« 12 Indestructible Careers (from MSN) | Main | 10 Questions for Alicia Rockmore, Co-Founder of Buttoned Up »
Should Manufacturers Be Allowed to Set Minimum Prices?
By JLP | July 2, 2007
Read this quote from a WSJ article I read this weekend and tell me what you think. The quote is from from an article titled Roberts Court Unites on Business ($), which is about the recent rulings of the Supreme Court. Here’s the part that bugged me:
In a split decision on Thursday, the court abandoned a 96-year-old law that prohibited manufacturers from setting minimum prices, allowing them to force retailers to sell goods at minimum prices as long as they promote competition.
I don’t know about you, but I don’t like the sound of this. It certainly doesn’t sound like free markets. I also don’t understand “…as long as they promote competition.” Who decides what competition is?
The rest of the court’s decisions I can handle, it’s this one area that really bothered me.
What are your thoughts?
For more on the Supreme Court’s recent rulings, check out the Christian Science Monitor.
Topics: Business News | 16 Comments »
July 2nd, 2007 at 10:40 am
I’m not familiar with the case so I probably should read it before commenting, but it can be argued that contractual or business relationships between manufacturers and retailers are private agreements. The caveat is that the government, usually via the FTC, has the authority to prevent anti-competitive behavior. How do they know? It’s like art I guess, they know it when they see it.
I could definitely see a legitimate case for a manufacturer, especially a manufacturer of a high end or luxury product, not wanting to see their product sullied by ending up in the discount bin which could affect their reputation.
July 2nd, 2007 at 10:52 am
From Greg Mankiw at http://gregmankiw.blogspot.com/ :
Resale Price Maintenance
One example of a controversial business practice is resale price maintenance, also called fair trade. Imagine that Superduper Electronics sells DVD players to retail stores for $300. If Superduper requires the retailers to charge customers $350, it is said to engage in resale price maintenance. Any retailer that charged less than $350 would have violated its contract with Superduper.
At first, resale price maintenance might seem anticompetitive and, therefore, detrimental to society. Like an agreement among members of a cartel, it prevents the retailers from competing on price. For this reason, the courts have often viewed resale price maintenance as a violation of the antitrust laws.
Yet some economists defend resale price maintenance on two grounds. First, they deny that it is aimed at reducing competition. To the extent that Superduper Electronics has any market power, it can exert that power through the wholesale price, rather than through resale price maintenance. Moreover, Superduper has no incentive to discourage competition among its retailers. Indeed, because a cartel of retailers sells less than a group of competitive retailers, Superduper would be worse off if its retailers were a cartel.
Second, economists believe that resale price maintenance has a legitimate goal. Superduper may want its retailers to provide customers a pleasant showroom and a knowledgeable sales force. Yet, without resale price maintenance, some customers would take advantage of one store’s service to learn about the DVD player’s special features and then buy the item at a discount retailer that does not provide this service. To some extent, good service is a public good among the retailers that sell Superduper products. As we discussed in Chapter 11, when one person provides a public good, others are able to enjoy it without paying for it. In this case, discount retailers would free ride on the service provided by other retailers, leading to less service than is desirable. Resale price maintenance is one way for Superduper to solve this free-rider problem.
The example of resale price maintenance illustrates an important principle: Business practices that appear to reduce competition may in fact have legitimate purposes. This principle makes the application of the antitrust laws all the more difficult. The economists, lawyers, and judges in charge of enforcing these laws must determine what kinds of behavior public policy should prohibit as impeding competition and reducing economic well-being. Often that job is not easy.
July 2nd, 2007 at 11:59 am
Well, I may disagree with it in one sense (I’m a consummate bargain hunter) but I have to acknowledge that it’s reasonable for a manufacturer to do it.
Apple is huge on this. You won’t find retailers deviating by more than $5 from the MSRP on the price of an iPod or an Apple computer. Sometimes they’ll throw in a free printer, free speakers, or some other promotion, but the price itself is always firm. I can see how this generally makes things easier for Apple. They don’t have to worry about one retailer undercutting another or Apple’s own stores. They want people simply buying their stuff, not shopping around for the best prices. Plus it helps control the price of used products in the secondary market. You can easily sell a year-old Mac for 60-70% of what you paid for it.
July 2nd, 2007 at 12:47 pm
To add to GTCS comment, Miserly Bastard discussed how companies like Apple could get away with that kind of pricing strategy here. It makes for an interesting read.
