FTC Staff Comment to the Hon. John Norquist Concerning Wisconsin S.B. 140 to Repeal Unfair Sales Act Prohibiting Sales Below Cost

FEDERAL TRADE COMMISSION
Chicago NegionaJ Orb
r-
"y'(
-.J ~I
.( ./ 	/ 	I'	i' ",", ... "	- 	f, 	, ....
-~."".i..".~, ... ,...,." •. .l "" ..
. '. ""
(,:
Suite 1437
56 Easl Monroe Stred
Chicago, lUinois 600)3
Area Code 312353·8156
April 	22, 	1967
The 	Honorable 	John 	Norquist
State 	Senator
State 	Capitol
P.o. 	Box 	7882
Madison, 	WI 	53707-7882
Dear 	Mr. 	Norquist:
The 	Federal 	Trade 	Commission 	staff 	1s 	pleased 	to 	have -this
opportunity. to 	respond 	to 	your 	letter 	of 	Maich 	6, 	1987, 	.
requesting 	our 	comments 	on 	Senate 	Bill 	140. 	In 	essence, 	sa 	140
would 	have 	the 	effect 	of 	repealing 	Wisconsin's 	Unfair 	Sales 	Act,2
which 	prohibits 	sales 	below 	cost 	and 	encourages 	fixed 	profit
margins-for 	certain 	items 	of 	merchandise. 	We 	support 	SB 	140. 	By
rernov ing 	the 	pr icing 	restraints 	con·tained 	in 	the 	present Act,
SB 	140 	~ill enable 	consumers 	to 	benefit 	from 	lower 	and 	more
competitive 	prices.
Our 	interest 	in 	this 	legislation 	stems 	from 	the 	Commission's
mandate 	to 	enforce 	the 	antitrust 	and 	consumer 	protection 	laws 	of
the 	United 	States. 	Section 	5 	of 	the 	Federal 	Trade 	Commission 	Act
prohibits 	unfair 	methods 	of 	competition, 	and 	unfair 	or 	deceptive
acts 	or 	practices. 	In 	enforcing 	this 	statute, 	the 	Co~isslon
staff 	has 	gained 	substantial 	experience 	in 	analyzing 	the 	impact
of 	various 	restraints 	on 	competition 	aRd 	the 	costs 	and 	benefits
to 	consumers 	of 	such 	restraints. 	The 	Federal 	Trade 	Commission
has ,been 	specifically 	involved 	in 	"below-cost" 	pricing 	issues 	and
has 	expressed 	opposition 	to 	anticompetitive 	state 	and 	federal
pricing 	legislation 	during 	recent 	years. 	In 	1985 	the 	Commissio~
staff 	submitted 	comments 	in 	opposition 	to 	legislation 	in 	South _
I 	-
1
2
The 	views 	presented 	in 	this 	letter 	are 	those 	of 	the 	Chicago
Regional 	Office 	and 	Bureaus 	of 	Competition, 	Consumer
Protection, 	and 	Economics 	and 	are 	not 	necessarily 	those 	of
the 	Commission 	itself 	nor 	of 	any 	individual 	Commissioner,
although 	the 	Commission 	has 	authorized 	the 	presentation 	of
these 	comments.
Wis. 	Stat. 	S 	100.30 	(1985-86).

· ...
The 	Honorable 	John 	Norquist·
Page 	2	) , 1 •• 1
. /. ~ .. " .
Carolina 3 and 	North 	carolina 4 	which 	would 	have 	banned 	so-called
"below-cost" 	prieing. 	The 	Commission 	also 	filed 	an 	amicus 	brief
1n 	Snider 	v. 	Wal-Mart 	Stores, 	No. 	84-C-436-E 	(N.D. 	Okla. 	1986),
arguing 	that 	an 	Oklahoma 	statute,·· which 	prohibited 	retailers 	from
selling 	goods 	at 	discounted 	prices, 	would 	result 	in 	harm 	to
competition 	and 	to 	consumers 	in 	general. 	These 	matters, 	coupled
with 	the 	Commission's 	familiarity 	with 	and 	responsibility 	for 	the
enforcement 	of 	the 	federal 	antitrust 	laws, 	have 	provided
Commission 	staff 	with 	substantial 	experience 	in 	analyzing 	the
potential 	competitive 	consequences 	of 	below-cost 	pricing
provisions.
