Chapter 7



The federal courts have interpreted predatory pricing statutes broadly on the grounds that there is insufficient evidence below-cost pricing hurts competition. This non-enforcement has given business more freedom to compete on prices. In response, plaintiffs in predatory pricing lawsuits are increasingly turning to state courts in the hope of drawing upon a different philosophical tradition.

In the face of strong federal antitrust laws (see Chapter V), nevertheless, there has been substantial interpretation of antitrust law as discouraging predatory pricing lawsuits. However, recently, both the Justice Department and the Federal Trade Commission have become more active in their reviews of the increasing powers of mega-retail discount chains as well as vertical restraint cases involving manufacturers and retailers.

In some quarters, there are anti-trust attorneys who do believe that the U.S. Justice Department has not pressed forcefully on vertical restraint cases. However, it is a fact that both the Justice Department and the FTC have brought resale price maintenance cases against manufacturers in the last five years, and both have had active investigations of other vertical restraints such as exclusive dealing (as in the Toys "R" Us case discussed below).

This changed with the recent accusation by the FTC accusing Toys "R" Us of antitrust violation by using its power to keep competitors' prices high and reserving the most popular toys for its own stores. The FTC has accused the chain of:

"bullying major toy makers onto deals that kept the toys from being sold at low-priced warehouse stores, such as Sam's and Price Clubs, thereby curbing competition."

"Toys R Us has used its clout to force Mattel, Hasbro and other toy makers into arrangements that cut out competition and 'forced consumers to pay more than they otherwise would have for toys,' said William J. Baer, director of the FTC's Bureau of Competition."1

The plaintiff anti-trust bar was indeed pleased when it appeared that Assistant Attorney General Anne Bingaman would provide new confidence in the antitrust activities in the Justice Department. She and her department seemed to be on the verge of abandoning the Reagan guidelines on several aspects of antitrust activities. Ms. Bingaman was regarded as a tough-talking, pragmatic chief of the antitrust division of the Justice Department. 2 However, Ms. Bingaman suddenly resigned effective November 1996, and for the present it doesn't appear that enforcement policies with regards to the Justice Department are not likely to change in the near future.

Had Ms. Bingaman remained she would have been strong company for Robert Pitofsky, a leading antitrust scholar and author of several papers in the early 1990's, which called for the re-invigoration of antitrust law. Pitofsky has been confirmed by the U.S. Senate as Chairman of the Federal Trade Commission. 3 Antitrust lawyers say that Mr. Pitofsky, a former Federal Trade Commission Commissioner and the agency's former Director of the Bureau of Consumer Protection, should be regarded as a powerful chairman. In his writings, Mr. Pitofsky, a former Law Dean at Georgetown University Law Center, has called Federal Trade Commission enforcement of the Robinson-Patman Act, which prohibits price discrimination, as "exceedingly modest, during the Republican years." Mr. Pitofsky was formerly of Counsel to the Washington, DC firm, Arnold and Porter. 4 It is this author's belief that predatory pricing may soon be reviewed in the near future by such an aggressive appointee as Mr. Pitofsky.

Recently, Charles P. Kocoras, U.S. District Judge for the Northern District of Illinois has had before him a class action involving manufacturers of brand name prescription drugs. 5 This case, which was referred to in Chapter V, has become very complicated due to the inability to have all plaintiffs agree to be part of the certified class, while others are involved in pending actions as individual plaintiffs.

Specifically, the individual plaintiffs argued that the class notice must disclose the following:

A. "That the class actions allege only violations of the Sherman Antitrust Act."

B. "That there are also pending individual actions alleging price discrimination in violation of the Robinson-Patman Act, as well as violation of the Sherman Act," and

C. "That the Robinson-Patman Act claim is not being pursued in the class action and would have to be pursued, if at all, in an individual action."

Judge Kocoras, dismissed the individual plaintiff's motions and granted the class plaintiffs proposed motion, "as the best notice practicable under the circumstances." 6 (F.R. Civ. p 23(c)(2))

It may be observed that small drug stores see the enemy as the drug manufacturer, rather than the big retail chains. They may have a compelling case against the manufacturers. In an antitrust case the manufacturers may have to prove not only how they can justify selling at lower prices to higher volume customers, but, even more difficult, is how they can justify selling at lower prices to lower volume customers -- HMO's, hospitals, etc. Legal victories may come too late or even after-the-fact for many sole proprietor drug stores.

Inasmuch as when one observes the inability of plaintiffs to use federal agencies rather than state agencies in predatory pricing disputes, it is interesting to note that in the late 1970's, several faculty members at the Harvard Law School broke new ground with their "average variable costs" (AVC) rule for predatory pricing lawsuits. Their AVC rule would create for the firm that the legal price was its marginal cost, rather than total cost. Critics deemed the AVC rule as a kind of "monopolist's heaven, where wolves are a metaphor for sheep." 7

Predatory Pricing

Predatory pricing is the practice of selling a good or service at a loss in order to drive competitors out of the market, and thereby increase the market power of the predator firm, allowing the firm subsequently to raise prices above the levels that prevailed before the predatory pricing began.

Firms engage in predatory pricing in the hope of using the resulting increased market power to ultimately raise prices and thereby increase their profits.

