Fair-Trade Laws

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Fair-Trade Laws

State statutes enacted in the first half of the twentieth century permitting manufacturers to set minimum, maximum, or actual selling prices for their products, and thus to prevent retailers from selling products at very low prices.

Manufacturers have an interest in establishing and maintaining good will toward their products. This means assuring consumers that the manufacturers' goods are quality products. Good will is promoted by advertising and other sales efforts. Manufacturers in the early 1900s believed that commanding minimum retail prices was necessary to preserve good will, and that uncontrolled price-cutting by retailers would be detrimental to good will. Specifically, manufacturers feared that consumers would become skeptical if a particular retailer began to sell for a lower price a product that had had a relatively consistent price over the years: the lower price would undercut any claim by the manufacturer that the higher price was necessary to maintain the product's quality, and purchasers at the higher price would feel cheated.

The Great Depression following the Stock Market crash of 1929 started a movement toward state involvement in product price controls. State lawmakers believed that allowing manufacturers to dictate resale prices to retailers would help stabilize price levels and markets.

In 1931, California became the first state to pass fair-trade laws. These laws made it legal for a manufacturer to enter an agreement whereby the purchasing retailer, the signor, could resell a product only at a prescribed minimum price. In 1933, California amended these laws to make such an agreement binding on nonsignors. The amendments made minimum-price agreements enforceable against any retailer who had knowledge of another retailer's agreement with the manufacturer.

The setting of minimum resale prices, which state fair-trade laws legalized, was precisely the sort of vertical price-fixing that the federal sherman anti-trust act of 1890 (15U.S.C.A. § 1) had been intended to prohibit. While the courts wrestled with the conflicting state and federal laws, Congress passed first the Miller-Tydings Act (50 Stat. 693 [Aug. 17,1935]), which amended the Sherman Act to exempt state fair-trade laws, and then the McGuire Act (66 Stat. 632 [1952]), which allowed states to pass fair-trade laws making minimum price agreements enforceable against nonsignors as well.

After the enactment of Miller-Tydings and McGuire, state fair-trade laws and federal antitrust laws were no longer in conflict, and as many as forty-five states enacted fair-trade laws. As time passed, though, state courts whittled away at the fair-trade laws, often finding them to be in violation of the state's constitution. The perceived importance of allowing manufacturers to set minimum prices deteriorated as it became evident that the laws were harming the free market. In 1975, Congress, with support of the Ford administration, passed the Consumer Goods Pricing Act (Pub. L. No. 94-145), which repealed the Miller-Tydings and McGuire Acts, putting state fair-trade laws back within the prohibitions of the Sherman Act.

Today, the computer and electronics industries face retail price-cutting issues. Volume discount retailers sell name brand computers and electronics at prices far below those initially established in the market. With fair-trade laws off the books, retailers and the market determine at what prices goods will be sold.

Further readings

Areeda, Phillip, and Louis Kaplow. 1997. Antitrust Analysis. 5th ed. New York: Aspen Law & Business.

Posner, R. 1976. Antitrust Law: An Economic Perspective. Univ. of Chicago Press.

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