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ProblemManagement decision to temporarily lower its prices in Paper

Words: 2825, Paragraphs: 75, Pages: 10

Paper type: Essay , Subject: Business

Problem:

Management decision to temporarily lower its prices in a specific geographic area, to a point just below its competitor’s break-even price point and effectively eliminate it as a meaningful competitor. A commercial intelligence provided an accurate estimate of the break-even, pricing point of the competitor.

The expected task was to perform brief research on the Robinson-Patman Act of 1936 (USA law), to ascertain the application and understating of Robinson-Patman Act of 1936 in relations to legal, ethical and economic-social implications.

This paper presents the research onto the Robinson – Patman Act, the implications of the law on the intelligence about the competitor and a presentation on three areas affected the application of this law and concluding remarks on the impact this law has over and above the three that are affected by it.

Keyword/s: Robinson-Patman Act of 1936; legal ethical and economic-social implications.

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Research on Robinson-Patman Act of 1936

The Robinson-Patman act is important for a fact that it prevents the very unfair competition in the market amongst the small and big giants of business. It is also argued that there are some questions that many businessmen and attorneys were not table to answer regarding its application (Coogan, 1964).

He argues that the Act has limitations while defining the effects of price discrimination. Robinson-Patman act portrays a shift from previous anti-trust legislation, through which it substitutes the impact of certain actions as being the reasons for condemning that action rather than what the actors had intended. In contrast, the Sherman Act was viewed through reasoning lens and if a company has a size or certain power was not necessarily an offense if that position has been secure through unfair methods (Coogan, (1964)

But with Robinson-Patman act some methods that are legitimate are condemned not solely for the intent but rather for a threat that it might lead to monopoly.

According FTC, price discrimination is generally legal if they reflect a different cost of dealing with different buyers or when a seller want to meet a competitor’s offering but when price discrimination is done based on the religion, gender, race, nationality or when against the anti-trust or price fixing laws, it is illegal (Shpanya, (2014).

The act which is also known as the Anti price-discrimination act. The supreme-court has clearly state that violation under Robinson-Patman act must be weighed against the broader antitrust policies. To test the legality of the claim it must meet several conditions (“Price Discrimination: Robinson-Patman Violations”, 2019) such as;

• The act is applying only on to commodities but not services and to purchases but not leases.

• The goods must be of like “Grade and quality”.

• A likely injury to the competition. Whoever so must file a case against the price discrimination must show the actual harm to the business.

• Sales are to be “in” the interstate commerce, which means the process of transaction whether in terms of money, goods, transportation of people will be between different states.

Robinson-Patman Act of 1936 is a United States federal law designed to protect small retail shops against competition form chain stores by fixing a minimum price for retail products. Robinson-Patman Act was introduced to prevent unfair competition and this law was amendment to the Clayton Antitrust Act of 1914 (Wikipedia, 2018).

The law specifically prohibits different prices being charged to different buyers, based solely on that fact that the buyers are different. The act is supposed to help smaller buyers who may be at a competitive disadvantage when it comes to competing against larger buyers who buy larger quantities (Black, 2019).

Section 2 of Clayton’s act which was aimed at price-cutting practice of large trusts to take advantage over small competitors has gaping loophole which made it exceedingly difficult to prove a case of price discrimination. During the great depression of 1930’s, the Congress forced to act on the practices of large grocery chains and their immense buying power to pry out price discounts from food processors and wholesalers. As a result, the small shops began to fail. In 1936, congress enacted Robinson-Patman act. Although prompted by concern about how large buyers could use their purchasing power, the act in fact places most of its restrictions on the pricing decisions of sellers Saylor Academy. (2012).

Robinson-Patman act applies only to sales of commodities. A lease, a rental or a license to use a product does not constitute a sale, a rental, or a license to use a product does not constitute a sale hence price differentials under one of these arrangements cannot be unlawful under the act. The Robinson-Patman act protects inefficient competitors rather than consumers. The act shifts the benefit of antitrust law from consumers to less efficient competitors (Sokol, n.d).

Federal Trade Commission (FTC) is the enforcing agency and in the first thirty-four years of the Act (1937-71), the FTC issued almost 1400 Robinson-Patman complaints (Sokol, n.d).

There is a longstanding criticism for Robinson-Patman from academics and practitioners. Many people argued for the need to reform the act. Vast majority of the academic community have called for repeal of Robinson-Patman (Sokol, n.d). Even with so much of criticism, Robinson-Patman act survived but FTC has scaled back its enforcement of the law over the years (Wald, D. L. (2014).

Application of law based on commercial intelligence found

The business intelligence on the competitor legitimately or illegitimately obtained challenges the statutory of America based on the adopted Robinson-Patman Act of 1936.

There is a requirement to determine and conduct an in-depth analysis of the legislation. Is there a law that this decision has somewhat compromised? The decision to “temporarily lower its prices (in just that specific geographic area) to a point just below your competitor’s break-even price point and effectively eliminate it as a meaningful competitor” (case study, par 2)

It is common cause and unwritten rule of thumb that business survives on studying its competitor which is similar to how an athlete could gain advantage over its opponent by carefully studying the opponent’s tactics to win. One might argue that, business or an entrepreneur exists to outdo the competitor as the competition for scarce resources remains.

