5. The Forgotten Consumer

The retailers, however, felt that they had a fair and proper place in the business, including markup, and that it should be protected. At about the same time a leading patent medicine com pany, Dr. Miles, fell out with some of its distributors. They were not maintaining the retail price of Dr. Miles' medicine as the makers wanted them to. The Supreme Court had little difficulty in striking down both of these efforts at what is now called "resale price maintenance." If distributors wanted to cut prices below the customary margins, that was all right with the court. It was a form of competition, and it benefited the consumer.! Much more recently the Supreme Court made a similar finding in the Ethyl Gasoline case.2 It found that Ethyl violated the Sherman Act when it refused "to grant licenses to jobbers vvho cut prices or refused to conform to the marketing policies and posted prices of the major refineries or market leaders among them.~' In other words, it here again struck down resale price maintenance.

34 THE FORGOTTEN CONSUMER 35 These were Sherman Act cases. But recently, the Federal Trade Commission found resale price main tenance to be a violation also, of the FTC Act, as an "un fair method of competition." 3 Times have changed. And in an astonishing recent case-the so-called "Detroit gasoline case"-the FTC reversed itself, in effect, and required a big oil company practically to enforce resale price maintenance on certain of its jobber-retailer customers. What happened in the case was this. The Standard Oil Company of Indiana had in Detroit what is called a "dual distribution system." In other words, it sold, on the one hand, direct to several hundred retail gas stations; and on the other hand to four jobbers, some of whom not only sold to retailers but also sold at retail,that is, direct to consumers, through the jobbers' own gasoline stations. Standard sold to the jobbers at 1~ cents a gallon lower than it sold to retail station-operators. This was a tank car price to the jobbers, and a tank-wagon price to the retailers. This was not a wide spread. In fact a number of oil companies had been fined a few years earlier under the Sherman Act for holding the jobber-retailer spread at two cents.4 One of these jobbers, however, selling at retail through its own service stations, often passed on some of this dis count to the drive-in customers, during some of the re peated price battles that raged in the Detroit gasoline business. And this tended to aggravate the competitive battle, pull down retail prices to the consumer, and hurt some of this jobber-retailer's competitors.

The FTC thereupon ordered the Indiana Standard company, among other things, "to cease dealing with any wholesaler who [it] knows, or should know, will 36 THE FORGOTTEN CONSUMER not maintain [its] price to retailers." And the Circuit Court of Appeals upheld the FTC in this, saying that Standard might, "under the right to choose its customers, refuse to sell to wholesalers who sell to retailers below the price [it] makes to its own retailers." 5 By odd coincidence a somewhat similar case was tried in Milwaukee at about the same time, also involving gasoline prices, but with a quite opposite outcome. Bear in mind that it was Detroit gasoline dealers who set off the above case and precipitated this FTC price main tenance ruling. But meantime the State of Wisconsin was winning a case against price maintenance in Mil waukee. The Milwaukee Retail Gasoline Dealers' Asso ciation had sent bulletins to its members suggesting resale prices, which were adhered to by more than 90 per cent of its members, while only 55 per cent of the nonmember dealers to whom these bulletins were sent, maintained the suggested price. The Wisconsin court found the Association to have conspired to maintain gasoline prices, fined it $2,000, and ordered its charter dissolved.6 The Wisconsin proceeding was brought under a state antitrust law. This law and the action taken under it were in line vvith the original spirit of the federal antitrust laws. But a remarkable change has taken place in the interpretation of the federal laws, even though on Janu ary 8, 1951, the Supreme Court reversed the Circuit Court in this case.

