Antitrust

Borders Patrol

Book sales are surging. Superstores are booming. And the American Booksellers Association doesn't like it.

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Simone Wallace can appreciate the vagaries of retail competition, even if she doesn't exactly have the time or the inclination to relish their nuances. Wallace is co-owner and co-founder of the Sisterhood Bookstore, a small (1,200 square feet) but impressive Los Angeles shop that specializes in women's studies, gender issues, and feminism. Over the past 23 years, the store had developed a steady and appreciative clientele.

Then, last fall, the nightmare that troubles the sleep of small bookstore operators across the nation suddenly came to life for Wallace: Directly across the street, a two-story Borders Books and Music superstore opened for business. The new store casts a long shadow, literally and figuratively. Look out the entrance to Sisterhood and all you see is Borders.

Borders is one of several national bookselling chains that are rapidly transforming the American bookstore from a quaint, genteel establishment into an expansive, book-lover's pleasure dome. The typical Borders store, says Dan Conetta, vice president of marketing for the Ann Arbor, Michigan-based company, carries 120,000 book titles and more than 2,000 magazines. The L.A. store is bigger still: It fills 43,000 square feet, boasts over 140,000 book titles, plus 50,000 music selections, a coffee bar, live music, reading groups, a carpeted play room for toddlers that's filled with toys and stuffed animals, and free underground parking. As one awestruck woman put it on the store's opening day: "This is the Disneyland of bookstores."

So far, Sisterhood has managed to keep pace, if just barely. Since Borders opened last October, Wallace says, "Business has been flat. Sales aren't up or down. We're working three times harder, though, and since we're not making more money, we can't afford to hire more help.

"In some ways, though, [the competition] has been positive," grants Wallace. Sisterhood has responded by increasing the number of author signings, creating a frequent-buyer program, sending articles and press releases to the local papers, attending conferences and seminars geared to their stock, and beefing up their textbook sales at nearby UCLA. Sisterhood's customers, she says, are definitely benefiting from the innovations born of the looming presence across Westwood Boulevard. Still, the competition is taking a toll. "I don't know if having stressed workers who are working many more hours is good for morale. Our quality of life is going down," says Wallace.

The cavalry, however, is charging into this particular retail war on behalf of independent
bookstore owners. Last May, the American Booksellers Association, a trade association that represents over 4,500 bookstores—chain and independent alike—filed a federal antitrust lawsuit against four U.S. publishers. The suit claims that Houghton Mifflin Company, Penguin USA, Rutledge Hill Press, and St. Martin's Press are violating the Robinson-Patman Act of 1936 by granting "unfair" and "illegally preferential" volume discounts and promotional allowances to national bookstore chains and "warehouse buying clubs." A fifth publisher, Hugh Lauter Levin Associates, was named in the original suit but reached an out-of-court settlement in February. David Kaye, general counsel for St. Martin's, dismisses the suit, saying, "I think it's all bullshit."

While the lawsuit may help independent bookstores secure through the courts what they may be losing in the marketplace, it is unclear that bookstore customers will benefit from the legal proceedings. Indeed, the ABA case appears to be an object lesson in how antitrust laws are used to protect embattled competitors rather than benefit consumers. As economist Paul Samuelson—hardly an enemy of antitrust legislation—has written, Robinson-Patman "make[s] competition more imperfect….Instead of concentrating on bringing [prices] down for the consumer, it concentrates on keeping many firms in business, even though some may be inefficient."

The ABA lawsuit shares many of the same issues with a recent Federal Trade Commission investigation charging HarperCollins, the Hearst Corporation, Putnam Berkley, Random House, Simon & Schuster, and Macmillan with giving illegal discounts to chain stores. The FTC investigation team, which started its work in 1988, reached an agreement with the publishers in 1992, but the terms have yet to be approved by the full commission or made public.

Under Robinson-Patman, whenever a seller offers a similar product to various buyers, any difference in price—including volume discounts—must be "economically justified" and extended to all buyers on a proportional basis. Otherwise, the seller is considered to be engaging in "anti-competitive" behavior, and a victorious plaintiff can be awarded treble damages. (The ABA, according to Executive Director Bernie Rath, "is not seeking damages, but only injunctive relief.")

Although Robinson-Patman is ostensibly designed to foment competition, it is almost universally decried by antitrust scholars because it severely restricts market forces and effectively punishes successful and innovative firms. By making virtually every price discount and promotional allowance subject to judicial review, it creates an environment in which the benefits of a more efficient retail organization and greater economies of scale can be negated, if not lost altogether in penalties. Robert Bork, for once squarely in the mainstream, has memorably called the act "the misshapen progeny of intolerable draftsmanship coupled with wholly mistaken economic theory. One often hears of the baseball player who, although a weak hitter, was also a poor fielder. Robinson-Patman is a little like that. Although it does not prevent much price discrimination, at least it has stifled a great deal of competition."

