efforts to control and limit size by specific statutes were made by the states long before 1890, when Congress passed the Sherman Law prohibiting conspiracies and combinations in restraint of trade. A few private suits had also found their way into the federal courts and some agreements in restraint of trade were invalidated because contrary to public policy. But the courts soon deflected what was the apparent purpose of Congress in passing the Sher-man Act. In 1895 the Supreme Court decided that manufacturing was not commerce and was therefore not subject to federal restraints unless carried on in such a way in one state as to produce serious effects on the commerce in other states as well? During the next few years some of our largest consolidations were effected.
The first important break in this line of reasoning came in a 1904 case in which a holding company formed for the purpose of controlling businesses that could not be controlled directly was adjudged to be in violation of the anti-trust laws.
The situation was further confused by the injection in 1911 of the famous "rule of reason," under which the Supreme Court assumed an obligation to distinguish between contracts and combinations which unreasonably restrained trade and those which were beneficial or harmless .4 This dictum lighted controversial fires that still burn brightly today. Officials of the present administration have said that qualifications of this type have turned the anti-trust laws into "theological tracts on corporate morality." Back in 1914 agitation of the same type contributed to the passage of the Federal Trade Commission and Clayton acts.
The Federal Trade Commission presumably was intended to have power to suppress specific practices which in its opinion worked toward monopoly. But its area of discretion has been sharply limited by such rulings as: "It is for the Courts, not the Commission, ultimately to determine as a matter of law what (unfair methods of competition) include."
The Commission's mandate under the Clayton Act to prevent corporate stock acquisitions under certain conditions was similarly circumscribed. One of the court's pertinent rulings on this point was that it was beyond the power of the Commission to order a divestiture of physical properties. It therefore became possible to acquire stock in apparent violation of the Clayton Act, vote it so as to accomplish a physical merger of the assets, and then claim lack of jurisdiction of the Federal Trade Commission. Similarly, there was considerable judicial churning over the Clayton Act's prohibition of tying contracts and exclusive dealings although the eventual trend, particularly in the case of the former, was toward their condemnation if substantial injury to competition threatened for fifty years the success of business units in becoming big and powerful has been a cornerstone of our national pride.
In a perverse way the anti-trust laws themselves, as judicially construed, may have helped rather than discouraged business concentration. Large size in itself-as long as it involved no monopoly-was declared not to be unlawful . But small concerns were forbidden to agree on price, output or market policies. Hence when business felt it necessary to do any of these things it became simpler to merge rather than flout the law of the land.
Most of these issues concern bigness in production. The Sher-man Act has scarcely interfered with the mass distributors. That has been left for the more recent statutes imposed by hostile and sometimes desperate small dealers. Two reasons for this apparent incongruity stand out.
First, the growth of the mass distributors has been accompanied by an unceasing fanfare concerning their economies and lower prices. The public has been taught to be as tolerant toward them as it was indignant toward the producers. Under the battering of organized opposition this attitude may be changing although there has not yet been a conclusive showdown. Second, from the legal as well as economic standpoint no single mass distributor is monopolistic. No one of them controls more than a small fraction of the great retail market and their competition with each other is usually as relentless as the most wistful classical economist could desire.
But there is a deeper issue than individual monopoly. The mass distributors have taken command in many retail markets. Independent dealers are losing ground to the chains and mail-order houses and manufacturer-owned outlets in many retail fields such as automobile tires, oil and gasoline, groceries, and lately in drugs and hardware and other lines.
There is no evidence of monopoly in a legal sense in any of these situations, but neither is there that democratic swarm of small entrepreneurs that has been the dream of many of the enemies of size. They are hardly satisfied with a mere escape from monopoly. To them it is just as important to keep business open to new and small enterprises and to forestall the conversion of the country into a nation of employees as merely to prevent concentration. This is the issue which is being fought out not under experimental interpretations of the Sherman, Clayton, and Federal Trade Commission acts, but under the more forthright attacks em-bodied in anti-price discrimination, resale price maintenance, and chain store tax laws.
