Federal Trade Commission V. Morton Salt Co. 334 U.S. 37 (1948)
Question One: Abstract
The Federal Trade Commission v. Morton Salt Cocase is a US antitrust landmark case. The respondent, a salt manufacturer, sold one of its brands on a standard discount system under which only few large-scale firms qualified. The Commission then issued a cease and desist order against the respondents herein having found them liable in price discrimination contrary to section 2 of the Clayton Act as amended by the Robinson-Patman Act. The respondent petitioned to the Circuit court of Appeal which quashed the Commission’s decision. Thereafter, the Commission appealed to the Supreme Court. The appeal was argued on March 10, 1948 and decided on May 3, 1948. The Court reversed the Circuit Court of Appeal’s decision and remanded the orders thereon.
Question Two: Provisions of the US Anti-trust Laws Invoked
The US Anti-trust Law provisions invoked in determining the presence of anti-competitive conduct of potential thereof on the part of the respondent was Section 2 of the Clayton Act as amended by the Robinson-Patman Act. Section 2(a) of the Act mandates the sellers to offer the same prices for commodities of like grade and quality to all purchasers indiscriminately. On the other hand, section 2(f) makes it unlawful for buyers to induce variable prices from the sellers. This is aimed at curbing commercial practices that may have the effects of lowering competition, entrenching monopoly, and, or injuring competition with buyers favored by the discrimination in question(334 U.S. 37, 1948, pp. 43–44). Section 2(a), (b) and (d) seals the loopholes for circumvention of interdictions under section 2(a) and (f) by prohibiting sellers from engaging in discriminatory discounts under the guise of promotional services.
These provisions are not without exceptions. To begin with, price differentials are permitted only as a function of variable costs of production. Moreover, section 2(a) permits bona fide price discrimination for the purposes of meeting competition from counterparts in good faith as opposed to restraint of trade.
- The geographical domain of the product/firm and its relation to “monopolization” or “dominance”
The court decision was inspired by the geographical domain of the commodity and its relation to “monopolization”. The standard quantity discount system had the effect of entrenching monopolistic market structure in the industry. Given that all the firms were operating on the same geographical domain coupled with the fact that only few firms could qualify for the discount, the system would have forced small scale firms out of the industry leaving only a few(334 U.S. 37, 1948, p. 50). It is on this basis that the court found the respondent’s price differentials unjustified pursuant to section 2(a) of the Act.
- Evidence of Growth in “Market Power”
There had been evidence of growth of “market power”. In the case, only five companies had qualified for the discount(334 U.S. 37, 1948, p. 41). Hence, they could afford to offer relatively cheaper prices for the same brand of salt compared to their counterparts. The small-scale firms had to do with meager profits if any. It only took the court’s intervention to guarantee their stay in the industry. Therefore, it is in this premise that the respondent’s conduct was held anticompetitive.
The respondent’s conduct in the case to a larger extent barred prospective firms from entering the market. It raised the stakes too high beyond the reach of most firms given that for a firm to sustain itself in its market, it had to offer competitive prices to consumers(334 U.S. 37, 1948, pp. 42–44). It could only do so if it could get standard quantity discounts, an undertaking which was next to impossible unless it had a correspondingly huge capital base. Therefore, prospective entrants to the market were hindered. This fact was taken into account by the court in arriving at its decision.
Question Four: Respondent’s “Anticompetitive Conduct”
- Anticompetitive Price Strategy
The respondent’s standard quantity discounts system was held to be anticompetitive within the meaning of the Act. It amounted to anticompetitive behavior based on both price and non-price strategies. The standard quantity discount mechanism employed by the respondent on Blue Label table salt accorded a few large retailers and wholesalers unfair advantage over other small-scale purchasers who could not meet the terms of the discount(334 U.S. 37, 1948, pp. 41–44). As indicated above, only five companies had qualified for the discount owing to their large-scale nature. As a result, the favored buyers would sell Blue Label salt at a relatively cheaper retail price compared to competing purchasers who sold the same brand of table salt but did not qualify for the discount. Therefore, the conduct made possible price anticompetitive strategy.
