"The history of the Robinson-Patman Act actually begins in 1914, when section 2 of the Clayton Act became the first federal statute that expressly prohibited certain forms of price discrimination. In 1936, section 2 of the Clayton Act was amended by the Robinson-Patman Act, and it became a far more complex statute. It is important to consider the context in which the amendments were adopted. In 1936, Congress believed that large firms could dominate markets through predation and other forms of economic warfare directed against smaller firms, and felt that "power buyers" such as large retailers could use their market power to extract price concessions from manufacturers and other sellers that were unavailable to their smaller competitors. As the Commission has stated, the major legislative purpose behind the Robinson-Patman Act was to provide some measure of protection to small independent retailers and their independent suppliers from what was thought to be unfair competition from vertically integrated, multi-location chain stores. The Supreme Court has summarized the objectives of a main section of the Robinson-Patman Act in the following way:

To that end, reduced to their essentials without their exceptions -- and provided that a number of jurisdictional requirements are satisfied -- section 2(a) of the Act requires sellers to sell to everyone at the same price, while section 2(f) of the Act requires buyers with the requisite knowledge to buy from a particular seller at the same price as everyone else. Sections 2(c), 2(d), and 2(e) -- as elaborated by the Commission through the FTC Act -- prohibit sellers and buyers from using brokerage, allowances, and services to accomplish indirectly what sections 2(a) and 2(f) directly prohibit."^*

The survival of small retailers depends on their ability to compete with the big retailers. While, our industry no longer has any large chains of general performance stores, we do find a huge disparity in competitiveness between mail order retailers and small independent stores. There are lots of "A" movers from top product lines being sold in magazines at or below WD price. When the big mail order company is selling a fast moving item below your cost, it really sucks; and this is the predatory pricing that the Robinson-Patman Act bans. There are ways by which manufacturers can try to level the playing field for you and that's what I want to discuss here.

Years ago many states, such as California, had "Fair Trade" laws under which manufacturers could set and enforce minimum retail selling prices for their products. The big companies could make larger profits; but they couldn't undersell the small retailer. Then consumerism came along and this form of price fixing was declared bad for the consumer and therefore banned. The little guy wasn't going to be allowed to compete. Manufacturers are not allowed to fix retail selling prices and the courts are continuing to attack any method by which manufacturers try to do so.

However, the Robinson-Patman Act had another trick that would still allow the small retailer to be competitive in a 2-step distribution system. The granting of a larger discount to distributors than that granted to direct buying retailers is legal under the Act as a "functional discount." In theory the distributors could then buy at a deep enough discount that they could sell to small retailers at around the same price paid by the large retailer who buys direct from the manufacturer. Since the distributors provide the functions of warehousing and distributing the manufacturers product to retailers, the distributors are eligible for that extra discount. As stated earlier, businessmen competing at the same "functional level" should be able to compete equally. I believe that the first application of functional discounts in our industry was at Allison Performance Electronics (now Crane Electronics) in 1987 when I created a tiered pricing system based on this discount method. Not long after that, Bob Franzke instituted a functional discount system at NOS and many other manufacturers have since followed. Functional discounts are a fully legal way to maintain relatively equal competition at different levels of the distribution channels.

Another method employed in the performance industry over the last decade is Minimum Advertised Price (MAP.) In many MAP programs the manufacturer agrees to give the buyer an extra discount, called an advertising allowance, if the buyer agrees not to advertise the manufacturer's products below a set retail price level (often "jobber" price or some percentage above jobber.) However, this practice is probably illegal. According to the FTC a manufacturer can legally require that MAP be used in advertising done by the retailer provided that such requirement is limited to cooperative advertising that is paid for in whole or in part by the manufacturer, the retailer is not required to adhere to the MAP when using its own funds to advertise the manufacturer's products, and the retailer is not forced to sell the manufacturer's product at the prices fixed by the manufacturer or prohibited from selling at discount prices. Providing discounts across a product line as an ad allowance isn't really a cooperative ad program and MAP restrictions could be considered illegal price fixing.

