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Private damage actions under the Robinson-Patman Act.

I. Introduction

In 1911, the Supreme Court decided Standard Oil (1) and American Tobacco (2) Allegations of predatory pricing played a prominent role in each case. According to the Court, the evidence showed that below-cost pricing was used to drive small competitors into submission. The predator allegedly used profits earned in markets where it faced no competition to finance localized bouts of predatory pricing. The intent was to monopolize those markets and then raise prices to the monopoly level thereby recouping the investment in predation. Troubled by such conduct, Congress included a prohibition of price discrimination in the Clayton Act. (3)

Subsequently, the chain store movement also proved to be troublesome. (4) Large chains, epitomized by A&P, used economies of scale and their buying power to gain a competitive advantage over small mom-and-pop stores. (5) In order to protect the smaller rivals, Congress amended section 2 of the Clayton Act by enacting the Robinson-Patman Act in 1936.

In recent decades, there has been virtually no public enforcement of the Robinson-Patman Act. The Department of Justice has not filed a Robinson-Patman case since 1972. (6) For its part, the Federal Trade Commission has filed only one case in the last twenty-five years. (7)

Consequently, enforcement of the Robinson-Patman Act is entirely a private matter. (8) In most cases, private suits are filed under [section] 4 of the Clayton Act, which provides for private damages. But these suits have become increasingly difficult, due to the Supreme Court's decisions in Brooke Group (9) and J. Truett Payne. (10)

In Section II, we examine the prohibitions contained in the Robinson-Patman Act. In doing so, we distinguish primary-line and secondary-line cases. We then discuss antitrust injury in Section III. In Section IV, we turn our attention to the theory of primary-line injury and the impact of Brooke Group on private plaintiffs. We focus on secondary-line injury in Section V and analyze the significance of J. Truett Payne on private plaintiffs in Section VI. Section VII closes the article with some concluding remarks.

II. The Robinson-Patman Act

Section 2 of the Sherman Act condemns business conduct that has resulted in monopoly or is apt to do so. More specifically, section 2 provides that:

   Every person who shall monopolize, or attempt to monopolize, or
   combine or conspire with any other person or persons, to monopolize
   any part of the trade or commerce among the several States, or with
   foreign nations, shall be deemed guilty of a felony, and, on
   conviction thereof, shall be punished by fine not exceeding $
   100,000,000 if a corporation, or, if any other person, $ 1,000,000,
   or by imprisonment not exceeding 10 years, or by both said
   punishments, in the discretion of the court. (11)

Since the Act's broad language would seem to condemn both reasonable (12) and unreasonable conduct, the Supreme Court explained that the rule of reason would be employed to distinguish reasonable business conduct from unreasonable business conduct.

Congress did not find this reliance on the judiciary to be comforting. It apparently was concerned that the courts might miss something and decided to single out price discrimination and other things for specific prohibition in the Clayton Act. (13)

In 1914, the Clayton Act was enacted in an effort to provide some specificity that the Sherman Act's broad language lacked. In the wake of Standard Oil (14) and American Tobacco, (15) section 2 of the Clayton Act took dead aim at price discrimination. Rightly or wrongly, Congress envisioned large multimarket firms that could use discriminatory prices in isolated markets, which may have been predatory, to bankrupt single-market rivals as a means of extending monopoly power into those markets. By the 1930s, however, the aim was protectionism. Chain stores began to make life difficult for small, inefficient, locally owned stores. (16) The source of this "problem" of low prices allegedly was the purchasing power of the chains. In 1936, the Robinson-Patman Act amended section 2 of the Clayton Act in an effort to protect mom-and-pop stores from the large retail chains. It has been argued that such protectionism was ill-advised since consumers obviously preferred the lower prices of the more efficient chains to the higher prices offered by mom-and-pop. But the premise of the Act is that free markets were rife with unfair and anticompetitive practices (17) that threatened competition, small business, and consumers. (18)

As amended by the Robinson-Patman Act, 2a of the Clayton Act provides that:

   It shall be unlawful for any person engaged in commerce, in the
   course of such commerce, either directly or indirectly, to
   discriminate in price between different purchasers of commodities
   of like grade and quality, where either or any of the purchases
   involved in such discrimination are in commerce, where such
   commodities are sold for use, consumption, or resale within the
   United States and where the effect of such discrimination may be
   substantially to lessen competition or tend to create a monopoly in
   any line of commerce, or to injure, destroy or prevent competition
   with any person who either grants or knowingly receives the
   benefits of such discrimination, or with customers of either of
   them. (19)

Thus, the Robinson-Patman Act protects two groups. First, rivals of the firm practicing price discrimination are protected from what is known as primary-line injury, which is examined in Section IV. In addition, competitors of the favored customer are also protected from what is known as secondary-line injury, which is analyzed in Section V. (20)

It is important to recognize that the Robinson-Patman Act is prophylactic rather than remedial. It seeks to prevent injury, not to rectify it. In the event that either primary-line injury or secondary-line injury has actually occurred, the private plaintiff relies on [section] 4 of the Clayton Act. In this case, the private plaintiff will seek treble damages for actual injuries that are causally linked to the unlawful price discrimination.

A successful plaintiff will have to prove that a violation has occurred and that it has suffered antitrust injury as a result. As defined in Brunswick, (21) antitrust injury, which is discussed in the next section, is injury that results from the anticompetitive effects of an antitrust violation. In addition, the plaintiff will also have to provide a reasonable estimate of the damages sustained. This requirement may pose serious evidentiary problems and econometric challenges.

III. Antitrust Injury

Those who engage in price discrimination can violate the Robinson-Patman Act even though no actual harm has occurred. But proving liability is not the same as proving damages. All that is necessary is that the price discrimination may lead to a substantial lessening of competition or tendency for the creation of monopoly. The victim of the price discrimination must proceed under [section] 4 of the Clayton Act to recover damages.

The literal language of [section] 4 of the Clayton Act would seem to permit anyone injured by an antitrust violation to file suit for private recovery. In relevant part, [section] 4 provides that

   any person who shall be injured in his business or property by
   reason of anything forbidden in the antitrust laws may sue
   therefor, ... and shall recover threefold the damages by him
   sustained and the cost of suit, including a reasonable attorney's
   fee.... (22)

In spite of this broad language, the Supreme Court has imposed various limits on those who have standing to sue for private damages. One of these limitations involves antitrust injury, which is a legal construction that has an economic foundation. (23)

One might infer from the language of [section] 4 that any actual economic injury factually related to an antitrust violation is compensable in a private suit. In its Brunswick (24) decision, the Supreme Court, however, made it clear that this is not the case. (25) A brief review of the Court's analysis will prove useful in understanding the concept of antitrust injury.

