served as a member of President Xixon's Task Force on Productivity
and Competition and also as a member of the American Bar Associ-
ation's Commission to Study the Federal Trade Commission.
The task force report was hi^lilA' critical of the Robinson-Patman
Act and recommended substantial re^dsion coupled with reduction of
the FTC enforcement efforts. I won't dwell on the details of these
proposals but suggest two basic reasons why the act is so widely, and
T think justifiably, criticized.
First, although the act wears the clothing of antitrust, it seems
designed rather to promote than to prevent monopolistic pricing
practices. It was enacted at a time when faith in competitive markets
was at its low point in this country, and the act in both origin and
in its enforcement has been an example of protectionist and anticom-
petitive legislation. The public interest is not served, so far as I can
see, by seeking to protect food brokers, wholesale grocers, and retail
147
druggists against the competitive inroads of chain stores, mail-order
houses and other innovations in distribution.
Secondly, the act is so badly drafted and has been so capriciously
enforced that it has probably harmed small business more than it has
helped it. A firm must incur very heavy legal and accounting expenses
to comply with the act's intricate and obscure provisions, and this is
a particular hardship for the small firm. Ironically, most of the re-
spondents in FTC Robinson-Patman Act proceedings have been small
rather than large firms, and indeed larger or vertically integrated
firms are often able to arrange their affairs so as to avoid being subject
to the act. Finally, the act has not infrequently been used to strike
down practices beneficial to the very groups designed to be protected
by it, such as cooperative buying groups composed of small retailers.
In sum, the act is neither an antitrust law nor a boon to small
business.
In offering these highly critical reflections on the Eobinson-Patman
Act, I am, of course, testifying as an individual, but I would venture
to suggest that nearly all lawyers who either teach or j^ractice in the
field would join in these criticisms.
Mr. Smith. Professor Stigler, in your item 2, at the bottom, you
say Robinson-Patman is one expression of monopoly power but leaves
the monopoly power itself undisturbed, and still operative.
Of course, there is the Sherman Act. You didn't assume that this
act was supposed to do everything the Sherman Act
Mr. Stigler. No, sir. All I meant to say was that price discrimina-
tion cannot exist unless there is monopoly power. If you stop one
expression of this monopoly power by, say, a successful Robinson-
Patman Act, you still leave the party in possession of that monopoly
power. So that if there are any ways he can use it, he will still go ahead
and use that monopoly power, perhaps Avith tie-in sales or something
else.
Mr. Smith. But that is where the Sherman Act comes in.
Mr. Stigler. If you were to destroy his monopoly power, then there
would be no task left for the Robinson-Patman Act in that particular
industry. I am saying you are dealing with an important symptom
but not witli the caus^, and if you can deal with the cause you don't
have to deal with the symptom.
Mr. Smith. Let's take an example, since we have gotten the Sher-
man Act involved, too — let's take an example of an oil company that
builds an oil station across the road from a competitive oil company
and they furnish gasoline to the operator of that station at a lower
price than one down the street two or three blocks. Do you think they
should do that?
Mr. Stigler. On its face I see no serious harm in that practice.
Mr. Smith. The harm is that as soon as they run the fellow out
across the street, they may raise their prices to an even higher price
than it ever would have been otherwise, so they have extended their
monopoly power, it would be going in if they could. And they have
tried to "do it in several different ways through lease-back arrange-
ments and so forth.
Mr. Stigler. I don't know the facts of this particular case. I would
say that if I were running an oil company, if I were Standard Oil of
148
IrLdiana, I would not attempt to drive out an Enco station or a Mobil
station by this tactic because they would, of course, give comparable
â– discounts to their outlet. The predatory competitive practice which
is what you are describing would be engaged in very seldom not
because of any particular moral misgivings but because such practices
don't work and they are very costly.
Mr. Smith. Well, apparently
Mr. PoTViN'. Mr. Chairman. Professor, though, is there not tliis
further refinement. Let us say you are trying to drive away a small
private brander instead of an Enco station across the street. Now, let
me say parenthetically that I tliink this is a terribly important dis-
tinction for other than structural reasons, and that is that private
branders, as you know, bring price competition to the marketplace.
