South-Western College Publishing - Economics  
Price Floors Are No Longer a Bad Thing
Topic International Trade
Key Words Imports, Exports, and Trade Surplus
Full Article

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Reference ID: A165804194

News Story Recently, the Supreme Court ruled that price floors were not automatically illegal, thus rescinding a 1911 Court ruling law restricting their use. Why did they do this?

The Bush Administration and the economists at the University of Chicago argued before the Supreme Court that there was nothing inherently anti-competitive about such price restrictions and therefore the old law was inefficient. They argued that it could become easier for a new producer to guarantee that retailers could undertake the risky act of marketing a new product and getting a return for their investment, since all retailers were selling the good for the same price. The ruling allows much greater latitude in the creation of minimum prices for retailers, and no-discount requirements of manufacturers, as long as the individual cases were not stifling competition.

The argument opposing this was that it was unclear exactly when a pricing restriction was anti-competitive and when it was pro-competitive. Just as the above example was possible, it was also possible for a new retailer to be harmed because it is now no longer able to provide discounts to create additional business for itself.

Since the Supreme Court has ordered the “rule of reason” to be used, instances of price-fixing will be handled on an individual basis. If nothing else, it has given lawyers and economists a great deal of work to do over the next few years as it tries to figure out which pricing relationships are pro-competitive and which are anti-competitive.

Questions
Discussion Questions:
1. Consider a textbook example of a price floor. What does a price floor do to consumer surplus and to producer surplus? Draw a graph to explain your answer.
2. Based on your answer in question 1, what must happen for consumer surplus to increase as a result of the price-fixing relationship?
3. How do you think economists will begin to identify which pricing relationships are anti-competitive, and which are not?
Multiple Choice/True False Questions:
1. True/False. According to the article summary, the use of price-fixing relationships was inherently unconstitutional.
2. According to the article, what rule will be used to determine if a particular pricing relationship is anti-competitive?
  1. Habeas corpus
  2. Rule of reason
  3. Amicus brief
  4. Prior restraint
3. Which of the following is an example of a price floor?
  1. Minimum wage
  2. Rent Control
  3. State minimum pricing on cigarettes
  4. A and C
Source : Labaton, Stephen. “Justices End 96-Year-Old Ban on Price Floors.” The New York Times, June 29, 2007.
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