1. 	Brief 	Description 	of 	the 	Wisconsin 	Unfair 	Sales 	Act
Under 	the 	Wisconsin 	Unfair 	Sales 	Act, 	the 	selling 	of
merchandise 	below 	cost 	to 	attract 	patronage 	is 	deemed 	a 	fo§m 	of
deceptive' advertising 	and 	an 	unfair 	method 	of 	competition. 	This
Act 	goes 	far 	beyond 	federal 	prohibitions 	against 	predatory
pricing.. 	It 	also 	encourages 	a 	uniform 	mark-up 	to 	be 	included 	for
overhead ~n t~e 	"cost W of 	tobacco 	products, 	alcoholic 	~everages,
and 	gasollne. 	For 	these 	three 	categories 	of 	merchandlse, 	the
statute 	requires 	that 	retailers 	include 	a 	markup of ~ percent,
for 	overhead, 	in 	the 	absence 	of 	proof 	of 	lesser 	overhead 	costs.
For 	the 	same 	three 	categories 	of 	merchandise, 	wholesa~ers are
presumpthvely 	required 	to 	add 	an 	overhead 	allowance 	of 	three
percent. 	For 	all 	other 	items 	of 	mercha~dise, overhead 	need 	not
be 	included 	in 	the 	calculations 	of 	cost.
".I 	--
3 .-
Comment: 	Letter 	on 	South 	Carolina 	House 	Bill 	2663, 	May 	14,
1985.
4 	Comment 	Letter 	on 	North 	Carolina 	Senate 	Bill 	73, 	March 	27,
1985.
5 	Wis. 	Stat. 	S 	100.30(1) •
6 	Id. 	at 	§ 	100.30(2) (a) 	1 	and 	S 100.30(2) (c) 	l.a.
7 	Id. 	at 	S 	100.30(2) (a) 	1.
S 	Id. 	at 	S 	100.30(2) (c) 	l.a.
9 	Id. 	at 	S 100.30(2) (a) 	2 	and 	S 	100.30(2) (c) (2).

The 	Honorable 	John 	Norquist
Page 	3 '.
Under 	the 	Act, 	neither 	a 	retailer 	nor 	a 	wholesaler 	may 	sell
any 	item of 	merchandise 	at 	less 	than 	cost 	with 	the 	"intent 	or
effect 	of 	inducing 	the 	purchase 	of 	other 	merIBandise 	or 	of
unfairly 	diverting 	trade 	from 	a 	competitor." 	If 	a 	retailer 	or
wholesaler 	violates 	this 	provision, 	the 	Department 	of 	Agri-
culture, 	Trade, 	and 	Consumer 	Protection 	or 	a 	district 	att~iney
may 	sue 	for 	injunctive 	relief 	or 	to 	recover 	a 	forfeiture. 	The
Act 	establishes a 	rebuttable 	presumption 	of 	intent 	to 	injure 	a
competitor 	once 	the 	defendant 	has 	been 	Shownt~2have sold
merchandise 	at 	less 	than 	the 	statutory 	"cost." 	Thus,
the 	burden 	of 	proof 	is 	shifted 	to 	the 	~efendant•
.~
10 	The 	Act 	contains 	certain 	limited 	exceptions 	to 	its
prohibition 	against 	below 	cost 	sales. 	There 	is 	no 	violation
of 	the 	Act 	if:
.,
" 1.
2.
3.
4.
5.
, 6.
7.
8.
Merchandise 	is 	sold 	in 	bona 	fi~e clearance 	sales.
Perishable 	merchandise 	must 	be 	sold 	promptly 	In 	order
to 	forestall 	loss.
Merchandise 	is 	imperfect 	or 	damaged 	or 	is 	being
discountinued.
Merchandise 	is 	sold 	upon 	the 	final 	liquidation 	of 	any
business.
Merchandise 	is 	sold 	for 	charitable 	purposes 	or 	to
relief 	agencies. 	~
Merchandise 	is 	sold 	on 	contract 	to 	departments 	of 	the
government 	or 	governmental 	institutions.