Thus Federal Trade Commissioner Lowell B. Mason recently said: I remember back in 1936 when the Department of Justice decided to stop restraints of trade in the distribution of sugar. The courts agreed with the Attorney-General's contention, and in Sugar Institute v. United States (297 U.S.553) condemned the practices of the Sugar Code as a compendium THE FORGOTTEN CONSUMER 37 of near)y every aspect of systematic restraint of trade that there ,,'as. I am sure the Attorney-General will not take offense if I tell him that we (in the Commission) do not care whether he won the Sugar Institute case in the Supreme Court or not, because three months after his department obtained this signal victory over the sugar trust, Congress [in the Robinson-Patman Act-ed] gave us the power to protect not competition but competitors, and now the Federal Trade Commission can enforce the very thing the Sugar Institute code was condemned for doing. . . . 7 And the President's Council of Economic Advisers said in its 1948 report: "The philosophy of the Sherman Act appears to be yielding to a policy of 'ethical com petition' which does not differentiate between the sta bility of the individual firm and the stability of the total economy." And it went on to quote favorably President Woodrow Wilson's statement to the effect that he took off his hat to the businessman who by selling more at lower prices and by improving the quality of his product was able to take business away from his competitors.

They observed that although warm admiration is often expressed for the policy of the Sherman Act, one excep tion to the antitrust laws after another has been enacted in recent years, notably the Robinson-Patman Act and the Miller-Tydings Act to permit resale price maintenance of certain branded products. One of the most direct ways in which the· old spirit of the Sherman Act is being changed is through the increasing enforcement of the "functional discount," by both the FTC and (as in the Morton Salt case) by the courts. A functional discount is one given by a manu facturerto a buyer, because of the latter's "function" in the distributive scheme. It is little more than resale price maintenance by another name. In effect, it freezes into 38 THE FORGOTTEN CONSUMER the distribution system the traditional markups, from manufacturer, through wholesaler and retailer, to con sumer. Thus, if the final consumer is expected to get a thing for a dollar, the wholesaler may get it for 60 cents and the retailer for 80 cents. By freezing-in their mark ups, the discount tends to freeze these people into the distribution system.

Around such traditional discount practices the FTC has been, for some time, weaving a gossamer of restric tions to prevent them from being pared, reduced, or eliminated and the reduction being passed on to the consumer. Thus it has become legally dangerous to grant a discount to wholesalers so low that, as in the Detroit case, they can resell to retailers below one's own price to retailers. In this case, it was the retailers who were being protected. On the other hand the Morton salt decision made it dangerous to sell even to the most lush large retail account like that of a chain at a price which disregards the traditional difference between prices to wholesalers and those to retailers. In this case it was both the wholesalers and the small retailers who were being protected. Any price schedule today which can inlure these two categories may now, by court-supported FTC finding, prove illegal on the ground that it·"lessens"

or "injures" competition. The net effect is to preserve the wholesaler in his wholesaling and the retailer in his retailing. More than that, it keeps them from invading each others' territory. Most important of all, it retards the cost-cutting expan sion of chains, mail-order houses, and other dual-function and multiple-function firms. Thus it tends to preserve what might be called a caste system in distribution, with each traditional function assigned a place and a markup. This new interpretation seems to steer toward the inTHE FORGOTTEN CONSUMER 39 elusion of various traditional classes of distributors in a new "welfare state" form of security. In its concern for these functional markups, the Trade Commissiongoes even beyond the letter of the Robinson Patman Act, though perhaps not beyond the spirit. The Robinson;...PatmanAct does not require them, ex cept by implication in the case of brokerage fees. But the FTC is coming to require them. And, significantly, the Commission has picked, of two going definitions of functional markup, the one most likely to protect the in efficient or obsolescent middleman. For by one defini tion, the functional discount is based on the service per formed by the middleman, such as storing, re-packing, keeping books, extending credit, and so on. But the Commission has chosen the second. definition, in which the discount is given according to the middleman's tradi tional role-wholesaler, jobber, retailer-regardless of how comparatively useful he remains in the distributive scheme of things.