That individual producers and distributors are now mighty beyond the dreams of those who once thought to keep them small by law is self-evident. Unquestionably American business enter-prises are big, and the only choices left open to the will of the people are to decide whether their net effects are good or ill, and if ill, whether to try to break them up, assume greater control over them, or let them alone in the fear of hampering their productivity to a greater extent than could be compensated for by the salvage of an ideal.
Price-fixing in the sense used here means a definite agreement or understanding to maintain prices and should not be confused with "price leadership" exercised by a dominant concern. It is undoubtedly true that the price policies of a great corporation may often influence the decisions of smaller competitors in an industry in ways that do not correspond to theories of free competition. As matters now stand, however, the courts have consistently refused to condemn size per se, whatever the effects of a large corporation's price policy on competitors.
In the Steel case the Supreme Court said "the law does not make mere size an offense or the existence of unexerted power an offense . . . it does not compel competition nor require all that is possible." This sentiment was repeated in the 1927 International Harvester case; and even in the United Shoe Machinery case where an overwhelming percentage of the industry's resources were controlled by the defendant. In the Steel case, moreover, was a strong inference that dominant price leadership was not a form of monopolistic behavior; and in the Harvester case it was declared not to "establish any suppression of competition or any sinister domination." Likewise in some of the price-filing cases the court has handed down reassuring dicta that tendencies toward uniformity in price, short of agreements or understandings for maintaining them, were insufficient to constitute a violation of the Anti-Trust Law.
The Sherman Law and Price-Fixing
Outright price-fixing or price agreements, however, fall directly under the Sherman Act's ban and the courts have been clear and consistent in their attitude toward it. At least since the passage of the Sherman Act they have always ruled that price-fixing constituted restraint of trade and was therefore illegal.
It still does not follow inevitably, however, that in terms of economic effects, or even of the law, every agreement to fix prices must mean increased costs, and every frustration of such efforts must mean decreased costs. Attention is frequently drawn to the contrasting situations and interpretations of the law presented in the Trenton Potteries and the Appalachian Coals cases. In the first of these the court held that the power to fix prices, whether reasonably exercised or not, involves the power to control the market and to fix arbitrary and unreasonable prices. In the second case the court appeared to be influenced by the grave economic conditions with which the industry was beset and permitted the particular producing companies before it to pool their sales efforts even to the point of selling at agreed prices. Consumers were believed to be safeguarded by the existence of adequate competition from other mining areas.
Any accurate measure of the effect of government control over price-fixing is impossible. Undoubtedly the laws have prevented both producers and distributors from making many agreements of this kind. Had there been no restrictions the whole picture of our economic life might have followed a different pattern.
It is hardly to be doubted that competitors have times out of number endeavored to sustain prices cooperatively. During the last two years thirty-three suits and complaints have been initiated by the Department of Justice or the Federal Trade Commission against various forms of price control. An additional twenty-seven actions were instituted against alleged controls of distribution channels, most of which directly or indirectly included an intention to prevent prices from weakening under the pressure of competition.
These cases reflected merely the limited number of instances of supposed conspiracy that the administrative agencies were able to apprehend and attack. An abundance of circumstantial evidence indicates that price understandings of varying degrees of effectiveness are by no means uncommon. Such a statement implies neither moral nor economic judgment on the participants, for the issues as to what the law means in particular circumstances or as to when competition is economically inadequate or excessive, are still wide open in the opinion of many analysts.
The practice of open filing or posting of prices by various concerns in any line of trade has been one of the burning issues of the past decade in both the economics and the law of distribution. For better or worse it has had a real effect on prices and therefore on costs. Research has yet to trace all of the effects of the various experiments that have been made in this area.
Proponents of price-filing claim that the free and informed market of economists' prayers can be achieved in no other way and that deception and misrepresentation could thus be avoided. Critics say that if prices are brought out into the open price-filing gives too much opportunity for pressure on the seller who wants to cut, and that natural economic forces are balked even more extensively than in a system under which prices are determined by sub-surface dealings.
The Supreme Court has acquainted the public with its views on the legality of open price plans under the anti-trust laws in five notable cases. A number of fine distinctions appear in the judicial treatment of the separate problems presented, so that the principles so far laid down are neither certain nor clear.
