5. Q. Do they offer service or is that generally handled by the manufacturer's warranty independently of the retailer?

A. The manufacturer's warranty is generally sufficient to provide customer satisfaction in the event of the initial failure of a product. In fact, in most cases, Best Products simply exchanges the defective item for a brand new piece of merchandise so as to limit the consumer's inconvenience. Should an item fail at a time beyond the manufacturer's warranty, Best will, on the customer's request, return that item to the manufacturer, on behalf of the customer, for the appropriate repairs. If the customer prefers, Best directs him to a local factory authorized service center if available. Best Products, like most other retailers, does not operate its own repair facilities.

6. Q. What is the average overhead of catalog showrooms?

A. Our understanding is that the average range of the industry's overhead varies from 17% to 21% of sales. Information regarding overhead of Best Products, whose securities are traded on the New York Stock Exchange, has not been publically disclosed.

7. Q. How does this compare to other retailers?

A. Our understanding is that the typical retailer ranges from 33% to 40% of sales. These higher costs require the typical retailer to price his goods at higher levels. Somebody has to pay for this higher overhead.

MATERIAL RELATING TO THE TESTIMONY OF ALBERT REES

QUESTIONS BY SENATOR THURMOND, ANSWERS SUPPLIED BY MR. REES

Question. Mr. Rees, you indicate that a revolt against fair trade laws is underway with a number of states repealing these laws. If the states are doing this, do we need Federal legislation such as S. 408?

Answer. Repeal of state fair trade laws is merely illustrative of the growing realization that these laws are undesirable. However, some states may well fail to repeal, as happened recently in Virginia where repeal failed by a single vote. Individual states are certainly entitled to draw their own conclusions about fair trade laws. However, the legislation establishing the Council on Wage and Price Stability specifically directs us to review and appraise the various programs, policies and activities of the Departments and agencies of the [federal government] for the purpose of determining the extent to which those programs and activities are contributing to inflation.

What is at issue, therefore, is the existing Federal legislation that exempts fair trade practices from prosecution under Federal antitrust laws when interstate commerce is involved. It is this exemption under Federal law which S. 408 would repeal. Regardless of whether a state desires to retail fair trade, there is no justification for national laws which afford fair trade its present exemption from federal antitrust prosecution.

Question. You have said, "because 'fair trade' laws raise retailers gross margins, it can be imagined that they raise net margins, that is profits, and thus generate income for small retailers." Isn't the small retailers overhead higher per unit than a large high volume operation, thus meaning less profit?

Answer. In response to your question, I must emphasize the context in which I made that statement. In my prepared remarks, I accompanied the statement to which you refer with the clarification that "such effects, if they exist, must be only temporary." The point I emphasized was that higher fair trade profits are short-lived, as new competitive entry will eventually erode them. Therefore, the retailer really has nothing to gain, while the customer loses in the end.

A specific small retailer may, indeed, have higher overhead than a large operation. However, he may also be able to offer advantages in terms of location. service, and convenience that would enable him to support a higher margin and maintain his profit. To the extent that small retailers offer such advantages to their customers, repeal of fair trade laws will not hurt them, and customers will be free to choose between added service and lower prices.

Question. Do you know approximately what percentage of manufacturers within general product categories fair trade their products?

Answer. I assume that you are alluding to the actual incidence of fair trade in the marketplace and this is particularly difficult to determine. As I noted in my prepared remarks, some estimates indicate that $35 billion of goods may be sold under fair trade. I should point out that even where it is permitted, fair

trade is not necessarily used, and this makes estimation particularly complex. For example, a recent Business Week article pointed out that one major manufacturer fair-trades only in the New York metropolitan area and in California, despite laws permitting the practice in many other states. Other articles have indicated that even in a fair trade state, Virginia, for example, only about 5 percent of all retail items were sold subject to a fair trade agreement.

The Council on Wage and Price Stability has not explored fair trade in sufficient detail to be able to make the estimates you request. However, we would be happy to pursue this further if you would like us to do so.

Question. If a retailer can purchase comparable goods from manufacturers who do not require them to be fair-traded, is there sufficient competition to limit the number of manufacturers who fair-trade their products?

Answer. No. Let us take the case of a retailer carrying two lines of television sets, Sony, which is fair-traded, and Brand X, which is not. Let us further assume that Sony television sets are seen by customers to be superior in some way to Brand X. Under free and open competition Sony would sell for a higher price than Brand X, reflecting consumer preference for the product. Under fair trade, Sony is able to increase this premium by preventing competition among the distributors of its products. There is no evidence that any of this benefit is retained by the retailer. Two factors suggest this. First, retailing is more competitive than manufacturing, so even if retailing margins are raised temporarily they are likely to be soon competed back down to normal levels. Second, it is the manufacturer, not the retailer who is active in enforcing fair trade.

