Looking Out for the Big Guys

Looking Out for the Big Guys

March 09, 2010
Originally published in The American Spectator

Big is bad, many on the Left believe, but only in business, not
in government. Many on the Left rail against mass discounters
like Wal-Mart and Target, and they blame the free market for
allowing them to run smaller retailers out of business. It
doesn't matter that these firms provide consumers lower prices,
they often say, the "little guy" needs a chance to compete.

Yet, recently, the big discounters have been swarming the Capitol
looking for special favors to help them crush their smaller
rivals, and the "small is beautiful" forces on the Left are
nowhere to be found. This iteration of the biblical story of
David and Goliath pits the interests of large discount retailers
such as Amazon.com against their smaller, service heavy
competitors, with Big Government doing Big Business' bidding.

On Wednesday, January 13, the House Judiciary Committee approved
the Discount Pricing Consumer Protection Act of 2009 (H.R. 3190).
According to Dow Jones, this bill, which would again make resale
price maintenance (RPM), which involves manufacturers setting a
resale price for the retailers to whom they sell their products,
illegal, was lobbied for by "numerous retailers, including Amazon
and eBay." RPM was illegal for nearly 100 years in America under
court interpretations of federal antitrust laws, until a 2007
Supreme Court decision (Leegin Creative Leather Products,
Inc. v. PSKS, Inc.) ruled that in certain circumstances it
could be used by manufacturers and retailers.

At first glance the practice seems to be either unfair or futile.
A manufacturer with sufficient market power could utilize it as a
tool to ensure that profit margins on goods without much
competition remained high. Further, it doesn't seem like fixing
prices would benefit manufacturers or retailers. After all, the
lowest possible price at which the highest number of demanding
consumers can be satisfied and sellers not run out of stock is
the price at which sellers make the highest profit. Establishing
price floors below the market clearing price would seem to only
cause gluts in supply.

RPM, however, can be used as a voluntary means to solving an
economic problem, as University of Chicago economist Lester
Telser explained in his 1960 Journal of Law and
Economics article, "Why Should Manufacturers Want Fair
Trade?"

Consider a consumer shopping for a brand new plasma TV or DVD
player. A consumer could ask a salesperson at a small high-end
electronics store to show him exactly how it works. He would then
receive a tutorial explaining all of the device's features. The
retailer provides these services in order to increase the number
of consumers spending money in their store.

This service costs money and time for the store. They must pay an
employee who has to devote his time to educating customers rather
than other tasks needed to keep the store running efficiently.
Further, educating the employee on new product features costs the
store time and money.

Now what happens if the customer walks out of the store, with the
knowledge he has just received for free, turns on his laptop and
purchases the item from an online discount store? The customer
and the discount store are free riders, both benefitting from the
high end store's service without have to pay for it, while the
high end store loses out on the money and time they could have
saved by not providing the service.

RPM, however, can thwart this free rider problem. If the
manufacturer sets a minimum price for a good, competition between
retailers continues, it simply takes a different form; that of a
race to the top of the quality of service the retailers provide.

If the practice becomes illegal, the result will be that huge
discount retailers such as Wal-Mart, eBay, and Amazon will
benefit greatly from the free rider problem discussed above.
Outlawing alternative pricing measures intended to ensure that
people do not take advantage of the free services offered by
specialty stores will ensure that discount retailers will be able
to grab a larger market share than perhaps would be possible in a
free market.

The battle over RPM is just another anecdote which calls into
question the conventional wisdom that big business always opposes
new regulations, preferring the anarchic free market. The truth
is that very frequently big businesses profit from regulations.
New regulations can tilt the competitive playing field their way.
As Tim Carney says in his book, The Big Ripoff,
"Businesses will always do whatever they can to make money. If
they have government available as a tool, they will use it."

Big Government gives companies an incentive to seek politically
gained profits. Big companies have the biggest incentive to try
and influence the policy in their favor. They have the most money
to pay the best lobbyists, and the most to gain and lose from the
direction of regulatory policy. It is consumers and small
businesses that get left behind in this two man game. RPM is just
the latest attempt by big business to increase their profits at
everyone else's expense.

Opposing big business and allowing RPM to remain legal, on the
other hand, will enable all manufacturers and retailers to make
the best decisions for their own businesses. The two purported
threats neutralized by outlawing RPM are price fixing among
competitors across an industry, also known as cartelizing, and
high consumer prices. Cartelizing is already illegal under the
Sherman Anti-Trust Act. And there are far more productive ways to
cut prices than banning RPM, such as ending farm and ethanol
subsidies, and abandoning cap and trade legislation and other
proposed regulations that would drive up prices even further. The
costs which will be incurred if RPM is outlawed are far greater
than the benefits.

American businesses should be free to engage in RPM.
Manufacturers should be free to set requirements on the exchange
of their goods to retailers. Retailers should be free to accept
or reject those terms, and set their own terms. And consumers
should be free to accept or reject the prices set on goods.
Further, the free rider problem outlined above could be avoided
using the practice, if retailers and manufacturers want to avoid
it.

What the existence of resale price maintenance show is that
absent government intervention, there are plenty of niches for
big and small businesses in a free market. Voluntary action in a
market can solve many economic problems. At a time when many
small businesses are struggling to get credit or make sales, the
last thing we need is for the government to regulate a rational
market action by manufacturers that could greatly benefit small
retailers.