In the late 1950s, the popularity of bowling soared and with it the fortunes of Brunswick, which was one of the two largest manufacturers of bowling equipment in the United States. As new bowling centers opened, Brunswick's sales of lanes, pinsetters, and ancillary equipment increased rapidly. In the early 1960s, however, the bubble burst, and sales returned to their former level. Brunswick began experiencing considerable difficulty getting paid by the distressed bowling centers. Since Brunswick had made most of its sales on secured credit, it began repossessing the equipment. Given the decline in demand for bowling as a recreational activity, however, Brunswick's efforts to sell the repossessed equipment were largely unsuccessful. Since Brunswick had borrowed some $250 million to finance its credit sales, it encountered severe financial difficulties. (26) In an effort to minimize its losses, Brunswick decided to acquire and operate some of the failing bowling centers. Over a seven-year period, Brunswick acquired 222 bowling centers and operated 168 of them. (27) The remainder were either disposed of or closed. With a market share of 2%, Brunswick became the largest operator of bowling centers in an extremely unconcentrated market. (28)

Pueblo Bowl-O-Mat, a competing bowling center, sued Brunswick on the theory that Brunswick's acquisitions violated [section] 7 of the Clayton Act, which prohibits mergers that way substantially lessen competition. Because of the prophylactic nature of [section] 7, Pueblo did not have to prove that any anticompetitive results had actually materialized--only that they might result. Pueblo argued that Brunswick was a giant in a land of pygmies and, as a result, had the financial wherewithal to engage in predatory behavior and drive its smaller rivals out of the market. The jury found that the acquisitions violated [section] 7 and awarded damages. When the case reached the Supreme Court, Brunswick had decided not to contest liability and to focus its efforts on the damage issue.

Pueblo had a novel theory of injury and damages: but for Brunswick's unlawful acquisitions, the financially distressed bowling centers would have failed, and Pueblo's sales and profits would have been higher than they actually were. Thus, Pueblo was in a worse financial position than it would have enjoyed but for Brunswick's violation of [section] 7 and, therefore, was entitled to recover its lost profits. Pueblo thus complained that Brunswick's acquisitions preserved existing competition and thereby deprived Pueblo of increased profits. The Court held, however, that awarding damages for such an injury would have been inconsistent with the purposes of the antitrust laws. The Court pointed out that if Pueblo "were injured, it was not 'by reason of anything forbidden in the antitrust laws': while [Pueblo's] loss occurred 'by reason of the unlawful acquisition, it did not occur 'by reason of that which made the acquisition unlawful." (29)

In other words, it was true that the merger caused Pueblo's injury because the merger enhanced competition by not permitting a Pueblo rival to fail. What made the merger unlawful, however, was the potential for predatory behavior on Brunswick's part, but this potential had nothing to do with Pueblo's reduced profits. (30) The Court then went on to explain the private plaintiffs burden in an antitrust suit:

   Plaintiffs must prove antitrust injury, which is to say injury of
   the type the antitrust laws were intended to prevent and that flows
   from that which makes defendant's acts unlawful. The injury should
   reflect the anticompetitive effect either of the violation or of
   anticompetitive acts made possible by the violation. It should, in
   short, be the type of loss that the claimed violations ... would be
   likely to cause. (31)

Thus, the test for antitrust injury is essentially economic. A private plaintiff must identify the economic rationale for a business practice's illegality under the antitrust laws and show that its harm flows from whatever it is that makes the practice unlawful.

If the plaintiff's injury is directly related to the competitive evil that makes a practice unlawful, then that harm is antitrust injury. If, however, the harm does not flow from a competitive evil, then it may be injury in fact, but not an antitrust injury.

When a firm has unlawfully monopolized a market, (32) or a group of firms have engaged in price fixing, (33) the actual price in the market exceeds the price but for the violation. In other words, buyers suffer overcharges that constitute antitrust injury and, therefore, are compensable. Similarly, if buyers collude to depress price, sellers have suffered antitrust injury (34) and may recover the undercharge. In foreclosure cases, supply in the market is restricted by the full exclusion (or impairment) of rival sellers. This, too, will lead to higher prices in the market. It also leads to injury for the excluded firms. The injury flows from the anticompetitive consequences of the exclusionary conduct and, therefore, constitutes antitrust injury. (35) As we will see in Sections IV and VI, antitrust injury takes on a slightly different character in Robinson-Patman Act cases.

IV. Primary-Line Damages

The legal theory of primary-line injury depends on the assumption that a multimarket firm can reduce its price in one geographic market to inflict harm on a localized rival.36 The idea is to price predatorily in one market and finance this venture with profits earned in other, less competitive markets. The localized rival cannot use similar tactics because it does not operate in any other market and, therefore, has no source of economic profits with which to counter the competitive attack. As a result, the localized firm will eventually fail. After the local firm exits, the predator will then raise its price and recover its initial investment in acquiring the monopoly. (37)

Aggressive price cutting would seem to be procompetitive. The lower prices clearly benefit consumers as they expand their consumption. If the prices are below cost, however, expanded consumption is inefficient because the marginal value to consumers is below the cost to society of providing the additional quantity. In other words, below-cost pricing is socially inefficient because the value of the resources used in producing the good as measured by the consumers' willingness to pay is below the cost to society of those resources. Thus, below-cost pricing is not to be applauded. Compounding this problem is what happens once the localized rival is eliminated--monopoly and the usual welfare losses associated with monopolistic restrictions on output. Below-cost pricing is necessarily unprofitable while prices are below cost. If such conduct is predatory--designed to drive rivals out of the market--then recoupment must be possible. If not, then the conduct is irrational. A sensible inference of predation, therefore, requires both below-cost pricing and a high likelihood of recouping the investment in below-cost pricing.

So far, we have described the evil of predation in its classic form, a large multimarket firm with monopoly in some markets engaging in predation where it confronts small single-market firms. As we discuss below, predation was alleged but not found in Brooke Group. In its test for predation and, therefore, its test for unlawful primary-line price discrimination, the Supreme Court failed to consider that a powerful multimarket firm might engage in below-cost pricing to establish a reputation for predation. (38) In such cases, the investment in predation may be profitable because it forestalls entry in other markets. Thus, recoupment exists, but does so in a subtle form.

Suppose that a firm is a monopolist in a particular local market. It earns profits designated as [[pi].sub.M]. If a firm enters the market, the incumbent can accommodate the entrant or it can engage in below-cost pricing to fend off the entrant. If it accommodates, its profits will be [[pi].sub.A], which are higher than the profit generated by predation ([[pi].sub.P]). Thus, we have [[pi].sub.M] > [[pi].sub.A] > [[pi].sub.P]. Given these inequalities, predation in response to entry is clearly irrational--at least in the short run. Since [[pi].sub.A] > [[pi].sub.P], accommodation appears to be decidedly preferable to predation. But a reputation for predation may be worthwhile.

If the dominant firm can persuade would-be entrants that they will be met with below-cost pricing, they may well decide to refrain from entering. The aggressive firm must meet entrants with below-cost pricing to convince would-be entrants that they would rather fight than accommodate. In other words, the dominant firm wants to convince outsiders that the utility of predating outweighs the utility of accommodating, U([[pi].sub.M]) > U([[pi].sub.P]) > U([[pi].sub.A]). This reputation deters entry so the dominant firm need not engage in below-cost pricing. If this strategy is successful, the periodic bouts of predatory pricing will be unprofitable in the short run, but profitable in the long run as they deter entry.

