Justices open door to some price setting 'Rule of reason' could let supplier set retail maximum

Illinois gasoline case

Broadly lower prices expected in reversal of '68 antitrust ruling

November 05, 1997|By Lyle Denniston | Lyle Denniston,SUN NATIONAL STAFF

WASHINGTON -- The Supreme Court yesterday gave manufacturers and wholesalers of consumer goods their first chance to dictate the prices of their products sold to retail customers -- a break with the century-old tradition that condemns price-fixing as illegal under antitrust law.

In a ruling that could lead to lower retail prices for buyers of goods varying as widely as newspapers, gasoline, beer, cameras, cosmetics and appliances, the court unanimously overruled a 1968 Supreme Court antitrust decision that was often criticized by economists and legal scholars as harmful to competition.

The 1968 decision laid down the rule that a producer or supplier always acts illegally by dictating a maximum price for its goods at the retail level. In the language of antitrust law, that ruling said imposition of maximum selling prices on a retailer is always illegal.

The economic theory behind that decision, in a newspaper distribution case, was that manufacturers should have no control over their products after the goods have been passed on to the next level in the chain of marketing. In place of that ruling, the court said yesterday that such price-fixing would now be judged a "rule of reason." Suppliers can seek to justify such maximum retail pricing by showing that it actually increases competition at the retail level, especially competition among different brands of the same goods.

By holding down prices, a manufacturer or producer can ensure that a dealer does not make the goods too costly to customers, thus reducing demand.

"Everybody believes, at least in part, that this will help keep prices down," said Phillip H. Rudolph, a Washington antitrust lawyer. Rudolph said the decision could also lead to more selling by suppliers through independent dealers, because suppliers now won't lose all control over those dealers' pricing. That means more outlets will charge lower prices.

Rudolph noted, though, that the court did not say that all maximum retail price-fixing is legal, only that it would now be judged by a more lenient legal standard. He said the effect would be to make antitrust cases involving pricing more complicated.

Manufacturers or wholesalers can sell products through independent retailers, or through their own internal retail outlets. They have been able to control the prices that their dealers charge, but not -- until yesterday -- the prices that independents charge.

Yesterday's ruling does not change the legal status of producers or suppliers that set a floor under retail prices. That remains illegal. Nor does the decision allow businesses that operate at the same level -- for example, competing retailers or wholesalers -- to jointly set prices.

But the decision does mark the first time that the court has lowered the barriers for any form of price-fixing. The key antitrust law governing price-fixing is the Sherman Antitrust Act of 1890. Beginning in 1897, the court moved steadily to outlaw virtually all forms of price-fixing.

An Illinois supplier, State Oil Co., asked in an appeal for more power to control prices at the retail level. State's appeal sought to limit the price at which a service station could sell gasoline.

The company fixed its price at a ceiling that would allow the dealer a profit of 3.5 cents a gallon. The legality of that arrangement will now be judged by lower courts under the new standard set yesterday by the Supreme Court.

Pub Date: 11/05/97

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