X.Resale Price Maintenance

X. RESALE PRICE MAINTENANCE The "fair trade" law permits a producer of branded or trademarked articles to require that the buyer of his products shall not resell them at prices below those fixed by the producer. These laws also make such a price-maintenance agreement binding on all sellers of the goods in a given state if it has been accepted by any one seller. The effect of this law is to enable one merchant or a group of merchants, through agreement with a manufacturer, to set the markup for all other merchants dealing in that manufacturer's products. The markup is the price of the merchant's services. Therefore, the "fair trade" law permits one producer and any one of his distributors to fix the price which all other merchants must charge for their services. This legalizes fixing of standard rates of pay for distributors of "fair trade" commodities. Similarly, fixing standard wage rates-for all workers in a given trade, even those working on relief projects, is a chief aim of trade union policy. When a union wins an agreement with one employer calling for a higher rate of pay, it contends that all employers should come up to the same standard.

It argues, of course, that this does not standardize wage rates, since any employer is free to pay more than the union standard. Advocates of resale price maintenance use the same sort of argument in reply to the standardization charge. The first of the "fair trade" laws legalizing resale price maintenance contracts was passed in California in 1931. In 1933 this act was extended by the provision that a contract with one distributor becomes binding on all distributors of the particular article. This law set the pattern for the other 44 states which now have this type of legislation. The Miller-Tydings bill, passed by Congress as a rider to an appropriation act in 1937, gave Federal sanction to resale price-maintenance agreements. Theory of the "Fair Trade" Laws The purpose of these laws is to restrict price competition. To a large extent they are a by-product of the 1930-1939 depression, which greatly intensified price competition. In 19311932 90 DO WE WANT FREE ENTERPRISE?

most of the nation's business was conducted at a loss. In other words, "selling below cost" was a general practice. The idea that this price cutting was the cause of the depression produced the N.R.A. and helped secure the enactment of the "fair trade" and "unfair practices" acts. Arguments for these acts are: 1. Price cutting destroys the value of the trademark and the customer goodwill built by the producer. a. It makes consumers believe the article is inferior. b. Other merchants refuse to stock articles subject to price cutting. 2. Price cutting is fraudulent when a merchant sells a well-known brand below cost in order to attract trade. 3. A producer should have the right to set the price at which his own goods are to be sold. Enforcement of "Fair Trade" Laws Legal means for enforcement of these laws is the injunction process. More effective, however, have been legal or illegal agreements and boycotts among distributors. Dr. Edwards, Economic Consultant for the Antitrust Division of the United States Department of Justice, states: "The bill originated with retailers' pressure, and has been used by them to force the issuance of contracts whether the manufacturer wanted them or not ... Repeatedly the officials of retail drug organizations have had to urge their members not to be too hasty in boycotting manufacturers who announce retail prices lower than the retailer thinks necessary."

"In California, an aspirin manufacturer was forced by boycott to issue resale price contracts against his will ... In the same state the manufacturer of Pepsodent toothpaste, who had experimented with resale price contracts under the California law, decided to withdraw these contracts . . . Thereupon the druggists organized a campaign to put Pepsodent under the counter and to switch to other brands. This campaign was so effective that the offending company made public apology at a subsequent convention of the National Association of Retail Druggists and, as a token of its contrition, subscribed $25,000 to a fund to lobby for resale price maintenance in other states."* •"Memorandum for the Assistant Attorney General," February 10, 1941. Cf. RalphCassaday, "Maintenance of Resale Prices by Manufacturers," Quarterly Journal of Economics, May 1939, p. 459.It has been my own experience that proposals for putting more "teeth" in the "fairtrade" laws come mainly from secretaries and officers of certain retailers' associations.So do most letters of protest against criticisms of the.se acts.