Now we turn our attention to the two main cases on primary-line injury, or injury to the competitors of the price discriminating seller, Utah Pie (1967) and Brooke Group (1993).

Utah Pie (39)

Prior to Utah Pie's entry into the frozen dessert pie market in Salt Lake City, three multimarket firms (Carnation, Continental Baking, and Pet Milk) supplied Salt Lake City from their plants in California. For decades, Utah Pie had supplied fresh dessert pies, but it did not participate in the frozen pie market. In 1957, Utah Pie entered the frozen pie market and competed vigorously with the incumbent firms. Utah Pie's entry strategy involved undercutting the prices of the incumbents. Utah Pie was an immediate success. It its second year (1958), Utah Pie enjoyed a dominant market share of 67%.

The economic result of Utah Pie's entry is fairly predictable: lower prices and higher quantity. According to the Supreme Court, prices fell as the four rivals competed in the market (an average of 34%) while output increased (by 468%) during the 1958 to 1961 period. (40) One would expect some of the resulting cost reductions to be passed on to consumers in the form of lower retail prices. (41) During this period of intense competition, Utah Pie's market share fell from 67% to 45%.

Although Carnation, Continental Baking, and Pet Milk charged prices above those of Utah Pie, their prices in Salt Lake City were below those they charged in other geographic markets. (42) Apparently tired of vigorous price competition, Utah Pie sued the incumbents for unlawful price discrimination. (43) Ultimately, the case was reviewed by the Supreme Court, which condemned the incumbents: "Sellers may not sell like goods to different purchasers at different prices if the result may be to injure competition in either the sellers or the buyers market...." It is hard to see how competition was harmed by the competitive price response of the incumbents. After all, prices fell and quantities rose during the time period when the incumbents sold in Salt Lake City at prices below those in other markets. Had they refrained from competing, their shares in that market would have continued to decline and Utah Pie would have become a monopolist. Consequently, this opinion seems decidedly anticompetitive. (44) The theory of primary-line injury was revisited in the later Brooke Group decision.

Brooke Group

For decades, cigarette manufacturing had been one of the most concentrated and profitable industries in the U.S. economy. For many years, production was controlled by six major firms and there appeared to be no price competition among them. By 1980, domestic demand for cigarettes began to fall, and producers began to accumulate substantial excess capacity. Among the producers, Brooke Group fared particularly poorly, with its market share falling from over 20% to around 2%. Brooke Group responded to this decline by introducing generic cigarettes, which were priced 30% below the list prices of standard brands. Other manufacturers responded to this competition by introducing their own generic cigarettes. When Brown & Williamson entered the generic segment of the cigarette market in 1983, it adopted an even lower price strategy than Brooke Group. This action resulted in a price war between Brown & Williamson and Brooke Group. Tired of competing on price, Brooke Group sued Brown & Williamson for primary-line price discrimination. In its complaint, Brooke Group alleged that Brown & Williamson had given volume discounts to wholesalers that were both discriminatory and below cost.

The case reached the Supreme Court in 1992. By this time, the Court required that in order for price discrimination to be unlawful, it must be likely to have the effect of substantially lessening competition. Consequently, a difference in prices coupled with injury to a competitor would not be sufficient for plaintiffs to prevail in a primary-line case. The Court took this opportunity to set out the standards for proving predatory pricing. For the plaintiff to be successful, the Supreme Court imposed a two-pronged test. First, the defendant's price had to be below some appropriate measure of its costs. (45) Second, industry conditions must be such that the defendant has a reasonable prospect of recouping its losses caused by the below-cost prices. In other words, the plaintiff must demonstrate that price discrimination by the defendant is likely to substantially reduce competition in the postpredation period.

This is a much more demanding standard of proof for liability than that applied in Utah Pie, which was decided solely on proof of a price difference without any evidence of possible recoupment. In effect, the standard for unlawful price discrimination in primary-line cases became the same as the standards for unlawful monopolization under [section] (2) of the Sherman Act. Thus, Brooke Group clarified and substantially altered the liability standard in primary-line cases. It also had profound implications for the estimation of private damages.

Damages for Predation (46)

Because the standard for proving primary-line injury became synonymous with proving predation, we can think about damage estimation from the perspective of exclusion, either full or partial. In its classic form, predation occurs as pricing below cost to drive a rival from the market. In essence, the would-be monopolist sets price at a level that is so unprofitable that its rivals move their resources into another occupation. In theory, once the predator has the field all to itself, it recoups the losses suffered during the period of predation by charging monopoly prices. The victim of predatory pricing suffers financial losses during the predation period and suffers future lost profits following its demise. (47)

During the predation period, the lost profits are equal to the difference between the actual profits, which may be negative, and the but-for profits, that is, the profits that the victim would have earned in the absence of the predatory pricing. Following the victim's financial demise, the damage is captured by the lost future profits. This component of the total damages is the present value of the difference between actual future profits, which are assumed to be zero, and the profits that the victim would have earned but for the unlawful predation.

In sum, the victim's damage claim (A) can be written as

[DELTA] = [[tau].summation over (t=1)] [([[pi]] - [[pi].sub.a]).sub.t] + [T.summation over (t=[tau]+1)] [[pi].sub.t]/[(1 + i).sup.t],

where [summation] is the summation operator, n represents profit (but-for, bf and actual, a), and i indicates the discount rate. The first term on the right-hand side is the sum of the lost profits during the period of predation. Since there is no provision for prejudgment interest under [section] 4 of the Clayton Act, these losses are not capitalized. The second term on the right-hand side is the present value of lost future profits. These damages can be estimated directly, but it will be no simple task.

The first component of antitrust damages is the lost profit during the period of predation (t = 1 to t = [tau]), which is the difference between the profits but for the predation and the actual profits. The actual profits can be found in the victim's business records. The but-for profits, however, must be estimated. This may be a challenging empirical exercise. The careful use of econometric techniques, however, should provide a reasonable estimate of these losses. (48)

The second component is the but-for value of the victim's future profits that it would have earned but for the predation minus any salvage value that it received. This calculation is not straightforward. First, the plaintiff must estimate the profits that it would have earned absent the predation, controlling for varying market conditions.

Since a business is an income-generating asset, the value of the business at the time of its unlawful demise due to predation is the economic value of the lost future profits. Because these profits would be realized in the future but for the firm's demise, it is appropriate to discount these future profits. (49) Consequently, the damage ([DELTA]) is the present value (PV) of the future profits ([pi].sub.t]):

[DELTA] = [T.summation over (t=1)/[pi].sub.t] / [(1 + i).sup.t],

where [summation] is the summation operator, T is the reasonable life expectancy of the firm, and i is the appropriate discount rate.

