only 2 manufacturers would be enough to meet the statutory competition test. Certainly, the Court in defining the market for color film as distinct from black-and-white film was more antitrust-minded than another court which recently defined the market for cellophane.22

23

In the long-playing records industry, says Professor Herman, fair-trade pricing was upheld despite the fact that 4 firms produced 79 percent of the 1947 output. Unfortunately, however, Professor Herman fails to point out that LP's did not hit the market until 1947, that plaintiff Columbia Records never fair traded the conventional 78-RPM records, and that it did not begin to fair trade LP's until September 1950. Hence, the 1947 concentration statistics are of rather limited significance, particularly in view of the Court's finding that by 1951 there were 68 companies manufacturing long-playing records-companies which used "the same advertising mediums to reach customers in the same market" and which competed "in the sale of records of the same general class, such as symphonic records, classical soloists, and popular records. Many prominent artists, too, have made recordings for different companies, which recordings are now available to the public." " By 1953, we might add, there were probably more than 100 manufacturers of LP's and their competition was so intense as to contribute to a drastic reduction of the industry's entire price structure. The automatic lighter case cited by Professor Herman, Ronson Patents Corp. v. Sparklets Devices, Inc.,25 was a patent infringement action wherein defendants counterclaimed charging plaintiffs with illegal monopoly and conspiracy in violation of the Sherman act. The fair-trade practices of Ronson were never a central issue in the case, and the Court never mentioned the "free and open competition" clause. The Court's holding that the defendant had not established the existence of a monopoly, or damage resulting from plaintiff's actions, foreclosed the fair-trade issue.

Sig

Finally, with respect to the whisky industry, Professor Herman claims that the "free and open competition" clause was found to be no bar to fair trading despite the fact that the 4 largest firms produced 75 percent of the 1947 output." In support of this claim he cites 2 cases, one of which was decided 6 years and the other 7 years before the 1947 concentration ratios were compiled." nificantly enough, the cases cited by Professor Herman were decided at a time when the 4 largest producers accounted for only about 50 rather than 75 percent of the industry's output." Moreover, in the year that the Carstairs opinion was announced, the same Court denied an injunction to prevent violation of a fair-trade agreement because the plaintiff whisky manufacturer failed to deny defendant's allegations that the products concerned were not in fair and open competition.30

29

Obviously, if the "free and open competition" proviso is to be rejected as an inadequate safeguard against consumer exploitation, more convincing and unidirectional precedents shall have to be adduced. Precedents may be sparse, but the intent of Congress seems clear. For Senator Tydings, in discussing the construction of the "free and open competition" proviso, emphasized that fair trade should be available only where there are enough manufacturers to protect the consumer through a regime of effective competition. Significantly enough he mentioned toothpaste and its many producers to indicate the kind of competition he had in mind.3

31

22 United States v. E. I. du Pont de Nemours & Co., 118 F. Supp. 41 (D. Del. 1953). See also Stocking & Mueller, The Cellophane Case and the New Competition, 45 Am. Econ. Rev. 29 (1955).

23 Columbia Records, Inc. v. Goode, 278 App. Div. 401, 403-404, 105 N. Y. S. 2d 659, 662 (1st Dept. 1951).

24 Id. at 405, 105 N. Y. S. 2d at 663.

25 112 F. Supp. 676 (E. D. Mo. 1953).

26 Herman, supra note 1. at 25-26.

27 See Schenley Dstributors, Inc. v. H. Hollander Co., CCH Trade Reg. Rep., sec. 3154.23 (Mass. Super. Ct. 1940); Carstairs Distillers Corp. v. H. C. Drescher Co., 106 N. Y. L. J. 10. col. 3 (N. Y. Sup. Ct., July 1, 1941).

The

28 FTC, Report on Changes in Concentration in Manufacturing, 66-72, 138 (1954). developments in the whisky industry between 1940 and 1947 indicate that, from a public policy viewpoint, it is vastly more important to proceed against mergers and acquisitions that substantially lessen competition than to squander inadequate resources on de minimis restraints in vertical pricing arrangements.

