4. The Assumption That Price Differentials Should Primarily, If Not Exclusively, Occur As A Result Of Different Costs The next faulty assumption underlying the Robinson-Patman Act is that costs are the sole determinant of prices. In the real world, companies face a variety of fixed costs, such as debt service or depreciation, research and development expense, and many forms of advertising, which do not vary with the amount of the commodity produced. In producing particular goods they also incur joint costs, such as general corporate overhead, and the cost of purchasing raw materials (such as crude oil) which may vary according to the total output of an industry, but which cannot be assigned to any one product line. Most economists agree that the relevant price setting costs are the "marginal" costs of producing a particular good. By pricing on the basis of marginal costs, goods can be produced in a manner which makes the most efficient use of society's resources because the cost of goods is related to the expenses incurred in actually producing those goods. Economists find, moreover, that there is no correct way of allocating joint and fixed costs. Under some circumstances, the most efficient way to cover those costs by sales prices is to allocate them according to the relative demand characteristics of each market, i.e., allocating those costs to customers who are more willing to pay for them. Additionally, in times of slack demand when there is an excess of productive capacity the total revenue from the sale of a product may not be able to cover the fixed or joint costs involved In such cases, it is desirable that a manufacturer avoid in its production. bankruptcy or other financial difficulties by pricing goods in a manner which would help him minimize his total corporate loss. All of this means, therefore, that in a complex industrial society like ours, where industries are not in a perfect state of equilibrium of demand and of productive capacity, one would expect some discrimination among different customers and different geographical areas. Such discrimination would prevail even though there is absolutely no desire on the part of any buyer to achieve a monopoly in a particular market or to drive competitors out of business. Such non-systematic discrimination is both rational and desirable from the standpoint of the health of individual firms and the consuming public. In the real world, the competitive businessman is always seeking out new business and new customers. When faced with the opportunity of making a sale, the competitive businessman basically asks himself one question: "Can I make money on this transaction?" In negotiating the price for the transaction, the ordinary businessman is not concerned with, nor does he really know, whether the sale in question would cover what an accountant would determine to be the fully allocated or joint cost of the transaction. While he knows that all his company's sales revenue must cover all its costs, for any particular transaction his company need only receive more additional revenue than it will incur additional expenses. Furthermore, the only cost information which a businessman usually has is that for the prior accounting period. In today's inflationary economy, he may only be able to guess at his future costs of production or inventory replacement. In deciding what price to offer under such uncertain conditions, the businessman must also consider whether the proposed purchase will be of sufficient volume to allow him to increase production capacity or to take the risk of signing a long-term supply contract at perhaps a lesser price to him. But the decision to make the sale at a given price is really, to the businessman, a short-run proposition. 284/ If the businessman hesitates too long in order to make detailed analyses of the effect of a particular transaction on his longrun financial prospects, he may find the prospective purchaser has left for another supplier more ready to meet his immediate needs. commentator has noted: 285/ As one Contrary to an important legal premise of the Robinson-Patman Act, price variations are not causally based on costs, but on the interplay of manifold economic pressures Indeed, prices which influence sales, hence production volume, which in turn governs the efficiency of the firm's plant utilization may determine the unit cost of the ultimate output more directly than vice versa. Similarly: 286/ - [T]he illegal prices with which the Robinson-Patman Act deals are short run; the law mistakingly attempts to apply to such prices a long run basis of price determination [i.e., costs]. . . . The cost theory of pricing which underlies some parts of the act is antediluvian. Neither in theory nor in practice does cost have the price-making role assigned to them under this law. It is not surprising, therefore, that the attempt to use this archaic approach to pricing has been accompanied by such a bewildering number of difficulties. 284 285/ 286/ The possible exception is the signing of a long-term supply cost contract. F. ROWE, PRICE DISCRIMINATION UNDER THE ROBINSON-PATMAN ACT 31 Backman, An Economist Looks at the Robinson-Patman Act, 17 A.B.A The hallmark of the successful businessman is the way in which he responds to the short-run pressures governing the relationship between his company, his suppliers, and his customers, while at the same time assuring his firm's long-term financial success. In a freely competitive situation, the businessman has the flexibility needed to cope with the dynamic forces of the market place. A statute like the Robinson-Patman Act, which fails to reinforce such flexibility, necessarily limits the ability of businessmen to utilize their skill as entrepreneurs. 162 The sponsors of Robinson-Patman assumed that prices for large and small buyers are set at the same time and may be compared as contemporaneous transactions for the purpose of determining the existence of a discount. Such a perception is again consistent with the fact that the Act's major beneficiaries, wholesalers and retailers in the food and drug trades, were businesses which bought at non-negotiated list prices or current market prices. In the more complex economic relationships of today's economy, particularly in transactions between large organizations, goods may be purchased under long-term contracts. Such contracts may contain various escalator clauses relating to certain inflation rates 287/ or other changes in the cost of basic inputs, similar goods, or changes in the quantity of goods actually delivered under the contract. contract of several years duration: 288/ Under such a A series of payments by the retailers would be called 287/ See Laing, Spurred by Inflation, More Contracts in U.S. Hinge on Price Indexes, WALL ST. J., March 10, 1976, at 1, col. 6. 288/ Testimony of William F. Baxter, DCRG Hearings, Tr. 49-50. |