Once again, this may be a challenging empirical exercise. Since profit is the difference between total revenue and total cost, future profits will be influenced by demand factors such as the prices of substitutes and complements as well as income and population. Supply factors, such as production and distribution costs, rival products, new entry (or exit) of rival firms, and the like, will also influence profits in the future. Forecasting can be hazardous, but a careful econometric study can provide a reasonable estimate.

An expert could rely on business valuation techniques to provide a reasonable estimate. As long as these approaches to valuation are economically equivalent (or nearly so) to the present value of lost profits, they provide a reasonable estimate of the victim's loss.

Estimating the future lost profits is no mean feat. The exercise is necessarily fraught with uncertainty. (50) The plaintiff's obligation is to provide a reasonable estimate of the loss. Speculation is not permitted, but reasonable estimates are permitted.

There are several ways to estimate lost profits using business valuation methods. The economically sound methods involve capitalized earnings, or the value of a business based on its profitability. There are three basic approaches to capitalized earnings. First is the so-called discounted cash flow approach, which is equivalent to the estimation of the present value of lost profits, which involves approximating lost profits, selecting a discount rate, and choosing a duration of time.

A somewhat imperfect substitute for valuing a firm is the income capitalization method. In this case, the firm that was excluded could calculate its net income for one year from its financial statements, making adjustments for depreciation and amortization. After finding net income, it is capitalized by dividing by the expected rate of return. For example, if a 20% return is expected and the net income for the year is $100,000, then the capitalized value would be $100,000/0.20 or $500,000. Here, the expected rate of return acts like an interest (or discount) rate. For this approach to be reliable, the expected rate of return must be a reasonable approximation of the discount rate. And this approach assumes that the business would have existed into perpetuity. (51) The main shortcoming of this approach is the implicit assumption that the profit in each future year is identical to that calculated for year one. This assumption is, of course, suspect.

The final measure takes into account the fact that a firm driven out of one market can employ its assets in another. In that case, the loss is the incremental earnings that could have been realized but for the predation. The method looks to excess earnings as a measure of goodwill. In essence, this approach reduces the cash flow of the business to account for opportunity costs, such as the required return on similar investments, as well as economic depreciation of capital assets and amortization of intangible assets. The net result is excess earnings, or earnings above those necessary to keep resources invested in this enterprise. The capitalized value of the excess earnings, that is, economics profits, represents goodwill. The value of the business is the sum of the goodwill plus the fair market value of the tangible assets. Properly computed, this approach can provide a reasonably good approximation of the value of the business.

As with other damage calculations, the plaintiff must account for a host of factors that could influence its profitability, including, for example, demand and supply factors, competition from new firms, new products, and the like. The plaintiff must account for aggressive, legitimate pricing by the defendant and for other competitive responses such as improvements in product quality, service, credit, promotions, and the like. There is also the danger of new entry and shifts in demand.

In many ways, the damage calculation is easier if the victim is not driven out of business entirely. In that event, if it can show that it would have been profitable, or at least not unprofitable, then its losses will be the damages. This calculation becomes more complicated if the plaintiff attempts to claim more than this minimal amount.

V. Secondary-Line Cases

The intent of the secondary-line provision is the protection of disfavored customers. Suppose a producer sells its output to some of its customers at one price and to other customers at a lower price. If these customers then compete among themselves in the resale market, those that paid the lower price will have a competitive advantage over those that paid the higher price. To the extent that a favored firm makes sales at the expense of the disfavored firms there is secondary-line injury. For example, in Hasbrouck, (52) Texaco sold its branded gasoline to two customers at 3.65 to 6.0 cents per gallon below the price that it charged to its other dealers. Given the slender profit margins on sales in gasoline, the disfavored dealers were obviously at a competitive disadvantage relative to the favored dealers. If sales of Texaco gasoline were made by the favored dealers that would have been made by the disfavored dealers in the absence of price discrimination, then the disfavored dealers would have suffered secondary-line injury. The concern in these cases is with protecting the firm's disfavored customers rather than protecting competition in the market. The following case illustrates this point.

Over six decades ago, Morton Salt set an early and enduring precedent regarding secondary-line price discrimination. (53) Morton Salt sold Blue Label table salt to both wholesalers and large retailers. The wholesalers resold the salt to retail grocery stores that were in direct competition with the large retailers that bought directly from Morton Salt. Volume discounts were available to all its customers, large and small alike. The price schedule is shown in Table 1.

In principle, these discounts were available to all purchasers, but only five firms ever purchased enough salt to qualify for the lowest $ 1,35/case price. Not surprisingly, these buyers were large grocery chains. These large chains could set retail prices of Blue Label salt below the wholesale prices to their customers.

The Supreme Court condemned Morton Salt's price discrimination on the presumption that price differences that persist are bound to have adverse competitive effects. No showing of actual harm was required. Accordingly, the Court decided that such discounts are illegal unless they can be cost justified.

Morton Salt argued that table salt is not a big revenue factor for any grocery store and that its discounts were not shown to have caused injury to competition. The Court dismissed this argument: "We have said that 'the statute does not require that the discriminations must in fact have harmed competition, but only that there is a reasonable possibility that they 'may' have such an effect.'" (54) Morton Salt, therefore, stands for the proposition that proof of a persistent price difference between purchasers that compete in the resale market is sufficient to establish a prima facie case of illegal price discrimination.

The most recent Supreme Court opinion dealing with secondary-line price discrimination is Volvo Tracks North America, Inc. v. Reeder-Simco GMC, Inc. (55) In its opinion, the Court reaffirmed the Morton Salt inference of injury in the presence of persistent price differences. It also explained that this inference is only relevant when the favored and disfavored customers are competing for the same book of business.

Reeder alleged that Volvo provided deeper discounts to other Volvo dealers than those that it extended to Reeder. Reeder's theory of injury was novel. It contended that its profits would have been higher if it had received the discounts afforded to other dealers. Reeder had no viable claim that it lost sales to favored dealers. In fact, the sole question before the court was: may a manufacturer be held liable for secondary-line price discrimination under the Robinson-Patman Act in the absence of a showing that the manufacturer discriminated between dealers competing to resell its product to the same retail customer? (56)

There is no reason to suppose that prices will be the same in all local markets. (57) Any multimarket firm is apt to set different prices in different markets to exploit different demand and cost conditions. If the costs of production and distribution are the same in all markets, any price difference will be discriminatory by definition. (58) But there can be no adverse competitive impact as envisioned by the Robinson-Patman Act. Consequently, Volvo should never have survived a summary judgment motion.

In addressing the question before the Court, the majority noted that "a hallmark of the requisite competitive injury, our decisions indicate, is the diversion of sales or profits from a disfavored purchaser to a favored purchaser." (59) Since there was no evidence that Reeder competed with favored retailers for the same customers, sales diversion would be logically impossible. Consequently, Volvo was not guilty of a Robinson-Patman Act violation. At this point, the liability standard in secondary-line cases is the same as it was when Morton Salt was decided. Persistent price differences give rise to an inference of adverse competitive effects. Although the liability standard is soft, the proof of damages is not.

