Gary Galles is a professor of economics at Pepperdine University.
Independent bookstores have lost substantial market share to competitors during the past decade. So in 1998 they responded in the current American fashion. Twenty-six of them, along with the American Booksellers Association (ABA), sued their larger competitors, Barnes & Noble and Borders, for unfair competition under the 1936 Robinson-Patman Act. The plaintiffs spent $18 million on their action, but had their major damage claims dismissed by the trial judge. Nevertheless, during last April’s trial, the suit was settled, with the defendants paying the plaintiffs $4.7 million.
If the intent was to help consumers, it is not the chain booksellers that should have been put on trial. Their growing market shares reveal that consumers benefit from their offerings. Instead, the Robinson-Patman Act should have been put on trial, because of its anticonsumer effects. As federal Judge Richard Posner, a leading expert in the field, has written, “The Robinson-Patman Act . . . is almost uniformly condemned by professional and academic opinion, both legal and economic.”1
The ABA suit alleged that the large-volume discounts the book chains receive from publishers violate Robinson-Patman’s prohibition of price discrimination between customers not based on provable cost differences, “where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly.” Unfortunately, while the act reads like a defense of competition, its effect is to restrict competition, because the quantity discounts attacked benefit consumers by leading to lower retail prices.
How do quantity discounts help consumers? To get them, book retailers must sell lots of books. And they have, through lower retail prices, wider selection, more stores, longer hours of operation, more enjoyable atmosphere, and more. That these features benefit consumers is shown by the growing patronage of stores that provide them. Threatening to take away the quantity discounts whose results consumers clearly prefer is anticonsumer rather than proconsumer.
Robinson-Patman has long been known to be bad law. U.S. Supreme Court Justice Felix Frankfurter noted that “precision of expression is not an outstanding characteristic of the Robinson-Patman Act,”2 and former federal judge Robert Bork described it as “the misshapen progeny of intolerable draftsmanship coupled to a wholly mistaken economic theory.”3
Rulings under the act have often, without economic logic, held that quantity discounts somehow hurt competition. Those rulings confused harm to competitors who lose out to preferred suppliers with harm to the competitive process. But superior offerings from competitors—the essence of competition—necessarily “harm” less efficient rivals in the process of benefiting consumers. As a result, this semantic confusion has frequently led the courts to undermine the competitive process and its consumer benefits by protecting inefficient rivals from competition—all the while claiming to defend competition.
Robinson-Patman supposedly allows firms to defend their quantity discounts by showing that specific cost savings justify different prices. However, that defense is little more than an illusion. The courts virtually never find the cost data sufficient. Of course, given that costs (opportunities forgone) are subjective and given the limitations of historical accounting data for forward-looking decisions, especially for multiproduct firms with no clear “right” way to allocate overhead costs, advertising, storage costs, and so on, to particular products, unambiguous proof that costs justify price differences is impossible.
These confusions were the key to the independent bookstores’ hopes. If they could get the courts to buy the claim that large chains harmed competition because they took customers away from some competitors, then the chains would have to turn to the cost defense. And given the court’s historic refusal to accept cost defenses, the chains would lose, regardless of whether there was really any harm to competition. The result would have been far smaller discounts to the chains, leading to higher costs, which they would pass on in higher prices. (Robinson-Patman cases almost always result in higher consumer prices.) That anticonsumer result, wrapped in proconsumer language, is what the plaintiffs were looking for because it would help them keep their customers from better alternatives.
Before the settlement was reached, U.S. District Judge William H. Orrick ruled that the plaintiffs were unable to show the discounts had harmed them. Unfortunately, past cases indicate that many judges do not share his correct understanding of competition. The next Robinson-Patman case brought before a judge who interprets the statute’s ambiguous language differently will likely threaten consumers, the primary beneficiaries of the market process.