By way of rough summary, it is now widely believed that the anti-trust laws have been construed to tolerate free and full ex-change of information on prices and other operating particulars, so long as (a) only past transactions are involved, (b) or general offers currently available to the trade, with no express or implied agreement to adhere without deviation to price and terms announced, and (c) the prices so filed "are made readily, fully and fairly available to the purchasing and distributing trade." This summary is oversimplified in order to indicate the general trend of judicial reasoning. By way of illustrating the liberties taken, not all observers will agree on the extent to which current prices may or may not be reported.
Such experience as the country has had with open price-filing has failed fully to sustain either case. The principle involved happened to be one of the few that the NRA accepted in the beginning and supported to the end. While the NRA's records were far from complete it is known that under price-filing prices rose in some cases and in others declined. In most instances the prices of various sellers tended to come closer together. This can be said to be proof of either collusion or perfect competition, depending on the circumstances and economic convictions of the observer.
d. SALES BELOW COST
Selling below cost has become a leading issue in the field of distribution. To a man in business for the purpose of making money such conduct on the part of competitors often seems plainly sinful, and the failure of law to deal with it, incomprehensible. The drive for such a law to prohibit selling below cost filled one of the most colorful chapters in NRA's vivid history.
Although over two hundred sales-below-cost provisions were written into the NRA manufacturing codes, only thirty-seven were actually permitted to go into effect. Most of them required administrative approval of cost-finding systems, and there seemed never to be an administrative right of way for the systems submitted. As NRA passed from the period of necessitous and often impulsive action on an industry-by-industry basis to one of anxiety over the well-being of industry as a whole, it had little heart for the theory that a profit and loss system should be converted by law into a profit system only-even if this could be done, which few believed possible. The significance of the drive for prohibition of sales be-low cost lay not in its own fleeting impression on the American economy, but in the brief escape of an outlaw idea from forty years of legislative disapproval.
The courts, it is true, have sometimes disapproved below-cost selling, but usually because of collateral circumstances, and rarely as a principle. Thus, in United States v. United States Steel Corporationls the Circuit Judge-or "the trial court"-said: "when that price is so unreasonably lowered as to drive others out of business, with a view to stifling competition, not only is that wronged competitor individually injured, but the public is prejudiced by the stifling of competition." The customary Trade Practice Conference Rule on this subject states: "The selling of goods below cost with the intent and with the effect of injuring a competitor and where the effect may be to substantially lessen competition or tend to create a monopoly or to unreasonably restrain trade, is an unfair trade practice."
It is clear that public authority has regarded the practice of selling below cost as improper only when its intent and effect are to lessen competition and restrain trade to the ultimate injury of the consumer. Under such conditions the buyer's immediate advantage through lower prices would be more than offset by his ultimate loss through restriction of competition. On the other hand, it seems equally clear that an agreement among competitors which would prevent any one of them from selling below cost would itself tend to restrain trade and maintain prices at higher than competitive levels.
In recent years the prohibition of sales below cost (or below cost plus a minimum mark-up) in the retail field has been lifted to an eminence of its own by the organized protests of distributors. This practice has been dealt with by distinctive legislation, such as the fair trade and unfair practice laws, which will be considered at a later point.
e. PRICE DISCRIMINATION
For many years price discrimination has been a source of grievance to small- and middle-sized distributors, not so much in itself as because of the generous concessions which their large competitors have been able to exact. Laws and regulations to limit the size of these differentials have been advocated on the grounds that the preservation of small independent distributors is of paramount social importance and that the independent has lost ground not so much because of inefficiency as because of the bludgeoning buying tactics of his more powerful competitors. Under a discriminatory system, they say, small buyers must carry much of the distributing expenses both for themselves and for their larger rivals. Conversely, the manufacturers of less well-known brands are saddled with more than their share of the total distributing expense in mass outlets. As a result, it is claimed that price discrimination interferes with the free working of the competitive system, which should eliminate the inefficient distributor and preserve an open field for the competent merchant of whatever size.
Opponents of curbs on price discrimination say that the large buyer helps the producer to utilize his excess capacity and to maintain a more stable and predictable level of operations. From the viewpoint of the buying public the final result of price discrimination is claimed to be lower prices. The small independent can easily survive in local markets to which his adaptation is superior, while in the larger fields he can obtain the economies of large-scale purchasing through retailer-owned wholesalers and voluntary chains. Economic progress should not be retarded merely to preserve the small operator and maintain an established but inefficient system.