The most important Supreme Court decision on damages in secondary-line price discrimination cases is J. Truett Payne Co. v. Chrysler Motor Corp. (60) According to the plaintiff, Chrysler offered bonuses (or rebates) to those dealers that exceeded sales quotas set by Chrysler. (61)

J. Truett Payne's quotas were higher than those of its rivals. To the extent that Payne failed to meet its quota, it did not receive bonuses, and therefore, paid higher net prices for its cars than its rivals paid. Payne argued that this constituted unlawful price discrimination and that it was entitled to recover damages under [section] 4 of the Clayton Act. In order to recover the damages under [section] 4, a plaintiff must prove that it has suffered antitrust injury. (62) To do so, it must prove that is suffered some cognizable injury that can be causally linked to an antitrust violation. Following some lower court precedents, Payne estimated its damages ([DELTA]) as the product of the price difference and the number of automobiles purchased:

[DELTA] = ([P.sub.a] - []) [Q.sub.a],

where [P.sub.a] and [Q.sub.a] are the actual price paid and quantity purchased by Payne, respectively, and [] is the price paid by Payne's rivals, that is, the but-for price. This measure of damages in a secondary-line price discrimination case has been referred to as "automatic damages." In J. Truett Payne, the Supreme Court rejected automatic damages as a proper measure of antitrust damages.

VI. Damage Scenarios in J. Truett Payne

If the supplier engages in secondary-line price discrimination, the favored customer may react to its good fortune in several ways. First, the favored dealer may incorporate the lower price in its profit-maximizing calculations. Usually, this will result in lower output prices that result in sales diversion and damages for the disfavored dealer. Second, in some oligopolistic markets, the profit-maximizing response of the favored dealer may be to pocket the cost savings and not reduce its output price. Third, the favored dealer may not change its output price, but use the cost savings to increase nonprice competition.

In each of these instances, the relevant question is whether the disfavored dealer has suffered antitrust injury and by how much.

Favored Dealer Passes on Its Cost Advantage

Discriminatory price concessions result in lower costs for the favored dealer. In the normal course of events, these lower costs influence the favored dealer's profit maximizing price and output decisions. The impact on the disfavored dealer, however, will vary considerably depending on the nature of the competition between the favored and the disfavored dealer. We illustrate this point by considering the effects of price discrimination on Cournot, Stackelberg, and Bertrand duopolists.

Cournot Duopolists

This scenario is relatively easy to illustrate in the context of a Cournot duopoly, where firms choose quantities simultaneously in order to maximize profits. (63,64) We begin with two equally efficient firms. In other words, the marginal (and average) costs are equal. If demand is

P = 100-0.1Q,

and [MC.sub.1] = [MC.sub.2] = 40, each firm's profit function will be given by

[[pi].sub.1] = (100 - 0.1[Q.sub.1] - 0.1[Q.sub.2])[Q.sub.1] - 40[Q.sub.1],

[[pi].sub.2] = (100 - 0.1[Q.sub.1] - 0.1[Q.sub.2])[Q.sub.2] - 40[Q.sub.2].

Each firm will maximize profits, and so the relevant first-order conditions are given by

[partial derivative[[pi].sub.1]/[partial derivative][Q.sub.1] = (100 - 0.2[Q.sub.1] - 0.1[Q.sub.2]) - 40 = 0,

[partial derivative[[pi].sub.2]/[partial derivative][Q.sub.2] = (100 - 0.2[Q.sub.2] - 0.1[Q.sub.1]) - 40 = 0.

Solving these two first-order conditions simultaneously yields a symmetric solution of [Q.sub.1], = [Q.sub.2] = 200 and [P.sub.1] = [P.sub.2] = 60. Each firm enjoys economic profit of $4,000.

Now, suppose that a supplier discriminates in favor of Firm 1 with the result that [MC.sub.1], = 30, while [MC.sub.2] remains at 40. The profit functions are then

[[pi].sub.1] = (100 - 0.1[Q.sub.1] - 0.1[Q.sub.2])[Q.sub.1] - 30[Q.sub.1],

[[pi].sub.2] = (100 - 0.1[Q.sub.1] - 0.1[Q.sub.2])[Q.sub.2] - 40[Q.sub.2].

Again, each firm will maximize profits, and so the relevant first-order conditions are

[partial derivative[[pi].sub.1]/[partial derivative][Q.sub.1] = (100 - 0.2[Q.sub.1] - 0.1[Q.sub.2]) - 30 = 0,

[partial derivative[[pi].sub.2]/[partial derivative][Q.sub.2] = (100 - 0.2[Q.sub.2] - 0.1[Q.sub.1]) - 40 = 0.

Solving this system of equations for [Q.sub.1], and [Q.sub.2], we find [Q.sub.1], = 266.67, [Q.sub.2] = 166.67, and [P.sub.1 - [P.sub.2] = 56.67. (65)

The profits of the disfavored customer fall from $4,000 to $2,778.39. Part of the loss is due to selling only 166.67 units rather than the but-for quantity of 200. But part of the reduction is due to the decrease in price from $60 to $56.67. What is the proper measure of damages in this case?

The "automatic damages" would be:

[DELTA][P.sup.*][Q.sub.a] = ($10) (166.67) = $1,666.70,

where the [DELTA]P represents the difference in the prices paid by the favored and disfavored firms, that is, the difference in the marginal costs faced by the two customers.

Alternative approaches to estimating lost profits depend on one's beliefs about the but-for world. (66) Assume that the but-for world is one in which both firms face an MC of $40. Lost profits are equal to the difference between the but-for profits and the actual profits. As noted above, the but-for profits are $4,000. The firm that is harmed by the price discrimination has an actual profit of $2,778.39. As a result, the estimated lost profits would amount to $1,221.61, which is less than what automatic damages would yield.

A second alternative approach to estimating damages in this scenario is to reconsider the but-for world. If there is no price discrimination and each firm faces a constant marginal cost of $30, then the Cournot solution would yield [Q.sub.1], = [Q.sub.2] = 233.33, P = $53.33, and profits per firm of $5,443.59. Comparing the but-for profits in this example to the profits associated with the price discrimination described above ($2,778.39) would yield estimated lost profits of $2,665.20, which is more than what automatic damages would yield.

In our example using the Cournot model, the detennination of the but for price is not an economic matter. (67) There are two prices--one for the favored customer and the original, higher price for the disfavored customer. We have shown the damage estimate for both prices as the but-for price. The lost profits under either scenario are the damages. In either case, an expert must control for (and take account of) changes in other relevant variables. The cognizable damages are limited to the lost profits that flow from the price discrimination--not lost profits due to other causes.

Stackelberg Duopolists

The Stackelberg duopoly model (68) is a variant at the Cournot model that allows for first-mover advantages. Again, we assume that demand is

P = 100-0.1Q,

and initially that marginal costs are constant and equal

[MC.sub.1] = [MC.sub.2] = 40.