On the infrequent occasions when predatory pricing does occur and succeed, it has a pernicious effect on the economy because it leads to the formation of monopolies. 8

While it might appear that it is difficult to create a monopoly in retailing; nevertheless, the recurring sights of destroyed "Main Streets"; the decline of formerly prosperous malls, now loaded with store vacancies; and the elimination of the small retailer in the city neighborhood all attest to the formidable power of the mega-retail discount chains. Over time, the increasing power of the chains and the decline in the number of viable small retailers results in social as well as economic inequities.

Price discrimination allows firms to sell products at high prices to customers who are willing to pay them without simultaneously losing sales to customers unwilling to pay the higher prices for them. These discriminating behaviors can take place between manufacturer and mega-discount retailer; between manufacturer and wholesaler; or between manufacturer and small retailer. In retailing, it has often become impossible for a small retailer to obtain a source of supply, let alone at a price that will permit competition with a mega-retail discount chain.

Intentional price discrimination is essential to support a charge of predatory pricing. Predatory pricing with malice to eliminate competitors and thus enjoy a subsequent recoupment is indeed difficult to prove. Many people think that selling below cost is somewhat nefarious. Since firms are in business to make a profit, the thinking goes, they could not possibly sell below cost intentionally unless they were engaging in predatory pricing. In fact, selling below cost as a "loss leader" is a form of advertising and not necessarily indicative of predatory conduct. All in all, this is a difficult subject, and one well worthwhile for Congress and the FTC to explore further.

Congressional Research Service, Library of Congress Report on Predatory Pricing and State Below Cost Statutes 9

After reviewing the Chancery Court opinion favoring the plaintiffs, in American Drugs, Inc. v. Wal- Mart Stores, Inc. 10, and before the eventual reversal in Wal-Mart's favor upon appeal to the Arkansas Supreme Court, the Congressional Research Service(CRS) researched the question of predatory pricing on "the basis for predatory action." Were the standards different on a state basis versus a federal basis?

CRS made the distinction very clear between the state objective and the federal objective in the following statement:

"That difference in emphasis -- between 'competition' (the Wal-Mart court) and 'competitors' (the other courts cited) reflects precisely the distinction usually made between the federal concept of predatory pricing and state below-cost sales statutes. Whereas the federal antitrust laws are directed at competition and maintaining a competitive marketplace, the state statutes, which are variously denominated as Unfair Sales Acts or Unfair Practices Acts, were for the most part enacted during the Depression in an attempt to stem the tide of small business failures. Federal courts that have construed state law claims have often done so by emphasizing the federal considerations." 11

"As for example, the Wisconsin Unfair Sales Act was enacted in 1939 to prevent large retailers from selling below cost, an 'act of unfair competition' which was seen as one of the primary causes of small business failures . . . [It] is very similar to most unfair sales acts passed in the 1930's." 12

The federal courts when involved in state pricing statistics still emphasize federal consideration. Note the court's statement in the Seventh U.S. Circuit in 1989:

"Competition is a ruthless process. A firm that reduces costs and expands sales injures rivals -- sometimes fatally. . . . These injuries to rivals are by-products of vigorous competition, and the antitrust laws are not balm for rivals' wounds." 13

J.E. Rubin, Esq. of the Library of Congress research staff also points out the rationalization behind the state and federal interpretations of predatory pricing:

"Another way to differentiate between the federal and state unfair competition emphasis is to recognize that the federal concept of predatory pricing, which is included in the prohibition against monopolization (or attempted monopolization), is analyzed under the "rule of reason"; the state sales below cost provisions are more likely to be per se laws." 14

What Constitutes Predatory Pricing? (Congressional Research Service Analysis) 15

The Congressional Research Service in the following memorandum reviews various aspects of predatory conduct and predatory pricing in such a manner that the author believes there is an overlap in alleged predatory pricing conduct that would permit legal review under either state or federal statutes, such as the Sherman, Clayton and/or Robinson-Patman Acts.

"The basis for a designation of predatory conduct generally, and predatory pricing specifically, is the conclusion that the alleged predatory conduct allows a market participant to succeed, not on the merits of his product or performance vis-a-vis his competitors (e.g., efficiency), but only by harming his competitors."16

Courts vary in the standards they apply to pricing practices in order to determine whether pricing is "predatory," but perhaps the most accepted gauge is the courts' assessment of whether the price-cutter could, practically, later recoup his losses if he remains in the market as a monopolist: 17

Rubin added:

"A firm engaged in predatory pricing bites the bullet and forgoes present revenues to drive a competitor from the market. Its intent, of course, is to recoup lost revenues through higher profits when it succeeds in making the environment less competitive."

"The success of any predatory scheme depends on maintaining monopoly power for long enough to recoup the predator's losses and to harvest some additional gain."

"Will the predator recoup? Will the competitor(s) survive?"

"If rivals survive or entry [to the market] occurs [thus maintaining or creating competition for the alleged predator/monopolist], not only will predation be unsuccessful, but that very prospect reduces the likelihood that a challenged low price is in fact predatory." 20

It is obvious that pricing on the part of several mega-retail discount chains has contributed to the failures, bankruptcies and disappearance of many competing "Main Street" stores, as well as, the increasing vacancy and abandonment rate in many formerly prosperous and attractive malls and strip centers. It is certainly not the competition of the small retailer that is putting the other small retailers out of business. It is the formidable buying and pricing power of the mega-chains -- that often creates a situation where a legitimate retailer, losing his wholesale resource, has to buy at the lowest price at a warehouse club -- generally associated with a mega-retail discount chain. Can it be inferred that the "Main Street" failures result from the growing power of the mega-chains. Is this power a form of monopolization?