The obtained intelligence could be assumed as having been provided by a competitor’s insider, who is defined as “one person armed with price-sensitive, non-public (confidential) information, concludes a transaction to the detriment of persons or other innocent and unwitting investors”. (Chitimira, H. & Mabina, T.T. 2019, p 492-493).

The sample of Durnev, A.A. & Nain, A.S. (2004) conducted of “2,827 firms from 21 countries” provides guidance on the effects of introducing insider trading laws to protect uninformed investors, as per the study counties have introduced regulations to restrict the illicit information gathering. Based on their study the confirmed findings were that “insider trading regulation is less effective in reducing private information-based trading if investor protection is poor.”

The objective to make money and deliver equity to its shareholder remains. The Company Law however guides the confines, within which business must conduct itself and harness competitive practices by ensuring business toe the line.

A decision by legislators to preserve “economic liberty “was aimed at ensuring free and unfettered competition as the rule of trade” with the Sherman Act of 1890. This gave rise to endorsing of the Clayton Antitrust Act of 1914. The above detailed “prohibitions against various forms of anticompetitive price discrimination”. The price discrimination was not illegal under the Clayton Act of 1914, rather it was deemed illegal if the determination of such discrimination was to establish a monopoly or substantially lessen competition.

The two Acts addressed and guided on the breaking up and prevention of monopolies. Under the Clayton Antitrust Act consumers were afforded the rights to file civil lawsuits, where they could sue for damages resulting from unfair pricing practices. An emphasis on the importance of prevention of monopolies or combinations in restraint of trade amongst producers.

The decision and practice is referred to as predatory pricing, where a business absorbs temporary, short-term losses which it deems essential in driving out its local competitors. The outcomes of these decisions come in twofold, one competitor is eliminated and two the large business secures profit margin. (britannica.com/topic/Robinson-Patman-Act, par 2-3).

Literature seems to confirm that this practice is on the main prevalent amongst larger businesses or enterprises than the smaller ones. Large business receives substantial discounts from their wholesale suppliers, where there is no reciprocal gesture to smaller businesses. Their inability to offer products at competitive prices negatively affects their operating revenues thus forcing them out of the market. (britannica.com/topic/Robinson-Patman-Act, par 3).

The legislation adopted into Federal Law in 1936, coined anti-price discrimination legislation as it shared commonalities with Sherman Act of 1890 continues to have an effect on business, eighty years plus after its promulgation on the predatory pricing or price discrimination. The act barred “any individual or business engaged in regional commerce to sell the same products to different consumer groups, with the goal or effect of lessening competition, or creating a monopoly.” (legaldictionary.net/robinson-patman-act, par 2).

The Robinson-Patman Act expanded on the existing legislation on the analysis of predatory pricing policy, where an expansion on the shortcomings were covered thus providing a clearer understanding of The Sherman and Clayton Acts Section:

– “Prohibits price discrimination to avoid causing injury to competition on the market;

– Provides affirmative defence to this discrimination meaning that sellers have a defence to the discrimination if they offer products at a lower price to meet an equally low price offered by another seller;

– Limits or prohibits certain brokerage fees;

– Prohibits sellers from offering different prices to competing customers;

– Prohibits sellers from promoting the resale based on discriminatory prices and

– Prohibits sellers from encouraging buyers to violate the Act”. (legaldictionary.net/robinson-patman-act, par 3)

This was an outcome of the Federal Trade Commission established which provided input into price discrimination.

The cases shared below had gone through the Supreme court and served as a lesson learned after the passing into law and promulgation of this legislation:

• FTC v Morton Salt

In the 1940s, the Federal Trade Commission found Morton Salt to be in violation of the Robinson-Patman Act when it sold its “Blue Label” salt at a discount purportedly available to all customers who purchased a certain quantity. In truth, the discount was only made available to five large chain stores that purchased in sufficient quantities to obtain the discount.

Morton Salt took the decision to the U.S. Supreme Court in 1948, claiming the discount was standard and available to all customers. The Supreme Court upheld the FTC’s decision, stating that the Act makes it clear that “Congress considered it to be an evil that a large buyer could secure a competitive advantage over a small buyer solely because of the large buyer’s quantity purchasing ability.”

• Lewis v Texaco

In 1976, the FTC heard another case pertaining to the Act when 12 Washington Texaco retailers sued the Texaco corporation. The plaintiffs claimed that Texaco, which sold gasoline at one price to wholesalers and another price to retailers, continued to offer the discount price to wholesalers that went into the retail business, giving those retail stations an unfair price advantage. In 1990, the Supreme Court upheld the FTC’s decision on this matter, awarding the plaintiffs nearly $450,000 in damages.

