It first started back in the 1950s, in the heart of Texas, apparently as a little friendly competition among area grocery stores hoping to lure more customers and ring up additional sales. Some retailers were offering trading stamps as bait; others, like Safeway, were cutting prices.
But the federal government stepped in to see if Safeway, then the nation's second largest grocery retailer, was using its interstate power base to take advantage of local trade in violation of antitrust laws. Months later, Safeway Stores was charged with violating the Sherman Act and the Robinson-Patman Act. The criminal information and civil complaint filed by the Justice Department on Nov. 1, 1955, alleged that the chain had attempted to destroy competition in Texas and New Mexico by selling products below cost, engaging in price wars, operating stores at a loss, and establishing high sales quotas for its store managers.
Safeway officials argued that the company had not violated antitrust laws "in any way, unless meeting competition in good faith has become a crime or unlawful."
The case ultimately was settled with Safeway signing a consent decree that was nationwide in scope. Filed Dec. 7, 1957, in the U.S. District Court in Fort Worth, the decree enjoined Safeway stores at all locations in the United States from engaging in a number of specific actions, such as selling items at an "unreasonably low price" or "below price" for the purpose of attempting to monopolize the retail food market.
Now, 25 years later, Safeway has filed a motion asking the court to vacate the judgment on the grounds that it is obsolete, inhibits competition and denies consumers the chance to have lower food prices. And the Justice Department supports Safeway's motion, arguing that Safeway isn't likely to achieve a monopoly in today's markets. The restrictions only serve "to deter Safeway from legitimate price reductions," Justice said in its petition for termination.
Within the next few weeks, the Fort Worth court will decide whether to call a hearing to examine the issues--and whether to terminate the decree. The decision could come before the end of the year.
For Safeway Stores, now the nation's largest food retailer with 1,900 stores in 28 states and the District of Columbia, it is an opportunity to escape the complicated restraints that have kept its attorneys busy for years, checking to make sure that new pricing policies didn't violate the old decree. "Before making any significant merchandising decision, we have to consult with our lawyers," said company representative Felicio del Campo.
For the Justice Department, the motion for termination is part of a larger effort to eliminate as many as possible of the 1,300 antitrust decrees filed against more than 7,500 parties since 1890. Officials say their program is intended to promote economic efficiency rather than reflecting a Reagan administration attempt to abandon the antitrust laws.
"It is a bunch of rubbish that we are backing away from antitrust enforcement; we are just going at it in another way--a quite vigorous way," insists Jeff Zuckerman, the attorney appointed by Antitrust Division chief William Baxter to direct the review of antitrust decrees.
Zuckerman pointed to the break-up of American Telephone & Telegraph Co. as one example of the department's stand for competition and against antitrust in the marketplace.
So far, Justice has checked 317 judgments and set 228 of them aside for further investigation to determine if they should be terminated or modified, Zuckerman said. And, since 1981, the department has filed motions to lift or modify decrees against 13 companies. Decrees against six of those 13 have been terminated, and one decree has been modified. Motions to terminate decrees against the remaining six companies, including Safeway, are pending in the courts.
In reviewing a decree, the Justice Department typically tries to determine if the order should be terminated, modified or left intact, Zuckerman said. "The critical question we ask ourselves when we look at this decree as it stands now in 1983 is: Does it tend to restrain competition, promote competition or is it a zero, neither restraining nor protecting," he said.
"When we find a decree that restrains competition, we seek to terminate it," he said. "When we find one that promotes competition, we won't terminate it. When we find one that is a zero, but the company would like to terminate, we are generally willing to consent to that," he said.
Zuckerman said some provisions in the Safeway decree are "zero--they tell the company not to do things that violate the antitrust law." That sort of decree isn't very useful to the government or to the public in general, he said.
But in addition to the "zero" provisions, he said, the decree against Safeway contains provisions barring activities that are not necessarily unlawful and that are in fact desirable from the consumer point of view.
One example, he said, is a provision that enjoins Safeway from selling items at an "unreasonably low price" or "below cost" for the purpose of attempting to monopolize the retail food business or for the purpose of eliminating competitors.
The problem, Zuckerman said, is the implication that a price could be unreasonably low while still being above invoice cost. And, he said, "it becomes impermissible under the decree for them to be in this area (setting low prices) if some competitor would go out of business. So it requires Safeway to give a price unbrella to its competitors and keeps the company from competing on prices to the extent that it might otherwise wish to do and which would otherwise be perfectly legal under the antitrust laws."
Moreover, Zuckerman says, substantial increases in Sherman Act penalties passed by Congress in 1974 are adequate to deter future anticompetitive activities, and the likelihood of Safeway using predatory pricing schemes to eliminate competitors is "virtually eliminated if new entrants can quickly appear once prices are raised."
Entry into the grocery business is easy, according to the Justice Department officials, because capital is "readily available to new entrants," initial investment is modest and the time required to enter is minimal.
Leading food industry and legal experts tend to agree with that assessment. They say that predatory pricing--cutting prices to eliminate competitors and then raising prices to recoup losses--is no longer a significant threat in the retail food industry.
"It just doesn't mean much," says Robert Aders, president of the Food Marketing Institute, a trade association of the supermarket industry. He says the theory of "predatory pricing" is "all wet because anyone can get into the grocery business."
"If I drove someone out of business and then raised prices, within weeks someone would come in and open up against me," Aders said.
Robert Pitofsky, the dean of the Georgetown University Law School, a former member of the Federal Trade Commission and a recognized expert on trade regulation and antitrust law, doesn't see predatory pricing in the industry as a serious threat, either.
But he isn't willing to dismiss it completely. "I doubt that there is much anticompetitive pricing that is so low that it harms the competitive system," Pitofsky said. "Therefore, rules that hamper the ability of companies to sell at low prices can often do more harm than good."
But there are cases, he said, when companies with enormous treasures find it useful to drive competitors out of the market and then recoup with higher prices.
Pitofsky says that is less likely to happen in retail grocery sales, because entry barriers are so low. It is more likely, he said, in fields with high entry barriers, such as high tech manufacturing, where success is tied to secret technology and patents.
Nevertheless, some people do worry about the possibility of "predatory pricing" by a retail giant like Safeway.
Fifteen individuals, including consumers, grocery retailers and one academic, have filed comments in the Safeway case opposing the lifting of the consent decree. They contend that Safeway, freed of the judgment, will begin using "predatory pricing" schemes that lead to less competition and higher prices.
The most voluminous statement was filed by Fred C. Allvine, professor of marketing at Georgia Institute of Technology in Atlanta. In his 25-page comments, Allvine said that one possible victim of Safeway "predatory pricing" would be the warehouse grocery stores now trying to penetrate many concentrated and high-price grocery markets throughout the country.
" . . . these discount operators represent a serious threat to the costly non-price methods of marketing which certain large chains emphasize," says Allvine, who now is working on a study of warehouse stores.
The study is financed by a $45,000 grant from an ad hoc group of eight warehouse store operators. But Allvine denies that the statement he filed in the Safeway case was influenced by the grant.
"No one requested, authorized or sanctioned my statement," he said. "I was motivated by my concern over deterioration of the competitive process and the free enterprise system."