Antitrust Litigation & Investigations

Khan's FTC Reportedly Reviving Price Discrimination Law to Investigate What Big Retailers Pay for Cola

In her zeal to reform antitrust, FTC chair seems to forget the lessons of the past.

Beverage aisle at large retail store

Beverage aisle at Pennsylvania Costco March 2023. Photo by Jane Hagy. 

The Federal Trade Commission has reportedly launched an investigation to explore price discrimination in the soft-drink industry, apparently as part of FTC Chair Lina Khan’s effort to reinvigorate use of the Robinson-Patman Act. The Act, a 1936 amendment to Section 2 of the Clayton Act, strengthened the Clayton Act’s limitations on price discrimination. In the 1960’s, the government brought 518 Robinson-Patman cases against one form or another of price discrimination, but prosecutions fell off precipitously in subsequent decades. The last case brought under the Act was in 2000 in the spice industry and before that in the publishing industry in 1988.

Recently, according to the Wall Street Journal, Politico, and other news outlets, the FTC has contacted Walmart, Costco, and other large retail chains to gather information about their purchases from the Coca-Cola Company and PepsiCo Inc. The issue is whether the retail giants are using their market heft to obtain preferential pricing from the beverage companies, putting smaller retailers at a competitive disadvantage. The FTC has not commented publicly on the reports; the companies have denied any wrongdoing.

The National Grocers Association, a trade group representing the independent supermarket industry, previously called on the FTC to investigate “the unchecked power of big box stores and e-commerce giants” that are “squeezing suppliers” and “forcing higher prices and fewer products on independent grocers and their customers.” It is not surprising that such an entreaty would have struck a chord with Lina M. Khan, FTC Chair, in light of her pre-appointment writings, which extolled the virtues of the Robinson-Patman Act for “enshrin[ing] a key tenet: That preserving fair competition requires that we curb the bullying power of size.” It probably comes as something of a surprise to most antitrust practitioners to learn that “curbing the bullying power of size” is a “key tenet” of American antitrust law or competition economics.

As explained by the FTC on its website, “A seller charging competing buyers different prices for the same ‘commodity’ or discriminating in the provision of ‘allowances’ — compensation for advertising and other services — may be violating the Robinson-Patman Act. This kind of price discrimination may give favored customers an edge in the market that has nothing to do with their superior efficiency. Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller’s attempts to meet a competitor’s offering.”

Determining precisely when differences in prices are “generally lawful” or amount to a violation of the Robinson-Patman Act can be challenging, which is the main reason U.S. antitrust enforcement agencies have deprioritized price discrimination prosecutions over recent decades. Price differences can be justified by differences in the costs of serving particular customers (e.g., national, high-volume purchasers) or in order to “meet the competition,” allowing for a plethora of factual defenses and justifications that render price discrimination perfectly lawful.

In practice, Robinson-Patman claims are limited to:

  • Goods, not services, and purchases, not leases;
  • Goods of “like grade and quality”;
  • Sales that affect interstate commerce; and
  • Cases involving injury to competition.

The Supreme Court has read the last proviso into the law by holding that price discrimination prosecutions under the Act should be evaluated in line with broader antitrust policies, a point made clear in Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006), where the Court counseled that Robinson-Patman claims should be assessed in the context of the policy goals of other antitrust laws. “Mindful of the purposes of the Act and of the antitrust laws generally, we have explained that Robinson-Patman does not ‘ban all price differences charged to different purchasers of commodities of like grade and quality,’” the court wrote. Robinson-Patman proscribes “price discrimination only to the extent that it threatens to injure competition.”

The Robinson-Patman Act was last invoked by the government 23 years ago in 2000 in a case against McCormick & Company, the world’s largest spice company. McCormick agreed to settle the FTC’s charges that it violated the Act by giving substantial discounts to certain retailers but not others and agreed to discontinue the practice. Before that case, the Act was invoked in a 1988 case against the book publishers Simon & Schuster and Random House.

FTC Chair Khan has signaled her interest in resuscitating the Robinson-Patman Act as part of a modernization of sorts of U.S. antitrust law. Writing in a 2014 opinion piece for CNN whilst a policy analyst at the New America Foundation, Khan wrote that Robinson-Patman was “a key piece of American history” that could be used to curb the purchasing power of Amazon, the nation’s largest bookseller, which had been pressuring publishers for lower wholesale prices and penalizing those publishers that did not comply. Khan’s infatuation with Robinson-Patman featured prominently in her widely read and controversial 2017 Yale Law Review article, Amazon’s Antitrust Paradox, the student Note credited with catapulting Khan to her position at the top of the Commission.

Khan wrote in her Note that Yale Law economist Ward Bowman and controversial Supreme Court nominee Robert Bork, author of The Antitrust Paradox in 1978, influenced government enforcement to deprioritize Robinson-Patman and the related predatory pricing doctrine. Khan opined that the decline in FTC-initiated Robinson-Patman Act cases reflected the belief of these writers that these cases were of little economic concern, noting that Bork’s appointment as Solicitor General “gave him a prime platform to influence the Supreme Court on antitrust issues and enabled him ‘to train and influence many of the attorneys who would argue before the Supreme Court for the next generation.’”

Of course, Khan has earned critics of her own, such as one commentary titled, “The Flawed Analysis Underlying Calls for Antitrust Reform: Revisiting Lina Khan’s ‘Amazon’s Antitrust Paradox,’” by Robert D. Atkinson and Michael R. Ward for the Information Technology and Innovation Foundation. Khan had argued that the failure to consider Amazon’s conduct as anticompetitive allowed it to become dominant across multiple lines of commerce and the way to make things right is to reform antitrust. “Unfortunately, a careful assessment of Amazon’s conduct does not support Khan’s conclusion,” Atkinson and Ward wrote.

Perhaps even more unfortunately, the Atkinson-Ward critique is marred by a misplaced faith in the ability of markets to self-correct, special treatment for “platform” industries, and the narrow price-and-output perspective of the now-outdated Chicago school thinking of Bowman and Bork.

The real problem lies in Chair Khan’s apparent inability to appreciate that the Commission cannot bring a case just because economic principles may dictate that government intervention can improve the market outcome. That is not enough. Although the legal standards established by the courts have significant economic content, they must first comply with American standards of due process and legal procedure.

A fresh approach to price discrimination would carefully balance what are sometimes the opposing forces of legal propriety and better economic outcomes, a goal that cannot be achieved simply by taking Robinson-Patman out of mothballs, dusting it off, and going after the prices big retailers pay for Big Cola’s products as a test case. Yet, right or wrong, that is just what Chair Khan’s FTC may be preparing to do.

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