To be sure, the more substitutable consumers find two brands, the lower the price differential than can exist between them. However, so long as the two brands are not seen by consumers as perfect substitutes, fair trade will increase the premium that the manufacturer of the higher priced brand can extract from consumers. In the case where the two brands are seen as perfect substitutes, manufacturers will not seek the protection of fair trade contracts.

MATERIAL RELATING TO THE TESTIMONY OF HILLIARD SCHULBERG QUESTION ASKED BY MISS JOHNSON DURING ORAL TESTIMONY, ANSWER SUPPLIED BY MR. SCHULBERG

HILLARD SCHULBERG, Washington, D.C., March 11, 1975.

Re S. 408.

Ms. SHIRLEY JOHNSON,

Counsel, Subcommittee on Antitrust and Monopoly, Committee on the Judiciary, U.S. Senate, Washington, D.C.

DEAR MS. JOHNSON: In further response to your inquiries at the hearing on the above bill, please be advised that information supplied by the United States Brewers Association indicate that the States of California, Delaware, and Indiana have fair trade on malt beverages.

According to information supplied by the Distilled Spirits Council of the United States, the following States have alcoholic beverage price controls of one kind or another. The list does not include those 17 States which have monopoly operations, and set their own prices.

We are also enclosing the gallonage figures for all States for the 12 month period, ending October 31, 1974.*

Sincerely,

*This information has been retained in committee files.

HILLIARD SCHULBERG.

MATERIAL RELATING TO THE TESTIMONY OF KENNETH INGRAM MAGNAVOX TOP RATED BY LEADING INDEPENDENT CONSUMER MAGAZINES

MATERIAL RELATING TO THE TESTIMONY OF GEOFFREY NUNES PREPARED STATEMENT OF GEOFFREY NUNES TO BE GIVEN BEFORE U.S. SENATE ANTITRUST SUBCOMMITTEE ON APRIL 9, 1975

Good Morning: My name is Geoffrey Nunes, I am Vice President, Secretary and General Counsel of Lenox, Incorporated "(Lenox"). Lenox is a nationally known public held company, engaged primarily in the manufacture and marketing

of fine china dinnerware and giftware, hand-blown leaded crystal, gold and diamond wedding and engagement rings, high fashion jewelry, high school and college rings, silverplated holloware, candles, soaps and toiletries. All our fine china, crystal, gold and diamond wedding and engagement rings, as well as a line of our silverplated holloware is currently being sold under the protection of the fair trade laws in those jurisdictions where fair trade is legally permitted. Obviously I am here to testify in behalf of fair trade and against S-408. I know you gentlemen are very busy, at least as a taxpayer I hope so, therefore, I will try to be brief. And in this connection, I also realize that S-408 is only one of many Bills your Subcommittee must consider this term; still it is a Bill with very important ramifications to a fairly large number of people, and I very much appreciate being heard on the subject.

As a matter of fact, it really is not very difficult to be brief, because when one looks at Fair Trade objectively, that is, with a discerning eye enabling the viewer to see what is smoke and what is substance, the issues are quite clear.

Initially I submit one should see the expression "Fair Trade is merely a hangover from Depression Days" . . for what it is. A complete fabrication. I trust you are all familiar with the history of Fair Trade, and I will not bore you with a recitation of the cases and the legislative history, going back to the Dr. Miles case and beyond. I think it sufficient to quote Justice Oliver Wendell Holmes who said in 1911:

"I cannot believe that in the long run the public will profit by this course, permitting knaves (that's the Justice's word, not mine!) to cut reasonable prices for mere ulterior purposes of their own, and thus to impair, if not destroy, the production and sale of articles which it is assumed to be desirable that people should be able to get".

The argument has been the same, not since the Depression, but since the turn of the century; namely, that if the manufacturer gets his asking price from the retailer, he should not be concerned if the retailer wants to cut his (the retailer's price) to increase volume, since obviously (sic!) the consumer benefits! But, of course, this is the whole point today gentlemen-in fact it is the consumer who not only doesn't gain, but who is the ultimate loser!

When a discounter or mass merchant sells at less than the manufacturer's Fair Trade price (or suggested retail price) the public believes that, either the manufacturers or the other dealers price is too high, or that the product is not worth what the manufacturer says. This not only impairs the manufacturer's reputation for a quality product, but forces the other non-discounting dealers to lower their price if they wish to stay in the market. This in turn makes the product less desirable in their eyes, as they may drop it entirely, or they will reduce their orders from the manufacturer who will obviously suffer; or they (the other dealers) will demand the manufacturer lower his price to them, and if he does, so he must then reduce the quality of his product. It is no answer to say the other dealer must be satisfied with a lower price or that the manufacturer must sell for less. This is merely begging the question. The facts show that this (a lowering of the price) is not what happens. I would ask each of you to consider the quality (how long does it last of any one of the small appliances (such as a toaster) that you own today, compared to the one that you purchased say 10, 12 or 15 years ago! We often hear the complaint "they don't make 'em like they used to!"-but have you ever considered why? In many instances, it is because the manufacturer can't get a sufficiently large enough price to enable him to build in quality. And this is because of the effect in the market of the discounters and mass merchants. The end result is the consumer loses--because he is getting something other than top quality merchandise!