29 Carstairs Distillers Corp. v. H. C. Drescher Co., 106 N. Y. L. J. 10, col. 3 (N. Y. Sup. Ct., July 1, 1941).

30 Calvert Distillers Corp. v. Leland Wine & Liquor Stores, Inc., 105 N. Y. L. J. 2718. col. 1 (N. Y. Sup. Ct., June 17, 1941).

31 See the debate on what became the Miller-Tydings Act, a rider to H. R. 7472. 81 Congressional Record 7495 (1937).

THE BATTLE OF THE SURVEYS

Professor Herman disputes my contention that the "battle of the surveys" has been inconclusive. He avers that "in virtually every instance of a survey carried out by reasonably disinterested parties, the spotty individual studies point to the price increasing or stabilizing effects that we would expect on theoretical grounds." The following statements by leading opponents of fair trade (who may qualify as "reasonably disinterested parties") cast doubts on this generalization.

132

H. Graham Morrison, former Assistant Attorney General in charge of the Antitrust Division and an outspoken critic of fair trade (who, incidentally, is cited with approval by Professor Herman), conceded before a congressional committee that:

33

"Various so-called surveys or studies have been made concerning the effect of resale price maintenance on the consumer's pocketbook. Some of these surveys, run under the aegis of 'fair trade' proponents, purport to show one result, while others, which have been made on a local scale by its opponents, show diametrically opposite results. This is to be expected, by reason of the nature of the problem and the difficulty of being certain that a particular survey has considered all the pertinent problems. So far as I am aware, no study has been made on a wide enough basis to give definite proof of any kind.” 34

Similarly, Prof. E. T. Grether, dean of the school of business administration at the University of California and a persistent critic of fair trade (who is also cited with approval by Professor Herman) testified:

35

"In the United States there has not been a sufficiently long period of experience under relatively normal market conditions to appraise the full effects of resale price maintenance implemented by the nonsigner's clause. * * * It is important to know that we actually know very little in this country in a measurable sense concerning the full effects of resale price maintenance over a period of years in normal times. The more important effects of resale price maintenance are in the nature of secondary and long-run repercussions. We have not had adequate evidence of these effects in this country." 36

Finally, Dun & Bradstreet, whose integrity as an information-gathering agency has not, to my knowledge, been impugned by anyone, is quoted as saying: "Our position is that it is virtually impossible, through a survey, to establish the precise effect of fair-trade laws on the consumer's pocketbook. As Mr. Idleman points out, the first phase of the job--that of determining how much of the consumer's dollar is spent for fair-traded items-is in itself a stupendous task. Even if it were feasible to complete that phase, it would mean little unless we could then establish what effect the pricing of fair-traded items has on the prices of non-fair-traded items. We see no way to do that." 37

Clearly, conservative analysis of the fair-trade issue must rest on evidence other than that now available through the survey method.

LOSS-LEADER SELLING AND CONSUMER RATIONALITY

Professor Herman disputes my contention that price cutting in non-fair-trade areas merely indicates that loss-leader selling exists, and that some consumer bargains may be offset by lemons. "Such an assertion," he says, "rests on an