You would concede, would you not, Professor, that private branders,
even the largest, are rather fragile creatures compared to the large
international type oil companies.
Mr. Stigler. T don't know — well, I am sure that they have smaller
assets, if that will help the argument get along.
Mr. PoTviN. Yes. So that they are more vulnerable, that is to say
the driving away of private branders is scarcely an undertaking of the
sort of magnitude that driving away Humble Oil would be.
Mr. Stigler. That's right. It would be very easy for a large oil
company, I think, to drive out any particular individual small outlet.
Two weeks later, of course, another fellow would open up that station.
Mr. PoTviKT. Let us go l^ack one step further. It turns out that most
of the private branders get their product from the majors. Frequently
the same major will be supplying, «, the branded stations, and ?>, the
private brander if you trace it back far enongli. Now. would that
•change your feeling al^out it ? And obviously the replacement could
not come in unless he could produce and we are, after all, here during
the Vietnam
Mr. Stigler. I am now confused on the situation. Standard Oil of
Indiana — well, oil company X — is simultaneously supplying a small
off -brand man and trying to drive him out of existence ?
Mr. PoTviN". Yes, that is not an uncommon happening.
Mr. Stigler. I don't claim that discussions of hypothetical oil
situations can be answered one way or another. This strikes me as
ephemeral and irrational behavior that camiot be, in general, very
important. I don't mind pursuing it if you wish, and I would say it
would be just much simpler to cut off the small outlet's supplies than
to have a price war with it.
Mr. PoTviN. Let me assure you it is not ephemeral, neither is it
hypothetical. It is happening every day and there has been litigation
on just this set of facts in Jacksonville.
Mr. Smith. Of course, I think another example of what happens
is that the majors line up with the pipeline company and get there,
•one after another you see big brands lined up at the Gulf pipeline
company in Des Moines, Iowa, loading up their trucks from the same
pipeline, and then the independents come in with their truck and load
up, too, buying whichever octane they want. So that the source is
there, and the price I think at that point is the same. But the economic
power at the station is different, of course, if you get — the major's
149
got a lot of economic power behind him and he can, througli lease-back
aiTangements and other things, he can give more favorable, tempo-
rarily more favorable advantages to a station that is across tlie street
from a competitor. If he could drive the competitor out and get his
business, too, why of course in the long run it could be profitable,
Mr. Stigler. It may be. I would normally say that it is the interest
of the oil refiner, the owner of the pipeline, or the product being de-
livered through it to have the retailing done cheaply. Any dollar that
I have to spend on driving my car has to be divided between the re-
tailer and the refiner and the other people in the process, and the
less the dealer gets, the less inflated his marl-oips, the better off the oil
company is. So the interest of the oil company is basically in an ef-
ficient retail distribution system from its own viewpoint. And that
means large sales and the like. I have not studied the oil industrj- in
detail in recent years.
Mr. Smith. Did the task force that you were on go into these kinds
of problems?
Mr. Stigler. Let me say this. The task force I was on was con-
stituted in early January and reported at the end of February.
Mr. Smith. You didn't really have much time to do extensive study.
INIr. Stigler. We were not asked to, and obviously that time sched-
ule could not engage in any additional research work. It was a knowl-
edgeable group of people who had been involved in lots of problems.
Tliere are lots of things that we were infonned on. There were parts
of the economy that none of us had studied. That could be true of any
group of nine i>eople.
Mr. Smith. Did you have a new and independent study or just
take information that you had or your
Mr. Stigler. No, we were using the accumulated opinions and
knowledge that was at our own disposal. The time schedule com-
manded that.
Mr. Smith, You were formed in early January, did you say ?
Mr. Stigler. We were almost the last of the Presidential task forces
to be formed, in early January. At some date like the 11th of January
we had our first meeting.
Mr. Smith. And then when did you have your last meeting?
Mr. Stigler. Well, most of it was done by correspondence, and our
final report was submitted in March after a good deal of exchange-
in the mails. But we had only one other long meeting which all
attended.
