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Battle Over Minimum Pricing Heating Up
The Wall Street Journal is covering developments in the gathering battle between manufacturers and retailers / discounters, especially online ones, over minimum prices. Earlier this year the Supreme Court upheld the right of manufacturers to enforce price floors for their products. Since then, manufacturers have increasingly been employing service companies like NetEnforcers to snitch on discounters who offer goods below "minimum advertised prices" (or MAPs), and to send DMCA takedown notices to the likes of eBay and Craigslist for below-minimum offers. Separately, the Journal reports that a coalition of discounters and retailers is using eBay as a stalking-horse in a campaign to get consumers, and then politicians, fired up enough to pass legislation outlawing MAPs.
From TFA: eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law.
Shouldn't existing law prevent MAPs already? This sounds an awful lot like collusion and price-fixing to me. But since the Supreme Court has already said that manufacturers can enforce price floors, it sounds like new legislation is definitely needed.
How can minimal pricing be legal or logical?
If I sell you an apple from my apple tree then what right should I have to say that you sell that apple at? Or what rights do I have to then your apple at all?
Obviously the original manufacturer has certain rights like copyright, trademark, but I fail to see how these right extend to something like price further down the supply chain.
This whole system just seems abusive and will make it harder for competition to ensue which last I checked was meant to be what a capitalist society was all about.
How exactly could a market be described as "free" if a single market actor is able to force other market actors to not sell the goods at a price they see fit?
Slashdot, fix your code or at least hire someone who is competent at it to do it for you.
So price floors are good, but price ceilings are bad? As we all know, "only commies allow price ceilings", so this sounds a lot like socialism for the rich and capitalism for the poor.
Enforcing MAPs is often more about maintaining supply chain and sales stability than explicitly trying to be profiteering.
Recently in the model-aircraft world, we had one large online, offshore (Asia) store acquire a large lump of stock from a supplier via proxy (because the supplier explicitly didn't want this online retailer selling their stock), the store promptly dumped the stock into the market at a price within 10~15% of the supplier cost price which was about 30% below MAP (on a $400~$600 item).
This had a couple of immediate effects;
1) Everyone bought stock from the one online store
2) Other major US/Europe stores couldn't match due to legal issues with going below the MAP
3) Said US/European stores stopped purchasing from the factory
4) Existing customers became enraged at the "huge profiteering" (many electronics goods are retailed at roughly 400% of their factory cost or higher)
Ultimately, the factory goes into a situation where they're between a hard place and a rock.
Certainly quite an effective way to crush some competitors in your market space.
We don't like to think that people are carving out huge profits on the items we buy, however the reality is that a lot of what we pay for items -is- profit that pays the wages of people like us who need to buy things to keep on living.
It's probably bogus but I can't even figure out what the theory is on which manufacturers sue unauthorized distributors. I mean my understanding of trademark law is that it's uncontroversial that using a product's name to correctly identify the item you are selling isn't a violation of the trademark. Moreover, merely listing the item name isn't enough to create a copyright violation.
I mean I see how this might work against retail operations or online stores. After all they usually need to put up a description of the product, pictures of the box and other information to make it attractive to the customer. No doubt the allegation is that the text on the box or the blurb describing the item are copyrighted. But how does this reach ebay sellers?
If you liked this thought maybe you would find my blog nice too:
The difference is that price fixing involves multiple (competing) sources agreeing on a minimum price. This minimum pricing scheme just concerns one manufacturer's product. You're free to buy from a competitor. Now, even if these contract terms are voided by law, a manufacturer can still easily charge a minimum price - their own price charged to retailers. Minimum pricing is more about protecting certain retail outlets than about gauging the consumer.
Fleur de Sel
Exactly. Protecting the Dealers from other dealers is the reason for MAP Pricing.
I worked in pro audio for 5 years. MAP is very prevailent in that market. I live in North Dakota. Its not like I sell 1000 dollar speakers every day like Musician's Friend does. So if I'm a dealer and the 1000 dollar speaker costs me 800 dollars. plus 70 dollar shipping. I'm making 130 dollars per speaker.
If there is no MAP. then The online retailer is able to then sell the speaker for say 850 dollars and and then sell more, getting better pricing so that the speaker may only costs them 700 dollars. well now they're able to sell it for less than what the smaller local dealer can and still make a profit. and make up the extra amount in gross sales. Isn't this reminding you of Wal-Mart?
These companys want to keep their local dealers open. They want to have a place for you to take your unit back to for support. if they don't have MAP there is no reason for that local dealer to even been selling the product if they can't even be competitive with the pricing.