Rubin in the CRS Study raises an umbrella over predatory conduct which might fit into the federal jurisdictions, i.e., Sherman, Clayton and/or Robinson-Patman Acts. Rubin states:

"The fact that predatory pricing at the federal level is subsumed under the 'monopolization' rubric has one other significant consequence -- inasmuch as there is no 'no fault' monopolization, and legitimately realized monopoly positions are not punished, market participants must specifically intend that their behavior injure competitors. Intent will not be lightly inferred, and pricing policy is extremely unlikely to produce such an inference in the absence of other, strong evidence. Many state below-cost pricing statutes permit the inference that advertisements to sell below cost, or sales -- even one -- below cost, constitute evidence of an intent to injure competitors or destroy competition."21

Although the court in the lower Arkansas Wal-Mart Chancery Court case stated that it could not infer either a purpose to injure competitors or to destroy competition from the fact that the defendant store 'engaged in below cost advertising and sales,' it did infer such intent from, inter alia, the fact that there was a "disparity in prices between Faulkner County prices of the relevant product lines and other markets with more and less competition." 22

Price variation which is dependent upon market competition is generally considered evidence that markets are functioning properly. Similarly, no inference of harm (injury) flows from even a proven violation of the Robinson-Patman Act, the federal statute that is specifically addressed to price, and which prohibits price discrimination. 23

Payne v. Chrysler cited in Footnote 22 held that the Robinson-Patman Act did not allow for automatic damages upon proof of a violation: A plaintiff must prove the violation damaged him. It appears that were a company prosecuted under the Sherman Act, that monopoly and pricing would be directed against "competition"; but under Robinson-Patman, it might involve damage to the "individual competitor."

Should Complaints Against Predatory Pricing Be Filed under State Laws or Federal Laws?

Rubin provides a balanced analysis as to the way to go:

"Just as there were studies to indicate that state Fair Trade (resale price maintenance) laws did not serve their purported purpose of protecting small retailers against the pricing practices of 'discounters,' there is no evidence to show that state below-cost pricing statutes serve small business positively; the studies found no discernible difference in the number of small business failures between those states which had resale price maintenance laws and those which did not. Most states have enacted 'baby' Sherman Acts which track the federal statute, and the below-cost sales provisions, themselves, are often contained in more general pricing statutes that are similar to the federal Robinson-Patman price discrimination law -- either of which may be used advantageously to challenge truly predatory pricing behavior. Accordingly, states must weigh the purported benefits of below-cost pricing statutes and their emphasis on competitor protection against assessments of the competition policy inherent in the federal antitrust laws." 24

Rubin added further:

"State Fair Trade laws were also considered by proponents to be protection for small retailers against predatory pricing; they were rendered ineffective in 1976 when Congress repealed the authority for them by deleting the exception in the Sherman and Federal Trade Commission Act provisions which are used to prohibit price fixing (Consumer Goods Pricing Act of 1975, P.L. 94-145)." 25

This author believes after a review of materials in Chapters VI and VII that it will be extremely difficult, but not impossible, to demonstrate that the "Big Box" warehouse discount chains engage in the types of anti-competitive activities which are proscribed by federal antitrust laws. Although it is possible that government investigators could find appropriate evidence of such conduct, our sense is that such an investigation is unlikely to take place unless some evidence is supplied in the beginning. Any request for investigation ought to come from an appropriate congressional committee concerned with the economic future of the nation and its retail component.

Additionally the government ought to look to the Tax Code as a means for limiting some of the alleged "Box Store" abuses which result in a type of "corporate welfare." There will be more specific recommendations made on this approach later in this study. Concerns over benefits provided to these chains, by the local governments and state governments in California, New York and Illinois have already been revealed by quotations from respondents in Chapter IV.

"The appointments of Bingaman in Justice and Pitofsky in the Federal Trade Commission may begin to restore more active enforcement of the antitrust laws that were "more or less abandoned during the Reagan years" stated Robert S. Stein. 26

In the same article, Charles Rull a former Reagan antitrust chief was quoted as saying:

"Bingaman comes from the more traditional Democratic school . . . . They feel that (during the 1980s) antitrust didn't pay enough attention to protecting the little folks and let too many mergers through." 27

Bingaman had testified at her confirmation hearings that the Supreme Court should reverse its 1980s decision involving the Japanese electronic giant Matsushita, a decision that made it very difficult "to prove predatory pricing." 28

As the author pointed out in this chapter and Chapter VI, the Wal-Mart case based on predatory pricing has aroused national interest in the subject and the state cases on predatory pricing may yet stimulate further review of the federal regulatory powers provided in the Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts.

The Stein article also stated that, "Some antitrust experts note that companies can bring predatory pricing suits against others as a means of 'back-door protectionism'." 29

Some economists now endorse recent and relatively expansive theories of price predation, 30 despite the theorists who provide the traditional economic analysis that "predatory pricing schemes are rarely tried, and even more rarely successful." 31 Nevertheless the condition of this nation based upon the disruption of "Main Street" and of the malls and the neighborhood infrastructure, deserves a review and update of what is predatory pricing?

