“Competition that Kills”
And this is theThe Supreme Court says that a contract by which a producer binds a retailer to maintain the established selling price of his trade-marked product is void; because it prevents competition between retailers of the article and restrains trade.Such a contract does, in a way, limit competition; but no man is bound to compete with himself. And when the same trade-marked article is sold in the same market by one dealer at a less price than by another, the producer, in effect, competes with himself. To avoid such competition, the producer of a trade-marked article often sells it to but a single dealer in a city or town; or he establishes an exclusive sales agency. No one has questioned the legal right of an independent producer to create such exclusive outlets for his product. But if exclusive selling agencies are legal, why should the individual manufacturer of a trade-marked article be prevented from establishing a marketing system under which his several agencies for distribution will sell at the same price? There is no difference, in substance, between an agent who retails the article and a dealer who retails it.
For many business concerns the policy of maintaining a standard price for a standard article is simple. The village baker readily maintained the quality and price of his product, by sale and delivery over his own counter. The great Standard Oil monopoly maintains quality and price (when it desires so to do) by selling throughout the world to the retailer or the consumer from its own tank-wagons. But for most producers the jobber and the retailer are the necessary means of distribution—as necessary as the railroad, the express or the parcel post. The Standard Oil Company can, without entering into contracts with dealers, maintain the price through its dominant power. Shall the law discriminate against the lesser concerns which have not that power, and deny them the legal right to contract with dealers to accomplish a like result? For in order to insure to the small producer the ability to maintain the price of his product, the law must afford him contract protection, when he deals through the middleman.But the Supreme Court says that a contract which prevents a dealer of trade-marked articles from cutting the established selling price, restrains trade. In a sense every contract restrains trade; for after one has entered into a contract, he is not as free in trading as he was before he bound himself. But the right to bind one's self is essential to trade development. And it is not every contract in restraint of trade, but only contractsunreasonably in restraint of trade, which are invalid. Whether a contract does unreasonably restrain trade is not to be determined by abstract reasoning. Facts only can be safely relied upon to teach us whether a trade practice is consistent with the general welfare. And abundant experience establishes that the one-price system, which marks so important an advance in the ethics of trade, has also greatly increased the efficiency of merchandising, not only for the producer, but for the dealer and the consumer as well.When a trade-marked article is advertised to be sold at less than the standard price, it is generally done to attract persons to the particular store by the offer of an obviously extraordinary bargain. …..The evil results of price-cutting are far-reaching. It is sometimes urged that price-cutting of a trade-marked article injures no one; that the producer is not injured, since he received his full price in the original sale to jobber or retailer; and indeed may be benefited by increased sales, since lower prices ordinarily stimulate trade; that the retailer cannot be harmed, since he has cut the price voluntarily to advance his own interests; that the consumer is surely benefited because he gets the article cheaper. But this reasoning is most superficial and misleading.To sell a Dollar Ingersoll watch for sixty-seven cents injures both the manufacturer and the regular dealer; because it tends