Make sense?
There is no minimum rpice for second sale. The MAP they are trying to enforce is for distributor and first sale. Please note that I disagree with the MAP, I jsut wanted to point out that as a second sale they would have no right to enforce a MAP. YMMV by country, but usually second sale right is that you can put whatever price you wish. Even 1 cent if you want. Not so for retailer and distributor.
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Retailers are only consignment dealers, they don't buy anything up front. The manuftcr stocks their stuff on the floor, and the BestBuy remits as each item goes past the register. It's a form of floor planning like car dealers. If the item disappears from stock without going past the register (stock shrinkage aka employee theft) Apple eats it.
Since the mfr assumes the risk, then the mfr sets the terms and prices. This is how WalMart "Keeps Prices Low."
If the stores actually bought this stuff from the mfr as it came into the store, then it would be their property to dispose of as they see fit. But we don't.
This minimum pricing scheme just concerns one manufacturer's product. You're free to buy from a competitor.
Unless the product has no close substitutes, and the state enforces this lack of close substitutes.
and if you can't compete go out of business that's how it is supposed to work. Goods should be as cheap as possible that still keep them selling.
No, that may work in some businesses but in others it results in higher prices and worse service.
As the GP points out;
These companys want to keep their local dealers open. They want to have a place for you to take your unit back to for support. if they don't have MAP there is no reason for that local dealer to even been selling the product if they can't even be competitive with the pricing.
Once all the small companies go out of business the big guys can raise their prices above where they were when they had competition.
I sell "dual core intel computer with 2gb" for $1000 (or even more). Now, the customer *could* go to tigerdirect.ca and buy the "same" system for a few hundred dollars. I make my client VERY aware of that option. Really, I don't want any buyers remorse or anxiety over purchasing a system from me.
But... on-site setup, customized media software, lifetime labor, quality parts, little to no noise, and a nice pvr case.
Let's see tigerdirect.ca compete with that.
If *all* you are doing is selling the speakers -- I don't have much sympathy. Take your $50 dollar profit, if that's all you can get. Buy more speakers, and go "internet" as well.
MAP *does* gouge the consumer; if only to keep your business model afloat.
Personally, I think that MAP is designed to protect "reputation". Without the need for anyone to apply any extra elbow grease.
Just another "Cubible(sic) Joe" 2 17 3061
I find humorous. No one has mentioned Macintosh computers. Apple has a very interesting way to get around this problem. They have a MAP but they don't really need one.
Reason is, they sell them to you (the retailer) at VERY near their online store's price. When you, as an Apple Authorized Reseller sell a mac, you send proof of your purchase to them, and at the end of the month you get a check from them. Depending on a wide variety of factors, basically "how much you've behaved like Apple WANTS you to behave as their representative", that determines the amount of cash they give you back per machine. They call it "metrics". We call it "kickbacks".
AARs don't make ANY money on selling a mac. Many of them even LOSE money. But those BDU checks are what make their profit.
This has several interesting effects. First off, when a customer calls us asking about prices for all the systems, we can just direct them to the online Apple store, because all our prices will be the same as theirs, and will be the same as all our competition's. Second, Apple still holds us to MAP, so we can't sell at a loss to make more with the BDU checks. Third, we don't have to worry about direct competition in our market because no one else can sell below MAP, because everyone that's getting the computers from Apple directly has to sell at that price so they're not available anywhere below MAP to be bought "wholesale" and then retailed elsewhere.
The only two problems this causes us is #1 we have no way to compete with the deals Apple offers, such as discounts on ipod with computer purchase, or especially the student discount. #2 some of the places like Mac Warehouse get around this by throwing in free stuff like printer or memory upgrade and that's hard for us to compete with.
This whole thing wouldn't normally work because if Apple makes a price drop when a new model comes out, everyone would be stuck with merchandise they paid more for than they can sell for, so Apple also cuts us checks for any unsold inventory to make up the difference when they drop a price. (they call it "price protection")
The BDU checks and the price protection both are at Apple's discretion, so it gives them a lot of leverage to tell us what we can and cannot do. So even though we're independently owned/operated, we have to basically do whatever they say, or they'll cancel our AAR status and we lose the BDU checks and price protection and that puts us out of business. Really annoying when Apple does something like prohibit us from selling iPhones, and then turns around and lets places like Best Buy and Wal Mart sell them. Sort of a swift kick in the balls and we have no real recourse but to bend over and take it. For example, if Apple catches us selling an iPhone we'd get delisted instantly. If we were caught so much as displaying a pre-release of any Apple software, such as Snow Leopard or the new Aperture, same thing. So in this respect, the manufacturers can have a lot of control over their retailers - it goes far beyond just MAP.
