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Inching Toward Commercial Freedom

June 29, 2007

Tags Free MarketsLegal SystemInterventionism

It's not often I can say it, so enjoy: the Supreme Court did the right thing. It has reversed a century-old rule that criminalized retail price agreements. Good. Great. There are 10 million bad regulations to go.

Now, if you just happen to be reading over the Constitution, you will note that it does not give government power to tell manufacturers what the price of their products should be, or regulate the terms of the contracts, much less provide a rationale for economy-wide price controls. In fact, if you were reading it for the first time, you might find the assertion that such a power exists to be preposterous on its face. Truly it is. The Constitution gives the federal government no power to regulate the details of economic contracts.

A century ago, however, the Supreme Court developed a different view. After the passage of the Sherman Antitrust Act, a medicine manufacturer marketed its products to retail outlets on the condition that the retailer maintain a price floor on the product. In that way, the producer could be assured a certain return and avoided price wars with competitors. But the court decided that this was a violation of Sherman and banned the practice. A split in the contracting process occurred and now retailers take it for granted that wholesalers can't make contracts that include pricing agreements.

Does that sound like a good thing for consumers? Not necessarily. Many products have never come to market precisely because the producers can't be assured of avoiding bottom-line killing price wars. For example, let's say I make a widget and sell both in retail and wholesale markets. The retailers start to sell at a dramatically lower price. Without price agreements, I might find myself in a bidding battle with my own customers that would end in my own bankruptcy. Foreseeing that, I might avoid going to market at all.

So we can see how misleading the opinion of the minority is. "The only safe predictions to make about today's decision are that it will likely raise the price of goods at retail." That's a completely static analysis that assumes that all goods currently on the shelves will remain unchanged. A dynamic analysis would foresee different kinds of goods appearing on the shelves. Competition will take a different shape and might even, in the long run, end up lowering the price of goods.

Look at the circumstances that gave rise to the decision. A company called Leegin Creative Leather had a no-discount policy that came with its decision to sell to Kay's Kloset. Kay's didn't honor that policy, so when it came time for a new deal, Leegin said no deal. Kay's complained that the refusal of Leegin to sell hurt their business, which was all about a particular leather line that Leegin made. The courts ruled against Leegin, slapping them with a $1.2 million fine. In fact, the government was telling Leegin that it is a slave to regulation: it had to sell regardless of whether contracts on the other end were honored or not.

Folks, this is not free enterprise. Finally the Supreme Court agrees.

This is especially important in our times, when firms are integrated both vertically and horizontally. That is to say, firms on the web often function as both the wholesaler and one among many possible retailers. Publishers sell on their own sites and also through other distribution companies. Certain market conventions develop that are compatible with profitable business practice, and sometimes that requires maintaining price agreements. In these, there is ultimately nothing to prevent the retailer from charging any price that it wants, but it might also face a decision by the producer not to make such deals in the future.

Now, is retail price maintenance a good practice or a bad one? Every producer wants the highest possible price, but it too faces a competitive marketplace. To maintain a high price in the face of expanding competition isn't always a good idea. Downward pressure must sometimes be dealt with. So it might not be a good decision to enforce these types of agreements.

But the real question is: who is to decide? Should it be the government or the contracting parties? When the contracting parties decide, no one is hurt because all transactions, including those made by final consumers, are voluntary. When the government is involved, at least one party and sometimes several are compelled against their will to engage in transfers of property without their consent. Even if consumers benefit, it wouldn't matter: one group is winning at another's expense, which isn't the market way.

The good news here is that this ruling will have an immediate impact on the marketplace. Producers might start to offer deeper discounts on their products. This way, retailers can save money in other aspects of their business. It could result in some restructuring that will benefit everyone from workers to consumers. It's true that the marketplace has found workarounds to these rules in the past, but not without the high cost of regime uncertainty.

There is a broader point here about the Constitution. Clearly the federal government has no legal authority to be legislating or ruling on this subject at all. It is not only the regulation on retail price maintenance that is unconstitutional but the whole of the Sherman Antitrust Act, which, incidentally, is surely one of the most anachronistic pieces of economic legislation on the books. The entire law ought to be struck down, and Congress should make no other related to this topic.

 


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