Laws Against Low Prices

One of the most common ways government violates the right to make a living is through rules that prohibit businesses from charging low prices. Probably the most famous case about this issue is Nebbia v. New York, in which the state of New York, in the depths if the Great Depression, made it illegal to sell milk for low prices. The Supreme Court upheld this law in a decision that basically invented the “rational basis” test.

But there are many similar laws on the books in most cities and states today — laws that do not protect the public, but only protect established companies against competition. Tampa, Florida, for example, requires limo companies to charge at least $20 per hour. Why? Well, some years ago, I asked that question, and the Hillsborough County Public Transportation Commission answered that the restriction exists to “create a balance between the different transportation ‘markets’” so that taxis and limos would “not directly compet[e] against each other. This way, both manage to survive in their respective market area and the ‘balance’ is maintained.”

Balance? Why should the government impose an artificial “balance” in the market if it doesn’t reflect what consumers prefer? What authority does government have to force people to pay more for limo rides so as to protect the taxi companies from having to improve their services? Only if you think government exists to promote the interests of taxi drivers who can’t compete fairly, would you think the government should block mature adults from deciding for themselves what transportation choices to make. Such rules do not even arguably protect the public from fraud or violence or anything; they only exploit government’s coercive power to protect one private interest group against competition from another. That is arbitrariness — when the government decides to use its power simply as an act of will — not lawfulness.
Then there’s “predatory pricing” law. The theory goes like this: if one company cuts its prices really low, maybe even below cost (“loss leaders”) it’ll succeed in the market, and other businesses will fail. Then the first company will be a monopoly and jack the price up! The horrors! Thus the law forbids companies from trying to “harm competition” (i.e., succeed) by charging “unreasonably” low prices, and particularly by charging below cost. Loss leaders are illegal, for example, in California.

Of course, a child can see the problem with the theory: the instant the “predator” does raise his prices, the other companies will open their doors again, charge the market rate, and the clever “predatory pricing” strategy will fail. As Frank Easterbrook wrote, when he was a law professor, predatory pricing is “not a very good gamble,” because without some barrier to entry that prohibits the old companies from coming back, there’s no way for such a strategy to work: “it is quite unusual for a firm without a patent to hold a 100% market share and charge a monopoly price for very long.” (Although history books nowadays still often claim that Standard Oil used “predatory pricing” to drive out competition, that turns out not to be true.)

In a case called Brooke Group, the Supreme Court said that a plaintiff accusing a company of “predatory pricing” must not only prove that the “predator” charged low prices, but also that he had a “realistic probability” of recouping the losses incurred from the initial price-cutting. This is an eminently reasonable rule, because in theory, a successful “predatory pricing” strategy must include “recoupment”; without recoupment, price cutting is just price cutting, and that’s good for consumers.

But does antitrust law exist to protect consumers? The federal courts say so, and that is why they adopted the Brooke Group rule. But many state courts disagree. In fact, a case recently decided by the California Court of Appeal refused to adopt the Brooke Group rule precisely on the theory that California’s antitrust laws do not exist to protect the public — instead, they exist to protect “smaller, independent retailers” against having to compete aginst their “more powerful neighbor[s].” The California Supreme Court will soon decide whether to review that case.

In Minnesota a few years ago, the Midwest Oil company charged customers less than cost at its four Minneapolis area gas stations. I don’t know why — seems like a foolish idea to me, but they have the right to sell their gas for whatever they want. (That’s called “liberty.”) Certainly there was no likelihood that this four-station chain would come to monopolize gasoline sales in Minneapolis, which is full of Shells and Mobils. Still, other gas stations (not consumers, of course) complained, and Midwest Oil was assessed a heavy fine.

How exactly did this protect the public? It didn’t. It employed the state’s coercive powers to promote the interests of gas stations that didn’t want to lower their prices. And because Minnesota doesn’t employ the Brooke Group rule, Midwest Oil couldn’t make the argument that it had no actual chance of becoming a monopoly one way or the other.

This is just one of many examples of government violating the rights of business owners to make their own choices about what to do with their property and their liberty, not to protect the general public, but only to protect other businesses against having to compete by lowering prices and improving their products or services.

Update: To clarify, the Midwest Oil case and the California case I refer to are decided under state antitrust laws, as opposed to the federal Robinson-Patman Act. That’s why state courts are not bound by the Supremacy Clause to apply the Brooke Group recoupment rule.

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