Discounters must use economic data to fight curbs

The life blood of the discount industry is the ability to obtain popular manufacturers' lines and to sell them at less than prevailing prices. With the repeal of fair trade, things looked rosy for off-price retailers.

Then, in its 1977 Sylvania case, the Supreme Court decreed that nonprice vertical restraints should be judged under the so-called rule of reason rather than the automatic illegality or per se rule.

Consequently, since 1977 customer and territorial restrictions have become virtually per se lawful, because the complaining party seldom wins a rule of reason case.

After Sylvania, the issue became price restraints or RPM. Since 1981, the heads of the Federal antitrust agencies have been hostile to the discount community, even to the point of urging the Court in the Monsanto case to extend the rule of reason to RPM.

Although the Court declined to disturb the per se rule in Monsanto, there is little cause for rejoicing.

First, the Court did not promise it wouldn't reconsider the issue later. Indeed, the Court now has before it the Mack Trucks case and has asked the Department of Justice for its views in the matter, which raises the question the per se rule still applies to maximum vertical price-fixing agreements.

Second, in Monsanto, the Court reaffirmed the proposition that it is entirely legal for a supplier to maintain resale prices so long as it acts unilaterally--the Colgate doctrine. The holding--that an RPM violation cannot be shown solely by evidence that a discounter was terminated as a result of his competitors' complaints--means that terminations will be easier.

Shifting Emphasis

Colgate had long been considered a very narrow path through the minefield of RPM; Monsanto widens that path to a road and, perhaps, a highway with the coaching of legal counsel.

To propose a solution to the problem requires clear thinking about its cause. The discount community makes a serious strategic error in confining its efforts to the political arena. The issues are not political; they are academic.

The common strain through all these changes is an economic theory which holds that most vertical restraints are adopted to prevent discounters from free riding on the efforts of full service dealers, and that vertical restraints generally are economically beneficial to society.

Advocates of the theory have for some time fervently preached to receptive audiences, and have more recently made their way into the Federal judiciary and antitrust agencies. It is quite directly the growing acceptance of this economic theory that has been and will continue to be the underlying reason that discount retailers have had increasing difficulty obtaining leading lines free of RPM.

We are among those who advocate an opposing theory which maintains that it is not free riders but the superior officiency of the discount retailing segment that accounts for the imposition of vertical restraints.

We believe that the discounter offers the consumer not only lower prices, but also a different though no less valuable package of services. Consequently, society is made worse by laws that protect traditional dealers from price competition and inhibit the growth of a more efficient retailing form.

To prevail in this debate, it is necessary to fight back on economic grounds.

The discount retailing community has available a broad range of data on margins, productivity indicators, service levels, etc., that can indicate (historically and currently) that in most instances, RPM and restricted distribution are economically harmful to society.

However, the data must be gathered, organized and presented in a way to convince academics, jurists and policymakers that the free rider explanation is essentially erroneous.

Unless that is done, the legal climate will most likely continue to move in a direction that is adverse to the interests of off-price sellers and the American consumer. [Benjamin Sharp, an an antitrust lawyer in Washington, D.C., was with the Federal Trade Commission from 1977-1982 in various positions, including deputy director and acting director of the Bureau of Competition. Robert L. Steiner, a former president of Kenner Products, and an FTC economist, is an economic consultant residing in Washington, D.C.'

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