The 	price 	of 	merchandise 	is 	made 	1n 	good 	faith 	to 	meet
an 	existing 	price 	of 	a 	competitor 	and 	is 	based 	on
evidence 	in 	the 	possession 	of 	the 	retailer 	or
wholesaler 	in 	the 	form 	of 	an advertisement, 	proof 	of
sale 	or 	receipted 	purchase •.
Merchandise 	is 	sold 	by 	any 	officer 	acting 	under 	the
order 	or 	direction 	of 	any 	court.
11
12
Id. 	at 	S 	100.30(6}.
Id. 	at 	S 100.30(4) 	and 	S 100.30(5) Ca} 	and 	(b).
Id. 	at 	§ 	100.30(3).
!
\
\

~he 	Honorable 	John 	Norquist
Page 	4
2. 	Anticompetitive 	Effects 	of 	the 	Current 	Law
a. 	Requirement 	that 	Sales 	be 	Above 	Cost 	Unnecessarily
Raises 	Consumer 	Prices
The 	Wisconsin 	Unfair 	Sales 	Act 	was 	enacted 	in 	1939 	for 	the
purpose 	of 	£3eventing 	large 	retailers 	from 	selling 	merchandise
below 	cost. 	Despite 	the 	existence 	of 	the 	antitrust 	laws, 	some
retailers 	were 	thought 	to 	~~ed additional 	protection 	from
predatory 	pricing 	schemes. 	However, 	recent 	economic 	literature
indicates 	that 	predatory 	pricing 	is 	a 	very 	rare 	phenomenon •.. As 	a
result, 	Wisconsin's 	prohibitions 	on 	sales 	below 	cost 	operate
primarilY 	to 	deprive 	consumers 	of 	lower 	and 	more 	competitive
prices 	without 	offering 	them 	any 	compensating 	benefits.
One 	major 	problem 	with 	the 	statute 	is 	that 	predatory 	pricing
is 	not 	easily 	identified. 	As 	stated 	by 	the 	Commission 	in 	its l!!
Continental Baking 	Company 	decision:
.~
Price 	is 	the 	"central 	nervous 	system 	of 	the
economy" 	and 	vigorous 	and .. healthy 	competition
engenders 	economic 	efficiency which 	redounds 	to
the 	benefit 	of 	consumers. 	By 	contrast, 	overly
zealous 	efforts 	to 	prevent 	sales 	at 	prices
below cost 	are 	likely 	to 	reduce 	competition 	and
increase 	prices. 	Therefore, 	we 	must 	carefully
avoid 	adopting 	a 	predatory 	pricing 	rule 	that
will deti§ 	legitimately 	competitive 	pricing
conduct. 	. 	--
The Commission 	has 	adopted 	a 	standard 	for 	analyzing 	predatory
pricing 	allegations 	that 	raises 	a 	strong 	presumption 	that 	sales
at 	p'rices 	equal 	to 	or 	exceeding 	average 	variable 	cost 	are	, 	.
-	-
13
14
15
Waxman, 	wisconsin's 	Unfair 	Sales 	Act 	-- 	Unfair 	to 	Whom?, 	66
Marq. 	L. 	Rev. 	293 	(1983).
-M.
ITT Continental 	Baking 	Company, 	Inc., 	104 	F.T.C. 	280 	(1984).
(Bailey 	and 	Pertschuk, 	Commissione~s concurring 	in 	part 	an~
dissenting 	in 	part).

The 	Honorable 	John 	Norquist
Page 	5
legal. 16 	In 	contrast, 	Wisconsin 	has 	adopted 	a 	broad 	predatory
pricing 	standard 	that 	would 	tend 	to 	prohibit 	some 	sales 	that 	are
clearly 	above 	average 	variable 	cost. 	Thus, 	in 	its 	attempt 	to
prevent 	predatory 	pricing, 	Wisconsin 	runs 	an 	undesirable 	risk 	of
suppressing 	legitimate, 	pro-competitive 	pricing 	activity.
In 	addition 	to 	the 	difficulties 	and 	risks 	associated 	with
defining 	a 	predatory 	pricing 	standard, 	it 	has 	become 	increasingly
clear 	that 	predatory 	pricing 	activities 	are 	unlikely 	to 	occur.