Opponents also stress the technical difficulty of controlling prices by legal fiat and emphasize the difficulties of defining, detecting, and proving real price discrimination, in view of the multitude of conflicting cost practices. The technical problems involved in making prices serve doctrinaire objectives are bad enough in themselves, they say, without the risks and arbitrariness that come from entrusting such a broad idea as unfair competition to governmental definitions of cost and economies.
Decisions Under the Clayton Act
Section 2 of the Clayton Act and its sequel, the Robinson-Patman Act have limited price discrimination. But the Federal Trade Commission and the courts have to decide how the broad prohibition shall be applied to the intricacies of a multitude of practical situations.
The first judicial argument arose over the types of customers to whom the law should apply. In Mennen Co. v. Federal Trade Commission the Circuit Court of Appeals concluded that the law applied merely to price discrimination that might injure competition between the seller and his competitor and was not concerned with the competitive relations of a discriminator's customers.
In 1929, however, a private suit brought by Van Camp and Sons Co. against the American Can Co. resulted in a new ruling that any discrimination was unlawful which substantially lessened competition, not merely between the seller and his competitors, but also between the buyer and his competitors. Against this back-ground, the business world was somewhat startled by the Commission's action and reasoning in prohibiting the further operation of a long-standing contract between the Goodyear Tire and Rubber Co. and Sears, Roebuck and Co. in the spring of 1936. The out-standing feature of this long drawn-out proceeding was the Commission's meticulous sifting and allocating of overhead costs.
The relative ineffectiveness of the Clayton Act cannot be charged to the judiciary so much as to its own ambiguities. Debate as to how far Congress intended it to apply was common even among lay-men, who had no legal precedents to protect. In the Robinson-Patman Act, Congress tried to clarify its original intentions and also enlarged upon them.
Essentially-though not exclusively-the Sherman, Clayton, and Federal Trade Commission acts were concerned with the maintenance of arm's-length relationships between a concern and its competitors and customers and to some extent, at least, sought to accomplish this purpose by constraining fairly specific acts, such as combinations, price agreements, or tying contracts. The Robinson-Patman Act sets new precedents by dipping into the realm of internal management with controls over such discretionary intangibles as the choice of a cost-accounting system and the merchandising value of an advertising allowance.
It was inevitable that such a law would find its way to the courts. The Federal Trade Commission has already issued a number of cease and desist orders that have been appealed to the courts or will sooner or later lead to appeal. Even with sympathy for the purposes of the law on the part of the Commission and of business, it is still necessary to know what is meant by such phrases as "injury to competition," "services rendered," and "due allowances." The sentiment is frequently expressed that the drift of the Commission's reasoning to date has been toward realism and flexibility in applying the law in different circumstances.
Rulings of the Trade Commission
As the Robinson-Patman Act bears directly on prices and distribution costs, some of the highlights of the Commission's decisions to date are of interest. The focal point on which quite a number of cases were dismissed was "lack of injury to competition" between buyers involved in the acknowledged discrimination. There could therefore be no substantial injury of the type regarded by the law as a hindrance to sound business. The fact that discounts of the type under consideration were prevalent throughout the industry has also been given weight. Competing retailers did not have to sell at a loss even though they may have had to take smaller profits. In another case the Commission gave full weight to the fact that lower advertising costs and general sales expense, fewer salesmen's calls, non-use of branch warehouses and merchandising services and credit extensions, resulted in lower selling costs to certain large buyers and therefore justified lower prices.
The Commission did indicate at one point that it felt itself em-powered to follow a manufacturer's pricing policies into intrastate transactions when he retained an active interest in the handling of his goods within such states. One of its notable decisions was that in which the Biddle Purchasing Company was ordered to discontinue passing on brokerage to its retail and wholesale customers. It was held that the Biddle Purchasing Company, though ostensibly an intermediary, was in fact their representative, and that as buyers they were receiving a brokerage to which they were not entitled under law. The Commission emphasized that one of the purposes of the law was to force price concessions into the open. This decision was sustained in the Circuit Court of Appeals, and the principle animating it was more recently upheld by the Supreme Court itself in Oliner Brothers, Inc., et al. v. Federal Trade Commission.
