GMAT Reading Comprehension - Since the Dawning of Antitrust Regulation in America at the Beginning of the Twentieth Century

Reading Passage Question

Since the dawning of antitrust regulation in America at the beginning of the twentieth century, agreements establishing resale price maintenance have been considered expressly illegal. Unlike horizontal price fixing between competitors, however, where there are no exceptions to a blanket ban on such activity, certain types of vertically integrated price maintenance schemes have been held not to violate the law.

The current rule, the so-called Colgate doctrine named after one of the first major corporate litigants, provides that a manufacturer may state a pricing policy and refuse to deal with those who do not abide by it so long as no actual agreement is made. For example, a manufacturer is allowed to unilaterally establish a specific price at which it would like the retailers to resell its product. It may also state that it will terminate any retailer who fails to abide by its pricing policy. The manufacturer is even allowed to follow through by terminating any non complying retailers. The manufacturer is not, however, allowed to do anything beyond the flat statement of its pricing policy and a possible, but undiscussed, termination of the retailer. Any attempt by the manufacturer to obtain the retailer's agreement or its promise of acquiescence to the pricing policy goes beyond the approved unilateral action and will therefore be considered illegal.

This emphasis on unilateral action stems from the fact that the antitrust laws prohibit only contracts, combinations and conspiracies in restraint of trade. The law does not extend to unilateral action. So long as the manufacturer's policies and behaviors do not go beyond these accepted unilateral actions, there is no illegal activity. However, this result has left the field in virtually total disarray. The focus on unilateral action versus combined action puts otherwise sane sales people in the peculiar position of trying to state a policy to an existing or potential retailer but being required to avoid receiving so much as an ok in response. Without substantial reform of these rules, the continuing uncertainty and counterintuitive results will inevitably lead to completely unintended illegal behavior on the part of confused corporate entities.

“Since the dawn of antitrust regulation in America at the beginning of the twentieth century, agreements establishing resale price maintenance have been considered expressly illegal.”- is a comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 4 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analyzing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solution and Explanation

1. With which of the following choices would the author be most likely to agree?

A) Price maintenance policies are a rational approach by manufacturers seeking to maximize their profitability and control over their products in the retail market.
B) The Colgate doctrine is an ill advised attempt to meddle in internal corporate matters that should be left to the competence of the corporate managers.
C) The law should be revised to allow vertical and horizontal price maintenance.
D) Extending the law to cover unilateral action would be a positive step in improving the current state of regulation.
E) Eliminating the ban on combinations and conspiracies would be a positive step in improving the current state of regulation.

2. Which of the following can be inferred about retail price maintenance?

A) Antitrust law has a long history in America.
B) If the restraints on combined actions are not modified, consumer prices will increase as beleaguered manufacturers pass on the costs of compliance to consumers.
C) Manufacturers need to form a more efficient lobby to affect policy and reverse irrational restrictions.
D) Notwithstanding differing legal treatments, there are no substantial differences between horizontal and vertical pricing arrangements.
E) Irrational regulation is a significant cause of unintended illegal behavior on the part of many corporations.

3. Which of the following is not a result of the Colgate doctrine?

A) Manufacturers are limited in what they may discuss with potential retailers.
B) Manufacturers are allowed to unilaterally establish a specific price at which retailers should resell certain products.
C) Because manufacturers are reduced to unreasonable practices to comply with an arbitrary rule, consumers ultimately bear the cost of this poorly crafted policy.
D) A manufacturer's ability to craft detailed agreements with its retailers is compromised and constrained.
E) Manufacturers are not allowed to warn non-complying retailers of possible termination and cannot negotiate the retailers' future compliance.

4. Which of the following best describes the structure of the passage?

A) The author suggests two competing methods for accomplishing control over corporate pricing schemes and analyzes their efficacy.
B) The author presents a unique hypothesis supported by both general and specific examples in order to bring change to an established and unquestioned status quo.
C) The author provides detailed advice for managers seeking to maximize their profits in spite of irrational regulation by the courts.
D) The author identifies a problematic aspect of the regulation of certain corporate planning schemes.
E) The author identifies significant problems with price maintenance plans and provides alternative methods of accomplishing the goals and solving the irrational aspects of current regulation.

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