Mr. Smith, You didn't really have a chance to make any inde-
pendent study?
Mr. Stigler. No, we weren't intended to do that and could not with
that schedule.
Mr. PoT\TN. Professor, reverting to this gasoline situation, let us
agree that perhaps a more realistic short range goal would be price
discipline rather than driving the private brander away. Now, in real
life what happens, of course, is that the majors will allow the private
brander to sell, say, 2 cents below their price but no lower. If he goes
lower, they will come down, and as they say in that industry, meet him
on the nose and sell at the same price. Being rather more tender than
the major, rather than be driven away, he will come back up.
150
i^ow, one way, of course, of stopping that tactic is through the Rob-
inson- Patman Act. If there is another Himible station 2 miles down
the road, then you have a price discrimination going on as between
those two if they are in the same trading area. So is this not an example
of the Robinson-Patman Act being procompetitive if it can be used
to stop price discipline so that private branders would be free to go
down even lower in prices ? Wouldn't that be procompetition ?
Mr. Stigler. I don't think so. In the case you postulate where we
have this off-brand, cut-price outlet, at one area but much of the rest
of the area doesn't have people like him, as you impose the Robinson-
Patman Act the chain outlet across from him would not be allowed
to compete with him. And-
Mr. PoTviN. But you are
]Mr. Stigler (continuing). Otherwise it would be engaging in price
discrimination.
Mr. PcniN. But, Professor, you are ignoring the aftermath which
is as soon as they have disciplined him, everybody goes back up. It is
just a temporary apparition, as it were.
Mr. Stigler. A full, effective enforcement of the Robinson-Patman
Act as I describe it would prevent the discipline. I am accepting that.
As a result there would be no cutting of prices on the major brand.
And the other possibility, and the more imi^ortant and interesting one,
I think, is where the price cutting spreads and all margins for outlets
are reduced, the competitive level is stopped by the Robinson-Patman
Act.
Mr. Pot\t:x. Yes. I think this subcommittee and you, Professor,
would join in one fervent hope that the entire petroleum industry
would engage in price competition. That unhappily is not the fact.
These things are always temporary. They always go back up, as you
well know. Let's not confuse the record by suggesting that anyone in
this room is against overall lower prices for gasoline over time be-
cause I am sure that is not the truth.
Professor, this subcommittee has a long record of being greatly in-
fatuated with some of your ideas, namely, that more should be done
to stop exclusionary governmental policies such as the motor trucking
industry. It has been active in that. In the field of communications
it has been most active, and in the sort of thing that recently resulted
in common carrier microwave being licensed to pro\dde competition
for the existing modes, and I certainly think that you are on the right
track.
Now, on page 1, of your statement, sir, in paragraph number one,
you say, "It defines price discrimination improperly, and in particular
identifies it with price differences."
Now, what you are saying is that it is not proper to call any price
differences a discrimination. Would you give us your economist defini-
tion of discrimination ?
Mr. Stigler. We would say that the requirement for discrimination
is that the price difference, if there is a difference is disproportionate
to the difference in cost of producing the different kinds of goods we
are talking about. And in reverse, there may be no price differences
and yet price discrimination because the cost of serving different
classes of customers are substantially different. In that case, you are
151
favoring the one for whom the costs of dealing are higher if you
do not charge liim more.
Mr. PoT\'ix. And that is the correct definition rather than a price
difference ?
Mr. Stigler. That is right.
Mr. PoTviN. Professor, I have here a book entitled : "The Theory
of Price, Third Edition," written by yourself, and known, of course, to
students of economics throughout the world. On page 81 thereof, you
define price discrimination in tiie following language. You say, "Price
discrinnnation arises when a commodity is sold at different prices to
different people." Is that not squarely at odds with what you just
said?
Mr. Stigler. No, I said a conunodity. But the correct definition,
formal definition comes in a later chapter. Have you read all the way
through the book?
Mr. PoTsiN. I have, sir.
Mr. Stigler. I think you will find a later discussion contains the
explicit discussion. I mean by a "commodity" — that language is being
used in an early discussion — one which is identical in quantity, quality,
place. Then it is true where I have cleaned out all cost differences that
a difference in price will lead to discrimination.