In this case, Firm 1 produces 300 units, while Firm 2 produces 150 units. Since total output is 450, price will be S55. Finn l's profits are

[[pi].sub.1] = (55 - 40)(300) = $4,500,

which is more than the Cournot dupolist. Firm 2's profits are

[[pi].sub.2] = (55 - 40)(150) = $2,250,

which is less than the profits of the Cournot dupolist. (69)

Suppose that the first mover, Firm 1, is the beneficiary of price discrimination, with the result that its marginal cost falls to $30. In equilibrium, this will lead to an expansion in Firm 1's output to 400 and a contraction in Firm 2's output to 100. (70) With a total output of 500, price falls to $50.

Firm l's profits soar to

[[pi].sub.1] = (50 - 30) (400) = $8,000,

while Firm 2's profits plummet to

[[pi].sub.2] = (50 - 40)(100) = $1,000.

The decrease in Firm 2's profit is due in part to the reduction in price from $55 to $50 and in part to its reduction in output from 150 to 100.

For Firm 2, the loss in profits is

[DELTA][pi] = 2,250 - 1,000 = $1,250.

Sales diversion, however, is 50 units, such that

[DELTA][Q.sub.2] = 150 - 100 = 50.

Since price is now $50, the lost profit on lost sales is equal to

[DELTA] = (50 - 40)(50) = $500.

which is less than the fall in profits. This figure is lower than what automatic damages would yield

[DELTA] = (40 - 30)(100) = $1,000.

Bertrand Duopolists

In contrast, if the two customers are Bertrand rivals, (71) they will compete on price rather than quantity, which is the basis on which Cournot and Stackelberg rivals compete. When the favored customer's costs fall to $30, that firm can cut price below $40 and take all of the business. The favored customer will earn economic profit of S9.99 per unit sold if it sets its price at $39.99. The disfavored customer had earned no economic profit in the prediscrimination period. In a Bertrand equilibrium with homogenous products, price is equal to marginal (and average) cost. Thus, the disfavored customer might move its resources to another industry, but it will suffer no lost profits. The damages in this case amount to losses associated with moving from one industry to another.

Bertrand rivals may try to differentiate their products. The original assumption of homogenous products described above therefore may not be met, and as such, we consider the Bertrand model with heterogeneous products below. Because the firms offer different products, the demand curves faced by the firms differ. Let Firm 1 face demand given by

Q = 1,000 - 10[P.sub.1] + [P.sub.2],

while Firm 2 faces

[Q.sub.2] = 1,000 - 10[P.sub.1] + [P.sub.2],

First, consider marginal cost to be symmetric at $40. If Firm 1 maximizes its profits, the best response function will be

[P.sub.1] = 70 + 0.05[P.sub.2].

Firm 2 will similarly maximize its profits and find its best response function to be

[P.sub.2] = 70 + 0.05[P.sub.1].

Solving these equations simultaneously yields a market price where [P.sub.1]=[P.sub.2] = $73.68 and market output of [Q.sub.1] = [Q.sub.2] = 336.88. The resulting profit per firm is $11,346.12. Now, assume that Firm 1 faces a lower marginal cost ($30) than Firm 2. The best response function of Firm 2 will not change, but the best response function for Firm 1 becomes

[P.sub.1] = 65 + 0.05 [P.sub.2].

The resulting solution is no longer symmetric: Firm 1 charges [P.sub.1] = $68.67 and produces [Q.sub.1] = 386.73, earning profit of $14,954.85. Firm 2 now charges [P.sub.2] = $73.43 and produces [Q.sub.2] = 334.37, and earns profit of $11,177.99. Firm 1 is made better off by the drop in its costs at the expense of Firm 2. For Firm 2, the loss in profits is

[DELTA][pi] = $11,346 - 11,178 = $168.

Sales diversion is minimal,

[DELTA][Q.sub.2] = 336.88 - 334.37 = 2.51.

Since the price is now $73.43, the lost profits on lost sales are

[DELTA] = (73.43 - 40)(2.51) = $83.91.

This figure is considerably lower than what automatic damages would yield

[DELTA] = (40 - 30)(334.37) = $3,343.70.

Favored Dealer Keeps Its Cost Advantage

Under some circumstances, a favored customer may elect not to pass on any of the cost reduction flowing from the price discrimination. Ordinarily, a cost reduction leads to a price reduction through the profit-maximizing effort. As described by Sweezy, (72) an oligopolist may believe that its demand has a kink at the current price and quantity, as shown in Figure 1. (73) The kink at [P.sub.1] and [Q.sub.1] causes the marginal revenue function to be discontinuous. In the absence of price discrimination, the firm's marginal (and average) cost is [MC.sub.1], which passes through the discontinuous part of the marginal revenue curve. If the favorable price discrimination by a supplier causes [MC.sub.1] to fall to [MC.sub.2], which remains in the discontinuous region, then the favored customer will find it optimal to simply continue producing [Q.sub.1]. Thus, the cost saving will go into the favored customer's pocket, i.e., none of the savings will be passed on to its customers.

In this case, no sales are diverted. The disfavored customer suffers no loss in sales, no loss in market share, and no loss in profit. The favored customer's sales do not expand; nor does its market share. Its profits, however, increase by the amount of the discrimination. The change in profit ([DELTA][pi]) will be

[DELTA][pi] = ([MC.sub.1] - [MC.sub.2])[Q.sub.1],

where the difference between [DELTA][pi] and [MC.sub.2] is due to the discriminatory reduction in the price that it paid. Without more, there appears to be no competitive significance to this increase in profit. Consequently, there would seem to be no damages under the Robinson-Patman Act. (74)

Cost Saving Is Used in Nonprice Competition

A favored customer could recognize that passing on some of the cost saving through price reductions might expose its favored treatment. Consequently, it could mask this advantage while using it competitively. For example, it could hold the line on price, but use some or all of the cost savings on nonprice competition--advertising and promotion, improved service, enhanced ambiance of its retail outlets, and the like. In doing so, the favored customer enjoys a competitive advantage over its disfavored rivals.

To the extent that sales are diverted from the disfavored customer to the favored customer, market shares shift along with sales and profits. It is clear that the disfavored rivals have been injured and the task is how to measure that injury in the light of J. Truett Payne.

In principle, the damages seem to be lost profits on lost sales that can be attributed to the price discrimination. But how does the disfavored customer link a rival's improved quality of service or a spruced up retail location to the discriminatory pricing? There will be problems of proof.

VII. Conclusions

Public enforcement of the Robinson-Patman Act is nonexistent, leaving private enforcement to address issues of price discrimination. Private enforcement, however, has become more difficult due to several Supreme Court decisions regarding both liability and damages. With respect to primary-line cases, Brooke Group clarified what constitutes unlawful price discrimination. To prove unlawful price discrimination in a primary-line case, a plaintiff must prove that the reduced price was actually predatory. This requires proving that the price is below the defendant's cost and that the defendant has a reasonable prospect of recouping the investment in the below cost pricing. Thus, Brooke Group raised the bar for plaintiffs.

