Court's ruling may be no bargain
Companies looking for ways to stop shipping their products to discounters may find it easier to do that now. Manufacturers that want to protect their full-price distributors from price competition won support for this strategy Monday, when the United States Supreme Court ruled that vertical trade restraints are not illegal unless price is specifically discussed.
While some analysts say the ruling completely reverses the direction of antitrust law in the United States, many, but not all, manufacturers applaud the outcome of Business Electronics v. Sharp Electronics, saying it merely clarifies what the courts have been saying for about five years.
But consumer advocates say this could lead to higher prices and less choice for customers. And a number of antitrust experts expressed concern that it could also undermine laws against horizontal price fixing.
In its 6-to-2 ruling, the court reasoned that manufacturers often stop supplying to discounters when these retailers don't provide the kinds of services the manufacturer feels should go along with the product.
Because ``price cutting and some measure of service cutting usually go hand in hand,'' they wrote, it is hard for manufacturers to prove they cut off supplies not to squeeze out price competition, but to ensure proper service.
``Manufacturers would be likely to forgo legitimate and competitively useful conduct rather than risk treble damages and perhaps even criminal penalties,'' the court said. So unless the manufacturer and dealer specifically discuss price or price levels, dropping a discounter, even over price competition, cannot be considered price fixing.
But John Cuneo, an antitrust lawyer and general counsel to the Committee to Support Antitrust Law, says that ``this opinion is one of the worst in the 100-year history of antitrust laws.''
``If a powerful and entrenched full-price retailer is faced with an upstart discounter's competition, the full-price company has been given a green light to squeeze out the discounter,'' he says.
``I don't see any difference between eliminating competition and price fixing,'' says Michael Waldman, legislative director at Public Citizen's Congress Watch.
Under the Sharp decision, a discounter will prevail against a manufacturer only if it can prove it was terminated solely to eliminate price competition, and then prove the action was anticompetitive.
``That kind of marketplace bullying is completely inconsistent with the American principles of a free and open marketplace,'' Mr. Cuneo says.
Bullying is not the way most manufacturers and legal conservatives see it, though. According to the ``Chicago School'' of economic theory echoed by the Supreme Court's decision, discounters often do not help consumers in the long run, and price fixing can guarantee better service for the consumer after the sale.
``Manufacturers set higher resale prices in order to get dealers to spend money on other services, especially with electronic and high-tech equipment,'' says Diane Wood, a professor of antitrust law at the University of Chicago Law School. ``A discounter, unless he's very efficient, will probably not provide those extra services.''
``Sometimes, discount retailers can charge a lower price because they're not providing the range of services they are supposed to,'' says Gary Shapiro, vice-president of legal affairs at the Electronics Industry Association, which represents manufacturers.
``It allows the courts to look at a case and ask whether it's good or bad for the consumer,'' he adds.
But discounters stress that manufacturers do not always know what mixture of services and products a consumer wants. Consumers would probably rather have low prices today than the promise of better service at some future point, says Eleanor Fox, a professor of law at New York University.
Professor Fox says the decision ``puts manufacturers at the mercy of big retailers.'' She describes as unusual the ``free rider'' problem complained of by the manufacturers who say discounters gain because of the services provided by their full-price competitors, even when sophisticated equipment is involved.
What the court felt was a pro-competitive decision, many congressmen see as a threat to the discount industry.
A bill that passed the House of Representatives last year, and a companion measure pending in the Senate this session, attempts to address the availability of discount stores for consumers. If it passes, it would overturn the Sharp ruling, legal experts say.