Harvard Business Review - How an Old U.S. Antitrust Law Could Foster a Fairer Retail Sector
Legal director Sandeep Vaheesan and chief economist Brian Callaci discuss how lawmakers can address concentration and monopolization by enforcing the Robinson-Patman Act.
Antitrust is having a moment. Last summer, President Joe Biden issued an ambitious executive order with 72 directives and recommendations to his administration to “promote competition in the American economy.” Now, Congress seems poised to enact one or more bipartisan antitrust bills.
As they aim to revive antitrust against powerful corporations, legislators and regulators confront an important question: What types of competition should the law allow to support and sustain a fair economy? Not all competition is desirable: false advertising, industrial sabotage, patent infringement, and paying sub-minimum wages have been deemed unfair and illegal. Lawmakers tend to be preoccupied with “how much” competition there is, not what kind of competition they’re encouraging. But as they look to tame pervasive concentration and monopolization, they should consider an older approach to antitrust that fits one of the leading problems we face today: restricting abuses of buyer power.
This idea has fallen out of vogue. For several decades now antitrust orthodoxy has interpreted the antitrust laws as “protect[ing] competition, not competitors,” and reduced questions about legality to measurements of prices and output — we know the government needs to act when corporations raise consumer prices and reduce output. However, this viewpoint sits uneasily with the antitrust laws that are actually on the books. Historically, Congress restricted the ability of powerful corporations to unfairly lower the prices they pay to suppliers, farmers, and other producers — it was once a pillar of its antitrust strategy.
If you look at the origins of this policy, you’ll find that the United States was facing a situation much like the one it’s navigating today, in which corporations exercised enormous power over supply chains.
In the 1920s and 1930s, large chains were making major inroads into groceries. Corporations such as the Great Atlantic & Pacific Tea Company (commonly called “the A&P”) were opening stores across the nation and frequently offered lower prices than smaller rivals. In many places, these stores (as well as new mail-order outfits) introduced fresh competition into local monopolies — particularly in the rural South, where white-owned country stores charged high prices to their relatively poor farmer and sharecropper customers, who tended to be Black. They captured market share and appeared poised to dominate retailing in many local markets and nationally. In 1930, the A&P had more than 15,000 stores across the country. (For comparison, Walmart, the nation’s largest food retailer, has 4,742 stores in the United States, while the Albertsons family operates more than 2,200 supermarkets.)
But as the power of companies like A&P and Kroger grew, an unfair dynamic emerged, which put small retailers at a clear disadvantage. Because of their sheer size, these companies were able to compel manufacturers and wholesalers to grant them lower prices than they charged to small rivals, even in cases where the large volumes did not result in lower costs of production or distribution. The concessions chains extracted gave them a cost advantage over independent rivals as great as 35% in some local markets, according to a 1934 Federal Trade Commission (FTC) report. In addition to lower prices, large chains could obtain advertising allowances and brokerage fees that were not offered to their competitors.
If this sounds familiar, it should. Today, powerful buyers — such as Amazon, Target, Walmart, and other chain retailers — commonly use their purchasing clout to extract concessions from suppliers that their smaller rivals do not receive. Evidence shows that buyer power is on the rise across the economy: while horizontal integration has increased, vertical integration has declined, meaning firms are becoming more dependent on larger buyers. In manufacturing, annual “five percent letters,” in which corporations demand lower prices from suppliers each year, are commonplace.
Facing popular outcry, Congress had a dilemma much like the one it faces now: How could it allow consumers to gain the benefits of operational efficiencies and economies of scale while preventing chain stores from using power and exploitation of suppliers alone to win market share? Its solution was a statute targeting their buyer power. In 1936, Congress passed the Robinson-Patman Act, which President Franklin Roosevelt quickly signed into law. It still is law, though it has rarely been enforced by the government since the 1970s. And, it could be an essential tool today in the effort to level the playing field for businesses at risk of being trampled by giants.