Predatory pricing was certainly on the minds of the delegates at the 1995 White House Conference on Small Business when one of the top recommendations addressed this very issue. Small businesspeople were particularly concerned with the large retailers' ability to demand favorable pricing from manufacturers and service providers. They call for stronger laws action by the President in this area. Their recommendation follows:

141. "Small business cannot compete with large businesses who use their economic power to extract unfair competitive pricing from manufacturers and service providers. Antitrust laws should be strengthened and enforced to prohibit abuses including unfair vertical integration, tying of pricing and product purchases, and predatory pricing tactics. The President should appoint a presidential commission on competition to study the enforcement and impact of the federal antitrust laws ensuring the survival and diversity of small businesses." 32

Finally, in the predatory pricing area, the Supreme Court has steadfastly refused to resolve the debate that flourished in the mid-1970's over the proper standard of cost by which to determine whether prices are predatory.33 Instead, the Court has embraced a model of predation under which the predator expects to lose money during the predatory campaign, drive the competitor from the market, and more than recoup its losses thereafter. The Court has focused on the prospects for recoupment, the "back-end" of the scenario, and if the predator could not expect profit, the prices will be assumed to be nonpredatory.34 Consistent with the analysis, the Court will deem implausible a claim that a firm with a small market share engaged in predatory pricing, relying upon tacit collusion to recoup losses, for such a strategy would not likely be profitable. The court has largely repudiated the suggestion in Utah Pie35 that price discrimination undertaken to injure rivals in a concentrated market that merely contributes to the erosion of price levels is illegal, and it has suggested that the standards for illegality under the Robinson-Patman Act and the Sherman Act are all but identical. 36

The author's references to the U.S. Supreme Court's views on predatory pricing are germane indeed to this study. Perhaps one cannot prove that the several mega-retail discount chains individually lack intent to destroy their competitors or to recoup -- nevertheless it is obvious that with the destruction of the small retailers that a negative result, harmful to the national economy has occurred, regardless of the intent. Then why not have Congress and the federal departments and agencies reviewed the problem as it obviously exists. Further, in the author's previous footnote 34, the Supreme Court suggested that the standards for illegality under the "Sherman Act and the Robinson-Patman Act are all but identical."

A Review of Certain Questions Raised by the Author in Chapter V

1. In the author's discussion of the Federal Trade Commission Act and the Clayton Act, it was stated that the Federal Trade Commission Act created the FTC . . . to proceed against "unfair methods of competition in interstate or foreign commerce" and that the undefined nature of the latter power resulted from the view that businesses would always find new ways of suppressing competition that did not violate any given list of prohibited behaviors. The act empowered the FTC to proceed against each new form of unfair behavior as it appears and is recognized as a problem. 37 In lay language it looks like the FTC can and should look for new behaviors, which may or may not have been previously prohibited, but nevertheless raise serious questions about the economic welfare of the United States.

2. In Chapter V, the author pointed out that in the 1920's and 1930's the large chain retail stores rose to prominence and the market power of these firms entitled them to negotiate lower prices from manufacturers than the traditional small independent retailers could obtain. This led to pressure on Congress to help the small retailer and it was generally argued that the Clayton Act had failed to prevent price discrimination; so that pressure led to the passage of the Robinson-Patman Act in 1936.38 Hence, Robinson-Patman was to correct the failure in the Clayton Act and is a vehicle for reviewing possible predatory pricing cases.

3. There appears to be some doubt legally as to whether "location based" price discrimination is or is not prohibited by the Robinson-Patman Act. There is some legal thought that price discrimination is unlawful as Robinson-Patman makes price discrimination unlawful as between different purchasers of same commodity (i.e. chain X has one price in Atlanta and a lower price for the same product in Atlantic City) . . . does this justify the charge of "discrimination!"? Under the Robinson-Patman Act, the illegality is a purpose to "injure, destroy or prevent competition. Do the failures of hundreds of small businesses in the United States warrant a review under Robinson-Patman? Are we discussing a "competitor's" failure or "competitions'" failure? How much of a market, say in groceries or home improvements, must a discount chain have to be reviewed by FTC and Robinson-Patman? First, the plaintiff must establish that the company is pricing below average variable cost, and second, that the company has a reasonable prospect to recoup the investment below cost prices. It's tougher, therefore, for a private litigant to bring and prove predatory action under the federal law, but a government agency has the staff and resources to make these complex investigations possible. On the other hand, there are legal theorists who believe Robinson-Patman does not require a market share floor as a monopolization charge does, and the predatory pricing issues apply only to charges by a seller that its competitor has harmed the plaintiff by discriminating among the competitors' customers.

The issue here is who is the consumer that is being discriminated against. Is it the mega-retail discount chain that is discriminating against buyers in one location or another? Or, is it the manufacturer or food distributors that is discriminating against such competing chains as Wal-Mart, Target, Kmart or other smaller retailers.

4. In persuading any government agency to investigate antitrust implications of "Big Box" warehouse operations, a market definition is very important (see advice from Davis, Cowell & Bowe) in Chapter V. A more narrow market definition is easier to support a monopoly power presumption. Certainly a market share of 60% or 70% should be a strong indicator that the market is no longer free for small retailer viability, particularly when large chains buy "direct" from manufacturers and small retailers are unable to do so. Can a new businesses enter the market strongly under the influence of a mega-retail discount chain? Could he survive? Could he buy merchandise from a wholesaler or manufacturer?

5. Chapter V also pointed out that aggressive pricing was not necessarily indicative of monopoly power. It is the abuse of power that should be reviewed.

