"I'll Sell It To You At Cost": Legal Methods to Promote Retail Markup Disclosure, 84 Northwestern Law Review 1047 (1990) (with F. Clayton Miller)
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In today's marketplace, retailers provide consumers with a wealth of information about the prices, qualities, and uses of their products. Conspicuously absent, however, is information about the retailer's cost or markup. Retail sellers are generally unwilling to tell a buyer the wholesale cost of the goods they sell. To be sure, there are counter-examples. Some car dealers, for instance, promise to sell their cars for "$1 over dealer's cost." Yet, because such representations are almost certainly false, these very examples serve only to highlight the problem. In a limited number of markets, consumers value cost information but the competitive market process does not provide it in any credible fashion.

This Article examines whether consumer protection laws should be used to promote markup disclosure. Our goals are (1) to identify the markets in which consumers will most value markup information; (2) to show how markup competition could increase equity and efficiency by decreasing retail price dispersion and by substituting for consumer search; and (3) to suggest why competitive markets might not supply the information that consumers and society value.

Even if we achieve these goals, it does not necessarily follow that the government should intervene. Government intervention in even inefficient markets is only rationally justified if it does more good than harm. Keeping this premise in mind, we explore a range of possible government interventions and assess the costs and benefits of supplementing or displacing market forces. We prefer the rifle to the shotgun. Our policy proposals are aimed at a small, but significant, group of retail markets where we believe some forms of government intervention are justified.

The retail car market serves as a paradigmatic example for many of our theories. We suggest that buying a new car would be easier and more equitable in a world where retailers revealed their true costs. Consumers armed with information about the retailer's markup would not need to search at as many dealerships--for the simple reason that consumers would have a much better idea when they were getting a good deal. Markup information can thus serve as a dramatic substitute for consumer search. We also suggest that markup revelation would truncate the bargaining process at each dealership. The possibility of hoodwinking uninformed buyers into purchasing at a high markup would diminish as the excessive profits would be directly revealed. There would most likely be fewer rounds of bargaining and less price dispersion in the final offers. Finally, we imagine that retailers might begin to compete on the basis of markups. Retailers might advertise not to sell cars above a certain markup level. The dual burden of this Article is to explain how this "kinder, gentler" equilibrium could exist, and why market forces have failed to create it.

In Section I we discuss the evolution of the legal attitudes toward cost disclosure, beginning with the common law's indifference to intentional misrepresentation of seller's cost (while noting the increasing legal recognition of its relevance to informed consumer choice). Section II identifies the market conditions that make cost or markup disclosure relevant to buyers. In "thick" markets, such as the New York Stock Exchange, current price quotations are cheaply available, making seller cost immaterial. In "thin" markets, however, where this information is not so easily acquired, consumers may rationally value markup information. Section III explains why retail competition fails to provide this information about seller cost. Focusing on these sources of market failure, the fourth and final Section examines a range of ways that government might intervene to promote cost disclosure--including increased enforcement of prohibitions against markup misrepresentations, development of accounting standards to allow retailers to speak more credibly about their costs, and implementation of guidelines mandating disclosure of the retailer's costs or markups in appropriate markets.


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