As 	the 	Supreme 	Court 	noted 	in 	Matsushita 	Electric 	Industrial 	Co.
v. 	zenith 	Radio 	core., 	a 	firm 	that 	is 	planning 	on 	predatIon .r~st 	:
make 	a 	substantial 	lnvestment 	with 	no 	assurance 	of 	a 	payoff~
For 	a 	predatory 	pricing 	scheme 	to 	be 	successful, 	the 	predator
must 	be 	able 	to 	sustain 	losses 	for 	a 	significant 	period 	of 	time,
and 	there 	must 	be 	substantial 	barriers 	prohibiting 	the 	entry 	of
new 	firms 	into 	the 	industry 	o~ae 	the 	predator 	seeks 	to 	raise
prices 	and 	recoup 	the 	losses. 	For 	these 	reasons 	the 	United
States:S!lpreme 	Court 	has 	stated 	that 	"there 	is 	a 	consensus 	among
commentcil:ors 	that 	predatory 	Pl~cing' schemes 	are 	rarely 	tried, 	and
even 	more 	rarely 	successful." 	The 	Wisconsin 	Unfair 	Sales 	Act
therefore 	may 	deter 	legitimate, 	competitive 	pricing 	for 	the
purpose 	of 	prohibiting 	an 	activity 	that 	is 	thought 	to 	occur 	only
rarely •
.Even 	if 	predatory 	pricing 	activity 	occurred, 	it 	could 	be
attacked 	under 	the 	Sherman 	Act, 	the 	Clayton 	Act, 	or 	the 	Federal
Trade 	Commission 	Act, 	as 	well 	as 	under 	Wisconsin's 	antitrust
laws. 	The 	enforcement 	standards 	developed 	over 	the 	years 	in
antitrust 	prosecutions 	should 	deter 	firms 	from 	engaging 	in
predatory 	behavior, 	without 	correspondingly 	evoking 	the
anticompetitive 	effects 	that 	result 	when 	sales 	are 	generally
required 	to 	be 	above 	qost. 	:
16
17
18
19
For 	a 	more 	in-depth 	discussion 	of 	the 	Commission's 	predatory
pricing 	standard, 	see 	ITT 	Continental 	Baking 	Company, 	supra
note 	14, 	at 	402-6 	and 	General 	Foods 	Corporation, 	103 	F.T.C.
204, 	342-5 	(1984).
106 	S.Ct. 	1348, 	1357 	(1986).
Id.
Id. 	at 	1357-8. 	See 	generally 	predatory 	pricing 	studies
Cfted 	therein.
::

•• _"-'I'4.~ 	P.07
• 	•
The 	Honorable 	John 	Norquist
Page 	6
Another 	purpose 	and 	effect 	of 	the 	Wisconsin 	Unfair 	Sales 	Act
is 	that 	it 	prevents 	a 	type 	of 	below 	cost 	pricing 	that 	involves
the 	use 	of 	109s 	leaders. 	A "loss 	leader" 	is 	a 	popular 	and 	quite
ordinary 	form 	of 	promotion 	in 	which 	the 	sel1~r takes 	a 	loss 	on
one 	or 	several. items 	in 	order 	to 	induce 	customers 	to 	patronize
his 	or 	her 	store. 	From 	the 	retailer's 	standpoint, 	loss 	leaders
represent 	a 	profitable 	investment 	in 	goodwill 	that 	may 	ultimately
increase 	patronage. 	Loss 	leaders 	are 	not 	a 	type 	of 	predatory
pricing, 	but 	rather 	are 	a 	temporary 	loss 	on 	selected 	items 	of
merchandise. 	Accepting 	a 	lower 	profit 	margin 	or 	even 	a 	loss··on
certain 	merchandise 	is 	a 	classic 	and 	effective 	method 	of 	pr'ice
competition. 	For 	new 	entrants 	that 	need 	to 	develop 	a 	patronage,
loss 	leaders 	may 	be 	particularly 	useful. 	Moreover, 	from 	the
standpoint 	of 	consumers, 	loss 	leader 	advertising 	and 	other 	types
of 	selective 	discounting 	are 	desirable 	because 	they 	result 	in
lower 	pr~ces on 	selected 	goods. 	Under 	the 	Wisconsin 	Act, 	how-
ever, 	th~ use 	of 	this 	particular 	procompetitive 	selling 	device 	is
pcohibited .
