Antitrust laws are at the heart of our competitive free market system, and while they are the principal means of keeping monopolies in-check, there are many other laws that act “behind the scenes” to ensure a competitive market.
One of the most important laws that keeps competition vigorous on the retail level is the Robinson-Patman Act. That Act prohibits so-called “price discrimination,” where a seller sells the same product to similar buyers at different prices.
For example, two family-owned Music stores, Ken’s Music and Bill’s Music, purchase their tapes from Mega Tape Corp. Mega Tape decides that it likes Ken more than Bill and charges Bill seven dollars per tape while it charges Ken only five dollars. Clearly, Ken would have the competitive advantage and would be able to undercut Bill and perhaps drive Bill’s Music out of business, thereby damaging competition in the retail tape market.
Because this price discrimination has the potential to decrease competition by driving disfavored retailers (those charged the higher price) out of business, Congress enacted Robinson-Patman to prohibit this conduct.
The next logical question is why would Mega Tape Corp. want to damage its own customer-base by driving Bill’s Music out of business? The short answer is Wal-Mart and similar large buyers.
Let’s say that Bill’s Music is competing with Wal-Mart. Wal-Mart, because of the huge volume of tapes it purchases from Mega Tape Corp., has the ability to say to Mega: “If you want us to continue buying your tapes you must sell to Bill’s Music at two dollars over what you sell to us.” To placate Wal-Mart, Mega does so, and Bill’s Music now sells its product for two dollars over the same product at Wal-Mart. The result is that Bill is unable to compete with Wal-Mart and shuts his doors three days later.
This is the exact situation that is made illegal by the Robinson-Patman Act. Sellers must sell to buyers (at the same distribution level) at that same price, and buyers who know they are getting a lower price than their competition may not buy at that price.
The final question is why in light of Robinson-Patman is Wal-Mart still able to purchase its products at a lower price than most of its competition? The purpose of all antitrust laws is the enhancement of competition. Therefore, if a seller has a legitimate reason to sell at a reduced price to certain buyers, Robinson-Patman allows this. The Act specifically exempts price differences based on the cost of manufacture, sale, or delivery because of geographic location or volume of purchase. In short, Wal-Mart gets a lower price because of the massive volume it purchases and not because of any intent to harm competition, and that is permitted under Robinson-Patman. However, the Act still prevents Wal-Mart from using its clout to force its vendors to charge higher prices to its competition.
Thus, Robinson-Patman works behind the scenes to help ensure that stores like Wal-Mart still have competition.
— Mike Malin