6. In Chapter V, the author reviewed the Brook Group Ltd. cases and the Supreme Court indicated that whether a claim alleges predatory pricing under Section 2 of the Sherman Act or price discrimination under Robinson-Patman, the essential prerequisites to recover remain the same. This is correct where the discrimination charge is brought by the seller's competitor rather than its customer.

7. Manufacturers can also be targets of pricing suits. Increasingly there have been charges that pricing arrangements between manufacturers and distributors have been unchallenged. For example, while vertical price fixing has not been a significant problem in the grocery industry with regard to food items, it could have an effect on stores that have been stocking more non-food items to compete on a basis of "one-stop" shopping offered by the nation's mega-retail discount chains. Increasingly, courts have been demanding more than demonstrations of market concentration as antitrust violations. They want broader economic analysis with proof of harm to consumers. Most federal price discrimination suits have been brought against manufacturers.

Suits Are Now Being Filed Against Manufacturers

As an illustration of actions against manufacturers, a suit filed on March 10, 1993, in Arkansas by 135 independent Arkansas pharmacists in the U.S. District Court claimed that 42 of the world's largest prescription drugmakers were illegally setting prices on their products. The suit, according to Tyler Treadway39 is one of hundreds filed on behalf of more than 50,000 pharmacists throughout the nation. Most of the lawsuits eventually will be consolidated by the Judicial Panel in Multi-District Litigation and sent to U.S. District Judge, Charles Kocoras in Chicago, Illinois. The trial is scheduled to begin on January 5, 1996, and Judge Kocoras already denied a motion by the manufacturers to dismiss the suits. The Arkansas part of the federal case charged drug manufacturers with violating: (1) The Federal Clayton and Robinson- Patman Acts; (2) The Federal Sherman Act; and (3) alleged violations of state laws.

The Arkansas federal suit followed one in California filed in August 1993, where 680 independent pharmacists went out of business that year and a second lawsuit filed in October 1994, in Pennsylvania where hundreds of pharmacists had closed doors in recent years. The Arkansas attorney noted that the federal cases were quite different from the recent state case where a group of Conroy, Arkansas pharmacists had sued Wal-Mart in the Faulkner County Chancery Court.

Booksellers File Suit Against Publishers

Just as the pharmacists filed a federal suit against manufacturers and distributors, so did members of the American Booksellers Association(ABA) file an antitrust lawsuit. On May 27, 1994, the ABA filed a suit against five publishers in the U.S. District Court in Philadelphia. The suit, which followed a year-long investigation on the part of the ABA alleged that the ability of ABA member bookstores to compete had been "increasingly harmed by unlawfully favorable deals, prices, and promotional allowances" that these publishers have given to a limited number of large bookstore chains and discount outlets. 40

The plaintiff, the ABA, on behalf of its members, requested that the Court provide declaratory and injunctive relief and restrain defendants Houghton Mifflin Company, Inc., Penguin USA, Inc., St. Martin's Press, Inc., Hugh Lauter Levin Associates, Inc., and Rutledge Hill Press, Inc. from continued unlawful discrimination in prices and promotional allowances in violation of the Robinson-Patman Act. 41

According to the Plaintiff, the ABA brought this lawsuit on behalf of its membership, comprised of over 4,500 separate members operating general interest bookstores across the country. The vast majority of ABA's members were independently owned businesses operating individual bookstores. As they have done for generations, these bookstores provide books and services to meet the needs of the general reading public in communities where they were located. Many of these independent bookstores offer broad or specialized selection and services that are not generally available in larger chains of bookstores.

According to American Booksellers:

"The ability of these bookstores to compete had been increasingly harmed by unlawfully favorable deals, prices, and promotional allowances that certain book publishers, including defendants, had given to a limited number of large chains of bookstores and discount outlets in the country. By depriving independent bookstores of discounts and promotions made available to large chains and discount outlets, defendants damaged independent bookstores and threatened their capacity to compete in the marketplace. These threats to independent bookstores in turn threatened the richness and selection of reading material that was available to the American reading public. Through the complaint, plaintiff ABA sought to obtain for its members the level playing field required by antitrust laws of the United States." 42

Specifically mentioned in the lawsuit were major retail book chains as well as warehouse clubs:

"The two largest chains of retail bookstores in the country are Waldenbook/Borders and Barnes & Noble, which together operate over 2,000 retail bookstores under various trade names (collectively referred to herein as 'the Chains')." 43

"The two largest chains of discount outlets known as 'membership warehouse clubs' or 'buying clubs' are Price Club/Costco and Sam's Club (collectively referred to herein as 'the Buying Clubs')." 44

The complaint also alleged among other things, that the defendants routinely made payments to bookstore chains so that the chains would advertise the defendants' books; would place the defendants' books in favorable places within the stores; and would aggressively promote the sale of defendants' books, without making such payments proportionally available to all booksellers. 45

The complaint also alleged that the defendants sold certain books to "warehouse buying clubs" or their suppliers at wholesale discounts far beyond those offered to retail bookstores. The discriminatory discount granted by defendants enabled warehouse clubs to sell the books to the public at prices lower than the lowest wholesale prices defendants offered to retail bookstores. 46

While admittedly the Booksellers case is under Robinson-Patman and does not involve the section of the act having to do with predatory pricing and recoupment; nevertheless, the attention now given to arrangements between manufacturers (or publishers) and chain customers reflects a serious plight on the part of the independent bookseller, not too different from the plight of the small merchandise retailer who can't receive the huge discounts from the manufacturer for mass purchases, and who often can't find a supplier to sell to him. Hence, many retailers have to buy in Sam's Clubs, owned by Wal-Mart or in other warehouse clubs.

