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ADVERTISING AND LOWER PRICES

Critics of the free market never seem to tire of repeating the folklore that advertising increases prices by raising product costs. Nevertheless, the empirical evidence to the contrary—that advertising increases competition and lowers prices—continues to accumulate, and can hardly be ignored. Two of the best examples concern prescription drugs and eyeglasses.

Advertising of prescription drug prices is expressly prohibited by law in 37 states. In ten of these states pharmacies may not even advertise the fact that they give discounts. The effect of such laws on drug prices is clear-cut. Prof. Yale Brozen of the University of Chicago has compared the average price of a prescription in California (which has the most restrictive laws) and in the states with the least restrictive laws. Using 1970 data he found that the average California prescription cost $4.95, compared with $3.52 in the near-laissez-faire states.

The laws are beginning to change, however. The Supreme Courts of Florida (1969) and Pennsylvania (1971) have struck down those states' anti-advertising laws, but pharmacy trade groups (which control the state licensing boards) have since had new laws passed regulating the form and content of drug advertising, and have otherwise harassed those pharmacies that advertise. In 17 other states the battle for price advertising has been taken up by the 178-store Osco Drug chain. Osco began posting drug prices in its stores (which is not legally considered advertising) in Boston and Yakima, Washington, and found overwhelming support from consumers. Beginning in October 1971 it expanded the policy to all 178 stores, only to be assaulted by the coercive power of the State.

The Illinois Board of Pharmacy attempted to suspend Osco's pharmacists' licenses on grounds of "gross immorality," the North Dakota board suspended four Osco licenses (but was overruled by a Federal judge), the Wisconsin and South Dakota boards obtained court orders to remove the signs (but the orders were suspended for fear of Federal Price Commission action), the Iowa board threatened Osco but took no action, and the Idaho and Montana boards accused Osco of violating "anti-loss leader" laws. In addition, members of pharmacy boards at universities advised students not to go to work for Osco.

Still, Osco persisted, finding price competition to be good business. Osco has since been joined by Revco Discount Drug Centers, Pathmark, and several other chains. Osco recently won a suit against the restrictions in Wisconsin, and a Maryland Superior Court has declared that state's price advertising ban to be unconstitutional. Supermarkets General (which operates the Pathmark drug chain) has filed suits to overturn the New York, New Jersey, and Connecticut bans, meanwhile posting prices in all of its stores.

No such legal/economic battles have yet been fought over the ban on advertising eyeglasses, but a new study from the University of Chicago should set the stage. Prof. Lee Benham compared the prices of eyeglasses in states which do and do not ban advertising (both price and non-price, depending on the state) of eyeglasses and eye exams. In North Carolina, which completely bans all advertising, the average price was found to be $50.73. In Texas and the District of Columbia, where there is virtual laissez-faire, the average price was $29.97. Over all the states, Prof. Benham concluded that for eyeglasses alone, "advertising restrictions in this market increase the prices paid by 25% to more than 100%." The source and rationale for eyeglasses advertising restrictions are much the same as in the case of prescription drugs. "Professional" associations of optometrists and opticians are in league with the State to limit competition. It shouldn't take long for enlightened consumerists to pick their next target.

SOURCES:
• "Drug Pricing and the Rx Police State," CONSUMER REPORTS, March 1972, p.136.
• "The FTC's Attack on Advertising," Yale Brozen, INDIVIDUALIST, Vol. 4, No. 1 (undated), p.9.
• "Prescription Drugs Lose Their Mystique," BUSINESS WEEK, 18 December 1971, p.21.
• "Drug-Price Advertising Gathers Steam in Courts, CONSUMER REPORTS, March 1973, p.148.
• "The Effect of Advertising on the Price of Eyeglasses," Lee Benham, JOURNAL OF LAW & ECONOMICS, Vol. 15 (2), October 1972, p. 337. (The JOURNAL is published twice a year at the University of Chicago Law School, 1111 E. 60th Street, Chicago, IL 60637. $7 per year, $4 per copy. Highly recommended.)

