Synopsis
Fully the "Robinson-Patman Price Discrimination Act", an American federal statute which attempts to restrict ways in which price discounting can be used to stifle competition.
Details
The Clayton Antitrust Act (1914) was the first American federal statute to express prohibit certain forms of price discrimination. In 1936, section 2 of the Clayton Act was amended by the Robinson-Patman Act.
Congress felt that the rise of chain stores1 threatened competition in the retail sector. Through vertical integration and the buying power of multiple locations, large retailers could obtain significant price concessions from their suppliers that were not available to smaller competitors. The Robinson-Patman Act was envisioned to provide protection to small independent retailers and suppliers such that "to the extent reasonably practicable, that businessmen at the same functional level would stand on equal competitive footing so far as price is concerned." In very broad strokes, the Act requires sellers to sell to everyone at the same price, and buyers buy from a particular seller at the same price as everyone else, where they have the knowledge to do so.
The Federal Trade Commission has advised that "... interpretation and application of the Act should be consistent with the interpretation and application of the other antitrust laws whenever possible."
The most recent major Supreme Court decision interpreting the Act was Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation, in 1973. In this decision, the Supreme Court ruled in a way that made the interpretation of Robinson-Patman somewhat narrow. They found that the Robinson-Patman Act prohibits price discrimination only to the extent that it threatens to injure competition.
The Act requires allegations of discriminatory pricing to satisfy specific prerequisites. In brief, it requires at least two separate completed sales of commodities of similar grade and quality, close together in time, with a significant difference in price. The sale must be by the same seller, to two or more different purchasers. The goods must be "for use, consumption, or resale within the United States or any territory thereof" and must involve at least one interstate sale (as the Act is a Federal statue, this must happen to invoke its jurisdiction). Export sales are not subject to the Act. Finally, the sale must be one which may bring competitive injury to the plaintiff.
The restriction to "commodities" lets out intangible products or services such as cable television and cellular telephone service. It also casts doubt on the Act's applicability to software, as most companies sell you a 'license' to use the software, and not anything tangible other than shipping media - not even that for Internet purchases.
Section 2(a) of the Act prohibits a seller from discriminating in price between two or more competing buyers in the sale of commodities of like grade and quality, where the effect of such discrimination may be "substantially" to "lessen competition", "tend to create a monopoly", or "injure, destroy, or prevent competition."
In Brooke v. Brown & Williamson, the Supreme Court held that "First, a plaintiff seeking to establish competitive injury resulting from a rival's low prices must prove that the prices complained of are below an appropriate measure of its rival's costs. . . [Second, the plaintiff must demonstrate] . . . that the competitor had a reasonable prospect, or, under 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices." In other words, the plaintiff must prove that the accused is selling goods below their cost of manufacture, and also that the accused's intent is to reap long-term benefit by charging unreasonably high prices later, and also that the said intent has a high probability of success.
A wide variety of exceptions apply, such as the ability to charge territorial price differences, so long as such differences are applied throughout that territorial market, rather than on a customer-by-customer basis. Exemptions for different shipping costs, volume discounts, seasonal price variations, and more are also permitted.
The Act also prohibits so-called "secondary line injury," where the actual or threatened injury to competition occurs between different customers of the seller -- some of whom receive a discriminatorily lower price, while others do not.
Application
Proving all of the prerequisites and conditions of the Act is difficult - so much so that no case brought under the Robinson-Patman Act has been successfully won on its merits since the Brooke v. Brown & Williamson ruling.
Some cases have been settled by the parties involved without a ruling, others have been dismissed in summary judgment after failing one or more of the court tests described above.
The government (in specific the FTC) rarely enforces the Robinson-Patman Act, with the majority of suits being brought by private individuals. In 1998, the American Booksellers Association sued Barnes & Noble and Borders under the Act. The suit alleged that the chains had 'engaged in a pattern and practice of soliciting, inducing, and receiving secret, discriminatory, and illegal terms from publishers and distributors.' The suit was eventually settled when the ABA decided it was unable to continue to fund the court costs. Both sides claimed victory, but there was no clear winner in the case.
It is worth noting that the Federal government did not bother to invoke Robinson-Patman in its recent suit against Microsoft. Satisfying the below-cost pricing requirement for software is very difficult. Microsoft could well argue that the cost of Internet Explorer is effectively zero, and thus they can give it away over the Internet without violating this requirement. Of particular interest will be Microsoft's reaction to the news in July 2003 that America Online had laid off about 50 Netscape developers and end development work on the browser. Should Microsoft decide to charge money for Internet Explorer in future, this could be seen as evidence of predatory pricing behaviour under the Act.
Footnotes
- Specifically in this case, the chain was grocer Atlantic & Pacific Company (A&P).
Sources
Adapted from a speech by Donald S. Clark, Secretary of the Federal Trade Commission (source 1) and supplemented by other reading. Alterations, additions, clarification, and any resultant errors are my own.
- http://www.ftc.gov/speeches/other/patman.htm
- http://www.newrules.org/retail/robinson.html
- http://www.businesslaws.com/els18.htm
- http://www.bookstore.com/lawsuit.html