Robinson-Patman Deserves Last Rites, Not Resurrection

The 1936 Robinson-Patman Act (RPA), once a lynchpin of antitrust enforcement actions, because the government almost always won under its convoluted terms, has been all-but abandoned for decades. As Alden Abbott has recently reported, the 2007 Report of the Antitrust Modernization Commission recommended its repeal. Before that, the last RPA enforcement action was in 2000, and the last before that was in a 1988 case dismissed by the court.

But there is now renewed interest in its revival. As reported by The Capitol Forum, there is currently a “Bipartisan Push in the House to Designate $10 Million of FTC Budget for Enforcement of Robinson-Patman.” Unfortunately, that is an ominous prospect for American consumers, because as former FTC Chairman Timothy J. Muris has noted, the efforts to enforce RPA “were abandoned for good reason: they harmed consumers.”

So what does RPA prohibit? Among other restrictions limiting the means of creating economies of scale and extending such savings to consumers (i.e., to keep more efficient producers and suppliers from outcompeting less efficient ones, to the detriment of buyers), it outlaws “price discrimination between customers not based on provable cost differences, “where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly.” Its most important historical application was to large-volume discounts, particularly involving large chain stores that were revolutionizing product distribution (RPA was commonly called the “anti-chain-store act” and A&P, the largest chain store when RPA was adopted, was the main target).

While the words of the act read like a defense of competition, the effect of its restrictions is to reduce competition, because it puts in the antitrust enforcers’ crosshairs the quantity discounts and other efficiency enhancing mechanisms that advance consumers’ well-being by reducing retail prices.

How do quantity discounts help consumers? Consider the chain-stores that were the original RPA targets. To get lower wholesale prices, such chain stores had to find a way to successfully market a very large volume of products. What did they do to succeed in that effort? Lower retail prices, wider selection and deeper inventory, more rapid responsiveness to changes in conditions and consumer tastes, more stores, etc. And consumers proved they benefited by their increased patronage of such stores. So RPA’s supposed defense of competition was actually an attack on consumers, by threatening to prosecute successful competitors, as a form of protectionism for the less efficient.

Rulings under the act have often erroneously conflated harm to rivals who lose out to better offerings with harm to the competitive process. The essential reason is straightforward. Superior offerings from competitors, which is the goal of competition in the area Americans have most in common–our roles as consumers—also necessarily “harm” less efficient rivals in the process of benefiting consumers.

The language of RPA supposedly allows firms to defend their quantity discounts by showing that specific cost savings justify different prices. But such cost savings are more of a chimera than a reality, because from the court’s perspective, as Richard Posner put it “cost savings to the manufacturer could not be demonstrated with the precision required.”

Why was that the case? Because as economists harp on about, the costs (the value to the decision-makers of the best opportunities forgone) that are relevant to the choices being made are subjective. And they cannot be made objective in the face of a challenge. Consider just some of them. Accounting data is backward looking, but the relevant costs are forward looking. If you have a multi-product firm, even more than for one with a single product, there is no definitive “right” way to allocate overhead costs, depreciation, advertising costs, storage costs, or marketing costs, just to name a few. In Hamilton Walton’s analysis, “No accountant has been able to devise a method yielding…figures which does not embody a dominance of arbitrariness and guesswork.”

That, in turn, may go far to explain resurgent interest in reviving RPA. If the government can get the courts to again accept the false claim that large, successful competitors harm competition when they compete customers away from competitors, then the more successful producers in customers’ eyes would have to return to the cost defense. And given the court’s historic refusal to accept cost defenses, not because of their logic but because accounting data is insufficient to “prove” exactly what forward-looking cost savings there are, the targeted firms would lose, even when consumers gain. That is borne out by the fact that “successful” RPA cases almost always resulted in higher consumer prices, which is the goal of inferior competitors who pushed such suits.

RPA’s derivation proves no kinder interpretation, either. It grew out of the Supreme Courts’ rejection of Roosevelt’s National Industrial Recovery Administration, which essentially cartelized much of American industry to every consumer’s detriment, as unconstitutional. RPA tried to recreate the NIRA codes, but could not get enough votes. Only then did supporters turn to RPA and its language that Timothy Muris summarized as “vague, frequently self-contradictory, and subject to varying interpretations.” But laws that are vague to the point of indecipherability cannot be seriously defended as the basis for advancing what the Constitution called our “General Welfare.”

In fact, RPA was, and efforts to resurrect its use now are, attempted violations of what a law should be. It strips consumers’ freedom to choose for themselves in an area they are far more competent at than government “enforcers,” combined with the chutzpah of claiming that its purpose is to benefit competition. One need only look to whose complaints led to RPA prosecutions to see that. It was not the consumers, who knew they gained from those superior offerings. It was out-competed rival sellers. That is why resurrecting RPA would bring about a resurgence of recognition of 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 from burying such help rather than giving it new life.