The attention, discussions, papers (legal, business & economics) reflects research that is for or against this legislation. One particular economist, Martin, S (2007) in his paper “the goals of antitrust and competition”, sees this policy document as “use of the economic welfare standard which is characterized by judicial application that is inconsistent with mainstream economics”. He draws parallels between American courts and the European Courts on competition where he sees the adoption anti-trust policy and competition policy, as an “explicit welfare evaluation”. (Martin, S. (2007), par 2)

There are some truths in his swipes, where he cites Sherman Act as “Magna Carta (a charter of liberties) of free enterprise”. The Bill of Rights, which he sees as a protector of fundamental personal freedoms, and that this law is an illusionary preservation of economic freedom and free enterprise. (Martin, S. (2007), par 3). My disagreement his sentiments is that for some business regulation is required as free trade infringement on the Bill of Rights of others.

Kenton, W. (2018), in his digital article on Robin-Patman Act, provides an easier and latest review on what the Act sought to achieve which is:

– Control discrimination in price on at least two consummated sales from the same seller to two different purchasers

– Sales must cross state lines

– Sales must be contemporaneous of “commodities” of like grade and quality sold for “use, consumption, or resale” within the United States

– The effect must be to “substantially to lessen competition or tend to create a monopoly in any line of commerce”

The case study points to the decision and request which a predatory pricing taunt, in my opinion is an unethical request. The research conducted by Petrick, Cragg, & Sa?udo, (2011) points, to how business ethics has expanded to other facets, which is not limited to accounting ethics but includes, environmental, social and moral ethics.

The advice to discontinue from the practice would be argued based on business intelligence and illicit information received. The information was sensitive and privileged and should be treated as such, taking advantage of the situation will require consistent application of this unethical conduct which would damage the business’s reputation and future trading.

The business could find itself having to deal with information leak or a scandal as nothing stays hidden. The fundamental truth is that conducting one businesses in an unethical manner has serious repercussions especially to the sustainability of the business.

PowerPoint Presentation

Slide 1- Legal implications

• The Robinson-Patman Act was enacted in 1936 to limit the buying power of big retail chain stores.

• The legislation came about to combat unjust commerce practices in which chain stores were permitted to purchase goods at lower prices than other retailers.

• It was the first enactment to attempt to prohibit unfair price discrimination. It requested that the vendor offer the same price terms to customers at a given level of trade.

• The act which is also known as the Anti price-discrimination act. The supreme-court has clearly stated that violation under Robinson-Patman act must be weighed against the broader antitrust policies. To test the legality of the claim it must meet several conditions (“Price Discrimination: Robinson-Patman Violations”, 2019) such as;

• The act is applying only on to commodities but not services and to purchases but not leases.

• The goods must be of like “Grade and quality”.

• A likely injury to the competition. Whoever so must file a case against the price discrimination must show the actual harm to the business.

Sales are to be “in” the interstate commerce, which means the process of transaction whether in terms of money, goods, transportation of people will be between different states

Slide 2 – Ethical implications

• Utilizing criterions of allocative efficiency, with consumer benefit the target, we have argued that the Robinson-Patman Act has suffered both from inadequate economic theory and outright anti-economic biases; has been performed with no socially rationalistic system of priority; and has produced a group of scientific information that is relatively insignificant and sometimes wrong and implied definitions of competition and efficiency that are confusing to the body political.

• Federal Trade Commission (FTC) is the enforcing agency and in the first thirty-four years of the Act (1937-71), the FTC issued almost 1400 Robinson-Patman complaints (Sokol, n.d).

• According FTC, price discrimination is generally legal if they reflect a different cost of dealing with different buyers or when a seller want to meet a competitor’s offering but when price discrimination is done based on the religion, gender, race, nationality or when against the anti-trust or price fixing laws, it is illegal (Shpanya, (2014).

• There is a longstanding criticism for Robinson-Patman from academics and practitioners. Many argued for the need to reform the act. Most of the academic community have called for repeal of Robinson-Patman (Sokol, n.d). Even with so much of criticism, Robinson-Patman act survived but FTC has scaled back its enforcement of the law over the years (Wald, D. L. (2014).

Slide 3 – Economic-Social implications

• Above all, by enacting pervasive statutory risks for vendors’ competitive movements, Robinson-Patman conflicts the essential premises trust policy,

• It gives conflicting antitrust references and stimulants to business and besmirches the clarity of direction which is fundamental for the dings and prop of antitrust by the business section.

• This can be observed especially in an age of price rise and declining purchasing legal prohibit on price deducts or price discrimination creates high social and high risks of damage to consumers.

• If industriously considered at all, least such a legal prohibit should carefully concentrate on the claimed abuse, compulsion of discriminatory pricing features by big purchasers, particular influenced industries, instead of jeopardizing price variations vendors everywhere.

• Martin, S (2007) in his paper “the goals of antitrust and competition”, sees this policy document as “use of the economic welfare standard which is characterized by judicial application that is inconsistent with mainstream economics”. He draws parallels between American courts and the European Courts on competition where he sees the adoption anti-trust policy and competition policy, as an “explicit welfare evaluation”. (Martin, S. (2007), par 2)

About the author

This sample is done by Scarlett with a major in Economics at Northwestern University. All the content of this paper reflects her knowledge and her perspective on ProblemManagement decision to temporarily lower its prices in and should not be considered as the only possible point of view or way of presenting the arguments.

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