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B. THE MAIN CONTENTION: UNFAIR COMPETITION

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LOSS-LEADER

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AND THE

21. A more substantial argument in favour of resale price maintenance is that price competition between distributors of branded goods is sometimes undesirable in itself. To a large extent it would appear that this argument springs from a dislike of competition as such and from a 'preference for restrictionism and profit without risk. In so far as this is the feeling behind the argument, the Government can neither accept it nor take account of it.

22. The Government recognises, however, that one element in this argu- ment is a sincerely held belief that price competition in retail trading in branded goods inevitably leads to excesses and abuses which ultimately do harm to the manufacturer and the buying public as well as to distributors themselves and their employees. The Government expects that the main criticism of its proposals in this White Paper will in fact be on the lines that they will have the effect of bringing back into the trades concerned the evils of "uncontrolled price-cutting" and the "loss-leader."

The "Loss-Leader" Argument

23. The particular object of fear on the part of those who regard the continuance of resale price maintenance as essential is the " 'loss-leader." This term is applied to a particular type of selective price reduction. A trader makes a marked reduction in the price of some selected line of goods, perhaps even selling that line at a loss, in order to attract customers to his shop in the hope that once there they will buy other goods bearing a full margin of profit. It is a form of advertisement and the extent of the price- cut in the selected goods may bear no relation to the trader's general level of costs.

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24. Nationally-advertised lines of branded goods are particularly apt for use in this way because the public look out for them and can readily compare prices from shop to shop, so that the 'loss-leader price-cut is sure to be noticed. It is argued that when "loss-leading" becomes wide- spread, a serious instability is introduced into the trades concerned and this ultimately does harm to the manufacturers of those branded goods which are used as loss-leaders" and to the buying public. It is said that when faced with a loss-leader in their neighbourhood, other traders cease to stock the line concerned. (They may also reply by “loss-leading" in some other line, thereby spreading the practice.) The manufacturer finds that orders for the line fluctuate seriously and this may upset the steady flow of produc- tion and distribution on which the low costs of standardised branded goods depend. If "loss-leading is very common, traders will also seek to sell more unbranded goods or their own special brands, so as not to be caught with stocks of goods which are sold at cut-prices by competitors. Finally, it is argued that without an effective system of resale price-maintenance, "loss-leading" is bound to become widespread, bringing all these evils in its wake.

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The Government's View of this Argument

25. The Government has given this argument the most serious considera- tion before deciding on its proposals, but has reached the conclusion that the fears expressed are exaggerated.

In particular the argument fails, in the Government's view, to take account of the differences in conditions between the years of deflation and unemployment in which the practice of resale price maintenance was built up and the present era of full employment and a high level of demand. In the former conditions sellers had to go to great lengths to tempt the public to buy. The Government does not believe that in the absence of resale price maintenance extreme forms of price-cutting and other means of forcing sales would be likely in conditions of full employment to become a wide- spread or general feature of trading.

27. Secondly, the Government believes that the argument to a large extent assumes the existence of resale price maintenance and would cease to be valid in its absence. For example, a background of rigidly maintained prices is just what the price-cutter needs to make his "loss-leader" tactically effective. If it were general for prices to vary somewhat between different kinds of shop, no single price reduction would stand out in a spectacular way. Moreover, where variations in price are normal, it becomes impracticable for traders to respond to a particular price-cut by ceasing to stock the line of goods concerned and pushing some competing brand instead. The assump- tion is that competing brands will also be reduced in price by some retailers who can afford to sell at similar margins.

28. Thus the Government is not disposed to accept the contentions- which are based on past history and not on up-to-date experience that the pbsence of resale price maintenance would inevitably lead to excesses and

resulasses of 587 abuses of competition and that the price reductions which resulted would

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