to make the public believe that either the manufacturer's or the dealer's profits are ordinarily exorbitant; or, in other words, that the watch is not worth a dollar. Such a cut necessarily impairs the reputation of the article, and, by impairing reputation, lessens the demand. It may even destroy the manufacturer's market. A few conspicuous "cut-price sales" in any market will demoralize the trade of the regular dealers in that article. They cannot sell it at cut prices without losing money. They might be able to sell a few of the articles at the established price; but they would do so at the risk to their own reputations. The cut by others, if known, would create the impression on their own customers of having been overcharged. It is better policy for the regular dealer to drop the line altogether. On the other hand, the demand for the article from the irregular dealer who cuts the price is short-lived. The cut-price article cannot long remain his "leader." His use for it is sporadic and temporary. One "leader" is soon discarded for another. Then the cut-price outlet is closed to the producer; and, meanwhile, the regular trade has been lost. Thus a single prominent price-cutter can ruin a market for both the producer and the regular retailer. And the loss to the retailer is serious.On the other hand, the consumer's gain from price-cutting is only sporadic and temporary. The few who buy a standard article for less than its value do benefit—unless they have, at the same time, been misled into buying some other article at more than its value. But the public generally is the loser; and the losses are often permanent. If the price-cutting is not stayed, and the manufacturer reduces the price to his regular customers in order to enable them to retain their market, he is tempted to deteriorate the article in order to preserve his own profits. If the manufacturer cannot or will not reduce his price to the dealer, and the regular retailers abandon the line, the consumer suffers at least the inconvenience of not being able to buy the article.It is essential that the consumer should have confidence, not only in the quality of my product, but in the fairness of the price he pays. And to accomplish a proper and adequate distribution of product, guaranteed both as to quality and price, I must provide by contract against the retail price being cut….The position of the independent producer who establishes the price at which his own trade-marked article shall be sold to the consumer must not be confused with that of a combination or trust which, controlling the market, fixes the price of a staple article. The independent producer is engaged in a business open to competition. He establishes his price at his peril—the peril that, if he sets it too high, either the consumer will not buy, or, if the article is nevertheless popular, the high profits will invite even more competition. The consumer who pays the price established by an independent producer in a competitive line of business does so voluntarily; he pays the price asked, because he deems the article worth that price as compared with the cost of other competing articles. But when a trust fixes, through its monopoly power, the price of a staple article in common use, the consumer does not pay the price voluntarily. He pays under compulsion. There being no competitor he must pay the price fixed by the trust, or be deprived of the use of the article.The great corporation with ample capital, a perfected organization and a large volume of business can establish its own agencies or sell direct to the consumer, and is in no danger of having its business destroyed by price-cutting among retailers. But the prohibition of price-maintenance imposes upon the small and independent producers a serious handicap… Independent manufacturers without the capital or the volume of business requisite for engaging alone in the retail trade will be apt to combine with existing chains of stores, or to join with other manufacturers similarly situated in establishing new chains of retail stores through which to market their products direct to the consumer. The process of exterminating the small independent retailer already hard pressed by capitalistic combinations—the mail-order houses, existing chains of stores and the large department stores—would be greatly accelerated by such a movement. Already the displacement of the small independent business man by the huge corporation with its myriad of employees, its absentee ownership and its financier control presents a grave danger to our democracy. The social loss is great; and there is no economic gain