With respect to secondary-line cases, Volvo requires that the plaintiff and the favored customer be competing for the same book of business, which is most sensible and should have no impact on legitimate cases. J. Truett Payne, however, made antitrust damage estimates far more difficult in secondary-line cases. No longer can a plaintiff resort to the so-called automatic damage calculation. Instead, the plaintiff must engage in a far more complicated estimation of lost profits due to sales diversion causally linked to a rival's favored treatment.

DOI: 10.1177/0003603x15602404

Authors' Note

Authors can be contacted at and


We thank Bill Curran, Mark Glick, and Richard Romano for useful comments and suggestions that improved our analysis and exposition. We also gratefully acknowledge the benefits of earlier collaboration with (the late) David Kaserman and with Christina DePasquale.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.


The author(s) received no financial support for the research, authorship, and/or publication of this article.

(1.) Standard Oil Co. of N.J. v. United States, 221 U.S. 1 (1911).

(2.) United States v. Am. Tobacco Co., 221 U.S. 106 (1911).

(3.) Clayton Act, 15 U.S.C. [section][section] 12-27, 29 U.S.C. [section][section] 52-53 (1914).

(4.) Herbert Hovenkamp, The Robinson-Patman Act and Competition: Unfinished Business, 68 Antitrust L. J. 125, 137 (2000).

(5.) Morris A. Adelman, A & P: A Study in Price-Cost Behavior and Public Policy (1959).

(6.) Herbert Hovenkamp, Federal Antitrust Policy: The Law of Competition and Its Practice at 629 (4th ed., 2011).

(7.) Id.

(8.) Ryan Luchs, Tansev Geylani, Anthony Dukes, & Kannan Srinivasan, The End of the Robinson-Patman Act? Evidence from Legal Case Data, 56 Mgmt. Sci. 2123 (2010). Although private plaintiffs may not fare well when cases go to trial, they may still enjoy recoveries through settlements, which the authors did not examine.

(9.) Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).

(10.) J. Truett Payne Co. v. Chrysler Motors Corp., 451 U.S. 557 (1981).

(11.) 15 U.S.C [section] 2.

(12.) Reasonable conduct would include improved products, improved methods of production, better service, enhanced durability, and other means of competing on the merits.

(13.) Most prominently, these include conditional sales (S 3) and mergers that may be anticompetitive ([section] 7).

(14.) Standard Oil, 221 U.S. at 1.

(15.) Am. Tobacco, 221 U.S. at 106.

(16.) Small mom-and-pop grocery stores have largely disappeared. To some extent, they have resurfaced in the convenience store format.

(17.) Robert H. Bork, The Antitrust Paradox (1978) observed that superior efficiency is not popular with those who must compete against it, and it never seems well understood by lawmakers. On the origins of Robinson-Patman, see D. Daniel Sokol, Limiting Anti-Competitive Government Interventions That Benefit Special Interests, 17 Geo. Mason L. Rev. 117, 128 (2009).

(18.) Ironically, the Act largely failed to protect small businesses. Frederic M. Scherer & David Ross, Industrial Market Structure and Economic Performance 516 (3d ed., Houghton Mifflin Co., 1990), reported that, of the 564 companies named in FTC Robinson-Patman complaints between 1961 and 1974, only thirty-six, or 6.4%, had annual sales of $100 million or more at the time of complaint. More than 60% had sales below $5 million. Thus, the brunt of the Commissions effort fell upon the same businesses Congress sought to protect. See also Adelman, supra note 5.

(19.) 15 U.S.C. [section] 13.

(20.) There are two affirmative defenses to charges of unlawful price differences. First, in Section 2a, there is a cost justification defense. If the seller can show that any price difference is equal to the difference in the cost of making the sales, then the price difference is lawful. The cost justification defense has rarely been successful due to problems of cognizable costs. For a brief discussion, see Bork, supra note 15 and Hovenkamp, supra note 6. Second, there is a meeting competition defense in Section 2b. If the lower price is offered to meet (but not to beat) an equally low price of a competitor, the resulting price difference is lawful.

(21.) Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977).

(22.) 15 U.S.C. [section] 15.

(23.) Most antitrust violations lead to reduced output and elevated prices. Those effects ripple through the economy causing reduced employment, higher prices of substitutes, lower prices of complements, and reduced purchases of inputs. None of the victims of those adverse consequences have standing to sue under [section] 4 of the Clayton Act. For an economic approach to antitrust injury, see William H. Page, Antitrust Damages and Economic Efficiency: An Approach to Antitrust Injury, 47 U. Chi. L. Rev. 467 (1980), and Roger D. Blair & Jeffrey L. Harrison, Rethinking Antitrust Injury, 42 Vand. L. Rev. 1539 (1989). For a reasonably current survey, see John E. Lopatka, Antitrust Injury and Causation, in Issues in Competition Law and Policy (W. D. Collins ed., 2008). For a more detail on antitrust standing, see Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law, ch. 3F (3rd ed. 2007).

(24.) Brunswick Corp., 429 U.S. at 477.

(25.) For an assessment of Brunswick's importance, see John E. Lopatka & William H. Page, Antitrust Injury and the Evolution of Antitrust Law, 16 Antitrust 20 (2002).

(26.) Brunswick, supra note 22, at 479.

(27.) Id. at 480.

(28.) Id.

(29.) Id. at 488.

(30.) The Brunswick merger could not be unlawful on a coordinated effects theory because the merger preserved rivals and prevented unilateral effects.

(31.) Brunswick, supra note 22, at 489.

(32.) For the standards for unlawful monopolization, see United States v. Grinnell Corp., 384 U.S. 563 (1966).

(33.) This includes variants. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940). In his decision, Justice Douglas said: "Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se."

(34.) Mandeville Island Farms, Inc. v. Am. Crystal Sugar Co., 334 U.S. 219 (1948).

(35.) Roger D. Blair & Christine A. Piette, The Interface of Antitrust and Regulation: Trinko, 50 Antitrust Bull. 665 (2005).

(36.) Hovenkamp, supra note 6.

(37.) In order to prove liability, Brooke Group requires both below cost pricing and a high likelihood of recoupment.

(38.) Janusz A. Ordover and Garth Saloner, Predation, Monopolization, and Antitrust (1989).

(39.) Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967).

(40.) Id. at 691-92.

(41.) It is likely that retail prices fell given the large increases in quantity, but it is also likely that demand for frozen pies as well as other frozen food was expanding.

(42.) The prices in Salt Lake City were not necessarily below the

costs of the defendants, but they were lower in that market than they were on the West Coast.

(43.) It is not clear why the defendants did not have a meeting competition defense since Utah Pie's prices were below those of its out-of-state rivals.

(44.) Ward S. Bowman Jr., Restraint of Trade by the Supreme Court: The Utah Pie Case, 77 Yale L. J. 70 (1967).

(45.) While the Brooke Group court was not clear on the appropriate measure of cost, most lower courts have used average variable cost (AVC). See Hovenkamp, supra note 6, at [section] 8.3.

