The Future of ‘Fair Trade’

June 4, 1951

The Supreme Court has ruled that retailers are free to ignore “fair trade” agreements, designed to prevent price cutting, if they do not sign them. It is too early to say exactly what the practical result of this decision will be. Some lawyers contend that it in effect nullifies all the “fair trade” laws in 45 states. Others argue that it nullifies only the “non-signer” clause of state fairt-rade laws, and even this only as it applies to interstate, not intrastate, commerce. But while manufacturers are apparently still free to refuse to sell their products to a retailer who will not sign a fair-trade contract, many of them doubt the practicability of attempting to get a contract from every dealer.

The non-signer clause, in existing state fair-trade laws, provides that when a manufacturer has obtained the signature of even one retailer to a minimum-price agreement, all other retailers in the state are bound by it. According to the new Supreme Court decision, the Federal Tydings-Miller Act, which was previously thought to uphold the state fair-trade laws in full, simply permits an individual retailer and a distributor to fix a minimum retail price that would otherwise be illegal. “When they seek, however,” continues the six-man majority of the court, “to impose price fixing on persons who have not contracted or agreed to the scheme, the situation is vastly different. That is not price fixing by contract or agreement; that is price fixing by compulsion. . . . Contracts or agreements [the phrase used in the law] convey the idea of a cooperative arrangement, not a program whereby recalcitrants are dragged in by the heels and compelled to submit to price fixing.”

Whether or not this is a correct interpretation of the words of the Tydings-Miller Act or of Congressional intent, it is sound legal and economic principle. The chief valid argument in favor of price-maintenance laws is that government should permit freedom of contract and uphold voluntary agreements. But this argument cannot be applied in cases where no real contract or voluntary agreement exists.

Most of the other arguments in favor of price-maintenance laws are dubious. No doubt they make some things easier for the salesman for the manufacturer. The small retailer’s markup on the product is practically guaranteed; his larger or more efficient retail competitors, he is assured, cannot cut prices on him. But this also works the other way. The larger retailer may place a smaller order than otherwise because he cannot offer his customers any special price advantage. And the retailer who is overstocked or needs cash can’t cut his price to whatever level he thinks will move the goods.

The manufacturer’s real protection for his brand name lies in maintaining the quality of his product rather than in maintaining a uniform retail price for it. He is more likely to gain and keep consumer good will by trying to prevent retailers from selling his product at more than a “fair” markup than at less than one. And if the average price of his product is lowered by individual price cutters, he is likely to sell more of it rather than less.

It is often argued that price-maintenance laws, by protecting the small retailer, promote rather than prevent competition. This would no doubt apply to carefully drawn laws designed to curb clearly unfair practices—for example, against selling below actual cost with the deliberate intent of putting small competitors out of business in order to raise prices again later on. But that such practices are really frequent may be seriously doubted. In any case, preserving competition should not be identified merely with preserving inefficient competitors. Retailers exist for consumers, not consumers for retailers.

When we look at the problem from the standpoint of the interest of the consumer, we recognize that there is no merit in any law which tries to hold up prices arbitrarily merely to “help the small retailer.” Higher prices reduce consumption. Less consumption means less production, less employment, and lower living standards.