FOR CONSENTING ADULTS ONLY

New advances have been made in recent months in the continuing struggle to remove the nose of the State from people's consensual transactions (e.g. gambling and sex). In New York City the prestigious Fund for the City of New York has recommended the legalization of the numbers game. Citing the results of an extensive study, the Fund's report noted that one out of four New Yorkers plays the numbers, resulting in $600 million of the total $1.7 billion annual illegal gambling gross. In order to drive out organized crime and reduce official corruption, the report concluded that the state legislature should legalize numbers. Wisely, the report cautioned against the State seeking to use the numbers game itself for revenue, saying that this would defeat the object of combating crime and corruption.

In Hawaii, meanwhile, "gambling during social events" has just been made legal by the state's newly-adopted penal code. The new code (which never defines "social," leading to prediction of large-scale gambling), goes a long way towards eliminating victimless crimes, in addition to gambling. It changes marijuana possession from a felony to a misdemeanor (and makes possession of two ounces or less a "petty misdemeanor"), allowing first-time arrestees to be released with a warning. The code also virtually eliminates all statutes concerning private sex relations between persons over 14 years of age.

(Sexual activity between persons under 14 is legal as long as the persons are within four years of each other in age.) Finally, prostitution has been reduced to a misdemeanor, as has "small-time" promotion of prostitution by cab drivers or hotel clerks (in an obvious concession to the tourist industry).

In Pennsylvania, the State House has adopted a new 200-page criminal code which legalizes premarital and extra-marital sex.

Finally, in the District of Columbia the law against prostitution has been found unconstitutional. The D.C. ordinance did not outlaw prostitution per se, but merely solicitation. As the law was enforced, it was applied only to women, not to patrons (except for a short-lived experiment a few years ago). Judge Charles W. Halleck ruled that the law therefore discriminated against women, as well as being an invasion of privacy and a violation of the First Amendment guarantee of freedom of speech. In addition, the judge noted that since prostitution itself is not illegal in D.C., solicitation to commit a noncriminal act cannot be held criminal. This is the case despite the fact that fornication, sodomy, or adultery might result from the solicitation, because the laws prohibiting the latter forms of conduct are an unconstitutional invasion of the right to privacy.

SOURCES:
• "New York Report Suggests Gambling Be Legalized," AP (New York), 26 November 1972.
• "Hawaii Social Gambling Law Takes Effect," UPI (Honolulu), 20 January 1973.
CRIME CONTROL DIGEST, 26 January 1973, P-6.
CRIME CONTROL DIGEST, 8 December 1972, p. 4.
CRIME CONTROL DIGEST, 10 November 1972, p.2.

IRS QUOTAS EXPOSED

Last year opponents of coercive taxation cheered when Mr. and Mrs. Phil Long of Bellevue, Washington won a court battle with the IRS. Under the 1967 Freedom of Information Act, the court ruled that the IRS must make available to taxpayers their internal manuals and procedures. After having gone over some of the released materials, the Longs have informed the Senate appropriations subcommittee (which oversees the IRS budget) that the IRS uses a quota system in conducting audits. The 1972 plan, they said, called for office audits to produce $68 to $71 additional tax, on the average, for taxpayers earning under $10,000. For those between $10,000 and $30,000, each audit should produce an average of $926 in extra taxes. Similar quotas exist for businesses and other taxpayer categories.

The Longs' charges were supported by testimony from Vincent Connery, himself an IRS employee and president of a union representing 35,000 IRS personnel. Connery said he was told he must "produce X number of dollars" per audit and would be "in trouble" if he found no errors in the returns he audited. Agents in IRS training are told that "the presumption is that the taxpayer has cheated and the only question is to figure out how much more he owes the government."

The IRS, typically, denied the existence of any quota system.

SOURCE:
• "IRS Has Quota System, Senate Inquiry Told," UPI (Washington), 1 March 1973.

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