If we have learned anything from the failures of socialism and the achievements of capitalism, it’s that if you want to protect consumers, relying on the wisdom and benevolence of government is not the way to do it. America has the most dynamic environment for retailing because we let rival companies fight it out hammer and tong in the marketplace, using their own judgment about how to satisfy the customer.
But sometimes even we Americans forget that crucial lesson. This week, some Supreme Court justices indicated they think the iron fist of federal law is superior to the invisible hand of the market.
The issue in this case is whether a manufacturer can dictate to retail stores what they can charge for its goods. You might think that if you take the risk of making a product, you should be able to contract with sellers on terms you think will enhance its chances of success. If stores don’t want to go along with your preferences, they can carry someone else’s products, and you can look for other retail outlets.
But under our strange antitrust laws, that’s not always how it works. For a manufacturer to make an agreement with retailers to sell only at a specified minimum price is illegal — even when it promotes competition and offers benefits to consumers.
The practice, called resale price maintenance, is at the heart of a dispute between Leegin Creative Leather Products, which makes high-end purses and shoes for women, and Kay’s Kloset, a suburban Dallas boutique that cut prices on these items below those it had agreed to. When Leegin ended its shipments, the store owners sued, claiming antitrust violations. A jury awarded them $3.6 million, in keeping with established federal law that treats resale price maintenance agreements as invariably malignant.
This view stands up under scrutiny like butter under a hot sun. The assumption is that if you let manufacturers control retail prices, they’ll hose consumers for their own profit. But if they wanted to hose consumers, they could just raise the wholesale price they charge to retailers. That way, they would get the full proceeds of the rip-off, instead of sharing them with stores. So it’s reasonable to assume there is some motive besides price-gouging at work.
A friend-of-the-court brief filed by 24 economists, including several who have occupied the top antitrust jobs under Democratic and Republican presidents, portrayed the ban on resale price agreements as a relic of economic superstition. Such contracts, they argued, often enhance competition, and there is no evidence they usually harm consumers.
During oral arguments, Justice Stephen Breyer suggested that allowing resale price maintenance agreements would have "massive anti-consumer" effects. What he overlooks is that manufacturers already have all sorts of legal methods to penalize unwanted discounts. Though they may not enter an explicit contract requiring a store to charge a minimum price, they may announce a "suggested" minimum — and then cut off any retailer that charges less.
The difference between the permissible and the forbidden may make sense to Martians or lawyers, but the economics are identical. Yet in spite of the many ways manufacturers have to set retail prices for their wares — or because of them — American consumers have access to a vast array of low-priced goods.
Why would a company making purses or televisions or running shoes want to keep prices at a certain minimum? Maybe to induce stores to offer exceptional service or technical assistance. A store can afford to do that only if it can charge a commensurate price.
But a service-oriented store can’t charge a commensurate price if a consumer can come in, get lots of help and then go across the street to Discounts Galore and buy the item at 30 percent off. By setting a floor, the manufacturer can prevent "free-riding" by bargain outlets.
In our hypercompetitive retail environment, if the strategy doesn’t serve customers, manufacturers who use it won’t survive. Consumers who can’t get one brand at a discount price will defect to other brands.
Is it possible for resale price maintenance deals to be used for nefarious purposes? Possibly, in rare circumstances. But dropping the current ban wouldn’t affect those cases. It would merely obligate the complaining party to show an actual anti-competitive effect.
That’s the right policy. You think the manufacturer is trying to stop competition? Fine — prove it. Otherwise, we’ll rely on the robust interaction of many buyers and many sellers to protect the interests of consumers. For that purpose, government intervention is usually a poor substitute.
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