four cents on every head of lettuce sold in the (ii) Inhibiting More Efficient Forms of Distribution The Robinson-Patman Act creates great difficulties for sup pliers who operate "dual distribution" systems by which sales of goods are made directly to retailers in some instances, and in others to middlemen, such as warehousers, who then resell to retailers. Integral to such system is the "functional discount," which is a discount granted to different types of middlemen, such as wholesalers, and is designed to compensate the middlemen for assuming various distribution functions. The Robinson-Patman Act permits such discounts as long as each businessman performing a particular function gets the same discount for the performance of such function, and so long as the discount reflects the purchasers' relative positions in the chain. Cases involving functional discounts are often quite complex, sometimes involving one firm's sales to direct-ship retailers, wholesalers, and integrated wholesaler-retailers. The reprinted diagram from a court decision in one such case is illustrative (see next page). A difficulty with the Act's regulation of functional discounts is that, with respect to purchasers on the same functional level, a discount reflecting a manufacturer's cost saving will be upheld; discounts reflecting the value to the manufacturer of purchaser's service will not. Thus, the Commission has struck down the granting Such a test obviously discourages buyers from a finding of competitive injury. Moreover, those enforcing the Act determine the functional level of a "dual function" purchaser by reference to the function he performs "furthest" from the manufacturer. Under this rule, an inte grated wholesaler-retailer, for instance, is considered a retailer. Consequently, a discount granted to the integrated buyer must be justified by cost savings to the manufacturer, vis-a-vis its sales to other retailers. On the other hand, discounts to single-function wholesalers need not be cost justified and are lawful as long as they reflect an appropriate allowance to the wholesaler for performing the wholesaling function. Thus, the independent wholesaler is often entitled to a larger discount than the integrated purchaser. A singularly perverse impact of this feature of the Act is its impairment of the ability of small retailers, particularly in the 156 Mueller Co. v. FTC, 323 F.2d 44 (7th Cir. 1963), cert. denied, 377 U.S. 923 (1964). 157/ Prepared Statement of Paul H. LaRue, Subcommittee Hearings, pt. 2 at 229. An automotive parts industry, to replace their reliance on independent middlemen by establishing cooperative wholesale operations. example of this effect is found in the Alhambra Motor Parts case. 158/ There a cooperative in its warehouse capacity bought large parts inventories on its own account, stored them at its own risk, and filled members' orders out of the cooperative's inventory. The Federal Trade Commission ruled that since the cooperative was owned by retailer members, any discounts to the warehousing cooperative would be considered as discount payments to the retailer members. The Commission, therefore, ruled that since the retailers were in competition with other retailers not members of the cooperative, any discount to the cooperative would have to be cost justified. After analysis, the Commission rejected the justification offered and struck down the discounts. The Commission's ruling did not affect the size of discounts granted to the independent wholesaler-distributors, because these distributors were not in competition with any of the retailers. As a result, the decision guaranteed the continued existence of the independent wholesaler-distributors: without the ability to get the same discounts as the independent wholesalers, the cooperatives owned by small retailers were placed at a competitive disadvantage. It is not surprising, then, that the association representing the independent 158/ Alhambra Motor Parts Inc., 68 F.T.C. 1034 (1965). wholesaler-distributors submitted a statement to the Review Group in favor of preserving Robinson-Patman.159/ (iii) Inhibiting Backhauls Inefficiency in distribution also results from the Act's restraints on "backhaul allowances" in the food and other industries. Many manufacturers sell their merchandise on a delivered price basis: manufacturers charge the same price to all purchasers in a given geographical region without regard to actual differences in transportation costs for each customer. Under this system, a selling price of a good includes the price of manufacture plus the average cost of transportation incurred in selling to all the supplier's customers. The use of delivered pricing permits a food manufacturer to remain price competitive in a particular region by removing any disadvantage in selling to retailers who are relatively more distant from the manufacturer's warehouse than from the warehouse of the manufacturer's competitors. Many grocery chains and cooperative wholesalers operate large private truck fleets to serve their affiliated stores. After delivering goods to retail outlets, these trucks may return empty near the manufacturer's points of distribution. It would save both fuel and money for these trucks to pick up goods from the manufacturer's warehouse on the way back, thus eliminating the need for the manufacturer to hire a common carrier to deliver his goods to the warehouse of the chain or coop. Moreover, if a common carrier is hired, its 159/ Statement of Basil Mezines, DCRG Hearings. His statement indicated that a benefit of such rulings was that, in order to remain in business, any cooperative of retailers had to be open to all retailers in an area. Statement at A-13. |