Further the warehouse discount chains are also involved in the American Booksellers case as well. The warehouse buying clubs, Price Club/Costco and Sam's Club have been mentioned prominently in this study and while they are not a principal legal target of the lawsuit, it does provide some relevancy to an overall discussion of Robinson-Patman.

According to the Plaintiffs, because of price discrimination and disproportionately favorable promotional allowances, payment, and programs, and the advantages and extra profits that these allowances, payments, and programs provided to the Chains and Buying Clubs, some smaller and independent bookstores, including current and former ABA Members, have been harmed. The Plaintiffs indicated that the discrimination in favor of the Chains and Buying Clubs had caused, and will continue to cause unless enjoined, irreparable injury to the business and property of ABA's members and had lessened competition in the book retailing marketplace and threatened to reduce the selection of books available to consumers. 47

The dismissal by the FTC of its lawsuits against major publishers years after the FTC staff negotiated consent decree illustrates how difficult these price discrimination cases are.

Has Home Depot Utilized Predatory Pricing Techniques?

In March 1995, a story by Chris Roush, staff writer with the Atlanta Journal and Constitution48 quoted critics of Home Depot's pricing policies. He quotes a John Connolly of J&S Paint and Stein in Mableton, Georgia, who paints houses throughout the state and buys his supplies from Home Depot. Recently, Connolly claimed that he noticed price differences between Home Depot locations in Atlanta, where the chain dominated the home improvement market, and stores in Augusta and Savannah, where it competed with other chains.

"Paint prices in Atlanta are higher, he claimed. Which means he's forking out $2,500 more per year when he buys supplies in the metro area." (This is Roush quoting Connolly) "When they control the market, they gouge the prices" claimed Connolly, "I don't want to get into a fight, but it's predatory pricing in action." 49

According to the writer, Chris Roush, "It's not the first time Atlanta-based Home Depot has been accused of unfair pricing. As it enters new markets - and increases its domination in the Southeast - competitors have accused the nation's largest home improvement retailer of so-called predatory pricing designed to put them out of business." 50 On the other hand, Home Depot defended its pricing practices, saying its policy was to compete based on price.

"It's not a very complicated policy," said Home Depot spokesman, Jerry Shields. "We have the lowest prices in every market we do business in. Or we'll beat someone's prices if it comes to our attention. We're not saying you won't find a lower price; we'll just have to adjust our prices." 51 Shields also said that prices may also vary between markets because of fluctuations in transportation and other overhead costs.

Roush further stated in his article that in November 1994, Home Depot was accused of violating Utah's Unfair Trade Practice Act. Standard Plumbing company Inc., which operated 14 stores, filed two suits alleging that Home Depot was selling supplies below its cost. Roush further reported that Home Depot quickly settled the lawsuit in an out-of-court agreement in which it admitted no wrongdoing. And, according to Roush, the chain agreed to stop selling plumbing supplies in Utah below its invoice price. 52

The Atlanta Journal also quoted Kenneth Smith, an analyst from Interstate/Johnson Lane, who had conducted a study in 1994 comparing prices of 35 products at a Home Depot in Atlanta with those at a store in Greensboro, NC, where it competed head-to-head with Lowe's, another chain. Smith, pointed out that in Atlanta, the 35 items totaled $625.37, or were 9.7% higher than the $568.96 they cost in Greensboro. "They don't have uniform prices," said Kenneth Smith. He believed that it was not Home Depot's intention to kill competitors; however, he was convinced that Home Depot could buy in a lot bigger volume than the small firms. 53

Big Customers' Late Bills Choke Small Suppliers

Previous comments by the author in this study indicated that small retailers were having trouble buying from national or regional wholesalers and manufacturers because of the mass discounts offered to the mega-chains by both large and small suppliers. If, as reported, wholesalers and manufacturers were in fact being paid later than traditionally, it would contribute to having a negative impact upon the small retailer. Eventually there will be less suppliers available to sell to small retailers.

A Dun and Bradstreet Corporation Survey 54 released in 1994 indicated trends portraying continued weaknesses in the bill paying capacity of small retailers. Dun and Bradstreet has been tracking such behavior for over four years. The survey canvassed mostly small suppliers -- recipients of late payments and the firms that can least afford delays.

Lawrence Winters, a Dun and Bradstreet assistant vice president, stated that some large companies were routinely paying their bills as much as 90 days after receiving invoices routinely due in 30 days.

Smaller suppliers typically accept such terms "out of desperation to get business," Mr. Winters said, "They don't realize the implication of the decision until it hits them.." 55 Blinded by the prospect of a big new customer, many entrepreneurs forget "a sale is not a sale until you collect the money," 56 adds Paul Mignini, Jr., President of the National Association of Credit Management. Most of its 35,000 members are credit managers at small firms.

Does the Size of the Retailer Permit a Mega-Discount Chain Retailer the Right to Cancel a Previously Booked Order at Any Time Prior to Shipment?

As the power of the mega-chains continues to be more formidable, manufacturers and suppliers are bound to become weaker. As these suppliers turn their attention to the larger customer, they begin to lose the autonomy and sense of independence that a manufacturer possesses when it has a diversified list of many customers both large and small.