And indeed, while the ABA lawsuit names publishers, its real target are the beneficiaries of the alleged preferential discounts—chain bookstores. Although the ABA is quick to characterize the conflict in populist terms—"American culture has more riding on this than any other case I've heard of," says ABA President Avin Mark Domnitz—it is tough to shake the feeling that the legal action has less to do with promoting competition than with preserving the status quo for independent bookstores. "Right now, the independent is in a perfect bind," says Domnitz. "He can not discount, look like a thief, and lose his customers. Or he can discount, lose his margin, and go out of business. Either way, he loses."

"The ABA should be working for independent bookstores," says Sisterhood's Wallace. "I think that if there's unfair practices and discounts, it's good that the ABA—to which I pay a lot of money a year—is doing something."

"Among the things that are getting better in America are bookstores," declared columnist and TV commentator George Will on a special segment of the C-SPAN show Booknotes. "There's a chain—I don't mind giving them a big plug—called Borders….You go there and you find people who love books."

The show's other guests, eminent historians David Halberstam and David McCullough, shared Will's enthusiasm for Borders in particular and contemporary bookstores in general. "I don't know how many voices there are to choose from in a bookstore like Borders. Thousands?" asked McCullough.

"A hundred thousand," said Will.

"It's the most democratic forum," said McCullough, "the most democratic marketplace of ideas imaginable. No civilization has had anything like what we have now."

"The number of serious books we sell today in hardcover, plus the paperbacks, compared to 30 years ago, is a quantum increase," said Halberstam.

In other words, forget about the marketplace of ideas—we're talking supermarket here. Will and company are absolutely right when it comes to the way books are hawked nowadays: Never have so many books—new and old—been so available to so many people. According to the Book Industry Study Group, retail sales through bookstores increased from 914 million books in 1988 to 1.074 billion books in 1993. Part of the larger market for books is no doubt a function of an increasingly better-educated public.

But there can be little argument that part of the growth is the result of vigorous competition among booksellers, large and small. Indeed, the bookselling business is a case study in varied retailers. Book Industry Study Group data for 1993 show that adults purchased books from a number of different sources, none of which could claim anything close to market domination. (See chart.)

A 1994 study by Denver-based consulting firm G.A. Wright of retailing trends found that from 1985 to 1993, the number of "ultimate companies" (i.e., parent organizations) selling books increased from 9,243 to 19,853. Growth boomed at all levels of economic activity. For instance, while the number of companies with sales over $100 million grew by 200 percent, those with sales up to $1 million—roughly 90 percent of all bookstores in America—increased by 131 percent. The study also found that among retailers, bookstores enjoyed the second-lowest closure rate—1.3 percent. (Used merchandise stores, including such businesses as thrift shops, antique shops, and pawn shops, had a 0.9 percent rate.)

All in all, the findings paint a rosy, if competitive, future for small retailers, including booksellers. The trick is, in G.A. Wright's words, to meet the needs of an "older, affluent, and more diverse population" that is withdrawing from the mass market in favor of the convenience and individualized service that smaller stores can provide. A niche bookshop such as Sisterhood, with its specialized focus, is well positioned for the future.

To be sure, chains have been enjoying the largest growth among bookstores. In the fiscal year ending January 31, 1995, says Publishers Weekly, sales in the entire bookstore segment rose by 4.9 percent. But for the top four chains—Barnes & Noble (which includes Barnes & Noble, Bookstar, Bookstop, B. Daltons, Doubleday, and Scribners bookstores), Borders Group (Borders, Brentano's, Waldenbooks), Crown Books, and Books-A-Million—sales rose 16 percent.

And within the chains, the biggest sales growth is in the superstores. Borders' superstore sales, for instance, increased 89 percent over the last fiscal year. The chain currently runs 80 superstores and hopes to open another 30 by 1996. Barnes & Noble, the country's largest bookseller, operates 268 superstores and plans to push the total to 343 by year's end. Superstore sales account for 59 percent of all sales for Barnes & Noble.

By carrying a "tremendous and authoritative stock, creating a browser-friendly atmosphere" (complete with chairs, benches, and cafes), book superstores have become "destination stores," says Barnes & Noble spokesperson Lisa Herling. "They are places where people go to spend time." For the record, she also categorically denies that Barnes & Noble receives special discounts from publishers.

Curiously, superstores downplay pricing as a primary factor of success. While superstores usually discount certain books (Barnes & Noble, for instance, discounts hardcovers 20 percent, New York Times bestsellers 30 percent), Herling and Borders' Conetta stress that title base and ambience are what get people to walk through the door.

