FTC Comment to the Hon. Strom Thurmond Concerning S. 1849 to Ban Price Differences in the Sale of New Autos by Manufacturers

OFFICE OF
THE CHAIRMAN
FEDERAL TRADE COMMISSION
WASHINGTON, D,C, 20580
January 	17, 	1986
Honorable 	Strom Thurmond
Chairman, 	Committee 	on 	the 	Judiciary
United 	States 	Senate
Washington, 	D. 	C. 	20510
Dear 	Mr. 	Chairman:
Thank 	you 	for 	the 	opportunity 	to 	comment 	on 	S. 	1849, 	a 	bill
to 	"protect 	consumers 	and 	franchised 	automobile 	dealers 	from
unfair 	price 	discrimination 	in 	the 	sale 	by 	the 	manufacturer 	of
new 	motor 	vehicles, 	and 	for 	other 	purposes." 	For 	the 	reasons 	set
forth 	below, 	the 	Federal 	Trade 	Commission 	("Commission") 	opposes
enactment 	of 	this 	legislation.
I'. 	Background
Section 	102 	of 	S. 	1849 	would 	require 	that 	manufacturers 	of
automobiles 	or 	trucks 1I 	sell 	or 	lease 	all 	similarly 	equipped 	new
veticles 	of 	the 	9ame 	model 	to 	all 	persons 	at 	the 	same 	price.
Such 	price 	would 	be 	defined 	under 	§ 	101 	to 	"include" 	incentives
such 	as 	discounts, 	rebates, 	promotional 	services, 	additional
equipment, 	and 	other 	inducements 	or 	benefits 	provided 	by 	the
manufacturer 	to 	the 	person 	purchasing 	from 	the 	manufacturer 	or 	to
the 	ultimate 	purchaser. 	11 	In 	addition, 	the 	bill 	would 	require
that 	all 	new 	vehicles 	carrying 	such 	incentives 	be 	offered 	to 	all
ultimate 	purchasers, 	that 	dealers 	be 	notified 	in 	advance 	of 	such
incentives, 	and 	that 	all 	such 	incentives 	remain 	in 	effect 	for 	a
minimum of 	fourteen 	days.
. 	Section 	103 	of 	S. 	1849 	would 	provide 	for 	several 	exceptions
toJthe 	bill's 	requirements. 	Sales 	by 	a 	manufacturer 	to 	another
manufacturer, 	to 	non-dealer 	employees 	of 	the 	manufacturer, 	to
government 	agencies, 	to 	the 	American 	Red 	Cross, 	and 	to 	dealers
purchasing 	demonstration 	vehicles 	would 	be 	specifically 	exempt.
1/ 	Manufacturers 	would 	be 	defined 	under 	5101(3) 	to 	include
middlemen 	who 	purchase 	vehicles 	primarily 	to 	sell 	to 	others, 	who
in 	turn 	sell 	to 	ultimate 	purchasers.
Y 	"Ultimate 	purchaser" 	would 	be 	defined 	under 	5101(6) 	to 	mean
"with 	respect 	to 	any 	new 	automobila 	or 	truck, 	the 	first 	person
who 	purchases 	or 	leases 	such 	new 	automobile 	or 	truck 	for 	purposes
other 	than 	resale."

'.
Honorable 	Strom Thurmond
In 	addition, 	in 	various 	circumstances, 	the 	bill's 	requirements
would 	not 	apply 	to 	extensions 	of 	credit 	to 	ultimate 	consumers 	or
to 	dealers.
The 	Commission's 	primary 	objections 	to 	S. 	1849 	are 	that 	the
bill: 	(1) 	could 	hinder 	rather 	than 	aid 	the 	competitive 	process
and, 	therefore, 	harm 	consumers; 	(2) 	could 	create 	an 	overly 	broad
class 	of 	potential private 	plaintiffs; 	and 	(3) 	could 	encourage
the 	manufacture 	of 	vehicles 	that 	contain 	accessories 	not 	desired
by 	consumers. 	These 	objections 	are 	discussed 	below.