As "partnering" of sorts continues to interest the largest American corporations, small retailers continue to weaken in terms of their ability to buy from many resources formerly available to them.

A clause in Wal-Mart Stores' standard purchase contract that gives the discounter the right to cancel an order anytime prior to shipment, was found "substantively unconscionable," in a recent decision in New York State Supreme Court. 57

In a decision denying Wal-Mart's motion to dismiss a suit by Jonathan Cass, Ltd., a women's apparel manufacturer and seeking damages for cancellation of orders for some 150,000 items of merchandise, Justice Beatrice Shainswit said that among other defenses, Wal-Mart claimed that because of the clause, it had "the absolute right to cancel." 5858

The Court stated:

"On its face, this provision which gives Wal-Mart the right to unilaterally and arbitrarily cancel its orders at any stage of production prior to shipment regardless of the expense its vendor has incurred, is so grossly unfair as to be substantively unconscionable, that is, unconscionable by its terms." 59

The court continued:

"Given Wal-Mart's size and buying potential versus the relative size of its vendors, the contract formation process must be examined as well to determine whether the procedural elements of unconscionability (i.e., unequal bargaining position) are sufficiently present so as to bar enforcement of this clause for unconscionability." 60

This issue, the court said would have to be determined at trial. Merchandise involved in the action was ordered from June through October 1990, and later refused for various reasons including late deliveries and failure of the merchandise to conform with specifications. (Kenneth A. Schulman of Kreindler & Relkin represents the plaintiff.)

The author of this study has not yet seen the results of the trial ordered by Judge Shainswit. Obviously Wal-Mart may have had strong reasons for refusing shipment of the merchandise from Cass, such as lateness in delivery or lack of conformity to requisite specifications. Nevertheless, the Judge in the pre-trial activity in the Cass v. Wal-Mart case was concerned about whether or not unequal bargaining power may be sufficiently present to bar enforcement of a cancellation clause for "unconscionability." In this case the buyer is possibly one of the largest corporations in the United States in terms of volume and number of employees. Wal-Mart's motion for summary judgement was denied by the court (J. Shainswit).

Wal-Mart appealed almost immediately to the appellate Division of the New York Supreme Court. On June 6, 1995, the five judge panel unanimously affirmed the lower court's decision in denying the defendant's motion for summary judgement discussing the complaint, the case will therefore go back to trial.

In the August 1994, U.S. House of Representatives Small Business Committee Public Hearings, the Committee Lashed out at the Mega-Discount Super Store for Hurting Small Businesses and Entire Communities with Predatory Pricing, Unfair Labor Practices and Market Saturation

In Joyce Barrett's article on August 11, 1994, in Women's Wear Daily 61, she reported on the first Congressional probe of the retailing phenomenon that was changing local markets nationwide. The mega-stores were derided of everything from crushing local competition to altering the traditional product distribution chain.

As the largest retailer in the nation, according to Barrett, Wal-Mart Stores, Inc. drew most of the criticism, although Rep. John LaFalce (D., NY), Chairman of the House Small Business Committee, said he had hoped the discussion would not target specific retailers. Wal-Mart's actual volume for 1995 was $81 billion, but currently it projected to be over $106 billion in 1996.

Representative LaFalce said he aimed to explore three ways of protecting small business from the super-chains:

  • Increase publicity about expansion of the mega-stores.

  • Curb federal money, such as industrial revenue bonds, that goes toward retail development.

  • Insure that federal antitrust and banking laws are tough enough and are enforced. 62

LaFalce acknowledged that the federal government can do little to affect the recent course of retailing, but said he was concerned that superstore development was coming at the expense of smaller merchants. Unfortunately no tangible actions were taken by LaFalce's committee or subsequent ones except to hold the hearings and to provide publicity on the need for action to assist in the survival of "Main Street" businesses.

At the hearings, according to Barrett, there was a litany of complaints about the superstores edited by other panel members. Thomas Muller, previously mentioned, said Wal-Mart charged higher prices in communities where it has eliminated the competition. Also, Wal-Mart and other mega-stores don't increase the dollar volume of sales, but instead redistribute sales. Further, he pointed out that the claim that Wal-Mart creates jobs also is wrong. Muller added, noting that in communities with a Wal-Mart, the results could be fewer retail jobs. He also said that full-time jobs in the mega-stores were often based on a 28-hour work week, instead of the usual 40 hours and he observed that based on its current marketing strategy, Wal-Mart could open another 5,000 stores within the next 10 to 15 years. Muller estimated in the Daily News Record:

"...that Wal-Mart had reached 'optimum penetration levels' in Arkansas, Mississippi and Oklahoma, and now appears to be targeting urban and rural areas in other states. The new Wal-Mart approach for areas close to saturation, as well as others, is to revamp the older stores as supercenters," Muller said. "These combine the general merchandise store with a full-line grocery store, using the same checkout counters." 63

Muller continued:

"The experience of Wal-Mart has been that these superstores have increased per-square-foot general merchandise sales. With its superstores, Wal-Mart sales could easily double, even in states where current stores are close to saturation. In a few years, given current trends continue, one corporate entity may have a substantial share of all retail trade in the United States." 64

The Honorable Jean Ankeny, a Vermont State Senator, expressed similar concerns about jobs but also highlighted the sociological impact these large stores can have on a community in a letter written from her home in Williston, Vermont:

"The anxiety about Wal-Mart's aggressive tactics continues. Williston, St. Johnsbury and St. Albans are all feeling the hot breath on their necks, and opinion is divided over whether or not Wal-Mart will be a benefit. Many of us feel sure that this megalith will not only wipe out small stores for miles around, but also drain our communities of much needed leadership."