Those notions seem to resonate with customers. "My husband and I come here with [our 3-year-old daughter] because there's something for all of us to do," Monica, a paralegal in her late 30s, tells me on a recent Sunday at the L.A. Borders. "We can get something to eat, listen to music, browse the store. One of us can stay with our daughter while she plays in the kids' room. It's very convenient." At the Encino Barnes & Noble superstore, Jeff, a computer programmer, says he drops in for the magazine selection. "It's incredible," he says. "You can spend the whole day sifting through them. I probably pick up a couple of different copies every other weekend."

Does Robinson-Patman help a market to function more efficiently? In the words of the congressman who led the fight against its enactment, the act "intended, under the cover of devious but innocent-appearing wording, to assure profitable business to a trade class regardless of the efficiency of service rendered to the consumer." Indeed, Robinson-Patman is an exercise in governmental doublespeak, simultaneously exhorting free market values while effectively outlawing them: In the name of supporting competition, the statute effectively forbids sellers and buyers from jockeying for the best terms possible—that is, from competing.

"The day of the independent merchant is gone unless something is done and done quickly," Rep. Wright Patman of Texas, the act's chief sponsor, declared in a 1935 congressional hearing. "He cannot possibly survive [competition from chains]. So we have reached a crossroads; we must either turn the…business of this country…over to a few corporate chains, or we have got to pass laws that will give the people who built this country…an opportunity to exist….[The Robinson-Patman Act] has the opposition of all cheaters, chiselers, bribe takers, bribe givers, and the greedy who seek monopolistic powers."

Principal among the cheaters and chiselers Patman decried were chain grocery stores that, because of more efficient purchasing and distribution organizations, undercut traditional food merchants. While consumers benefited from the lower prices (it was, after all, the Depression), competing independent merchants cried foul. Rather than competition, Patman urged "a policy of live and let live" among merchants, big and small. Interestingly, the actual author of Patman's original bill was the counsel of the United States Wholesale Grocers Association, a lobbying group for independent food merchants. Given such history, it's no wonder that, in the words of University of Chicago and Carleton University economist Thomas W. Ross, "[Robinson-Patman] looks less like an antitrust measure than legislated relief for small business."

Robinson-Patman is itself a revision of the Clayton Act of 1914, the first antitrust statute that expressly prohibited certain forms of price discrimination. In an attempt to cultivate competition in a given field, Robinson-Patman prohibits a seller from charging "discriminatory" prices to buyers of goods of "like grade and quality" where the "effect of such discrimination may be to lessen competition or tend to create a monopoly." The prohibition extends to non-price considerations such as promotional allowances, as well. The act does grant the seller the right to vary prices in a "good faith" attempt to match competitors. It also allows for volume discounts, but it mandates that such policies be linked directly to savings in economies of scale. The main enforcer of law is the Federal Trade Commission.

Robinson-Patman's pernicious effect on competition—and its boon to small firms—is illustrated by one of the most famous cases brought under the act, Utah Pie v. Continental Baking Company, which was ultimately decided by the Supreme Court. Utah Pie charged that three national frozen-pie manufacturers—Pet Milk Company, Carnation Milk Company, and Continental—damaged competition in the Salt Lake City area by selling pies at illegally discounted prices.

The facts tell a more interesting story, however: Utah Pie entered the pie-selling market in 1957 and, within two years, captured more than 66 percent of the frozen-pie market by building a local plant, trimming transportation costs, and undercutting national competitors' prices. Naturally, Pet, Carnation, and Continental responded by cutting their prices. The price war played well with consumers: Between 1958 and 1961, the market for frozen-pies jumped from 684,000 to about 3.2 million. Over the same time, Utah Pie increased its sales volume, consistently turned profits, and, although its market share had dropped to 45 percent, maintained its standing as the area's largest pie seller. But because Pet, Carnation, and Continental were at various times selling pies outside the Salt Lake City area for higher prices, they were found guilty of anti-competitive practices and forced to pay treble damages.

That sort of bizarre outcome is endemic to Robinson-Patman because the law is flawed both in theory and practice, says Marius Schwartz, a professor of economics at Georgetown University who has also worked for the Department of Justice's Antitrust Division and joined the Council of Economic Advisers in June. "Robinson-Patman means that outsiders—the courts, the government—are trying to second guess decisions that are very subtle and require very localized information," says Schwartz.

Schwartz, who supports other forms of antitrust legislation, notes that Robinson-Patman attempts to punish "price discrimination": realizing different rates of return on sales of the same product. But in a fluid market, where prices and costs are constantly changing, that's a virtually impossible task, he says. Since government enforcers can't know when a price is discriminatory, they look for price differences instead.

"The courts," says Schwartz, "have ruled that in the absence of manifest price differences, no Robinson-Patman violations occur. That's stupid—if there are different costs of service to different people, then equal prices can mean discrimination." Such stupidity, according to Schwartz, is compounded because the burden of proof falls on the defendant in a Robinson-Patman case, not the plaintiff.