- Anticompetitive Non-Price Strategy
On the other hand, non-price strategy was enhanced by extending exceptional allowances to the five companies while unavailing the same to competing purchasers. As a result, market shares of the few favored purchasers were entrenched to the detriment of the rest of the purchasers. Hence, it evidenced a non-price anticompetitive strategy(334 U.S. 37, 1948, pp. 48–50).
Question Five: Effects of the defendant’s Conduct on Other Firms in the Industry
The respondent’s anticompetitive conduct had far-reaching effect on other firms in the industry. Rivaling players of the industry who could not benefit from standard quantity discounts were disadvantaged. The respondent attracted large wholesalers who owned chain stores. As a result their small-scale competitors could not favorably compete with the giants of the market(334 U.S. 37, 1948, pp. 46–47). Thus the level playing field envisioned by the Act was tilted by the respondent’s conduct. Consequently, it could potentially force the disadvantaged rivaling players out of the industry.
Question Six: Initial Action Taken Against/in Favor of the Defendant
Upon successful petition on the Circuit Court of appeal, an order of certiorari was granted in favor of the respondent. This had the effect of quashing the Commission’s decision. Moreover, it mandated the Commission to withdraw its complaint against the respondent besides refusing the Commission’s cross-petition for purposes of enforcing its order(334 U.S. 37, 1948, p. 41). The Circuit Court of Appeal’s decision was premised on its interpretation of the Act and the position that findings of the commission were not sufficiently substantiated by evidence. In addition, the decision was hinged on the broad scope of the commission’s order. Consequently, the initial legal action taken in favor of the respondent vindicated it from the alleged violations of the Act.
Furthermore, the legal action in favor of the respondent had significant impact on the onus of proof of justification for price discrimination. The Circuit Court of Appeal’s decision could be impliedly construed to have burdened the commission with the onus of disproving justification for price discrimination claimed by the respondent under section 2(a) of the Act(334 U.S. 37, 1948, pp. 44–45).Therefore, it relieved the respondent, the party relying on an exemption under a statute, the burden of proving it.
Question Seven: Subsequent Legal Action in Favor of/Against the Defendant
Question Eight: Application of the Structure-Conduct-Performance Model
According to the Structure-Conduct-Performance model, the success of an industry in satisfaction of the needs of consumers is highly hinged on the conduct of the firms in the sector. The firms’ conduct is influenced by the market structure. The model of the Structure-Conduct-Performance undeniably influenced the decision of the court in the case. The provision of section 2 of the Clayton Act was intended to cure the mischief synonymous monopolistic market structures(334 U.S. 37, 1948, pp. 43–44). To this end, it was designed to favor a perfect competitive market structure where consumers’ welfare can ideally be maximized.From the facts of the case, it is clear that the conduct of the respondent was setting pace for entrenchment of monopolistic market in the salt industry. Granting very few price-taking firms unfair advantage over the rest of the competing firms would have inevitably lead to establishment of monopolistic market. Eventually, the consumers’ welfare would be jeopardized by the ills associated with such market. The court did not desire to be remembered for having aided such ills.
The Supreme Court was quick not to be entrapped by the very snare to which its counterpart had fallen victim. It properly construed section 2 of the Act in a manner to restrain the respondent from employing price anticompetitive strategies to create monopolistic markets. The Supreme Court acted in the interests of the firm by shielding it from future extraction of price indulgence by the very monopolies the respondent was creating. Moreover, by restraining the conduct of the respondent, the court offered protection to the small-scale firms that could not qualify for the standard quantity discounts owing to their small purchase power. Therefore, it guaranteed their stay in the market. Finally, the rights of the consumers were protected in that they would get the best of deals from a perfectly competitive market.
In conclusion, the structure-conduct-performance model’s influence in the Supreme Court’s decision cannot be over-stated. It inspired the court a great deal in reaching a decision that guaranteed open and free market in the industry.
Luizzo, A. (2011). Essentials of Business Law. New York: McGraw-Hill Education.
MacIntyre, E. (2010). Essentials of Business Law. New York: Pearson Education.