The revival of price-fixing in the land of free enterprise

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The debate over the role of competition and competition policy is less about technical arguments than about the nature of society.

I have no commercial interest in Kay’s Kloset, the shop in Lewisville, Texas, selling women’s fashion accessories and no other interest until reports of its activities reached the Supreme Court of the United States.

The newly established conservative majority in the court decided last week to lift America’s 100-year-old prohibition of resale price maintenance (RPM) – the practice by which manufacturers fix the selling prices of their goods. It has been a difficult month for competition policy on both sides of the Atlantic, with Nicolas Sarkozy, the French president, asking rhetorically what competition has ever done for Europe.

Kay’s Kloset was discounting the price of Brighton leather belts by 20 per cent and the Leegin Corporation, which distributed them, cut off supplies. When Kay’s Kloset sued, the Texas Court refused to hear arguments from Leegin’s economists that the company’s price-fixing might enhance competition, and awarded $4m (€3m, £2m) in damages. Yet the Supreme Court ruled that judges must listen to the economics professors. The potential benefits to those who specialise in antitrust law are enormous. But what of everyone else?

The basic American legal principle used to be that when you had sold a good you had sold it and attempts to restrict subsequent use through contract were anti-competitive. But the law has always acknowledged that producers may have legitimate reasons to influence resale conditions. Complex products such as cars may require knowledgeable sales people to explain them. The ambience in which you buy a luxury product may contribute to the mystique of the brand.

Some economists and lawyers have constructed inventive arguments why similar concerns might extend to price, so that consumers could benefit from the suppression of retail competition. Until last week US courts declined to entertain these claims. British courts have always been required to consider them, but – with the exceptions of books and pharmaceuticals – have received them with little sympathy.

For good reasons. If car manufacturers need to restrict the activities of their franchisees in order to maintain high-quality pre-sales advice and after-sales service to their customers, they seem to be failing in their objectives. Their real motive is to control the distribution system.

The main issue in RPM has always been the balance of power between manufacturers and retailers. In the 20th century that balance shifted in favour of the retailer. The decline of RPM, in the face of legal challenge and market forces, was a crucial part of that story.

When the price of instant coffee became a cause célèbre in the 1950s, producers were not really anxious that people obtained wise advice when they asked for a jar of Nescafé. Nor was keeping retail prices high necessary to secure wide distribution. Food manufacturers wanted to limit the rise of Tesco and Sainsbury and when attempts at price-fixing failed that rise became inexorable.

A few years later, the end of RPM in electrical goods coincided with the growth of out-of-town discount retailers. Drug companies want to restrict retail competition because they would rather deal with small pharmacies than with big chains.

The outcome of the collapse of price-fixing by British publishers in the 1990s was broadly what some hoped and others feared. Chain retailers became more powerful and popular titles much cheaper, many books though few titles are now sold in supermarkets, and new channels, especially mail order and online, have gained market share.

The rise of Wal-Mart and the decline of small shops involve costs to communities as well as benefits to consumers. The issues are not one-sided. But the debate over the role of competition and competition policy is less about technical arguments than about the nature of society. Mr Sarkozy, his grasp of politics surer than his grasp of economics, understands this more clearly than the Supreme Court. But both the anti-liberal Sarkozy and the business-friendly justices realise that case-by-case analysis without a presumption of benefits of competition is a means of emasculating antitrust laws.

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