Fair Trade Law

Fair trade laws, also known as price maintenance laws or resale price maintenance laws outside the United States, give manufacturers of goods the power to set minimum price requirements for their products, which all retailers of those products are required to follow. In the US, such laws were first enacted in the first half of the twentieth century, beginning with California and later spreading to most other states. Their passage was driven by the widespread belief that large chain stores had been engaging in the practice of unfairly lowering prices on some goods in order to drive small business competitors out of the market. Larger chain stores had access to much larger populations of customers and sold a much wider range of products, so they could afford to temporarily lower the price of select goods, even below the break even point. However, fair trade laws proved unpopular as they raised prices for consumers and were difficult to enforce. Most US states repealed their laws, and in 1975 Congress deemed them illegal.

Brief History

Fair trade laws were first used in the United States in 1911, but were found to violate antitrust legislation. This meant that US fair trade laws could go no further than to allow the manufacturers of goods to suggest prices to retailers, instead of establishing a lower limit to such prices. This state of affairs continued until 1931, when California, under the economic pressure of the Great Depression, enacted the California Fair Trade Act to protect small businesses. During the next few years, most other states followed suit, and in 1937 the Sherman Anti-Trust Act was amended by the Miller-Tydings Fair Trade Act to permit these fair trade laws. This provided an unforeseen advantage when World War II began in 1939, because the spread of fair trade laws across most of the country meant that the United States had a greater degree of control over industrial pricing practices than was available to the governments of most other countries around the world.

After the war and in the decades that followed, fair trade laws gradually became less and less practical. This was due in large part to the growing complexity of the US and global economies, which made the enforcement of price control measures increasingly difficult. Whereas in the past fair trade laws had appeared to present a clear advantage, throughout the 1950s and 1960s the trend was for them to be less and less useful, and more often than not, a burden to comply with rather than a benefit to enjoy. As public sentiment began to turn against the idea of fair trade laws, states around the country began to repeal the laws they had previously enacted. Finally, in 1975 Congress ended the few remaining fair trade laws by repealing the Miller-Tydings Act, making them again illegal under the Sherman Anti-Trust Act. A similar pattern was repeated in other countries around the world.

Analysis

From the outset, some economists found it puzzling that there were manufacturers interested in placing limits upon the sales of the very goods they were engaged in producing. The conventional wisdom has always been that a goods manufacturer would want to avoid raising any obstacles that might prevent consumers from purchasing its goods through retailers. This is because manufacturers typically sell the goods they produce to retailers at wholesale prices. The retailers then set a market price that is higher than the wholesale price at which the retailer purchased the goods, and the difference between the retail and wholesale price (minus the retailer’s overhead costs) represents the retailer’s profit. Ordinarily a manufacturer has little interest in the competition that occurs between retailers, because the manufacturer has already been paid its wholesale price by those retailers.

Insofar as a manufacturer is concerned with retail prices, it is only to the extent that the manufacturer does not want consumer prices to be manipulated in such a way that could eventually diminish consumer demand for the goods. This might happen in a situation where all or nearly all of the retailers of a particular product, such as a smartphone, conspired together to offer the phone at such an exorbitant price that virtually no consumer could afford one. The result would be that demand for the phone would fall to zero, and the phone’s manufacturer would be unable to sell the device to retailers. This type of situation is extremely unlikely, however, because it would require the majority of retailers selling a product to agree with one another to act against their own economic interests by making the product unaffordable to consumers. The fair trade laws were designed to address the opposite situation, in which retailers conspire to lower prices below the wholesale price in order to drive targeted retailers—particularly small businesses—out of business. In the abstract, it would appear that manufacturers would have no motivation to interfere with this scenario, because lower prices would increase sales, causing retailers to purchase more product from the manufacturer.

An additional consideration appears to explain this confusing situation. Put simply, manufacturers had a reason, other than economic self interest, to explain their desire for price maintenance. If the manufacturers stood idly by while large chain stores manipulated prices to drive small businesses out of the market, then in a short time the large chain stores would be able to exert marketplace control over the manufacturers, because the large chains would effectively have seized control of all available distribution channels for the products in question. This would allow the large chains to dictate terms to the manufacturers, a situation that would be unpalatable to the manufacturers. Manufacturers of goods prefer an environment characterized by a diverse array of actors, each vying against its competitors in order to distribute the manufacturers’ goods. By supporting efforts to establish price maintenance regulations, manufacturers sought to use fair trade laws to keep in place the balance of power between producers of goods and retailers of those goods.

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