II. 	The 	Bill 	Could 	Hinder 	Rather 	Than 	Aid 	the 	Competitive
Process 	and, 	Therefore, 	Harm Consumers
2
The 	stated 	purpose 	of 	S. 	1849 	is 	to 	protect 	consumers 	and
franchised 	dealers 	from 	unfair 	price 	discrimination 	by 	the
manufacturer. 	Existing 	federal 	law, 	however, 	prohibits 	sellers
from 	discriminating 	in 	price 	between 	different 	purchasers 	when
substantial 	injury 	to 	competition 	may 	result. 	Robinson-Patman
Act 	§2(a), 	15 	U.S.C. 	§13(a). 	Unlike 	the 	Robinson-Patman 	Act,
S. 	1849 	would 	ban 	all 	price 	differences 	without 	regard 	to 	their
effects 	on 	competition. 	The 	bill 	would 	even prohibit
manufacturers 	from 	discriminating 	in 	price 	between 	purchasers
that 	do 	not 	in 	turn 	compete 	with 	each 	other. 	In 	fact, 	one
apparent 	objective 	of 	the 	bill 	is 	to 	ban 	the 	allegedly 	widespread
practice 	by 	motor 	vehicle 	manufacturers 	of 	selling 	new 	motor
vehicles 	to 	fleet 	purchasers 	at 	lower 	prices 	or 	with 	more
valuable 	incentives 	than 	are 	offered 	to 	dealers; 	it 	appears
doubtful, 	however, 	that 	fleet 	purchasers, 	such 	as 	corporate 	fleet
owners 	and 	rental 	companies, 	compete 	to 	any 	meaningful 	extent
wi~h dealers 	in 	the 	resale 	of 	new 	automobiles. 	In 	addition,
S. 	1849 	apparently 	would 	not 	permit 	the 	defenses 	to 	a 	price
discrimination 	suit, 	such 	as 	a 	showing 	that 	the_lower 	price 	was
justified 	by 	cost 	savings 	or 	was 	offered 	in good 	faith 	to 	meet
thefequally 	low price 	of 	a 	competitor, 	that 	are 	provided 	by 	the
Robinson-Patman 	Act.
Unintended 	harm 	to 	the 	competitive 	process 	could 	result 	from
the 	inflexibility 	of 	the 	proposed 	statute. 	For 	example, 	§ 	l02(a)
of 	the 	bill 	would 	appear 	to 	require 	a 	manufacturer 	to 	charge 	a
single, 	uniform 	nationwide 	price 	to 	all 	purchasers 	and 	lessees.
However, 	unlike 	the 	Robinson-Patman 	Act, 	S. 	1849 	apparently 	would
not 	permit 	the 	manufacturer 	to 	show 	that 	a 	difference 	in 	price 	is
justified 	by 	reduced 	transportation 	costs 	for 	delivery 	to 	a
dealer 	closer 	to 	the 	factory. 	Thus, 	under 	this 	bill 	a 	dealer 	in
Hawaii 	would 	arguably 	be 	entitled 	to 	sue 	a 	Michigan 	manufacturer
for 	charging 	a 	higher 	price 	to 	that 	dealer 	than 	to 	one 	located 	a
mile 	from 	the 	factory. 	It 	also 	appears 	that 	S. 	1849 	would 	bar

Honorable 	Strom Thurmond
manufacturers 	from 	passing 	along 	any 	savings 	in 	selling 	or
delivery 	costs 	to 	large 	volume 	purchasers, 	such 	as 	large 	rental
and 	leasing 	firms 	that 	purchase 	thousands 	of 	vehicles 	a 	year.
The 	Commission 	believes 	that 	the 	bill's 	absolute 	ban 	on 	price
differences 	without 	regard 	to 	competitive 	effects 	or 	to 	cost
savings 	would 	foster 	price 	rigidity 	and 	inefficiency 	in
distribution, 	and 	ultimately 	harm consumers.