ECJ Judgment of the Court of 13 July 1966. - Établissements Consten S.à.R.L. and Grundig-Verkaufs-GmbH v Commission of the European Economic Community. - Joined cases 56 and 58-64. (never overruled)
IN ADDITION, IT IS POINTLESS TO COMPARE ON THE ONE HAND THE SITUATION, TO WHICH ARTICLE 85 APPLIES, OF A PRODUCER BOUND BY A SOLE DISTRIBUTORSHIP AGREEMENT TO THE DISTRIBUTOR OF HIS PRODUCTS WITH ON THE OTHER HAND THAT OF A PRODUCER WHO INCLUDES WITHIN HIS UNDERTAKING THE DISTRIBUTION OF HIS OWN PRODUCTS BY SOME MEANS, FOR EXAMPLE, BY COMMERCIAL REPRESENTATIVES, TO WHICH ARTICLE 85 DOES NOT APPLY . THESE SITUATIONS ARE DISTINCT IN LAW AND, MOREOVER, NEED TO BE ASSESSED DIFFERENTLY, SINCE TWO MARKETING ORGANIZATIONS, ONE OF WHICH IS UNTEGRATED INTO THE MANUFACTURER'S UNDERTAKING WHILST THE OTHER IS NOT, MAY NOT NECESSARILY HAVE THE SAME EFFICIENCY . THE WORDING OF ARTICLE 85 CAUSES THE PROHIBITION TO APPLY, PROVIDED THAT THE OTHER CONDITIONS ARE MET, TO AN AGREEMENT BETWEEN SEVERAL UNDERTAKINGS . THUS IT DOES NOT APPLY WHERE A SOLE UNDERTAKING INTEGRATES ITS OWN DISTRIBUTION NETWORK INTO ITS BUSINESS ORGANIZATION . IT DOES NOT THEREBY FOLLOW, HOWEVER, THAT THE CONTRACTUAL SITUATION BASED ON AN AGREEMENT BETWEEN A MANUFACTURING AND A DISTRIBUTING UNDERTAKING IS RENDERED LEGALLY ACCEPTABLE BY A SIMPLE PROCESS OF ECONOMIC ANALOGY - WHICH IS IN ANY CASE INCOMPLETE AND IN CONTRADICTION WITH THE SAID ARTICLE . FURTHERMORE, ALTHOUGH IN THE FIRST CASE THE TREATY INTENDED IN ARTICLE 85 TO LEAVE UNTOUCHED THE INTERNAL ORGANIZATION OF AN UNDERTAKING AND TO RENDER IT LIABLE TO BE CALLED IN QUESTION, BY MEANS OF ARTICLE 86, ONLY IN CASES WHERE IT REACHES SUCH A DEGREE OF SERIOUSNESS AS TO AMOUNT TO AN ABUSE OF A DOMINANT POSITION, THE SAME RESERVATION COULD NOT APPLY WHEN THE IMPEDIMENTS TO COMPETITION RESULT FROM AGREEMENT BETWEEN TWO DIFFERENT UNDERTAKINGS WHICH THEN AS A GENERAL RULE SIMPLY REQUIRE TO BE PROHIBITED .
THE APPLICANTS AND THE GERMAN GOVERNMENT MAINTAIN THAT SINCE THE COMMISSION RESTRICTED ITS EXAMINATION SOLELY TO GRUNDIG PRODUCTS THE DECISION WAS BASED UPON A FALSE CONCEPT OF COMPETITION AND OF THE RULES ON PROHIBITION CONTAINED IN ARTICLE 85(1 ), SINCE THIS CONCEPT APPLIES PARTICULARLY TO COMPETITION BETWEEN SIMILAR PRODUCTS OF DIFFERENT MAKES; THE COMMISSION, BEFORE DECLARING ARTICLE 85(1 ) TO BE APPLICABLE, SHOULD, BY BASING ITSELF UPON THE ' RULE OF REASON ', HAVE CONSIDERED THE ECONOMIC EFFECTS OF THE DISPUTED CONTRAST UPON COMPETITION BETWEEN THE DIFFERENT MAKES . THERE IS A PRESUMPTION THAT VERTICAL SOLE DISTRIBUTORSHIP AGREEMENTS ARE NOT HARMFUL TO COMPETITION AND IN THE PRESENT CASE THERE IS NOTHING TO INVALIDATE THAT PRESUMPTION . ON THE CONTRARY, THE CONTRACT IN QUESTION HAS INCREASED THE COMPETITION BETWEEN SIMILAR PRODUCTS OF DIFFERENT MAKES .
THE PRINCIPLE OF FREEDOM OF COMPETITION CONCERNS THE VARIOUS STAGES AND MANIFESTATIONS OF COMPETITION . ALTHOUGH COMPETITION BETWEEN PRODUCERS IS GENERALLY MORE NOTICEABLE THAN THAT BETWEEN DISTRIBUTORS OF PRODUCTS OF THE SAME MAKE, IT DOES NOT THEREBY FOLLOW THAT AN AGREEMENT TENDING TO RESTRICT THE LATTER KIND OF COMPETITION SHOULD ESCAPE THE PROHIBITION OF ARTICLE 85(1 ) MERELY BECAUSE IT MIGHT INCREASE THE FORMER .BESIDES, FOR THE PURPOSE OF APPLYING ARTICLE 85(1 ), THERE IS NO NEED TO TAKE ACCOUNT OF THE CONCRETE EFFECTS OF AN AGREEMENT ONCE IT APPEARS THAT IT HAS AS ITS OBJECT THE PREVENTION, RESTRICTION OR DISTORTION OF COMPETITION