The use of MAP for retail price maintenance is definitely illegal price fixing. The music industry once used MAP to stabilize and then raise retail CD prices after they had been dropping from price wars. In May of 2000 the Federal Trade Commission issued a ruling that the music industry's use of MAP was illegal but did not assess penalties beyond discontinuing the illegal MAP programs. In August that year 28 states filed suite against 5 music publishers and 3 large music retailers seeking damages for all the consumers who had to pay higher CD prices due to the MAP programs. The suit expanded to include 43 states and the music industry lost to the tune of $143 million in cash and CDs.

The performance industry is rife with pricing practices that are illegal or, at the very least, open to plausible legal challenge. Many manufacturers have unpublished discounts that are not offered to all customers. MAP programs are used solely for retail price maintenance just as in the music industry. Sometimes pricing is based purely on the quantities purchased. Extra discounts are granted as ad allowances when the manufacturer has no formal co-op or ad support program offered to all customers. Advertising money (such as payment for catalog pages or individual ads) through negotiation rather that a set program offered to all. These, and many other practices, leave manufacturers open to legal action and keep our industry from having a level playing field.

If you are a manufacturer you should have your pricing practices reviewed by a knowledgeable antitrust attorney. Lots of smaller companies use a single attorney for all of their business needs; however a specialist in the Clayton, Robinson-Patman, and Sherman Acts and related case law is a much wiser choice. It's a razor thin edge between illegal retail price maintenance and supporting market competitiveness. For example, a functional discount given to a distributor may well be illegal if that distributor also has a retail operation which uses the extra discount to engage in predatory pricing that damages other retailers. You could well find yourself open to individual or class action suits through a whole variety of your selling and pricing practices. Some pricing practices will hurt you even if you are not legally challenged. I've watched many manufacturers lose their margins as one special deal leads to another in a downward spiral of discounting.

If you are a retailer and find you can't compete equally, start doing your homework. I don't encourage lawsuits except as a last resort. There are too damn many lawsuits in American society as it is. When you find your business failing because of predatory pricing you should, of course, consult an attorney. If a proper investigation reveals that illegal manufacturer pricing policies are to blame, then use that attorney to negotiate a solution rather than running off to court. Negotiation is a lot cheaper than a lawsuit and everyone can usually remain friends. You may want to search out other retailers with the same problem and negotiate as a group. Don't bother with one time or short term sales. Your remedy lies in the fact that your business was damaged by illegal pricing over a longer period of time. Besides, there's nothing older than yesterday's newspaper. Consumers are used to things varying in price from time to time through special sales. When you are making buying decisions, try to favor manufacturers who use functional discounts. Functional discounts are the only legal way I know of to foster competition at the retail level. Those companies who use it are making a legitimate effort to provide a level playing field for you to compete on and are concerned about the extinction of any segment of our business. The market pressure you apply by favoring manufacturers with functional discounts is a very powerful thing.

Unfortunately, over the years I have not been able to find a resource to guide me in setting pricing policies. I've had to do the research myself and pay large fees to attorneys for advice and review. It's surprising that the Federal Trade Commission and industry trade associations haven't produced "white papers" for guidance. If you are aware of such resources, please let me know so that I can pass that information along to other readers.

Your local store is important to consumers, distributors, and manufacturers. I know of at least 3 retailers doing more that $100 million in sales each year and their negotiating power is an awesome thing. Pandering to those huge retailers with pricing that leaves you uncompetitive has been illegal in the US for almost 100 years. As an industry we need to clean up our act before local retail dies out or, worse, the government comes in to do it for us.

*"The Robinson-Patman Act: Annual Update", Donald S. Clark, Secretary Federal Trade Commission, before the Robinson-Patman Act Committee Section of Antitrust Law Forty-Sixth Annual Spring Meeting