RESALE PRICE MAINTENANCE 91 Others testify to the same collusive influences: "Fairtrade committees, composed of independent retailers for the most part, have been organized and the manufacturer who wants to avoid trouble will work through these groups . . . Members of the retail associations which these committees represent may refuse to sign any contracts that do not carry the official approval of the committees. This usually means that manufacturers with nonconforming agreements may have difficulty in getting cooperation and their sales may start sliding down."* "... the manufacturer of consumer goods in his dealings with wholesale and retail distributors has faced the organized attempt to force on him a price policy distinctly determined by the interests of these groups ... In some industries retail associations exercise almost dictatorial power over retail margins and have become the determining factors in the shaping of the entire merchandising policy of producers."** Enforcement of this price control for retailers requires no such elaborate bureaucracy as the Agricultural Adjustment Administration. Because it has fewer members an organization of merchants can restrain competition with a much less complicated apparatus than is needed to reduce competition among farmers. However, the objectives and results upon community prosperity are much the same in the two cases.

"Fair Trade" Laws Restrict Competition 1. By a contract with one merchant, a manufacturer under this law can legally force all dealers in a "fair trade" article to act precisely like a combination in maintaining the stated price. 2. The law increases the incentive for illegal collusion among merchants to compel manufacturers to issue fair trade contracts. It does this by providing a legal means for enforcing such contracts once obtained. 3. Opportunity to control resale prices also encourages price "understandings" among manufacturers to maintain their own prices. 4. By restraining price competition price maintenance increases the tendency for competition to take less desirable forms, such as special advertising allowances and generous "free samples." 5. Under this law a chain store is still free to carry out a cut-price raid on an independent store through use of its private brands. However, the independent cannot retaliate and defend himself because he is handcuffed by fair trade contracts.

•Printer? Ink, August 19, 1937, p. 80. •Z?V Revuw, July 1938, p. IS, 92 DO WE WANT FREE ENTERPRISE? "Fair Trade" Laws Raise Living Costs 1. About 50 per cent of total retail trade is in identified (trademarked or branded) items which may be made subject to the law. Surveys show that prices of items covered by "fair trade" contracts were raised on the average 30 per cent or more in the chain and cut-rate drug stores. 2. These laws eliminate or reduce seasonal price cutting. 3. Reduction of excess stocks is made more difficult. This increases need for costly hand-to-mouth buying by merchants. 4. Manufacturers bid for business by raising the retailers' margin instead of by offering consumers a better product at a lower price. 5. Competition among merchants takes the form of more aggressive advertising, uneconomic use of stamps and premiums, and pricecutting on a few items not covered by resale price contracts instead of competition in reducing over-all distribution costs.

The Manufacturer's Interest in the Loss Leader Use of an article as a loss leader temporarily increases sales volume and builds consumer knowledge of the product. Long-range effects on the manufacturer depend on: a. his comparative efficiency in production; b. the proportion of manufacturing cost represented by promotional work, advertising, or "puffing." 1. Merchants who refuse to stock an article which has been subjected to loss leader pricing help build the markets of other merchants in that commodity. Long-run demand for the commodity is stimulated because the price cutting introduces the article to new customers. If they like it they will come back for more. The price can then be restored to a level covering production and distribution costs for the nearest competitor in respect to productive efficiency. 2. In case of those commodities whose price covers disproportionately large expenditures for advertising, or high profits for successful promotion, loss-leader price cutting opens opportunities for substitute articles at lower prices. In this way "puffing" expenses are squeezed out of costs. Competition is diverted from promotion to production, a change common to all occupations as they "come of age."

In preventing this development resale price maintenance keeps business in the medicine-man stage.

RESALE PRICE MAINTENANCE 93 It restricts opportunity for producers who aim at giving consumers maximum value for their money. This it does by encouraging merchants to patronize manufacturers who "fair trade" their products at high markups which can be maintained only by costly advertising. Whose Product Is It? But should not a manufacturer have the right to set the price for his own product ? 1. Before the "fair trade" laws were enacted any producer distributing through bona fide agencies and retaining title to the goods until their final sale could fix retail prices as he pleased. 2. Any producer could announce the retail prices he desired and could refuse to sell to distributors who did not maintain these prices. When a producer, however, sells an article at his own price to another person who then is the owner? The distribution, or resale, of the article is the service of the merchant. It is the price of this merchandising service which is set by the "fair trade" contracts, not the price of the manufacture/s product.

