A growing number of manufacturers are dictating the retail prices that stores can charge for their products. Although this price setting violates federal law, according to Assistant Attorney General William F. Baxter, it has his blessing in most cases.

Baxter, chief of the Justice Department's Antitrust Division, said in an interview that he agrees with critics who charge that these pricing agreements are illegal and may result in higher costs to consumers. But since he has other reasons for believing that the laws against this form of price setting don't make good economic sense, Baxter said he will only enforce them in special cases.

Baxter's policy has upset discount retailers, who fear they no longer will be able to obtain brand-name merchandise to sell at reduced prices. The administration's policy, they claim, means higher prices for consumers.

Baxter's views also have infuriated several key members of Congress who believe a public official does not have the right to ignore laws simply because he doesn't agree with them.

"This is a most unusual and extreme situation," said Sen. Arlen Specter (R-Pa.). "The law in this area is not being enforced and people complaining to me have every right to be furious."

"Throughout the long history of antitrust in the United States, there has never before been such an attempt to ignore the clear intent of Congress and the law as interpreted by our Supreme Court," said Sen. Howard M. Metzenbaum (D-Ohio). "It seems that Mr. Baxter and his associates believe that it is their right to disregard entire areas of antitrust law because the law is different form their personal economic theories."

In 1975, Congress made it illegal for manufacturers to dictate the prices that stores charge customers. The legislation was passed with almost no opposition after many members of Congress and President Ford argued that "legalized price-fixing" was costing consumers $2 billion a year.

The Supreme Court has ruled on several occasions that this type of price setting is illegal.

While Baxter agrees that the price setting he is allowing is illegal, he believes that in certain situations, allowing manufacturers to specify retail prices has effects that encourage competition.

"The disagreement is not about the present state of the law so much as whether that law really makes sense," Baxter said. "The Supreme Court has said on a variety of occasions that vertical price fixing is per se illegal . . . . It is the position of the Antitrust Division that this practice should not be illegal per se in view of certain competitive principles."

Baxter said he believes manufacturers of technologically complex products like cameras, stereos, calculators and personal computers should be allowed to specify minimum retail prices. Without this protection, Baxter said, retailers will not provide the trained staff needed to sell these goods.

At the extreme, Baxter said, this may stifle innovation since manufacturers may decide not to produce technologically complex goods if they will not be supported by retail sales services.

"If it is possible for a consumer to go into a store and take advantage of a highly trained sales staff, and then say, 'Thanks, now that I understand the product I'm going to walk down the street and buy it at a discount house,' then no retailer can afford to provide point-of-sale services and the product may be driven off the market," Baxter said.

"I would permit manufacturers to dictate prices charged by stores for technologically complex products that had been on the market for a short time, and I see no reason on earth why it shouldn't be permitted any time one is sure that it is not being used as a device to facilitate horizontal collusion," Baxter added.

Horizontal collusion, a violation of the Sherman Antitrust Act, occurs when restrictive agreements are made among competitors. For example, there is horizontal collusion when retail competitors agree to sell an item at a specified price.

Baxter concedes that prices may rise in the short run if manufacturers are allowed to specify minimum retail prices. However, he believes that there is a greater long-run danger that may result if "a whole category of complex products is not developed and brought to the market because it is not possible for them to be distributed and merchandised in a way suitable for those particular products."

Service Merchandise, the nation's second-largest catalogue showroom retailer, has allied itself with other companies, trade associations and consumer groups opposed to Baxter's views and to new Federal Trade Commission rulings that enable some manufacturers to restrict distribution.

Discount retailers such as Best Products Co., K Mart Corp., Wal-Mart Stores and Service Merchandise, long accustomed to the refusal of manufacturers to sell to them directly, would often purchase their goods from dealers or "middlemen." But a shift in antitrust policy at the FTC and the Justice Department now permits some manufacturers to prohibit middlemen from selling their products to discount chains.

Service Merchandise has a list of 70 makers of brand-name merchandise that refuse to sell to it directly. Since Service Merchandise will no longer be able to buy many of these goods from middlemen, consumers will be paying higher prices, company officials said.

Service Merchandise officials believe Reagan administration policies take away the right of consumers to pay lower prices and do without in-the-store services provided by more expensive retailers.

"We think consumers may want to skip the cooking lessons in the store and buy the oven for less from us," said Service Merchandise attorney H.E. Lambert. "In this case, we are faced with an administrative agency the Justice Department ignoring the law. If changes in the law are going to occur, that should take place in Congress where both sides can articulate their views."

Sanford Litvack, who preceded Baxter in his post at the Justice Department, said it is "fundamentally wrong" for the nation's chief antitrust official to not enforce the law because he doesn't like it. He also disagreed with Baxter's economic arguments.

"In the real world, allowing manufacturers to set minimum retail prices offers no advantage to the consumer," Litvack said. "The argument that discounters are 'free riders' who live off other retailers' promotions has been taken much too far.

"Their cure will result in higher prices and it is worse than the problem," Litvack said.