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to serve its purpose as a means of eliminating excessive competition. Hence it was abandoned in favor of a more coherent form of organization. There is no doubt that pools prevented waste and they increased profits so long as good demand sustained prices. But this very increase of profits in turn made more compact control necessary as a means of defense against unfavorable conditions of trade. Under higher profits severer competition came in again to unsettle market conditions and bring lower prices. Speaking of this in its effect on trade understandings a Pittsburgh manufacturer said: Such understandings do not last if the market is not behind them. If prices are advancing they stand; but if prices go the other way, they do not last."
4. Re-Sale Contracts in Mercantile Field
Agreements between manufacturers and merchants constitute a field difficult to traverse in drawing the line of demarkation between what is freedom and what amounts to restraint or unlawful control. These so-called factors' agreements, in the opinion of Stevens, are still probably very numerous. They regulate contract relations between producers and distributors, including wholesale and retail merchants. They aim at price-fixing and at restriction of competition. They project the influence of the manufacturer into the mercantile sphere to an extent that has raised many puzzling questions
as to how the manufacturer may legally reach and profitably maintain his markets. In some cases it has resulted in his entering the retail business directly as the best available method of selling his own goods.
Several judicial decisions have greatly modified the status of the question within the past few years. After the mimeograph case, which gave the patentee a market among consumers of necessary supplies, the Miles Medical Company decision went far in the opposite direction. It declared illegal, both at common law and by statute, "a system of contracts between manufacturers and wholesale and retail merchants by which the manufacturers attempt to control not merely the prices at which its agents may sell its products, but the prices for all sales by all dealers at wholesale or retail, whether purchasers or sub-purchasers, eliminating all competition and fixing the amount which the consumer shall "* pay.
By this and other decrees it is now fully established that the manufacturer of patented articles has no right to fix the price at which jobbers, wholesalers, or retailers, shall re-sell the products of his factory. Passing of ownership does not carry with it any sort of price control. The buyer is free to sell what he owns on his own terms and at his own price, even though it be below the cost of production or under factory
*Federal Anti-Trust Decisions, Vol. IV, p. 1 (1911).
prices. Nor does it matter whether the goods be patented or not. Trade-marked products, copyrighted books, or patented medicines-all alike are no longer subject to the restraints of price maintenance by the producers upon retailers.
One effect of cutting away these agreements which pertain to price-fixing has been to throw open to the freest competition the dealings of patentees, licensees, or makers with wholesalers and retailers. They are all on a level with others less favored. The owner may not use his patent to extend his monopoly of manufacturing into the marketing of the product.
Another effect of this has been to cancel a vast number of sale contracts that were in force before the highest court of the land declared them to be contrary to the anti-trust law. Jobbers, in known cases, now sell without any price agreement with the manufacturer as to the resale prices. Manufacturers try to convince the jobber of what in their judgment is a fair price; but there is no pressure. As a result the freedom of the jobber has led to his pushing business and vastly increasing the sales.
The main purpose of the re-sale contract was to prevent price-cutting. The issue under the Sherman Act was fought out most fully in the famous book trust cases. The facts and conclusions, as stated by the U. S. Supreme Court, were as follows: "It appears that the Publishers' Association was composed of probably seventy
five per cent of the publishers of copyrighted and uncopyrighted books in the United States and that the Booksellers' Association included a majority of the booksellers throughout the United States; that the Associations adopted resolutions and made agreements obligating their members to sell copyrighted books only to those who would maintain the retail price of such net copyrighted books, and to that end, that the Associations combined and co-operated with the effect that competition in such books at retail was almost completely destroyed."
The Court's conclusion in this case, based on the Bath Tub decision relating to sales control through patents, was thus stated: "No more than the patent statute was the copyright act intended to authorize agreements in unlawful restraint of trade and tending to monopoly, in violation of the specific terms of the Sherman law, which is broadly designed to reach all combinations in unlawful restraint of trade and tending because of the agreements or combinations entered into to build up and perpetuate monopolies."*
Naturally the cutting of this Gordian knot produced much confusion in mercantile circles. In the grocery trades "free deals" and quantity prices became more general. The fixed-price policy assumes that the retailer could not be trusted to survive without it. In order to coun
* Strauss vs. Am. Publishers' Assn., Dec. 1, 1913.
teract the effects of this upheaval the American Fair Trade League was organized in July, 1913, by prominent manufacturers (1) to secure to the public the benefits and protection of stable uniform retail prices upon all trade-marked and branded goods; (2) to prevent the elimination of the small retail dealer whom price-cutting department stores were regarded as menacing; (3) to aid in re-establishing and insuring fair competitive commercial conditions.
5. Rule of Reason in Trade Restraints
In ordinary language the three terms, competition, restraint of trade, and monopoly are often confused. But in their more exact meaning they apply to three different degrees of economic activity. Competition is an act in which two or more persons seek to get the advantage each for himself in a common transaction for profit. Restraint of trade is some limitation put upon the conditions upon which this rivalry is shared. And monopoly refers to cases in which the advantages are narrowed down to a single individual or corporation sufficiently in control of the situation to dominate the terms of the bargain. The three purposes of the Federal anti-trust policy are (1) to restore competitive conditions as between trading corporations; (2) to prevent unreasonable restraints upon trade between the states; (3) to abolish monopoly.