Mr. PoTVTN. And, of course, the Robinson-Patman Act plays a
commodity at a time per force, you would agree with that ?
Mr. Stigler. I don't understand your sentence.
yiv. PoTVTx. A sale alleged to be discriminatory is a sale typically
of that commoditv so that I don't see that vour distinction, because vou
are only talking about one commodity, is meanmgful m terms of the
practical enforcement of the Robinson-Patman Act which speaks not
to the entire flow of commerce but to finite specific transactions.
Mr. Stigler. Let me say that the formal definition, if you will look
later, is one that rests on prices disproportionate to costs. That initial
definition was presented in connection with an elaborate geometrical
exercise, which I would be delighted to go into, on why discrimination
is opposed by economists for its effects on consumers.
Mr. Pot\t:x. Now, we sit here today, sir, in the aftermath of a rather
vibrant presentation by members of the Neal task force yesterday
in which this hall literally rang with denunciations of the attempt to
suppress price discriminations for the reason that they promoted eco-
nomic efficiency and lower prices or eroded them as their phrase was
used.
Now, I will ask you, sir, to comment on your language from the same
publication. You say, "Price discrimination plays the same role here
as the tariff' plays in the theory of comparative cost. It is an oljstacle —
an obstacle, if you will — "to maximizing utility." Thus you characterize
it as a barrier, an obstacle, playing the same role as a tariff. The Neal
group yesterday characterized these under the table, secret, sporadic
discriminations as somehow good and procompetitive. Would you care
to comment on the seeming difference?
]\Ir. Stigler. I think there is a substantial difference in the two
classes of differences in price, and the Neal task force in its report
talked about persistent and significant price differences. You have two
questions. One is, in the long run is it good or bad to have two sub-
152
stantially different prices for the same quantities and the same quali-
ties to different people. And the answer is, no, it is not good.
The second question is : suppose a market is at the wrong price level ;
it is wrong price level either because cost conditions are changing or
because the bussinessmen got together in a Philadelphia hotel and
fixed the prices. I would like to have those prices come to the new set of
cost conditions or break that tacit collusive system such as we had in
the electrical equipment, and so forth. How do I get to this price flexi-
bility ? Now, to get to it is a problem of, well, what the economists call
the dynamics of the market. How can we create incentives to individ-
ual people to doublecross other people or to go out and move the market
price to a new level which corresponds to competition or to new and
lower costs and the like ?
One way that can happen is for individual firms to begin the game
of nibbling at prices and saying here is a real good customer and he
is less costly to deal with than other customers, so we will give him
a slightly better price, that price then spreads and spreads until finally
the whole price system collapses.
Now, I take it the Neal system is really saying that this latter, infor-
mal, transitory price cutting serves an important use in loosening up
agreements and making markets flexible.
Mr. PoT^^x. The dichotomy between a microstatic and a micrody-
namic analysis is scarcely new in the flow of intellectual history, of
course, Professor, but you will admit that in your analysis on page
81 you did indeed characterize price discrimination as "bad," that
l^eing my word rather than yours, yours being obstacle and the analogy
of the tariff.
Mr. Stigler. I won't pursue it. The main section in that book is
under a headin.'T entitled "Is price discrimination desirable?"
Mr. PoTmx. Yes, sir. And you are referring to the section which
would include page 213, sir, in which you say, "Although discrimi-
natory prices are inefficient" — I stress again the use of that word "ineffi-
cient" — "methods of allocating a commodity among individuals, they
do yield a larger revenue than a single price system." Thus the person
giving the discrimination, to theorize, would make more using ])rice
discrimination, yet in the overall sense you stress that it is inefficient.
Mr. Stigler. Yes.
Mr. PoTvix. And this, of course, is in sharp distinction to the lan-
guage the subcommittee has been hearing about the glorious efficiencies
of the under-the-table deal.
Mr. Stigler. I am not sure I am as enthusiastic for the under-the-
table deal or attaching as much importance to it as the Neal task force.