Under competitive conditions the merchant's markup varies from one merchant to another, even for the same article. Types of merchandising service vary widely and they command a variety of prices. For example, the neighborhood independent may provide delivery service and credit, whereas the chain store operates on the cash and carry plan. The neighborhood store offers convenience, the downtown store may offer lower prices. One store maintains a wide selection of goods and the services of a prescription counter. Another specializes in popular packaged and trademarked articles. Resale price-maintenance contracts standardize the price of the merchants' services and thus force merchants to charge and consumers to pay the same price for widely different types of service. The "fair trade" laws, therefore, operate to restrict competition between merchants and they lead merchants to patronize manufacturers who cooperate in this restrictionism.

94 DO WE WANT FREE ENTERPRISE? Do "Fair Trade" Laws Make Trade Fair? 1. Loss-leader pricecutting is a bargain offered to draw trade. a. It is an economical and efficient form of advertising—"money talks." b. It is honest to the extent that the buyer gets his money's worth in purchase of the loss-leader commodity. 2. Abuse of the loss-leader device is restricted in several ways: a. Prices cannot be placed below wholesale levels without attracting purchases by dealers. b. Consumers know from experience that cheapness in one line does not mean cheapness in all. Therefore, they tend to concentrate their purchases on the "loss-leader." This discourages the practice by most merchants. c. Altogether apart from the "fair trade" laws, manufacturers have the right to refuse to sell to merchants to whose price policies they object. 3. "Fair trade" laws divert competition from "more for less" to "less for more."

Dealers push the high markup items for which costly advertising by manufacturers builds and maintains the market. "Puffing" the reputation of high-priced items replaces price competition. 4. Resale price maintenance restricts the opportunity for low-cost merchants to expand at the expense of high-cost merchants. Therefore, it retards progress in distribution methods. "For sporadic cases of under-pricing it proposes to substitute a universal policy of over-pricing."* Price Maintenance Causes Unemployment A rapid decline in general price levels, such as that of 19301932, which gave rise to a wave of "fair trade" legislation, is a symptom of depression, not the primary cause. Causes of depression are as numerous as the types of catastrophe which may befall mankind from natural causes or from human errors. They bring about reduced output of goods and services (as in the case of a drought or flood), or contraction of credit (as in the case of unwise investments or "over-speculation"), or both.

In any case the community's total rate of spending is reduced. •Bclroont Frank, Ftmr Free States, p, 39.

RESALE PRICE MAINTENANCE 95 This means that buyers must either a. pay less for each commodity and service, or b. buy fewer goods-and services. Price maintenance forces buyers to the second alternative—purchase of fewer commodities and services. This causes reduced output and unemployment. Thus it accelerates the downward spiral of declining production and falling incomes. When all prices, profits, wages, salaries and interest charges decline together the losses are widely distributed. Unemployment and lossof real buying power are kept to a minimum. Attempts at price maintenance aggravate the losses and tend to concentrate them on fewer persons (that is, on those who are less well organized or whose services are considered less essential by the buying public). General price maintenance is impossible when the community's total spending is declining. Maintenance of commodity prices, rates of markup or hourly rates of pay merely intensifies unemployment and aggravates the decline of wage incomes, salaries and profits, which are the real prices of producers' services.

Why Resale Price Maintenance Restricts Enterprise Resale price maintenance, therefore, restricts enterprise in two ways: 1. by retarding growth in efficiency necessary for expansion of real buying power in good times; 2. by increasing unemployment and thus aggravating" the decline of real incomes in depression.