"The owner of the hardware store is the coach of Little League. Members of the school boards, supporters of local arts, etc. live here and have their businesses here. Wal-Mart will not replace these local leaders." 65

These are the effects that can not be put into numbers; but are at the basis of the concern raised in many communities when a large corporate chain is entering the market.

Jonathan Laing, in a May 1996 article in Barron's, confirmed the growth strategy of Wal-Mart by reporting on CEO David Glass's predictions for the future. Laing accepts Glass's projections that by the year 2000, the grocery business to be enjoyed by Wal-Mart's new Supercenters will blow past the $24 Billion business volume of the Kroger supermarket chain. By adding groceries to the stores and often using the lower prices to entice shoppers, the overall business of the Kmarts and Wal-Marts are increased. Laing goes on to say:

"The synergy of the supercenter concept is best grasped by a simple calculus. By merely adding 35% - 40% to the floor space of a traditional discount store to create a supercenter, sales essentially double once the supercenter reaches maturity in four to five years. Profits won't rise quite as sharply because of the inclusion of lower-profit food items. Maybe they'll jump only 80%. Nonetheless, the supercenters will yield a higher return on investment than most of Wal-Mart's existing discount stores and provide a substantial boost to sales and earnings down the road." 66

This is indeed substantial growth, both in sales and profits. Examples of this are evident from Muller where he cites expansion already occurring in New York State.

Muller pointed to Wal-Mart's expansion in upstate New York as an example of its growth potential. A few years ago there were essentially no Wal-Marts in the region. As of 1993, there were 28 Wal-Marts and 14 Sam's Clubs. Because the economy of the region is not growing or growing slowly, virtually all sales represent losses to existing merchants. Also, the evolution of Wal-Mart supercenters means that its new stores, with about 175,000 or more square feet of retail space, will be equal to more than 100 typical small businesses. 67

In fairness, it should be mentioned that there were only few proponents of the mega-retail discount chain present at the La Falce committee hearings. Morrison Cain, Vice President of the International Mass Retail Association, was the sole voice testifying in defense of the burgeoning mass industry.

After the hearings, in a telephone interview from Kmart's Troy, Michigan headquarters, Don Morford, Director of Employee Benefits, said he could understand smaller retailers complaining that the bigger stores hurt their business. He noted, however, that smaller retailers liked the increased traffic the big stores generate. Cain said the mass stores provide greater choices for consumers, employment and income growth and an improved economy. Mass retailers can offer the low prices that have made them famous because, early on, they embraced technological advances in distribution and logistics, such as checkout scanning, sophisticated inventory processing systems, direct store-to-warehouse and store-to-vendor communications and Just-In-Time delivery.

Cain stated:

"These operating efficiencies can spell the difference between success or failure in this fast-moving business. The sheer volume of merchandise they sell also leads mass retailers to put growing emphasis on greater consultation and communication with their suppliers, not just in traditional areas, such as price and availability, but also in a broader range of concerns, including product design or customization or joint promotional efforts." 68

Cain offered a menu of adjustments small businesses could make to survive superstore competition; find a niche, sell items not carried by the giant discounters, refocus on upscale merchandise, improve store marketing and image, price competitively and emphasize services that discounters do not. 69

Cain's comments remind one of the Ten Commandments prescribed by Taylor and Archer, in their book, Up Against the Wal-Marts and the usual management prescriptions taught in Management 101 in schools of business throughout the country. As already discussed, in reality, these suggestions are impossible for the small business to finance and implement.

Concluding Comment

It is recommended that the current Committees on Small Business in both the U.S. House of Representatives and the U.S. Senate continue to hold hearings on the applicability of such regulatory statutes as the Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts relevant to the weakening condition of small retailers in the United States, in part because of the ever increasing power of the chains to procure the lowest of prices from manufacturers and suppliers.

While predatory pricing might have to be viewed differently in the federal area compared to state litigation, nevertheless the increasing power of the chains requires federal review in terms of applicable statutes and regulations designed to protect small business and to provide free market opportunities. Further, the opportunities of the large chains to secure "corporate welfare" in terms of financial assistance for building their huge stores should be re-examined by Congress since many of the grants are basically part of federal funding.

The author has given some thought to the possibility of federal review by either the Justice Department or the FTC of the overwhelming power of the mega-retail discount chains and their impact upon the opportunities of small businesses to survive. Obviously, one can be skeptical that either agency would be likely to undertake an across-the -board review of the subject that has been under study in this document. One reason, the author believes, is that both agencies have internalized some basic lessons of "Chicago School" economics, primarily that the antitrust laws are concerned properly only with questions of economic efficiency. Also, the Antitrust Division appears to be reluctant to use the Robinson-Patman Act because of the difficulty of reconciling its effect with other antitrust laws.

However, both the Antitrust Division and the FTC have been conducting some fairly aggressive investigations of predatory pricing and related issues. This initiative represents a significant change in enforcement over the last few years. Enforcement policies depend so much on who is formulating them, but one should hope that investigation of anticompetitive activity by dominant firms is likely to continue.

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