The Benefits of Better Competition
According to Congressman Wright Patman, the law’s House sponsor, its aim was to “protect the independent merchant, the public whom he serves, and the manufacturers from whom he buys, from exploitation by his chain competitor.” He asked, “[H]ow can the independent merchant in this country exist when the goods on his shelves cost him 15 percent to 20 percent more than the goods cost his chain competitor on the other side of the street?”
Expanding on existing restrictions on price discrimination, the act aimed to bar large buyers from extracting lower prices through raw market power, while allowing lower prices where genuine efficiencies — such as large orders allowing a supplier to exploit economies of scale — were the source of the discount. In its technical legal language, the act prohibited “discriminat[ion] in price between different purchasers of commodities of like grade and quality” where the effect of that discrimination was to “substantially to lessen competition” or to harm competition with rivals or suppliers. The prohibition, however, was not absolute. Price discrimination was permissible when based on the lower costs of serving the preferred purchaser, or necessary to meet competition from a rival supplier. The Robinson-Patman Act also banned brokerage commissions, and advertising allowances that favored one purchaser, or one set of purchasers, over their rivals in the same market.
The golden age of enforcement of Robinson-Patman was the 1960s. Building on precedent established in the 1940s that held that the price discrimination prohibitions in the act applied to each individual article in a store, the FTC’s enforcement peaked between 1960 and 1964, when it brought more than 500 cases. The result was a vibrant retail sector. Despite dire predictions by critics in the 1930s that Robinson-Patman would slow progress and produce a stagnant distribution system, the law — paired with tight antitrust restrictions on mergers and acquisitions and below-cost pricing — channeled business strategy in socially beneficial directions. Instead of using their buyer power to demand concessions from suppliers, retailers built supermarkets with more floor space and better layouts and aimed to lower prices by increasing the efficiency of their operations. In a legal environment that checked the power of the largest chains, “[r]egional, sectional, and local chains led the postwar supermarket boom,” while their national rivals lagged behind. The Robinson-Patman Act had taken away an important advantage of corporate bigness and helped create a more decentralized and vibrant retail sector.
While New Deal reforms have a decidedly mixed record in terms of addressing racial inequalities, laws like Robinson-Patman helped Black-owned businesses — which started at a smaller size, given white capital’s 300-year head start in wealth accumulation — compete on more equal terms. Throughout the postwar period white-owned banks continued to deny Black entrepreneurs access to credit, while white landlords refused to lease favorable business locations. Nonetheless, Robinson-Patman at least leveled the playing field in some respects, allowing independent Black-owned retailers to compete with chain stores, and Black-owned suppliers to protect their margins from unfair price squeezes initiated by large buyers. It was during the heyday of Robinson-Patman enforcement that J. Bruce Llewellyn built FEDCO Foods, the nation’s largest minority-owned retail business, from the Bronx, and Henry J. Parks, Jr. made his Baltimore sausage manufacturer the first Black-owned business on the New York Stock Exchange. Both independent businesses were forced to sell to larger competitors in the 1990s — FEDCO to Target, and Parks to Dietz & Watson.
In countering buyer power and fostering a fairer economy, the Robinson-Patman Act played an analogous role to New Deal labor and employment laws, which granted workers the legal right to organize and receive minimum wages and overtime. The Fair Labor Standards Act even declared the payment of subminimum wages an “unfair method of competition.” As workers organized entire sectors and established certain labor market standards, they channeled employers’ competitive struggles away from brute squeezing of workers’ wages towards the generation of more efficient production processes. Union protections and vigorous antitrust enforcement both helped foster the dynamic, and, by 21st century standards, more equal postwar economy.
The New Era of Antitrust
The Robinson-Patman Act always had its critics, though. In the 1950s, the liberal economist John Kenneth Galbraith argued that the law impeded the exercise of “countervailing power” by retailers against the oligopolistic manufacturers that dominated the postwar economy. Starting in the 1970s, antitrust enforcers and courts adopted a much more skeptical attitude toward the Robinson-Patman Act. In an environment of rising inflation, emerging neoliberal ideas centering the public’s interests and identities as consumers rather than as producers gained traction. In the case of antitrust law, scholars affiliated with the right-wing University of Chicago economics and law departments embraced a narrow consumerist worldview that treated low prices as almost always beneficial.
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