At the risk of incurring your wrath for "lecturing" you, I would caution you all to be sure you are really aware of what it is you are doing if you abolish Fair Trade. You are taking away from the consumer one additional choice. You are not benefiting the consumer, you are limiting his options! Remember that in order to be able to benefit from the Fair Trade laws, a product has to be a trademarked product and in free and open competition with other like goods. In other words, it must compete in the marketplace. If the consumer feels that she doesn't want to buy Lenox China (no matter how misguided she may be to feel so) she doesn't have to, because it is always displayed right next to a goodly number of china patterns produced by others, and not necessarily fair traded.

Put another way, the distinction is, or should be, between price fixing, which is illegal, and price maintenance which is, and should be allowed to remain, permissible, when done in accordance with local Fair Trade laws.

As Justice Brandeis said some 60 odd years ago:

"The independent producer of articles which bear his name or trademark. seeks no special privilege when he makes contracts to prevent retailers from cutting his established selling price... It is essential that the consumer should have confidence not only in the quality of (the producer's) product, but in the fairness of the price he pays . . . He establishes his price at his peril—the peril that if he sets it too high, the consumer will not buy, or if the article is nevertheless popular, the high profits will invite even more competition.”

I submit this analysis as valid today as it was in 1913, and more importantly, has nothing to do with the Great Depression. What it has to do with, is making sure the consuming public has as many options as possible!

Let me put it in this way: Lenox has been making fine china for almost 100 years, and crystal and wedding rings for over 100 years. When we put our trademark on our products, we put our reputation on the line. What is wrong with our putting our price on it at the same time? If the consumer doesn't like our price, he doesn't have to buy our ware, certainly we can all agree with that. But why can't we also agree that a discounter should not be allowed to use our product as a loss leader and debase our reputation, built up over all these years! Can't we then agree that it is an advantage to the consumer to be able to buy a nationally known product with a nationally known manufacturers reputation behind it? I think we can, but what we can't seem to agree on is that this will not continue, and in fact will cease, if you take away the manufacturers right to sell at a Fair Trade price. In short, I am here only for one purpose, and that is to tell you that this is exactly what will happen if we can't get our price from our normal channels of distribution. If the discounters and mass merchants use our products as loss leaders, then we will have to lower our price to our regular dealers so they can lower theirs and compete. This means we will have to lower our quality, and as I said a few minutes ago, the next thing you will hear from somebody is "they sure don't make Lenox like they used to".

Now I'd like to take just a minute to give you another reason why the elimination of Fair Trade does a disservice to the consumer. Today if you want to buy a major appliance, certain articles of jewelry, or a lot of other items, you can, in fact, "get it for less" at a catalog showroom, or at a discounter. JG&E is a prime example in Metropolitan New York. But what you can't get there is any kind of service or advice. Lenox, and I am sure other quality products require sales personnel who are familiar with the product so they can properly advise the customer. Can you imagine sending your daughter or your daughter-in-law, as young brides to be, into a JG&E to select her fine china or crystal-I think not! That is not saying these outlets don't serve a purpose. They do, and so do Sear's and Montgomery Ward and the other large mass merchants who really fix their own prices, since they are substantially vertically integrated. But they are all just one or more channels of distribution, all of which should remain available to the consumer. In our industry, the fine department stores and the local jewelers are also channels of distribution, which perform a valuable service to the consumer, and which must not be allowed to disappear. As a hypothetical, what would be your reaction if tonight you saw a T.V. commercial which said in effect-"Attention all brides to be, go to your local department store or fine jeweler, talk to the nice people there, take as much of their time as need be, get lots of good advice as to china and crystal, get the appropriate pattern names or stock numbers, and then come to us, we'll sell it to you for less." In a situation like that, something would have to give.

I've said it more than once this morning, so I shouldn't have to say it again. The consumer should have a choice. The elimination of Fair Trade will take away one of his choices. This is what I have been trying, successfully I hope, to demonstrate here. All we want is just the opportunity to compete in the fashion we choose!

That concludes my not very formal presentation. I will be glad to answer any questions you may have, at least to the extent I am able.

Thank you for your attention.

MATERIAL RELATING TO THE TESTIMONY OF BERNARD MITCHELL

PREPARED STATEMENT OF MR. BERNARD MITCHELL, U.S. PIONEER ELECTRONICS

CORP.

Mr. Chairman and Members of the Committee: My name is Bernard Mitchell. I am President of S. Pioneer Electronics Corp., the exclusive distributor in the