Functional discounts unlawful whenever an adverse effect on competition results therefrom The Commission…

No. 111. Functional discounts unlawful whenever an adverse effect on competition results therefrom The Commission recently issued an advisory opinion to the effect that the 14 percent discount which would be offered under the plan outlined below probably would result in violation of Commission administered law.

At present, the manufacturer seJ!s his product to manufacturers of a complementary product exclusively. The purchasing manufacturers reseJ! the product to independent distributors and to ultimate consumers.

The seJ!ing-manufacturer proposes to seJ! independent distributors direct, charging them approximately 1.4 percent more than the purchasing-manufacturers wouJd be charged on shipments to the warehouses of the latteL On drop shipments to purchasers buying through the purchasing-manufacturers, the manufacturers would be charged the independent-distributors' price. On drop shipments to consumers of the product, the independent-distributor price would be charged. Drop shipments could be ordered by any customer and would be openly available to all on the same terms.

There would be no agreement between purchasing-manufacturers or distributors and the 111anufactul'er as to prices the funnel' \vQuld charge; however, the ll1anufacturer does nm'v suggest and consumers.\vanId continue to suggest prices to be charged other form of control over resale of the product is now or would be exercised by the manufacturer.

The Commission pointed out that the price difference which would result from the proposed discount is within the purview of Section 2 (a) of the Robinson-Patman amendment to the Clayton Act. Section 2 (a) provides, in essence, that it is unlawful for a seller in commerce to discriminate behveen different purchasers of goods of like grade and quality where the effect may be substantially to lessen competiUon or to tend to create a monopoly. The Commission added that the 11 percent discount to be offered to purchasing-manufacturers is a functional discount and that such discounts are not prohibited by the applicable Jawor judicial Jnterpretations thereof uniess the discounts result in the adverse competitive efIects the law proscribes. The Commission ,vas of the view that such adverse effects were likely to result clue to the fact that purchasing-manufacturers would compete against ADVISORY OPINION DIGESTS 1725

distributors in seJ1ing to ultimate consumers and the manufacturers would enjoy a 14 percent price advantage on such sales. The Commission pointed out that unless the 14 percent only made due aJ10wance for differences in the cost of manufacture , sale or delivery resulting from the differing methods or quantities in which the tile cement would be sold or delivered to the manufacturers substantial anti competitive effects probably would result from implementation of the plan. Such a result would be violative of Section 2 (a) of the Robinson-Patman amendment to the Clayton Act. (File No. 673 7045, released Feb. 2, 1967.