A conspiracy to eliminate efficient forms of retailing

Discount Store News, August 4, 1997 by Ken Rankin

Wherever you go these days, you can't cross the street without stepping on a conspiracy theorist. Whether it's "men in black" from the government or an extra gunman on the grassy knoll, we seem compelled to weave complex theories to explain events that are sometimes not very complicated at all.

Conspiracy fever has even infected the marketplace. In fact, some experts are suggesting that it is just this kind of paranoia that has caused government antitrusters to drop their guard against resale price fixing activities directed at discount stores and their customers.

One of them is Washington, D.C., economist Robert Steiner, a former Federal Trade Commission official who disagrees with the "Chicago School" that sees no problem with schemes designed to coerce retailers into charging consumers artificially high prices for merchandise.

In a recent issue of Antitrust Law Journal, Steiner said, "The conventional view is that vertical restraints (such as resale price maintenance schemes that discourage retail discounting) have one of two origins."

On one hand, RPM practices are often viewed "as activities that are adopted voluntarily by manufacturers to cure a `free-ricer' problem or ensure an appropriate level of customer service," Steiner said.

On the other hand, these vertical restraints may be regarded as a result of "a manufacturer's cartel" or even coercion "on an unwilling manufacturer by a dealer cartel or a dominant retailer," Steiner explains.

Depending on which of the two theories prevail, it may be appropriate for government antitrust enforcers to challenge the vertical restraints of trade as an illegal and anticompetitive practice, Steiner said.

But according to Steiner, neither one of the scenarios may accurately show the real cause of the vertical trade restraint.

He contends that "a third explanation, largely unrecognized in the contemporary antitrust literature, may be the largest single cause of voluntary vertical restraints."

Could it be that antitrust enforcers are so bogged down in complex theories that they over look the obvious cause of the problem?

He suggests that the real reason for many vertical trade restraints may be a response to "price cutting by a series of more efficient retailers whose lower prices are due to lower costs for performing the normal retailing functions rather than to cost savings from skimping on services."

Aha! Suspicions confirmed! In this example, the use of resale price maintenance by a manufacturer would be designed to reduce or eliminate more efficient forms of retailing. Why would a supplier want to do that?

"The manufacturer recognizes that, due to their higher costs, the bulk of its retailers cannot profitably operate at the low prices prevailing in the discount stores, Steiner said. "Unless the price cutting can be stopped, most retailers will drop the line."

Curiously, economists often justify abusive, anti-consumer trade restraints so long as they promote the "efficiency" of the perpetrator.

Steiner pokes a hole in that reasoning.

While the vertical restraints described in his scenario may very well prove to be efficient for the manufacturer, "they can have longer-term adverse social welfare consequences by retarding the entry of new, more efficient types of retailers, whose service package often has been different, but not inferior overall, to those of the incumbent high-price stores."

Come to think of it, maybe there is a conspiracy going on, after all.