Why the Robinson-Patman Act Revival May Backfire

In recent months, neo-Brandeisians and other proponents of small businesses have been advocating for the revival of the Robinson-Patman Act (RPA), an act passed in 1936 to prohibit price discrimination in order to level the playing field for small businesses competing with large firms. For instance, the Open Markets Institute called the act “a keystone in America’s competition law regime” that needs to be reintroduced and vigorously enforced. Meanwhile, the Federal Trade Commission (FTC) has also taken steps to revive the act when they initiated an investigation into the pricing practices of Southern Glazer’s Wine and Spirits, a U.S. alcohol distributor. Similarly, they are also in the preliminary stages of investigating the pricing practice of Coca-Cola and PepsiCo for violations of the Robinson-Patman Act. However, proponents of the act fail to understand that its revival will not only have consequences for consumers but also for the small businesses they are trying to protect. As such, RPA enforcement should not be reinvigorated because doing so will not benefit society.

The RPA raises prices for consumers because it prevents suppliers from offering discounts to buyers of similar products. When suppliers sell, they may have an incentive to price their products differently based on the quantity that buyers are purchasing or other factors that impact a supplier’s economic competitiveness. For example, a supplier could provide discounts for 1) large orders in order to achieve scale economies in manufacturing, 2) the lower delivery costs of large orders compared to small ones, 3) new sellers to try its products, and 4) buyers who aggressively market the seller’s products. However, the RPA condemns these discounts and prohibits sellers from charging different buyers different prices for goods of similar grade and quality. This means sellers have to offer the same prices to all buyers regardless of the benefits a buyer can provide to a seller. As a result, buyers will face higher prices and thus will pass on the price increases to consumers in the form of higher prices.

Proponents of small businesses will argue that higher consumer prices because of the RPA are reasonable as long as all competitors are treated equally. Indeed, an Open Markets Institute report supporting the revival of the RPA argued that “the supporters of the RPA recognized that stronger price discrimination law could raise consumer prices but…rejected the philosophy of low prices at any cost.” In this view, “fair” competition, “fair” treatment, and “fair” prices to producers took precedence over low consumer prices. In other words, they believe the RPA should be revived to protect small competitors from competition—even if it harms consumers. However, rather than result in “fair” market outcomes, the Department of Justice itself recognized in its 1977 report that the RPA can itself lead to more violations of the antitrust law by promoting price coordination and collusion, which the Supreme Court has made clear is “the supreme evil of antitrust.”

In fact, the RPA does not so much protect small competitors as it does prevent them from competing effectively against larger businesses because they cannot receive discounts. Although the act was passed to prevent large buyers from receiving discounts that small competitors did not get, as scholars have noted, it also had the unintended effect of preventing associations of small merchants from obtaining lower prices when making large-volume purchases. Indeed, in Mid-South Distributors v. FTC, the FTC filed suit against two cooperative buyer groups, Mid-South Distributors and Cotton States, Inc., and their 23 jobbers for buying automotive parts at a discount. In ruling against the co-ops, the court found that the co-ops “must, as would any other organization of comparable size, respect the prohibitions against discriminatory price differentials.” In other words, the RPA served to hurt small buyers who now face higher prices from sellers because they can no longer receive discounts even when making large purchases as a group—a textbook example of attempts at regulation working against its intended goals.

The RPA will also hurt small distributors and the small businesses purchasing from them in another way. Small distributors are more likely to compete based on the ability to offer price reductions to only select customers or areas. However, this would be in violation of the RPA. As a result, small distributors would not be able to effectively compete against their larger rivals because their higher prices will deter customers from buying their products. Moreover, the RPA will also hurt the downstream mom-and-pop shops because large manufacturers may remove them from their distribution networks. As has been long understood, large manufacturers are unlikely to lower their prices to compete with a lower-priced distributor because doing so will require that they lower their prices nationally. As a result, small businesses would not be in the distribution networks of top brands because those prices are too high.

In conclusion, it’s worth looking at the facts. In a study surveying the damage done during the period of RPA enforcement, F.M. Scherer and David Ross found that of the 564 companies in violation of the RPA, only 6.4 percent had annual sales of $100 million or more while more than 60 percent had sales below $5 million. In other words, most of the RPA complaints were against small businesses, not the A&Ps of the world. As former FTC chairman Tim Muris has pointed out, this was the central concern behind the passage of the RPA, with the ultimate persecution of the company coming both at its expense and that of the consumers who benefited from low prices. Today, the FTC is considering reviving RPA enforcement, including against large retailers such as Amazon, who, like A&P, have found new and innovative ways to offer consumers low prices, including through vertical integration with its logistics network. Rather than reopen this Pandora’s Box, the FTC should leave the RPA in the dustbin of history where it belongs. Small businesses and consumers will be better off for it.