Under 	S. 	1849, 	manufacturers 	would 	be 	prohibited 	from
adopting 	a 	variety 	of 	pricing 	and 	incentive 	schemes 	that 	are
procompetitive 	and 	presently 	lawful. 	To 	the 	extent 	that
discrimination 	in 	sales, 	whether 	in 	terms 	of 	price, 	service 	or
other 	dimensions 	of 	competition, 	is 	causing 	competitive 	injury,
the 	Robinson-Patman 	and 	Federal 	Trade 	Commission 	Acts 	provide
adequate 	means 	of 	addressing 	such 	problems.
III. 	The 	Bill 	Provides 	For 	An 	Overly 	Broad 	Class 	of
Potential 	Private 	Plaintiffs
3
Section 	104, 	the 	bill's 	enforcement 	provision, 	would 	provide
that 	"[a]ny 	person 	may 	bring 	an 	action 	••• 	to 	require
compliance ll 	(emphasis 	added) 	and 	seek 	damages 	not 	to 	exceed 	two
times 	the 	value 	of 	"the 	manufacturer's 	incentive 	involved 	in 	the
violation." 	Unli~e the 	Robinson-Patman 	Act, 	S. 	1849 	contains 	no
clear 	requirement 	that 	plaintiffs 	establish 	actual 	or 	threatened
injury, 	or 	even 	that 	plaintiffs 	be 	purchasers 	of 	vehicles. 	If
the 	bill 	would 	create 	a 	cause 	of 	action 	for 	persons 	who 	are 	not
injured 	by 	violations 	of 	the 	bill, 	S. 	1849 	could 	result 	in 	the
unjust 	enrichment of 	some 	persons 	while 	imposing 	large 	costs 	on
manufacturers. 	In 	addition, 	if 	S. 	1849 	were 	enacted, 	persons 	who
are 	injured 	by 	price 	discrimination 	could 	possibly 	recover
damages 	under 	both 	the 	Robinson-Patman 	Act 	and 	S. 	1849. 	There 	is
no 	apparent 	justification 	for 	such 	cumulative 	damages 	as
compensation 	for 	injury 	or 	as 	a 	penalty 	or 	deterrent 	for
discriminatory 	prices.
!
IV. 	The 	Bill 	May 	Encourage 	the 	Manufacture 	of 	Vehicles 	that
Contain 	Accessories 	Not 	Desired 	by 	Consumers
Finally, 	because 	the 	price 	discrimination 	prohibition
applies 	only 	to 	"similarly 	equipped" 	new 	vehicles, 	the 	bill 	may
encourage 	manufacturers 	to 	introduce 	minor 	physical 	differences,
such 	as 	different 	accessories, 	in 	order 	to 	differentiate 	a~ong
vehicles 	and 	thus 	avoid 	the 	operation 	of 	S. 	1849. 	The 	use 	of
product 	differentiation 	to 	evade 	a 	statute, 	rather 	than 	in

Honorable 	Strom 	Thurmond 	4
response 	to 	consumer 	demand, 	is 	generally 	inefficient. 	While
product 	differentiation 	used 	as 	an 	evasion 	tactic 	is 	also
possible 	under 	the 	Robinson-Patman 	Act, 	11 	S. 	1849 	leaves 	such
little 	room 	for 	price 	differences 	(i.e., 	no 	cost 	justification 	or
meeting 	competition 	defenses 	are 	allowed) 	that 	manufacturers 	may
be 	more 	likely 	to 	resort 	to 	product 	differentiation 	techniques 	to
circumvent 	S. 	1849 	than 	is 	the 	case 	with 	respect 	to 	the 	Robinson-
Patman 	Act.
v. 	Conclusion
For 	the 	foregoing 	reasons, 	the 	Commission 	opposes 	the
enactment 	of 	S. 	1849. 	The 	absolute 	ban 	on 	price 	differences
without 	regard 	to 	competitive 	effect 	would 	restrict 	the 	ability
of 	manufacturers 	to 	adjust 	their 	price 	and 	incentive 	structures
to 	competitive 	levels 	and 	would 	likely 	injure 	competition 	and
consumers.
By 	direction 	of 	the
That 	Act 	applies 	to 	the 	sale 	of 	commodities 	of 	like 	grade 	and
quality. 	Robinson-Patman 	Act 	§ 	2(a), 	15 	U.S.C. 	§ 	l3(a).