This can result in what might be called "phantom" markups, in which the buyer has to pay a price which includes a markup for the intermediate middleman even though there isn't any intermediate handler. This came out in the Morton Salt case, in which it appears that the company was ordered to quote prices to all retailers, big or small, as retailers. In such case the big chains, who do for themselvesthe equivalent of the wholesaling func tion, would nevertheless have to pay a price for their salt which would include a charge for the wholesaler. The manufacturer will thus be collecting a phantom dis count from such big buyers, since he will be in effect charging a price which includes the services of a whole saler, though the buyer performs these services himself. In recent years the Federal Trade Commissionhas been 40 THE FORGOTTEN CONSUMER paying more and more attention to costs. It seems to be moving toward a sort of cost-plus principle of pricing.

This has begun to take shape in at least three major cases already. In the Morton Salt case, the result of the FTC's plea was that the price of salt must include the cost of the wholesaler's function, whether actual or not. In the Cement case, the result, in effect, was that the price must include the cost of the freight (in other words the seller was not allowed to "absorb" the freight charge by paying it out of his own pocket to get the distant business). And in the Detroit case again, the price was made to in clude what might be called a "proper" cost for the job ber's function (that is, the goal was to prevent the jobber from reducing his markup) . The relation between cost and price is a significant one. A sales manager will not consistently charge less than his known costs or consistently take a loss on busi ness. He will, in many markets, charge a price well above his costs. But for various reasons he may shave that price down to a razor-edge above his estimated costs, to increase or to hold his volume of business.

Thus he may be willing to "absorb" freight to distant markets in order to get added business, which often may permit larger volume with resultant mass-production savings. He may offer substantial discounts for quantity sales, which also may save on selling costs, whether the quantity goes out all at. once or over a period of time. And he may cut his price to the bone to meet a competi tor's lower price and so hold on to his customers ("good faith" price reductions). But all three of these forms of price reduction have been endangered by the Federal Trade Commission: freight absorption in the Cement case, quantity discounts in the Morton Salt case, and cuts to meet competition THE FORGOTTEN CONSUMER 41 in the Detroit gasoline case. In each case, the brake was put on price reductions explicitly for the protection of competitors who were small local producers in the freight absorption case and independent retailers in the Morton Salt and Detroit gasolinecases.

The Federal Trade Commission is here following the spirit of the Robinson-Patman Act. As the Supreme Court pointed out in the Monon Salt case, that·Act was designed to prevent injury to competitors. And it was said of the bill in Congress during its·passage in 1936: AIr. Logan: I might say that the billis not aimedexclusively at chain stores. It applies to all large units which control great purchasingpower.8 Mr. Edwall: The bill is designed to accomplish what, so far, the Clayton Act has done in an important manner, namely,to protect the independent merchant.9 Federal courts support this attitude. Almost their entire preoccupation is with the competitor. The con sumer and the general public interest go quite unmen tioned, as anyone can see by reading the decisions, but the courts' concern for competitors goes to extraordinary lengths. It applies not only to present but to possible future competitors. The couns look out, not only lest existing competitors be actually injured, but lest there be a "reasonable possibility" that prospective competitors might be injured.

All this is done in the name of fostering competition, yet obviously this concern for competitors is bound to lessen the vigor of competition. If it is illegal for sellers to absorb freight to distant markets, the effect is to reduce the number of competitors who will try to sell in those markets and thus to encourage local monopolies. If it is legally dangerous to offer quantity discounts, then large buying organizations are panly excluded from the market.

42 THE FORGOTTEN CONSUMER And if, as the FTC successfully maintained in the Cir cuit Court in the Detroit gasoline case, it may be illegal to match a competitor's price if some one down the dis tribution line is hurt, then competition is obviously lessened. The effect is strikingly like what is sought in the cartel system. The dictionary defines "cartel" as "an agree ment between rival merchants to limit production or otherwise temper the extremity of competition." The essential purpose of a cartel is to keep competitors from cutting each others' prices. The methods-dividing up of markets by percentage or territory, and so forth-are of less importance. The goal is to restrain disturbing influences, to stabilize prices, and to assure those in the' business the comfortable feeling that their position is secure. This is the trend in present Trade Commission and Court interpretations of the Clayton Act, as amended by the Robinson-Patman Act.

The consumer pays the bill.