--
.~
Moreover, 	the 	Wisconsin 	Unfair 	Sales 	Act 	is 	not 	necessary 	to
prevent 	deception. 	'Some 	have 	argued 	that 	prohibiting 	below 	cost
sales 	might 	suppress 	bait-and-switch 	merchandising 	schemes. 	In
such 	schemes, 	the 	seller 	advertises 	a 	low-priced 	item 	to 	lure
customers 	into 	his or 	her 	store, 	but 	then 	attempts 	to 	induce
buyers 	to 	purchase 	higher-priced 	substitute 	models. 	As 	with
predatory 	pricing 	schemes, 	it 	is 	often 	difficult 	to 	distinguish
balt-and-switch 	schemes 	from 	legitimate_competitive 	activity. 	In
any 	case, 	the 	FTC 	Act, 	as 	well 	as 	Wisconsin 	law, 	already
prohibits 	deceptive 	sales 	practices. 	Bait 	and 	switch 	schemes 	may
be 	effectively 	prosecuted 	without 	broadly 	prohibiting 	below-cost
pricing. 	~
b.	I 	Minimum 	Markup 	Presumptions 	Chill 	Price
Discounting
The 	provisions 	of 	the 	current 	Act 	further 	may 	have 	the
effect 	of 	discouraging 	efficient 	efforts 	to 	minimize 	overhead 	in
both 	wholesale 	and 	retail 	distribution. 	For 	example, 	by
defining 	cost 	for 	retailers 	of 	cigarettes, 	liquor, 	and 	gasoline
as 	generally 	including 	a 	markup 	of 	six 	percent 	for 	overhead, 	the
Wisconsin 	statute 	chills 	discount 	pricing 	and 	encourages 	fixed
profit 	margins 	for 	these 	items. 	Even 	when 	a 	retailer 	has 	an
overhead 	of 	less 	than 	six 	percent, 	the 	retailer 	may 	be 	reluctant
to 	lower 	his 	price 	accordingly 	for 	fear 	that 	he 	may 	have 	to 	bear
the 	substantial 	costs 	associated 	with 	a 	lawsuit. 	The 	Act 	may

The 	aonorable 	John 	Norquist
Page 	7
also 	impose 	unnecessary 	costs 	on 	retailers 	by 	requiring 	them 	to
set 	up 	accounting 	systems 	that 	specifically 	allocate 	overhead
expens~s among 	the 	three 	categoriep 	of 	merchandise. 	Finally,
there 	appears 	to 	be 	no 	sound 	~mpirical basis ·foc 	specifying 	three
percent 	and 	six 	percent 	as 	the 	appropriate 	mark-up.
3. 	Conclusion
We 	believe 	that 	the 	Wisconsin 	Unfair 	Sales 	Act 	is 	contrary
to 	the 	public 	interest 	because, 	by 	prohibiting 	sales 	below 	cost,
it 	unnecessarily 	restrains 	competition. 	The 	minimum 	markup
provisions 	further 	restrain 	competition 	and 	appear 	to 	have 	no
countervailing 	benefits 	to 	consumers. 	Apparently, 	the 	Act 	Is
intended 	to 	protect 	small 	retailers 	and 	wholesalers, 	but 	does 	so
at 	the 	expense 	of 	consumers.
For 	all 	of 	the 	above 	reasons, 	the 	staff 	of 	the 	Federal 	Trade
Commission 	urges 	that 	Wisconsin 	repeal 	its 	Unfair 	Sales 	Act 	by
passing.~B 140. 	In 	removing 	these 	restraints, 	we 	believe 	that
Wisconsin 	will 	be 	continuing 	its 	tradition 	of 	progressive
consumer 	legislation. 	We 	appreciate 	having 	had 	this 	opportunity
to 	provide 	our 	vi~ws on 	the~e 	issues.
very 	truly 	yours,
uy~;t.l~
John 	M. 	Peterson
Director
Chicago 	Regional 	Office
JMP: jd
TOTAL P.08
-,
"