34 Hearings, supra note 4, at 42.

35 Herman, supra note 1, at 28 n. 24.

30 Hearings, supra note 4, at 555.

37 Id. at 744-745. The dilemma of the Nielsen study to which Professor Herman refers is no dilemma at all. According to the Bureau of Education on Fair Trade (for whom the Nielsen study was made), the study showed that the fair-trade price in the fair-trade States tended more often than in the nonfair trade States to become the maximum as well as the minimum price. Thus, according to the Nielsen findings, the overall weighted average price was higher in the non-fair-trade States, despite the quite reasonable assumption that some retail outlets in these States charged substantially less than the fair-trade price for 1 or more of the 26 articles surveyed. The Nielsen findings are corroborated by Herman C. Nolen, vice president of McKesson & Robbins and a supporter of fair trade. "We keep a fairly accurate record of our prices," says Mr. Nolen, "and they are not any lower in the non-fair trade' than they are in the 'fair trade' States." Conference Board Economic Forum, The "Fair Trade" Question 36 (1955). Then, citing the figures of Eli Lilly & Co., Mr. Nolen claims that drugstores in the fair-trade States operate "on slightly lower margins" than their counterparts in the non-fair-trade States, although the "difference is not significant." Id. at 37. Admittedly, these are claims by avowed supporters of fair trade, but we can hardly refute them by dismissing them. We cannot act like the chess player who wins the game by sweeping his opponent's pieces off the board.

assumption of consumer irrationality which is least appropriate for precisely those persons to whom a unit of money has the most significance." 88

39

Consumer behavior during the "massacre on 34th Street" (the brief period of price cutting which followed the first Schwegmann decision) does not inspire much confidence in the consumer's rationality or his ability to separate bargains from lemons. For example, on June 4, 1951, the trade journal Retailing Daily reported that:

"The thousands of consumers who came to housewares sections of New York stores to buy Toastmasters and Mixmasters last week stayed to buy a lot more, from can openers to sauce pans, and most of these at regular prices. "The electrics may have been phenomenal,' one (department store) buyer grinned, but you should have seen some of the garbage we were able to get rid of.'" 40

On June 3, 1951, Edward Davidson, chairman of the board of Bloomingdale's, was quoted as saying:

"It hasn't taken long for retailers to realize that Macy's had no intention of broad, general price cutting, but merely picked a group of famous names and miscellaneous items for their publicity to give the impression that everything was now cheaper."

99 41

On June 9, 1951, Business Week reported:

"A salient fact about the price cutting in New York is that almost all of it has been on fair-traded items. In other words, price cutting in New York has been largely a promotional deal. When people have been pulled into the stores on the strength of bargains, they have bought a lot of other things, too. ***

"In New York the 'price war' promptly pushed department stores sales up 25 percent over the same week a year ago. And it wasn't only fair-traded goods that moved over the counter. Once you get people in the mood to buy, everything doesn't have to go at bargain prices."

19 42

Consumer "rationality” is often no more than a convenient assumption in economics texts, and anyone who believes that the consumer confines his purchases exclusively to loss-leaders must find it rather difficult to explain the popularity of loss-leader selling.

ALTERNATIVES TO FAIR TRADE

Professor Herman contends that there are "other methods available for preventing monopolization of the distributive mechanism which do not require the throwing out of the baby (current competition in distribution) with the bath water (loss-leaders)."

44

9 43

Unfortunately, neither Professor Herman nor the Attorney General's Committee indicates what these methods are nor how effective they are likely to be. Significantly enough, the Miller-Tydings Act was passed in 1937 precisely because the antiprice discrimination statutes had proven woefully inadequate, and one of the strongest arguments for the McGuire Act in 1952 was the haphazard enforcement of the Robinson-Patman Act (which, by the way, the Attorney General's Committee proposed to weaken further in a number of important respects). Certainly, Professor Herman's optimism about such laws as the Robinson-Patman Act stands in sharp and puzzling contrast to his pessimistic appraisal of the enforcement possibilities of the "free and open competition" proviso, which has had a shorter and perhaps less decisive history. In my article I did not argue, nor do I now argue, that fair trade is an un