I have enough trouble defending my positions, I don't have to defend
theirs, too. But on the other hand, I must emphasize that we would
not normally consider as price discrimination in the same sense the
casual, transitory prica difference and tlie permanent price differences.
Mr. PoTpN. Well, yes, sir. Now, as you point out in your book, "The
Organization of Industry," sir
Mr. Stigler. I am delighted with your choice of reading matter.
Mr. Potvin. I won't bring out how many hours of sleep this has
cost trj^ing to understand some of your more rigorous and elegant
models.
153
On page 44, sir, you say that :
It follows that oligopolistic collusion will often be effective against small
buyers even when it is ineffective against large buyers when the oligopolists sell
to numerous small retailers. For example, they will adhere to the agreed upon
price even though they are cutting prices to larger chain stores and industrial
buyers. This is a first empirical implication of our theory. Let us henceforth
exclude small buyers from consideration.
Of course, that last sentence — this is, I need not remind you, after all,
the small business committee — I think that one of the goals over time
of certainly this committee and hopefully the entire Congress is that
the small businessman and small buyers included would not be entirely
"excluded from consideration.'' And I
Mr. Stigler. You are obviously joking. It is all right. Tlie exclusion
was for the purpose of discussing one subject at a time.
Mr. PoTviN. Of course. Professor. But I think that in a less jocular
vein, if I may, you make a point here of the first magnitude of impor-
tance, and that is that the secret price cut will be given to the large
buyer, never to the small buyer. Thus, when you have a situation such
as the one depicted on the chart to your right, the blue or leftermost
bars representing the declining market share of single unit firms
within the grocery store sector, the next section depicting the rising
market share of the giants, which 32 firms have 34.5 percent of the
entire market, that that sort of trend would necessarily be exacerbated
by the use of secret price cuts, would it not, since the large would
always get them and the small would never get them ?
Mr. Stigler. Well, I won't use words quite that strong. I would say,
yes, the distribution of secret price cuts is as you say. No, I don't
think it has much to do with that chart.
Mr. PoTViN. It was a target of opportunity.
Mr. Stigler. I mean by that, first of all, these trends are deep-
seated and in some ways are slowing down. If you ran those charts
back not to 1948 but to 1900, let us say, there would be a substantial
slowing down. So that nothing new has happened. There are no new
reasons for concentration arising out of secret price cutting. They
have been there all along and they should have worked themselves
out long ago. And, therefore, I would assume that any subsequent
grovv'th of the large chain which you have in your original charts
arises from other forces and not from this one.
Mr. PoT\aN. Yes, sir. It was not my intention, Professor^f I gave
the impression I apologize— to attempt to assign monolithic responsi-
lulity for price discriminations to the conditions revealed by that chart.
Yet IS not the central point this, that whate\-er difficulties the smallest
firms are encountering, whatever advantage the larger firms have,
each of those would be added to in its own way by the use of secret
price cuts since the large firms would get them, the small ones would
not, flowing out of a collusive oligopolistic sector ?
Mr. Stigler. The larger ones will get them. Whether they will keep
them or whether they will spread to the rest of the trade is a problem.
But I accept that as a comparative advantage to be large when dealing
with oligopolists that you more likely get preferential terms. This is
an argmnent that is restricted to dealing with concentrated industries,
not competitive industries.
154
Mr. PQT^^N. Yes, sir. Xoat, Professor, it seems to me that another
area in wliich your group is certainly to be commended for their candor
is that in which you state that the', and I am quoting, "The meeting
competition and cost justification defenses have been rendered mean-
ingful these last few years by the Commission."' Yesterday again these
halls literally rang with the denunciations of the esoteric, difficult, well
nigh the impossibility of achieving both those defenses. I thinl^: that
you have been most candid and correct in your statements.
Mr. Smith. Mr. Conte.
]Mr. CoNTE. At the outset. Professor, I want to compliment you on
your fine presentation here this morning, both of you. Yesterday Dean
Neal and Professor Jones of the Xeal Presidential Task Force testified
their belief that the Robinson-Patman Act protects small business in-
terests at the expense of higher consumer costs. Earlier, former FTC