In its effort to be realistic, however, the Commission did not for-give a discrimination merely because it was small. In one of its decisions it forbade so low a quantity rebate as 2.25 per cent, on the ground that the item in controversy was so popular and so fast-moving that the profit margin on it was only 0.5 to 2 per cent. Distinctions of this kind illustrate the difficulty of ferreting out justice in an endless tangle of diverse situations. In this case, however, the Commission's main objection was to the granting of volume discounts on shipments to individual chain store units.
The most advanced positions taken by the Commission have been with respect to cumulative discounts, delivered prices and brokerage. Subject to action by the courts these decisions are bound to affect common pricing practices. The intricacies of the broker-age issue have been discussed in some detail. The significance of the Commission's ruling on cumulative discounts is that they are really promotional rather than earned allowances, and are therefore justifiable under the "quantity discount" clause only if "savings develop that were not reflected in the price at the time of the individual sales." In construing the Robinson-Patman Act to be applicable to delivered prices and basing point prices, the Commission has somewhat unexpectedly made use of a law primarily concerned with other practices to sustain its traditional belief that prices constructed on other than an f.o.b. mill basis are uneconomic and unlawful.
Effects of Curbs
Price discrimination of the extreme type, which has been the chief center of protest, has undoubtedly undergone general but moderate shrinkage during the past two years. This may be no revolutionary change, for despite the clamor over a few spectacular cases no one really knows how much "ruthless" discrimination existed even before the Robinson-Patman Act. It is known of course that price differentials were customary, but even the Robinson-Patman Act concedes that they can normally be justified.
There seems no reason to doubt that direct payment of broker-age to buyers or their agents has been greatly curtailed, while payments to such intermediaries as cooperatives and voluntary groups are now less general. Rationalization of advertising allowance was also one of the main objectives of the act. Here there is random but fairly extensive evidence that the old loose practices in this area have been modified. Such action as has been taken, however, has been of a common sense or precautionary order as there is still no judicial definition of "proportionally equal terms." Perhaps the most useful result has been greater insistence on actual performance of services for which payments were made.
In the beginning there was a good deal of excited prediction that most distributors would either do their own manufacturing on a much larger scale than was the case before the act or that they would avoid the law by contracting for the entire output of small producers, thus removing any possibility of discrimination. Some of this may have occurred, but trade news which is still the only available source of evidence on this point does not give very positive evidence of trends in this direction or cite many specific examples. A further stimulus to private brands was also confidently expected, but again there is no safe measure of the extent to which it has happened.
f. RESALE PRICE MAINTENANCE
Another leading issue in distribution is resale price maintenance -by which the manufacturer or owner of a trade-marked product may dictate the price below which it may not be resold by distributors. As usual in the case of controversial issues, the arguments on both sides are a mixture of fact and emotion.
Those in favor claim: (1) that such protection is necessary to keep small retailers in price competition with their large competitors on volume merchandise; (2) that it is one of the few effective ways of curbing iniquitous loss leaders and "bait" merchandising; (3) that better distribution will result because thousands of small distributors will be able to range themselves loyally and aggressively behind useful merchandise that they are now afraid to touch or are actually induced to suppress; (4) that it often costs manufacturers as much and sometimes more to build goodwill than it does to make goods, and that the one should be secured against exploitation as fully as the other is under common law and the Federal Trade Commission Act against competitors' misrepresentation; (5) that the diversion of trade into unnatural channels by price-cutting and loss leader methods is far more costly in the long run than a system under which the price of goods per se is deter-mined by competitive demand; and (6) that a large body of prosperous distributors is necessary to a prosperous country.
As is always true in such institutional conflicts, the defense unconsciously keeps running back and forth between broad public interests and the private desire of individuals to be saved by law.