July 2nd, 2007 at 12:49 pm
“It certainly doesn’t sound like free markets.”
Government meddling in the contract between a manufacturer and its resellers is not an attribute of a free market. The abandonment of this law actually brings us closer to a free market.
July 2nd, 2007 at 2:18 pm
manufacturers have been getting around the former law by posting MSRP. The S being “suggested” enabled manufacturers to avoid the rule, but still fix prices. Manufacturers are known to punish retailers who do not sell at MSRP, despite the former law…Apple being one of them…by limiting distribution as well as revoking reseller ability if deviating. all done under the guise of not wanting to undercut other resellers. i’m not apple bashing, but the example was mentioned above. there are plenty of companies that do the same thing. Rolex is a big one as are most luxury goods manufacturers. In my view, nothing has changed. i’m sure there will be plenty more class action lawsuits once companies start to set minimum prices, though.
July 2nd, 2007 at 4:31 pm
The imprtant thing to point out here (which no one does) is that it is no longer *automatically* illegal to require minimum prices. it will be determined on a case by case basis. Similar to how acquisitions are deemed to be anti competitive on a case by case basis. All SCOTUS said was the lower court should have listened to the arguments instead of applying precedent SCOTUS case law (that’s the big problem with scotus case law — it changes).
July 2nd, 2007 at 6:28 pm
Err… “free market” “liberal trade” it’s all good for us in the long run. Eventually people will stop buying the high priced items (modulo some amount irrational behavior due to advertising) if they are not worth it or someone can make a better item cheaper. Basic Adam Smith stuff.
(Of course, in the long run we are all dead, but maybe our kids will be happy… or not.)
July 2nd, 2007 at 8:15 pm
I am fine with it in that the manufacturer should be allowed to do it if they choose… because, as a consumer, I can choose to buy it, or not.
Some companies manufacture products that cater to a certain group of people, and if they see it as inexpensive, they won’t buy it.
July 3rd, 2007 at 7:23 am
That’s just ridiculous. It’s up to them to set their price to the retailer. After that, it’s out of their hands.
–
Baz L
Day In The Life of Baz
July 3rd, 2007 at 8:29 am
It seems to me that this may take away a lot of competitive advantages. For online retailers they can’t pass on savings from not having a physical store. For large retailers that are willing to take a loss to get customers into the store they won’t be able to give huge discounts for things like Black Friday. Overall I don’t see how anyone but the manufacturers benefit from this change.
July 3rd, 2007 at 11:35 am
We all benefit from this change because it is one small step in the restoration of the economic liberty that has been stolen from us step by step in this country. If a middle man doesn’t like the manufacturer’s rules, he doesn’t have to sell the product, and then the manufacturer suffers. Same with consumers. If you don’t like Apple, buy some other MP3 player. Apple is only successful because people are willing to pay the price despite the competition. In that sense maybe iPods are underpriced. For every one company that wants to maintain a high price, there are 10 companies that are ready to sell an almost identical item at a lower price. That is competition, and it is much more reliable in terms of setting fair prices than government interference.
The only type of antitrust activity to really be concerned about is actual collusion among sellers of the same or very similar items to maintain higher prices. And even in those cases the collusion rarely holds up for long because of competition and greed – not only does it attract new entrants into the market, but each participant in the collusion has tremendous incentive to cheat.
July 3rd, 2007 at 11:54 am
Here’s my beef with this:
Allowing companies to set minimum prices that all retailers must charge is anti-free market. If one retailer wants to sell the product for less than they paid for it as a loss-leader in order to get customers into the stores, then that should be their right to do so. What difference does it make to the manufacturer if they get paid?
July 3rd, 2007 at 1:38 pm
rob, i doubt it. this isn’t economic liberty, it is price fixing. we’re not talking about a slippery slope. now manufacturers can est. min prices on necessity items which we cannot choose not to buy.
July 3rd, 2007 at 4:33 pm
Tim – Please name one necessary item where the manufacturer can set a minimum price and not have another existing manufacturer immediately sell the same thing at a lower price, or a new manufacturer come in and sell at the lower price. As long as there is true competition, the market will set the equilibrium price.
July 17th, 2007 at 8:21 am
Hi,
I found the pinexbank has many good services in forex and cfd.
visit the http://www.pinexbank.com/en/ website.
You can send your question and problem there in a e-consulting system. send your question in consulting form online and you get rapid reply.
Also, there is a forecasting system whoich can you register there for one month free.
http://forecast.pinexbank.com