I don't know for sure, but it seems like their preventing us from selling iPhones is something that should be illegal? Apple is notorious for taking steps to eliminate competition within their market, specifically from their partners. "competes with an Apple product" is the #1 reason for iPhone apps to be rejected by Apple from being sold on the Apple Store.
I work for the Department of Redundancy Department.
You're correct legally, but NetEnforcers et al seem to be demanding that eBay take down all sales of new products below the minimum price, assuming that these must be prohibited first-sales.
10 PRINT CHR$(205.5+RND(1)); : GOTO 10
and if you can't compete go out of business that's how it is supposed to work. Goods should be as cheap as possible that still keep them selling.
No, that may work in some businesses but in others it results in higher prices and worse service. As the GP points out; These companys want to keep their local dealers open. They want to have a place for you to take your unit back to for support. if they don't have MAP there is no reason for that local dealer to even been selling the product if they can't even be competitive with the pricing. Once all the small companies go out of business the big guys can raise their prices above where they were when they had competition.
And then small guys come back in to compete - so either the big guys keep prices low to keep out the little guy or they raise prices and open themselves to competition. Conversely, if enough consumers want the extra service they will pay a higher local price - but that should not prevent others from offering a better price. the kicker is many stores now have the click on cart to see price to get around MAP restrictions.
I'm a consultant - I convert gibberish into cash-flow.
Exactly. Protecting the Dealers from other dealers is the reason for MAP Pricing.
Except the consumer gets screwed by this - essentially it's a way to make price comparison more difficult. As a result, some places don't advertise price but require a call or email to get a quote.
I worked in pro audio for 5 years. MAP is very prevailent in that market. I live in North Dakota. Its not like I sell 1000 dollar speakers every day like Musician's Friend does. So if I'm a dealer and the 1000 dollar speaker costs me 800 dollars. plus 70 dollar shipping. I'm making 130 dollars per speaker.
If there is no MAP. then The online retailer is able to then sell the speaker for say 850 dollars and and then sell more, getting better pricing so that the speaker may only costs them 700 dollars. well now they're able to sell it for less than what the smaller local dealer can and still make a profit. and make up the extra amount in gross sales. Isn't this reminding you of Wal-Mart?
If it means consumers pay less then it is a good deal - the manufacturers don't want to piss off they big buyers by not offering steep discounts but don't want to offer the same pricing to the little guy. They could offer the same price to the little guy but they don't want to take the revenue hit so they use MAP to "protect" them while hurting the consumer.
These companys want to keep their local dealers open. They want to have a place for you to take your unit back to for support. if they don't have MAP there is no reason for that local dealer to even been selling the product if they can't even be competitive with the pricing.
If they really want then don't give the big sellers a sizable discount - stay a specialty product selling through dealers only. Some companies, such as Stihl and Snapper, do this. Of course, their prices are not that much more than for a similar product at Home Depot; they simply chose not to get into the price death spiral and instead sell on quality. As the CEO of Snapper said - "My tombstone will say 'He turned down WalMart.' - whether or not that was smart remains to be seen"
Make sense?
It depends on the business model - I don't think one that gives better pricing to Big Box / large online stores and tries to keep a dealer network in place via MAP is a viable long term strategy. The big guys will find ways to sell for less (MAP only controls advertised, not selling price); squeezing the dealers.
I'm a consultant - I convert gibberish into cash-flow.
You've successfully demonstrated that the problem lies upstream.
If JBL's policies are hurting the customers, then they need to change those policies. If the problem relates to the distribution model, then JBL needs to beef up their distribution accordingly.
The MAP I think is a crutch. Sure, I could save a few bucks online, but at what cost ? If anything, audio guys are aware that gear breaks down (a lot), and a web site isn't going to be of any use when your amp blows up the day before your show - might as well cancel the next 2 months' bookings! A brick and mortar store has customer service (most of the time). They will fix your amp (or ship it back for you), and give you a loaner.
You know what sucks about buying online ? Shipping. The first time you send those cheap speakers out for repair, the shipping will burn whatever you had saved by buying from www.cheapspeakers.cn
Frankly, I think we can do away with MAP. If someone wants to pay a cheaper price for less service, that's their choice. They will probably end up buying another when the first one breaks, so the manufacturer might actually benefit from the crap service.