Opponents of price maintenance rest their case on a similar mixture of noble and "me first" oratory. Being big distributors, they are outnumbered by the small, but they have powerful means of expressing their views. Through the loud-speakers of advertising, radio and artful display, they inform the world that through price maintenance: (1) efficiency is being hamstrung; (2) savings from low costs must be hoarded instead of passed on to the public; (3) operating margins are so unequal in different types of outlets and different communities that only at a handful of accidental points can a fixed minimum price be appropriate; (4) that which is judicially approved in the name of the manufacturer's goodwill is really foisted upon him to his own disinterest by distributors who are already too numerous and who are literally going on "commercial relief" at public expense; (5) whatever diversion of merchandise from so-called normal channels there may be is likely to be unpleasantly cured by a further shift to private brands rather than back to higher cost operators; and (6) the legal problems of both manufacturers and distributors trying to do a straightforward business will be magnified out of all proportion to either real or theoretical benefits.
Resale price maintenance was held illegal under the Sherman Act. It was also one of the few major practices that the Federal Trade Commission was successful in restraining under Section 5 of its own act prohibiting unfair practices in commerce. Opposition from the Commission has usually been determined and sustained, as evidenced in its letter of protest to the President against enactment of the Miller-Tydings bill. This attitude is in keeping with a long line of hostile decisions by the United States Supreme Court, which was relieved only slightly by recognition of the right of a seller to cut off a customer who refused to respect his wishes.
From the Miles decision in 191119 to the Supreme Court's approval of the California and Illinois Fair Trade laws in 1937 adverse judicial decisions on resale price maintenance were numerous. The core of the court's logic was : (1) that when a trader bought and paid for goods they were his to dispose of as he saw fit; (2) that his merchandising costs and problems were peculiarly his own; and (3) that resale price maintenance would bring about results scarcely different than would follow an illegal conspiracy on the part of wholesalers or retailers to the same effect.
The only passage left through this barricade was the court's frequent assurance that the vendor could always refuse to sell to a buyer who would not respect his wishes concerning the resale price of his goods. But this narrow concession was always accompanied by the caution that the seller could not take active steps to detect and check violations.
But resistance to this administrative and judicial trend against resale price maintenance never flagged. In February 1914 two bills to legalize resale price maintenance were introduced in Congress (the Stevens and Metz bills) . In later years a long succession of Capper-Kelly bills were introduced, but without success until the Kelly bill passed the House of Representatives in January 1931. However, it failed to pass the Senate. The NRA finally vouchsafed the campaigners a substitute measure in the "loss-limitations" provision of the various trade codes. With the disappearance of NRA, the pressure for legislation was shifted to the states where it finally met with success.
California had enacted a "fair trade" law in 1931 exempting certain types of resale price maintenance contracts from the state anti-trust laws. This particular sanction was converted from passive to active form in 1933 by a clause requiring non-contracting buyers to abide by the prices agreed upon by sellers and contracting buyers. Approval of the California type law by the United States Supreme Court in 193620 was the signal for a virtual flood of similar state laws.
Forty-four state laws now permit manufacturers to stipulate the prices at which their goods may be sold or resold. In the main they follow two closely related forms, the pioneer California act and a model of a state act prepared by the National Association of Re-tail Druggists. Only branded goods are involved; they must be in free and open competition; the proclaimed aims are to protect manufacturers' goodwill and check use of popular lines as loss leaders; and horizontal price agreements between manufacturers,between wholesalers, or between retailers are expressly forbidden.
As these laws swept through successive state legislatures, manufacturers setting resale prices on their trade-marked goods became immune from most of the state anti-trust laws, but were still guilty of conspiracy in restraint of trade under the federal anti-trust laws. To cure this inconsistency Congress finally passed the Miller-Tydings Act which became effective August 17, 1937. This law be-stows immunity from the federal anti-trust laws on manufacturers who set retail prices in interstate commerce on goods selling in the states sanctioning this practice.
Results of Legislation
The effects of these laws have been diverse. When resale price maintenance was legalized some manufacturers started with consumers' list prices, lost trade, and lowered prices. Others, obliged to cope with loss leader sales in metropolitan areas, started with relatively low prices only to see the minimum become standard everywhere, and then raised their prices.
