The Right To Compete

In the name of free enterprise, the Reagan Administration is urging the U.S. Supreme Court to let big business dictate resale prices.

By Jerome S. Lamet | 
 

A fight for economic freedom is being fought in this country, not on a battlefield, but in the U.S. Supreme Court, in Congress, and in regulatory agencies. As with other economic battles, the effects of the outcome of this one will be felt by businesses and consumers alike for years to come.

The legal issue is resale-price maintenance -- whether suppliers can dictate to distributors the price at which products must be sold. It boils down to a challenge to the freedom of retail businesses to set their own prices.

In its 1983-84 session, the Supreme Court will hear arguments in Spray-Rite Service Corp. v. Monsanto Co. Spray-Rite contends that Monsanto refused to continue supplying it with herbicides because Spray-Rite was a price cutter. If the court rules against Spray-Rite, it will be reversing the intent of a 72-year-old body of legislation that makes it illegal for suppliers to fix the resale price of their products. Until now, such price fixing has been illegal, per se, which means that any attempt at resale-price setting has violated the law.

Outside interests are using the case to attempt to substitute a "rule of reason" for the per se illegality of resale-price maintenance. Such a change would allow suppliers to argue, for example, that resale-price fixing in the name of economic efficiency and market stability is all right. The U.S. Department of Justice and the Federal Trade Commission both favor the "rule of reason" principle. It is consistent with the Reagan Administration's bias against any restrictions on businesses' freedom to do as they wish.

On the other side, the National Mass Retailing Institute, several members of Congress, and the Association of General Merchandise Chains Inc. insist that a supplier that cuts off a discounter in response to complaints from the discounter's competition violates the Sherman Antitrust Act.

Spray-Rite is not an isolated case. You probably know of discount retailers that suddenly went out of business or quit carrying major lines. One discount retailer suffered considerably when a name-brand-pen company cut him off. A woman with a discount dress shop gets "late" or "short" deliveries from a major supplier while her full-price competitors do not. A franchise service station owner I know was cut off by his giant gasoline supplier because he was price cutting.

These people are not guilty of short-changing suppliers. Discounters pay the same wholesale prices to their suppliers as the full-price retailers do, but they offer the consumer a price choice -- perhaps with less service and fewer frills, but the consumer is free to choose which retailer he or she prefers.

While this approach pleases consumers, it creates problems for suppliers. They are subject to pressure from full-price retailers to get rid of discounters in the same territories. And suppliers sometimes feel that discounters tarnish their products' prestigious name-brand image. Further, they argue that discounters cost suppliers goodwill and that they are taking a "free ride" on the market developed by full-price retailers.

These suppliers raise legitimate issues, but they have a legal, fail-safe option: They can refuse at the outset to sell to discounters. The law says only that having started to sell to discounters, suppliers may not then cut them off just because they cut prices. By refusing to deal with discounters at all, suppliers can easily sidestep all the complications being debated in the Spray-Rite case.

Supporters of the status quo argue that any move to encourage resale-price fixing substantially raises consumer prices, blocks innovations in retailing, requires consumers to pay for undesired services, leads to price fixing, and reduces price competition among sellers. They say their opponents assume that consumers are ignorant folk who don't have the sense to purchase whatever additional services they need to enjoy a product. They also say that the opposition doesn't realize that a high retail price is no guarantee that service will be given.

These arguments, pro and con, have merit, but they distract attention from the heart of the case, which is this: To overturn the practice of permitting businesses to set their own resale price subverts a fundamental principle of the marketplace -- the right to compete.

This right is well established by common and statutory law. The English courts gave us an early case.

In 1410, a schoolmaster complained to the court that he had been driven out of business by a new competitor whose lower fees lured away the schoolmaster's students. The court ruled against the schoolmaster and declared that anyone has a fundamental freedom to enter a market and, once there, to compete in a fair way.

The English rule is reflected in U.S. law. In 1919, in U.S. v. Colgate & Co., the Supreme Court established unequivocally that retailers and distributors are free to calculate their own resale prices and that any agreement limiting this freedom is anticompetitive. The Court has reasserted this policy many times, and Congress reconfirmed it in 1975 by enacting the Consumer Coods Pricing Act. The act repealed the right of suppliers to sign fair-trade agreements with retailers and wholesale distributors fixing the resale prices of their products.

If our system is to continue working, there must be freedom of choice. A company's management must have the right to decide at what price the business will sell to the marketplace and what level of service it wants to offer. Consumers can decide what prices they want to pay and how much service they want to buy. If the business doesn't offer the right product mix -- price and service -- it will fail. Any law or policy that restricts this freedom or, worse yet, assigns pricing authority to someone outside the company, weakens our competitive system.

Freedom has always been a troublesome concept. There is a kind of messiness about it that offends political despots and economic planners. But our experience in the United States has always been that the benefits of freedom substantially outweigh the costs. And so it is with the issue before the court: Freedom of pricing, which is freedom to compete, is too valuable a principle to discard in the interest of one small group.