The implementation problems are even greater when dealing with volume discounts and promotional allowances. "Let's say I sell you three candy bars packaged as one. Maybe there's some saving in wrapping paper or in the cost of answering the order. We could maybe take those savings into account. But a lot of the savings have to do with transaction costs—I don't have to send as many salesmen out to place a big order—a lot of them are overhead costs, so it's very difficult to apportion them to a particular transaction," says Schwartz.

Promotional allowances pose still tougher difficulties, since the returns on such practices are virtually impossible to quantify in any hard-and-fast way. For instance, says Schwartz, it might make sense for a firm to sell to a "marquee" account at a lower-than-average rate of return because the account itself has promotional value. Schwartz points to a 1940s-era case against cosmetics company Elizabeth Arden as the reductio ad absurdum of trying to proportion promo allowances. Arden sent beauticians to department stores and bigger outlets to do customers' nails and makeup. Smaller stores demanded proportional terms under Robinson-Patman. "What do you do," asks Schwartz, "Give them a full woman for half a day or half a woman for a full day?"

For Schwartz, the upshot of Robinson-Patman is that it works to weaken competition among firms in a given field, not to enhance it. By giving competing sellers and buyers the right to bring action against one another based on price differences, suggests Schwartz, you limit incentives on the part of buyers and sellers alike to make the most economically efficient arrangements.

To be sure, the ABA insists that what they want is more competition, not less. And, says ABA President Domnitz, all independent bookstore owners want is a share of what the chains are getting. Domnitz, who is also chairman of Harry W. Schwartz Bookshops, a local chain of six bookstores in the Milwaukee area, spins out a scenario of social and cultural apocalypse highly reminiscent of Wright Patman: "Today, the big corporate store carries a wide inventory because it is competitive to do so. But look down the road and [suppose] that, because of illegal [volume] discounts and illegal promotional allowance payments, the chain corporate stores of this country flourish and put the independents out of business. When there's only two chains left—or one chain, who knows how it might wash out—the decision to carry a particular book no longer [is] a cultural or a competitive issue. It becomes an economic issue and the number of times a book will sell in a given year will become the sole determinant as to whether a book will be carried."

The ABA's attempt to demonize "chain corporate stores" as rapacious profit-mongers and to lionize "independents" as defenders of life, liberty, and the American way is perfectly in synch with Robinson-Patman's tradition, says Donald Boudreaux, associate professor of law and economics at Clemson University. "Whenever technology or organizational innovation changes very rapidly [as is happening in the bookstore industry], a lot of apple carts are being upset. And the people whose apple carts are falling over run to the government and say, 'Look, this is terrible.'"

By the same token, Boudreaux, who considers Robinson-Patman "the worst example of federal antitrust legislation," doesn't find Domnitz's scenario very plausible. For starters, the idea that a bookstore chain or cartel could monopolize the retail market is unlikely, says Boudreaux, because entry into the market is relatively easy and even the threat of potential competition undermines monopoly control. Domnitz's vision of bigger and bigger bookstores offering smaller and smaller selections also ignores what customers prize most about a bookstore: variety.

As important, book publishers actually have an interest in maintaining competition at the retail level, says Boudreaux. Although we normally think that publishers sell books to retailers who then sell them to customers, it is more appropriate to look at retailers as providing a service to publishers by helping them sell books, says Boudreaux. "No one who buys a service wants that service to be monopolized," he points out. "Of course, it's possible that publishers are making a mistake when they grant certain volume discounts or promotional allowances to certain stores, but my money is on the publishers rather than the rivals of favored retailers, or judges, or bureaucrats."

For now, however, the future of book retailing rests very much in the hands of judges and FTC bureaucrats. On March 3, U.S. District Court Judge John Keenan denied defense motions to dismiss the case on the grounds that the ABA had no legal standing and that the suit failed to state an actionable claim. The judge found that the ABA's complaint "sufficiently alleges injury" and that the "favored and disfavored purchasers are in direct competition with each other." The judge also denied a defense request that the discovery process be delayed until the FTC decision comes down regarding HarperCollins, the Hearst Corp., Putnam Berkley, Random House, Simon & Schuster, and Macmillan. The discovery phase is set to be completed by November 3.

However the ABA case works out, one thing seems certain: It will not make the retail book trade—already a highly competitive field—more responsive to consumers. Within walking distance of the Third Street Promenade, a pedestrian shopping area in Santa Monica, California, there are no fewer than a dozen bookstores, including several independents and a recently opened three-story Barnes & Noble superstore.

"If I can't find what I'm looking for here," says Jim English, a Los Angeles restaurant worker, standing outside the Barnes & Noble, "I'm sure I'll find it at Midnight Special or one of the other stores down the block."