Some little evidence on the shifts in price levels that have resulted is being accumulated. One fairly elaborate summary appeared in an article by Reinhold Wolff and Duncan Holthausen in the July 1938 issue of Dun's Review. This was based on a voluminous collection of New York State prices filed with the New York State Pharmaceutical Association, others secured with the help of the National Independent Pharmacists, Inc., and partly checked by independent sampling by the authors.
According to this report prices of fifty fast-moving products went up 1.9 per cent in the neighborhood drugstores and 29 per cent in large price-featuring stores in New York City and Brooklyn. But in cities with population of 10,000 to 1,000,000, prices of the same articles declined by percentages ranging from 4.4 to 5.1. In rural communities and still smaller towns there was an average decline of 6.7 per cent. Naturally there were greater individual extremes in both directions.
On speculative grounds only, it seems likely that the increase in cut-rate stores measured the rebound from "deep loss leaders" and price advertising. It seems at least credible, on the other hand, that the relief from this pressure made it more worthwhile for small neighborhood dealers to push the affected lines instead of merely carrying them as necessary convenience goods. This last possibility must certainly have been supplemented to some degree by the tendency of the minimum price to become standard.
One weakness in these returns is that there is no measure of the relation of sales volume to the different adjustments. Assuming that the total public bill for these popular goods was higher as a result of the laws, it is still an open question whether the increased cost was more or less important than its value as leverage toward better balanced competition on an efficiency basis.
There is reason to believe that the competition between manufacturers' brands and substitute goods has been more of a deter-rent to reckless price hiking than the much feared "fighting" or "bait" merchandise of the big distributors.
Limited Application of Laws
It is probably a fair assumption that resale price maintenance laws as enacted have but limited application. In the first place they apply to branded goods only. The business Census of 1935 lists some twelve groups of retailers. Of these, foods, automobiles, and general merchandise-accounting for nearly half of the total retail trade-are either not suited to such close control or have their own methods of approximating it.
So far the principal effects of the fair trade 'acts have been on popular items in the drug, cosmetics, book, radio, tobacco, and other rapid turnover trades. Smaller but nevertheless definite use of them has been made in the case of the stationery, hardware, jewelry, refrigerator, rubber tire, and confectionery fields, with others trailing off in the distance.
In some of these trades the remedy has been successful in accomplishing its purpose and in others it has broken down dismally. Although the points of success or failure are of great importance to the trades involved and to economic estimates of the ultimate area of coverage, they are perhaps not so important as the reasons for success or failure. As far as ultimate coverage is concerned it has been estimated by a number of authorities that no more than 5 to 10 per cent of the country's retail sales will be brought within the jurisdiction of resale price maintenance laws.
Other effects of the fight to legalize price maintenance go beyond business practices into the larger field of group rivalries and alliances. The new powers of organized retailers have been effectively arrayed against the different powers of mass distributors. There are also rumors of occasional alliances between distributors and labor unions to force hesitant manufacturers into line. There are obvious perils of course in the determination of price levels through group warfare rather than through the automatic adjustments by which the economic system is supposed to be kept in order.
These perils are not entirely dissimilar however to those raised by other current types of corrective legislation, such as the AAA, minimum wage laws, the Guffey Coal Act, and even the Labor Relations Act. In final judgment all of them call for imponderable risks to win imponderable benefits. The case is usually one of misgivings over untested and arbitrary controls as against an urgent demand for better economic and social balance. A great deal of history will be written before there is general agreement on the verdict.
It must also be recognized that this modern type of control over price is frequently reinforced or supplemented by companion state laws to prevent sales below cost. Although twenty-seven states have adopted these "loss leader" laws, the Nebraska, New Jersey and Pennsylvania statutes have been declared unconstitutional. These laws have been promoted in many instances by the grocery trade as a substitute for resale price maintenance, which manufacturers of grocery products have been afraid to impose because of fear of antagonizing the chains. Dealers are prohibited by these laws from selling goods (and in some cases services, as well) below "cost," which is ordinarily defined as purchase or replacement cost plus "cost of doing business." The majority of the laws establish a mini-mum mark-up--usually 2 per cent for wholesale and 6 per cent for retail-to cover cost of doing business, unless lower operating costs can be proven. So far as these laws can be enforced their effect obviously is to restrict competition and increase prices to consumers.