45

88 Herman, supra note 1, at p. 28.

39 Schwegmann Bros. v. Calvert Distillers Corp., (341 U. S. 384 (1951)). 40 Hearings, supra note 4, at p. 751.

41 Ibid.

42 Id., at pp. 751-752. A revealing aspect of the post-Schwegmann price-cutting flurry is the rapidity with which it petered out. By June 25, 1951, several Dun & Bradstreet field offices "indicated a waning of activity and interest in price cutting of fair-traded merchandise in their communities." See study prepared for the Joint Committee on the Economic Report and the Senate Select Committee on Small Business, Prevalence of Price Cutting of Merchandise Marked Under Price-Maintenance Agreements May 28 through June 25, 1951, 82d Cong., 1st sess., at vii (1951). Long before the McGuire Act was passed, therefore, the initial enthusiasm about price reductions had attenuated. The New York price war, it seems, was probably due more to the swollen inventories of wholesalers and retailers than to the Schwegmann decision, and it would be post hoc ergo propter hoc to attribute any causal relationship between the decision and the price war. See Adams, The Schwegmann Case: An Economic Comment (15 U. Det. L. J. 13, 15 (1951)). 43 Herman, supra note 1, at p. 29.

44 Report of the Attorney General's National Committee To Study the Antitrust Laws, pp. 149-155 (1955). 45 Id., at pp. 155-221.

equivocal blessing or that it represents the best way of facing up to the lossleader problem. My position was and is that, until a better solution is found, the fair-trade laws, together with vigorous and effective enforcement of the "free and open competition" clause, offer the most promising compromise of the conflicting considerations surrounding an admittedly knotty problem.

ALTERNATIVE FORMS OF RESALE PRICE MAINTENANCE

With respect to vertical integration, consignment selling, agency, and refusal to deal, Professor Herman contends that there are disadvantages to each of these "alternative devices for maintaining resale prices, which make them less than perfect substitutes for fair trade."

946

The generalization raises a number of questions. First, if these alternative devices are less effective than fair trade, why do they account for a far larger annual sales volume than does fair trade?" Second, assuming that the alternatives are more expensive than fair trade, are we to condone the alleged vices of resale price maintenance when it costs the manufacturer (and hence the consumer) more, but condemn resale price maintenance when it costs the manufacturer (and hence the consumer) less? Third, if fair-trading manufacturers possess the market power that Professor Herman assumes, would the allegedly higher cost of the alternatives be an effective deterrent to adoption of resale price maintenance techniques other than fair trade? Fourth, if the alternatives are more costly than fair trade, would not the repeal of the MillerTydings and McGuire Acts disadvantage smaller manufacturers who would then find it more difficult than their more powerful rivals to protect trademarks and brand names? Fifth, is it accurate to say that an effectively policed fair trade system is less costly to the manufacturer than, say, a simple refusal to deal? (According to Herman C. Nolen, executive vice president of McKesson and Robbins, it costs approximately $5,500 just to notify distributors and retailers of a fair trade price change.* Sixth, why are newspapers, magazines, and periodicals sold on consignment rather than fair traded? What intrinsic market forces would make it less convenient and more costly to sell Colgate toothpaste on consignment than Life magazine? Of course, not each of the fair-trading industries or each of the fair-trading manufacturers would find the alternative devices readily available and effective substitutes for fair trade. Nevertheless, the facts remain that the economic effect of all forms of resale price maintenance is virtually the same, that fair trade today is quantitatively less pervasive than alternative resale price maintenance techniques, and that in the event of the McGuire Act's repeal, the alternative devices would surely be extended to some, if not all, industries now covered by fair trade. Finally, it is an incontrovertible fact that fair trade is explicitly subject to a "free and open competition" safeguard while the alternative devices are not."

46 Herman, supra note 1, at pp. 30-31.

48

47 In this connection, it is noteworthy that the Federal Trade Coommission recently cited the following figures to indicate the growth of forward vertical integration in the American distribution system:

"Sales to or through own wholesale or retail branch stores. Sales to other wholesalers, jobbers, or retailers

Sales to consumers at retail.

Sales to industrial and other large users_.
Export sales---.