(46.) This discussion relies on 2A Phillip E. Areeda, Herbert Hovenkamp. Roger D. Blair, & Christine Piette Durrance, Antitrust Law at [paragraph] 397 g (3rd ed., Wolters Kulwer, 2014).

(47.) These losses would appear to constitute antitrust injury. Assuming that the prices are predatory, the below-cost pricing is unlawful under Brooke Group. The victim has lost profits flow from the exclusionary conduct. Thus, there is a direct link between that which makes predation unlawful and the victim's loss.

(48.) Keith Leffler & Ted Tatos, Proving Robinson Patman Damages Using Econometrics, Antitrust Bull, (forthcoming 2016).

(49.) A damage award should make the successful plaintiff whole. The absence of prejudgment interest is an economic error--past losses will not be fully compensated. Discounting future losses is designed to provide a lump sum today to replace a future stream of profits.

(50.) The wrongdoer must bear the burden of this uncertainty since its actions created the need for this estimation. In Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555 (1931), the Supreme Court pointed out that "the rule which precludes the recovery of uncertain damages applies to such as are not the certain result of the wrong, not to those damages which are definitely attributable to the wrong and only uncertain in respect of their amount." Id. at 562. The Court went on to explain that "it will be enough if the evidence show the extent of the damages as a matter of just and reasonable inference...." Id. at 563.

(51.) The infinite sum + 1/(1+i) + 1/[(1+i).sup.1] + 1/[(1+i).sup.2] + ... converges to 1/i.

(52.) Texaco Inc. v. Hasbrouck, 496 U.S. 543 (1990).

(53.) F.T.C. v. Morton Salt Co., 334 U.S. 37 (1948).

(54.) Id. at 46.

(55.) 546 U.S. 164 (2006).

(56.) Under the Robinson-Patman Act, this price difference may be deemed to be discriminatory, but it can have no competitive significance as the markets are distinct by hypothesis.

(57.) For example, suppose that demand in market 1 is [P.sub.1] = 80 - [Q.sub.1], while demand in market 2 is [P.sub.2] = 100 - [Q.sub.2]. If marginal (and average) cost is $10, then [+[[PI].sub.1], = (80 - [Q.sub.1]) [Q.sub.1] - 10[Q.sub.1], and [+[[PI].sub.2], = (80 - [Q.sub.2]) [Q.sub.2] - 10[Q.sub.2]. Profit maximization will lead the firm to charge a price of S45 in market I and $55 in market 2.

(58.) Under the Robinson Patman Act, price discrimination exists when prices are different. In this example, prices are different while costs are the same.

(59.) Supra note 55 at 177.

(60.) J. Truett Payne Co., 451 U.S., at 557.

(61.) This continues to be a problem for Chrysler dealers. A recent case against Chrysler was filed by a Chrysler dealership, alleging preferential treatment of new dealerships. Mathew Enter. Inc. v. Chrysler Grp., LLC, 2014 WL 193077, N.D. Cal., No. 5:13-CV-04236-BLF, July 11, 2014). The complaint alleges that the Mathew's dealership could not functionally obtain the same volume sales price discounts as new Chrysler dealerships which competed in the same sales area.

(62.) Brunswick Corp., 429 U.S., at 477.

(63.) Augustin Cournot's work was translated into English in 1897 by Nathaniel T. Bacon. Antoine Augustin Cournot, Researches into the Mathematical Principles of the Theory of Wealth (Nathaniel T. Bacon trans., Macmillan, 1897).

(64.) Tracing the economic effects of price discrimination in different oligopoly models is useful in demonstrating the potential problems of proof that a disfavored buyer faces. As with all economic models, the assumptions may not mirror the real world, but even in this stylized world, we can see that disfavored customers may have problems of proof.

(65.) The welfare effects of price discrimination provide the foundation for an economic critique of the Robinson-Patman Act. If we consider consumer surplus as the relevant welfare measure, price discrimination leads to higher consumer welfare. Consumer welfare in the classic Cournot scenario is equal to CS = 1/2(100 - 60)(400) = 8,000, whereas consumer welfare in the modified cost scenario increases: CS = 1/2(100 - 56.67)(433.34) = 9,388.31. If we consider social welfare (SIV = CS + profit) as the relevant welfare measure, price discrimination leads again to higher welfare. SW = 16,000 in the original Cournot scenario, but increases to SIV = 19,278.79 under price discrimination.

(66.) With respect to the Cournot examples, we have measured the lost profit, but there are many implicit assumptions, for example, demand does not change, no new entry, no new products, no other cost changes, and no changes in technology.

(67.) If the price discrimination is profit-maximizing and the defendant is obligated to set a single price, that price will make the marginal cost for Firm 1 and Firm 2 somewhere between $30 and $40. This, of course, makes the calculation far more complicated.

(68.) Heinrich Freiherr von Stackelberg, Marktform und Gleichgwicht (Market Structure and Equilibrium) (1934).

(69.) The total profits are $6,750, which is less than the profits in a Cournot duopoly.

(70.) The follower's best response function is [Q.sub.2] = 300 - 0.5[Q.sub.1], Substituting the best response function into the leader's profit function and differentiating with respect to [Q.sub.1], [Q.sub.1] = [(70 - 30)/0.1] or [Q.sub.1] = 400, meaning that [Q.sub.2] = 100.

(71.) Joseph Bertrand, Theorie Mathematique de la Richesse Sociale et des Recherches sur les Principles Mathematiques de la Theorie des Richesses, 67 J. des Savants 499 (1883).

(72.) Paul M. Sweezy, Demand Under Conditions of Oligopoly, 47 J. Pol. Econ. 568 (1939).

(73.) The kink occurs because the firm may believe that a price concession will not be matched and, therefore, the quantity response will be large. The firm may believe that the price decreases will be matched, so the quantity increases will be small.

(74.) This is not to say that the defendant would argue that it did not, in fact, pass on any of the cost savings. This model illustrates the consequences of price discrimination when the favored buyer does not pass on any of the cost advantage. In this case, there would be no impact on the disfavored customer of the price discrimination.

Roger D. Blair, Department of Economics, University of Florida, Gainesville, FL, USA

Christine Piette Durrance, Department of Public Policy, University of North Carolina at Chapel Hill, Chapel Hill, NC, USA

Corresponding Author:

Roger D. Blair, Department of Economics, University of Florida, PO Box 117140, 342 MAT, Gainesville, Florida, USA.


Table 1. Morton Salt Price Schedule.

Less-than-carload purchases     $ 1.60/case

Carload purchases               $ 1.50/case

5,000 case purchases in any     $ 1.40/case
  consecutive 12 months
50,000 case purchases in        $l.35/case
  any consecutive 12 months
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Title Annotation:To Defend or Reform? The Law and Economics of the Robinson-Patman Act
Author:Blair, Roger D.; Durrance, Christine Piette
Publication:Antitrust Bulletin
Date:Dec 22, 2015
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