Juan LondoñoIn an effort to ramp up antitrust enforcement, the Federal Trade Commission appears willing to bring back a 1930s-era law, the Robinson-Patman Act, from its dormancy. The law largely prohibits vendors from offering products of similar “grade and quality” to different buyers at different prices. Most notably, this prohibition prevents vendors from offering discounts to large buyers that are willing to buy high quantities of a product. The law went unenforced for decades, as courts and policymakers saw its detrimental effects for consumers and the economy at large. By bringing it back, the FTC will make the American supply chain less resilient and more vulnerable to shocks, such as the ones experienced during the COVID-19 pandemic.
The FTC’s ramp up of Robinson-Patman enforcement started earlier this year, according to a Politico report that claimed that the agency had launched inquiries against Coca-Cola and Pepsi for supposedly offering lower prices to large retailers. Additionally, a group of 14 lawmakers led by Democratic Rep. Mary Gay Scanlon of Pennsylvania and Massachusetts Democratic Sen. Elizabeth Warren recently submitted a letter to the FTC calling for increased Robinson-Patman scrutiny by the agency.
The FTC recently released a report on grocery stores’ reaction to the COVID-19 pandemic shocks, in what some consider to be the preface to future Robinson-Patman enforcement action. In this report, the FTC concludes that large retailers benefitted from supply shocks and harmed competitors. However, a closer look at the arguments drawn out by the agency shows that the FTC’s conclusion is a short-sighted one.
Contrary to the agency’s conclusion, the report provided ample evidence of how larger retailers were able to leverage their economies of scale to secure a steady supply of goods at a relatively stable price. This came despite massive surges in demand, that stressed their limits. As people sheltered at home during the pandemic, sales of food at home saw a nearly 14% increase. This massive spike in demand, naturally placed significant strain in the food supply chain, causing infamous shortages of essential goods such as toilet paper.
As families scrambled to re-stock on these essential goods, there was an increasing pressure on grocers to keep shelves full. According to the report, grocers resorted to “on time and in full” (OTIF) delivery policies, which would penalize producers if a certain percentage of an order went unfulfilled. Essentially, retailers put measures in place to incentivize producers to completely fulfill their orders, so that they could put as much product on shelves as soon as possible. By doing so, they made sure customers would have their needs fulfilled with little delay.
As the report also highlights, large retailers were able to not only secure a steady supply of goods, but they were able to do so at lower, stable prices. Chains that operated under the “everyday low prices” consistently outperformed chains than relied on rebates and discounts after purchases. The former group vehemently negotiated for the lowest upfront prices, while the latter group relied on offers and discounts that were dependent on the producers’ willingness to offer them. This approach allowed these chains to offer more competitive pricing to consumers in a time where supply chain disruptions caused prices to skyrocket.
Ultimately, these efficiencies are achievable only thanks to the large size of these retail firms. For producers, having a large firm as a customer has various benefits. Not only do they offer a significant source of revenue, but they also benefit producers with lower credit risk, faster-moving inventory, and reliable payment schedules. Thus, producers place a high value in engaging in commerce with large retailers, even if in some cases it means sacrificing profit margins via a price reduction. These efficiencies inherent to larger retailers is what economists call efficiencies of scale.
However, what the Robinson-Patman act does is target and erode these efficiencies of scale. By prohibiting firms from offering products at different prices to different purchasers, the law removes significant leverage for large retailers in the negotiation process, forcing them to buy at higher prices that they normally would. This, in turn, translates into higher average prices at the shelf for consumers. This is why the law has remained largely dormant and unenforced for decades.
In a turbulent economy that keeps trying to recover from recession-scares and creeping inflation, policymakers should aim to repeal the Robinson-Patman Act, not resurrect it. Unfortunately, the law still stands in place, so the FTC can wield it to punish companies for being competitive and providing value to its customers. Congress should move quickly before this archaic, dormant bill is brought back to life.
Juan Londoño is a senior policy analyst at the Taxpayers Protection Alliance.
Using these vague “policy violations,” Google is now threatening to demonetize us. It’s part of Big Tech’s effort to silence conservative voices.
Although the act is beneficial for decreasing institutional size, which can increase competition and decrease political power of the largest players, it does destroy the lower prices enabled by large market power. The question should be, at what point will this increased market power be turned to raise prices (and profits)? Maybe as insulation against massive market power, we have to sacrifice some price benefits from larger institution’s market power. In the general cereal and other packaged food benefits, can anyone deny that market power is enhancing the profitability of the giants, without any apparent decrease in market pricing?
It’s obvious that this is just one more communist idea they love – central planning and micro managing business, because that all worked so well for the USSR. Right?
This will basically cut out the smaller players from dealing with the manufacturers in small lots. If I’m manufacturing toilet paper and I sell at one price to a retailer that buys 1,000 lots and a larger price to a smaller retailer that buys 10 lots, I’d stop selling to the smaller retailer. I’d instead sell to a middleman in lots of 1,000, and the middleman can break the large lot down to smaller lots and sell to the smaller retailer. Likely it would be at a larger price than the small retailer was paying before, because now they are covering two different profits instead of just one.