"Percent

24. 5

44. 7

1.6

26. 0

3. 2"

Eastman Kodak Co., docket No. 6040 (3 CCH Trade Reg. Rep., par. 25291, at 35422 n. 24 (FTC Jan. 6, 1955)). Speaking through Chairman Howrey (an avowed and unrelenting critic of fair trade), the Commission then took "judicial notice of the fact that many manufacturers are partially integrated and engage to a lesser or greater degree in some form of wholesaling or retailing activity. In fact, the volume of direct selling," said the Commission, "has reached tremendous proportions. This is so of manufacturers who 'fair trade' as well as with others. As a matter of fact, the practice of selling exclusively through the 'regular channels' of distribution is almost becoming the exception rather than the rule." The Commission then concludes-and significantly so-"Sound business or economic reasons may justify such methods of distribution." Id., at pp. 35422-35423. This is the statement of a Commission which has consistently and vigorously opposed fair trade as a method of resale price maintenance.

48 Conference Board Economic Forum, The "Fair Trade" Question 39 (1955). 49 The "free and open competition" proviso currently sets forth an explicit control standard which is potentially applicable to all forms of resale price maintenance. It is, in a sense, an unequivocal expression of national policy on which the courts may rely not only in appraising fair trade practices but also in ruling on the legality of alternative resale price maintenance techniques. With the repeal of the Miller-Tydings Act, this standard would, of course, be wiped off the books.

CONCLUSION

Perhaps it is well to reiterate what should have been apparent that my article was not an unqualified endorsement of fair trade in all industries, under all conditions, and in disregard of competitive considerations. One does not have to be a fanatic exponent of fair trade to concede that the case against fair trade has been vastly exaggerated, that the evidence against fair trade is ambiguous, and that fair trade-so long as it is practiced in an atmosphere of genuinely free and open competition-tends to safeguard the consumer against exploitation, protect the retailer against loss-leader selling, and permit the manufacturer to defend his trademark and distributive system. Granted that fair trade is not the happiest formula for achieving these goals, it nevertheless is the most effective technique so far proposed. Certainly, if fair trade is to be condemned for its allegedly deleterious effects, consistency requires that we condemn other forms of resale price maintenance that produce the same effect.

As a member of the Attorney General's Committee I could not join in the majority recommendation for repeal of the Miller-Tydings and McGuire Acts, which contain the "free and open competition" safeguard, without a similar recommendation concerning alternative forms of resale price maintenance, which are quantitatively more significant and which are not subject to the same safeguard. In my view, the drive to repeal the fair trade laws is a dead end pursuit for the understaffed and inadequately financed antitrust agencies. More telling blows can be struck in the cause of competition by a strict enforcement of the "free and open competition" standard with respect to all types of vertical pricing arrangements, by actively prosecuting mergers that substantially lessen competition, and by ferreting out conspiracy and monopoly on the manufacturing level.

Mr. MACK. The first witness this morning is our colleague and member of the Committee on Interstate and Foreign Commerce, the Honorable Torbert H. Macdonald. Mr. Macdonald, we will be glad to hear you at this time.

STATEMENT OF HON. TORBERT H. MACDONALD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS

Mr. MACDONALD. Mr. Chairman and members of the Subcommittee on Commerce and Finance, I am grateful for the opportunity extended to me by your committee to present my views on my bill, H. R. 11264, which amends the Federal Trade Commission Act, so as to equalize rights in the distribution of identified merchandise.

Throughout our history, the American people have pinned their faith on two great principles, the principle of a free competitive economic system as the mainspring of the progress of our people and the principle of fair play. Both of these find legal expression in the antitrust laws which have set the rules for healthy competition for nearly 70 years. Of course, these laws have had to be modified and expanded as economic conditions and marketing practices were changed, as new problems for manufacturers and distributors arose. We stand at such a point today. Fair trade has been undermined to such a point that it has become almost totally ineffective. We must take vigorous steps to make it function as it should, as a strong weapon against unfair competition.

The fair-trade legislation of the various States, backed by the Federal fair-trade law popularly known as the McGuire Act, was introduced in most States in the 1930's. It was designed particularly to protect small retailers from the ruthless and unfair competitive practice of chainstores and other large retail outlets of using a well known trademarked article as a loss leader. These merchants were selling