SMALL BOOK STORES' SUIT SEEKS TO CUT CHAINS' ADVANTAGE : GAIN IN NET SALES.

Byline: Gary M. Galles Local View

THE 1990s have not been kind to independent bookstores. Their market share has fallen from 32 percent in 1991 to 18 percent in 1996. The American Booksellers Association, most of whose members are small bookstores, has seen its membership fall almost one-third, from 5,100 to 3,427, in the past four years alone.

But rather than relying on new entrepreneurial efforts to outdo their rivals in attracting customers, they have chosen to sue them instead, hoping to take away their advantages in an effort that would hurt consumers as well as those rivals.

The ABA and 26 independent bookstores have sued the Borders and Barnes & Noble chains in U.S. District Court in San Francisco, on the ground that the large-volume discounts the book chains receive from publishers violate the 1936 Robinson-Patman Act, which prohibits price discrimination between customers not based on provable cost differences, ``where the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly.''

But while the ABA suit, and the act it is based on, reads like a defense of competition, it really seeks to restrict competition without abandoning competitive rhetoric, because the quantity discounts it seeks to end benefit consumers by leading to lower retail prices.

How do quantity discounts help consumers? Book retailers who can get lower wholesale prices based on volume discounts must sell lots of those books to justify those discounts. How do they sell more books? Through lower retail prices, wider selection, more stores, longer hours of operation, a more enjoyable atmosphere, etc. But each of these benefits consumers, or they wouldn't patronize stores providing them.

Taking away one of the greatest benefits of increasing sales, lower wholesale prices, may help less-efficient retailers, but it penalizes consumers as well as more-efficient retailers.

What about the argument that quantity discounts will enable Borders and Barnes & Noble to become monopolists, who can then increase prices, harming consumers?

The economic literature clearly demonstrates that such attempted predation virtually never makes business sense.

Their 25 percent combined market share is hardly indicative of monopoly. Major retailers, such as Wal-Mart, Costco, etc., have a far greater overall share of the market, a share that is also growing faster, than these supposed dominant book dealers.

These chains are, in fact, intense rivals with each other, not two companies bent on colluding to restrict their offerings to force up prices. In fact, the rivalry between these two large, efficient chains is probably the most important guaranty of consumer benefits in the industry.

With rapidly growing Internet book sales, now approaching $1 billion annually, by companies such as Amazon.com forcing these chains to develop their own Internet sales operations, one can hardly speak of them being able to exclude efficient rivals.

Consumers have decided that the benefits from buying from the chains outweigh any potential risks to their future book-buying choices. Taking away the quantity discounts, the results of which consumers have clearly shown they prefer, can hardly be proconsumer.

Why would publishers cooperate in a scheme that would eliminate thousands of outlets for their books?

The weakness of the ABA claim is further illustrated by some unanswered questions. From 1991 to 1996, when independents saw their market share fall 14 percentage points, from 32 percent to 18 percent, the combined Borders and Barnes & Noble market share only rose 4 percentage points, from 22 percent to 26 percent. A 4-point gain in their market share cannot even explain one third of the 14-point fall in independents' market share.

Other major book retailers, as well as Internet sellers, have also been soundly outcompeting independent bookstores, increasing their market shares even faster. So volume discounts to Borders and Barnes & Noble cannot be the primary reason for independents' losses in market share.

If there is such a great case to be made here, why did the Federal Trade Commission, which sometimes sees anticompetitive practices where none exist, end a 17-year investigation of book publishers' practices last year without determining that any laws were broken? And why doesn't the ABA suit include publishers who, in a 1992 consent decree, agreed not to give chains more favorable terms than independents? If the chains are extracting better deals, surely publishers must be giving them.

Why is the ABA, and the independent bookstores they represent, bringing such a weak lawsuit that, if successful, will harm consumers? The answer is the combination of self-interest - they are losing the battle for customers, and this would help stem the tide - and a terrible law.

Robinson-Patman rulings have often, without economic logic, held that quantity discounts somehow hurt competition, by confusing harm to competitors who are losing out to preferred suppliers with harm to the competitive process.

But superior offerings from competitors, the essence of competition, necessarily cause harm to less-efficient rivals in the process of benefiting consumers. As a result, this semantic confusion has frequently led the courts to undermine the competitive process, and its consumer benefits, by protecting inefficient competitors from it, while claiming the defense of competition as their rationale.

Cost defense

Further, the defense that specific cost savings justify different prices, which is supposedly allowed by the act, is little more than an illusion, as the courts virtually never find the cost data sufficient. Of course, given the limitations of historical accounting data for forward-looking decisions - especially in a world of multiproduct firms with no clear ``right'' way to allocate overhead costs, advertising, etc. to products - unambiguous proof that costs justify price differences is impossible.

These confusions are the key to the ABA's hopes. If they can get the courts to ``buy'' large chains as representing a tendency toward monopoly, then major book dealers will have to turn to the cost defense. And given the court's historic refusal to accept cost defenses, they will lose, regardless of whether there has really been any harm to competition. The result will be far smaller discounts to the chains, leading to higher costs which they will pass on in higher prices (Robinson-Patman cases almost always result in higher prices, as cost savings are ruled out).

This anticonsumer result, wrapped up in proconsumer language, is what they are looking for, because it will help them keep their customers from better alternatives.

Say you aren't a big reader. Why should you care? Consider what a general restriction of volume discounts would mean for you. What would it do to the prices you pay at Costco or Sam's Club, Home Base or Home Depot, and every other discount store you frequent?

Would you want them to charge you more, by forgoing their volume discounts, to protect ``competition''? Perhaps your answer is why Judge Richard Posner, a leading expert in the field, said ``The Robinson-Patman Act . . . is almost uniformly condemned by professional and academic opinion, both legal and economic.''