Examining the Laws on Commercial Speech and Free Market Competition
Our society has advanced to where it is today because of the interaction and exchange that fosters innovation and economic progress. We cannot naively rely on the pure goodness of society to insure that trade and business is fair—society depends on institutions for that, more specifically the institution of law. Good laws are intended for society to capture the gains from trade and interaction. This paper will evaluate whether the laws that relate to commercial speech and free market competition are designed with society in the forethought. Commercial speech is speech delivered by a business or someone speaking on behalf of a business to potential consumers. The first amendment in the United States Constitution protects the freedom of speech, but whether it also protects commercial speech has been subject to debate in the past. A case that tackles this issue is Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council. Consumers in Virginia challenged a statute that prohibited licensed pharmacists from disclosing price information on prescription drugs, deeming that to be unprofessional conduct. What makes this case unique is that the ones who brought forth the suit are not the subject of the statute, the pharmacists, but the consumers. The consumers believe that the poor, sick, and elderly are hit the hardest by this statute because “a disproportionate amount of their income tends to be spent on prescription drugs…information as to who is charging what becomes more than a convenience. It could mean the alleviation of physical pain or the enjoyment of basic necessities” (VA State Board, 7). The District Court voided the Virginia statute because they believed that the law inconvenienced and prevented consumers from making the most informed decision. The opposing argument to this is that price advertising is unprofessional and would destroy consumer-pharmacist relationships because consumers will chase the pharmacist who will sell the lowest-priced drugs. Dissenting judge, Mr. Justice Rehnquist, argued that the there is “nothing in the United States Constitution which requires the Virginia Legislature to hew to the teachings of Adam Smith”, meaning that the idea of a free market system is not in the Constitution and Virginia should not have to consider advertising to be protected by the first amendment (21). The court refuted this argument and held that the free flow of non-misleading, legal information serves the public’s best interest. Our economy depends on allocating our resources “through numerous private economic decisions. It is a matter of public interest that those decisions…be intelligent and well-informed” (8). A pharmacist could prevent potential consumers from chasing low-cost products by advertising the benefits of his more expensive and superior products. If money is not a concern for the consumer, the consumer would probably choose the superior product. Society should give consumers the benefit of the doubt that they will make the right decision in accordance to their best interest, and so in consequence the right to advertise and the right for consumers to receive information will lead to increased exchange. One element of free market competition is the notion of restraints of trade. Restraints include any rules or activities that are set to limit trade and competition. The Sherman Antitrust Act Section 1 was passed by Congress to protect society against unreasonable restraints. This act was reinforced in the case of NCAA v. Board of Regents of The University of Oklahoma. A group of universities, the College Football Association (CFA), negotiated a television contract with NBC. When the NCAA threatened to take disciplinary actions against the universities, the issue was brought to the Supreme Court. The Court favored the universities by holding that the NCAA was participating in illegal price fixing and acted like a cartel. The NCAA argued that televised football games negatively affected the live attendance at these games. Thus they found it to justifiable to control the supply of televised games and set an artificially high price that held no relationship to the quality of the product. Unlike in a free market, the “price is higher and output lower than they would otherwise be, and both are unresponsive to consumer preference” (NCAA, 10). These monopolistic actions were considered anticompetitive and a direct violation of the Sherman Act, which was designed “as a consumer welfare prescription” (10). The phrase “consumer welfare” means that the application of antitrust laws should yield maximized benefits to society.
The District Court in the NCAA case argued that by taking away the restraints on televised games, there would be more consumption of the product because more games would be aired. College football games could operate under a free market and consumers would have their preferences taken into account, which is an overall benefit to society. In the Northern Pacific v United States case, Mr. Justice Black states “the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress” (Northern Pac, 1). Supply and demand should be able to come into play given that college football games operate in a commercial market.
In Professional Engineers v. United States, the policy goal of the Sherman Act is briefed as a “legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services” (Professional Engineers, 8). The NCAA’s plan didn’t consider the consumer’s interests and was intended to bring more revenue to colleges through increased ticket sales. Increasing live attendance by regulating televised games might have worked in the 1950’s, but during the time of the case, the District Court couldn’t find any evidence supporting that relationship. The NCAA plan not only was a disservice to consumers by disregarding their preferences, but also potentially cut off revenues to colleges by limiting their televised output. We can see the impact of deregulating college football’s television games today. Fans from any part of the country can tune in for a game. Watching a game on TV is a favorite pastime for thousands of people in our society, and college football has become a billion dollar industry. Similar to how the restraints of trade limits free market competition, monopolies are the antithesis of free markets and violate Sherman Act section 2 if they are held by anticompetitive means. This act was used in the case of United States v. Microsoft Corporation. The United States argued that Microsoft held a monopoly in the market for Intel compatible PC operating systems and attempted to gain a monopoly on internet browsers by packaging Windows and Internet Explorer. The issue was that even if Microsoft had the superior product, was it going out of its way to hold that position, and was there readily available substitutes for consumers to choose from? Microsoft argued that there were substitutes, namely Mac OS, middleware, and non-PC devices. The District Court dismissed Mac OS as a substitute because of network effects. Too many people use Windows operating systems and its applications so the switching costs would be too high. Non-PC devices could supplement PCs but would not perform the same functions. The argument for middleware was dismissed because “the test of reasonable interchangeability, required the District Court to consider only substitutes that constrain pricing in the foreseeable future…” (Microsoft, 9). The court determined that the lack of available substitutes was due to the high applications barrier to entry, which “ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems” (10). Microsoft argued that this is only a testament to their superior product. The court claimed that even if Microsoft has the superior product, they were going through anticompetitive means to maintain it. For instance, Microsoft claimed that it didn’t act as a monopoly because it didn’t charge profit-maximizing prices. The District Court rebutted and said that Microsoft “set the price of Windows without considering rivals’ prices, something a firm without a monopoly would have been unable to do” (13). A monopoly in and of itself does not violate the Sherman Act, because it’s reasonable and fair that a company shouldn’t be prosecuted for having a superior product. The challenge for the court lies in “distinguishing between exclusionary acts, which reduce social welfare, and competitive acts, which increase it” (14). Consumers shouldn’t buy Microsoft’s operating system because they feel that it’s their only viable option. By deeming Microsoft’s actions as anticompetitive, the court helped society by encouraging innovation to allow more competitors to effectively compete in the PC operating system market. Social welfare is improved because consumers get the chance to make a legitimate choice based on their preferences. Through this paper we have determined that the laws on commercial speech and free market competition are not set to merely inconvenience businesses, but rather to ensure that consumers are not taken advantage of and to promote more exchange. After all it was through the constant flow of interaction and innovation that has advanced our society to where it is today. The laws that have been examined ensure that businesses and consumers have the right to communicate with each other through commercial speech, and that consumers have their preferences taken into account in a free market system.