The literature on the benefits of the Robinson-Patman Act for consumer welfare is often contradictory. Professors Roman Inderst and Tommaso Valletti argue that sifting through the nuances of the literature and identifying where and how Robinson-Patman is most effective is essential to any discussions about its revival.
Recent discussions about a possible revival of the 1936 Robinson-Patman Act (RPA) that prohibited suppliers from charging companies different prices for the same goods have renewed interest in the economic implications of price discrimination in intermediate (wholesale) goods markets. For years, enforcement of the RPA has been tepid, most likely because the Supreme Court made it very difficult to bring a case. Inversely, the theoretical literature on input price discrimination has blossomed. Empirical analyses also exist, although they are fewer in number and their conclusions are often limited to particular industries. The debates and literature on input price discrimination are rich, seemingly contradictory, and often ignored by policy concerns. Our review of the literature is incomplete, but we hope to draw from its arguments two important contributions on the implications of input price discrimination for competition among retailers. First, we illustrate the untenability of arriving at assured positions for or against price discrimination based on the diverse and complex assumptions and implications of the literature. In a second step, we discuss which insights from this literature may be of particular relevance to the present debate.
To understand one important counterpoint to the RPA, imagine a manufacturer that offers retailers different terms and conditions justified not solely by the efficiencies of the manufacturer, such as different costs of distribution or economies of scale. In a large strand of the economic literature, these input price differences are due to the manufacturer charging a higher price to the retailer because the retailer can support the higher charge with a strong customer base or its own efficiencies. In other words, the manufacturer tends to charge higher prices to stronger buyers. Imposing the obligation of uniform pricing would effectively protect a more efficient retailer from a manufacturer’s attempt to extract a larger share of these gains.
This picture is quite different from the concerns of powerful retailers persuading manufacturers to sell them merchandise at lower prices that seems to underlie the RPA. Consequently, to adequately capture such practices and concerns, a relevant economic framework for the discussion of the RPA should capture “buyer power” or how more powerful buyers, that is, for instance, ones that act as gatekeepers to particular customers or that command a much larger volume than rivals, extract better deals from manufacturers under input price discrimination.
The literature on input price discrimination also differs widely in how it models contracts between manufacturer and retailers, which produces varying effects on competition in the downstream retailer market. When researchers stipulate sufficiently complex contracts in their models (often in the form of “two-part tariffs,” in which the price of a good or service comprises two parts: a lump-sum and a marginal per-unit payment), the exercise of buyer power may even be inconsequential for downstream competition among retailers. For example, if a retailer with significant buyer power extracts a larger share of total channel profits through a lump-sum payment, in these models these are not passed on to final consumers. As such, the exercise of bargaining power resulting in better terms and conditions does not in this case generate a competitive advantage in the downstream market.
Similarly, if all retailers obtain the same marginal wholesale price, they will operate at a level playing field in the downstream market. In another scenario, a retailer may benefit from reducing the procured quantity, which would even benefit downstream rivals. Again, these scenarios do not seem to map into current debates regarding an RPA revamp.
“This implies that the debate should focus on how mandated uniform pricing shields the weaker retailer who would otherwise be at a disadvantage.”
In practice, more powerful retailers may indeed extract better terms and conditions in various forms, including lump-sum payments such as listing fees. The derived competitive advantage may then be less evident than when a retailer negotiates a lower per-unit wholesale price. How the terms and conditions of contracts vary, particularly by industry, is thus important. Still, to address the potential competition concerns covered by the RPA, it seems suitable to derive insights from models where successful negotiations between a manufacturer and a retailer ultimately lead to a competitive advantage in the downstream market. This implies that the debate should focus on how mandated uniform pricing shields the weaker retailer who would otherwise be at a disadvantage. In such a scenario, various contributions in the literature have identified conditions when consumer welfare increases under uniform pricing.
It is also instructive to note in these models the following dynamic when we (re-)introduce price discrimination. A more powerful retailer manages to extract a lower wholesale price, which in turn allows it to gain market share. If bargaining power derives from larger volumes, perhaps because the retailer can threaten more credibly to turn to a different source of supply, the implication is that rivals lose both market share and are made weaker in their own bargaining with the manufacturer. This pushes up their own wholesale price. We have shown that such a “waterbed effect” is more likely to negatively affect consumer welfare when the strategic advantage of the stronger retailer is already more pronounced and when market shares are consequently sufficiently asymmetric.
However, the imposition of uniform pricing may also set in motion dynamics that are detrimental to consumer welfare. If a manufacturer is not constrained by the retailers’ ability to source elsewhere, the prohibition of discriminatory practices may shield the manufacturer from the demands of a strong retailer, which exerts an upward lift on all wholesale prices. Also, if retailers can no longer leverage their investments in lower wholesale prices, such as through customer loyalty, their incentives to invest will decrease. In a dynamic retailing landscape, such inefficiencies may thwart the more immediate benefits of uniform pricing. When positive market dynamics are mostly preserved under price discrimination, so that even a powerful retailer is subject to future competition by entrants or new retailing formats, the risk that possibly spiraling wholesale price differentials cement market power should also be much lower.
The analysis of a prohibition on price discrimination instigated by “buyer power” should thus be confined to those markets where this is likely to substantially reinforce existing significant competitive asymmetries, where it is unlikely to dampen incentives to invest, and where a powerful incumbent is unlikely to be challenged by entrants or new retail and shopping formats. Such asymmetries and lock-in effects may arise, for instance, in brick-and-mortar grocery retailing when entry or the expansion of smaller rivals is encumbered by zoning requirements. With respect to online retailing, such asymmetries, which are then reinforced by the exercise of buyer power, may arise, for instance, by superior data, consumers’ inclination for single-homing, or from bundling different services.