-Billco, Fnarg.com
The problem with that logic, is that it takes a lot more time and investment to open and close up shop than it does to change prices on a website. If an online retailer (or Walmart for that matter) uses low prices, sometimes so low that they aren't even making a profit but are willing to take it on the chin to clear out the market, and then jacks them back up, there will not be a return of the local small retailers. It's not like they just throw all their stuff in storage and wait for the day when they can come back and be competitive, if you're run out of business you're not popping back next week when the market is more favorable.
OK, so I grow one special breed of apple from the apple tree that is delicious, but bruises easily.
I contract with and certify authorized fruit distributors who certify me that in advance of doing business with me, they must staff up and provide gentle handling and quickly respond to consumer complaints. In return for their investing in this staffing up, I set a minimum retail price they will charge and maximum wholesale price so the distributors of all sizes will have some assurance of gross profit.
My distributors make the investment, build my reputation among buyers, and my buyers and distributors are happy and make me wealthy.
I also offer volume discounts. (I didn't say that all distributors would have the SAME profit margin, just an agreed-to MINIMUM profit margin.)
A rogue distributor starts buying in larger lots than he can handle to get the larger discounts. He takes the units he can't sell and sells them to an unauthorized "gray market" distributor. The gray market distributor can sell them because they cut corners on staffing customer service and support.
Consumers have no idea why, but word-of-mouth is that service and support at the (gray/unauthorized) retail level is degrading. Small problems are repeated over and over as they are not addressed. Eventually, the market-wide brand perception is damaged and my business is eventually on the brink of being ruined.
I cut off shipments to the rogue distributor. He takes me to court. The court agrees that I am operating legally and I am in the right to cutoff any distributor who violates our contractual terms.
Some people on web discussion boards present me as a monster intent on excessive and unfair profiteering.
Business should be a series of voluntary transactions between all parties. If a product is priced too high or service is too low, then the product deserves to suffer. Monopoly laws apply only to products deemed by the authorities as essential to the economy and where alternatives do not exist.
That is why monopoly laws apply to the vendor of the world's largest operating system (i.e. the US vs. Microsoft and the E.U. vs. Microsoft) and not to minority OS players (i.e. US court ruled Apple could put out of business the Apple clone maker).
Just another day among the chattering lunatics. (Yes, I appear to be one too.)
Live Long and Prosper - Thanks Leonard. You are missed.
"They want to have a place for you to take your unit back to for support."
This is an old argument; I remember back in the early days of computers, this came up over and over. The argument was something like this:
"If you buy from the mail-order guy, then you don't get the kind of great support you get from your local dealer"
Okay. So you'd go in and ask about a particular piece of software, that you'd need support with. The local merchant's answer?
"How can you expect us to be an expert in each of these packages! They're quite difficult, and I'd have to devote a lot of staff to it!"
So. I still don't get it.
Let's take your store. I've bought high-end audio. It's usually sold with no return. If you complain about it, they'll fix it, but since you probably don't have repairmen on premises, you send it back to the manufacturer.
Let me ask you this. When I buy any TV or audio equipment from your store, can I return it for any reason within 90 days? That $2500 high-end receiver, can I try it for a week and bring it back? Because that's Costco's policy.
It's been my experience that small merchants have the worst return policies because they'll tell you they can't afford to take returns. Or if they take it, it's a big hassle. They argue, they'll point to a policy on the wall which says if you open the box it cannot be refunded. They'll only take returns if it's broken.
Rarely do small merchants offer great return policies. At best, they'll offer you good advice before you buy.
Recently, I went looking for a high-end keyboard, every place on the internet and locally sells it for $2,500. I figured the local store (very large) would tell me all about it. The manager said "These keyboards, it's hard to keep them all straight. It's hard to really go through it. XXXXXXX company rep will be in here Wednesday, maybe he can show it to you". Would they discount it? "Sorry sir, we only sell a few of these a year and the markup isn't great". So I did a little digging and I found 2 large stores that indeed sell below MAP ($2000, free shipping). And they were more helpful, they offered all kinds of great advice. Now they didn't offer returns, but it turns out nobody does on high-end stuff like this.
So tell me again what value the local guy is bringing me? If he went out of business tomorrow, how would that harm the consumer?
You were mistaken. Which is odd, since memory shouldn't be a problem for you
Therefore How do I sell a speaker to a customer if I am not an authorized dealer? If I sell it to them they will not have a warranty? Sure I can get it through a distrubutor but thats being shady to the customer, and downright bad business.
It would have the same manufacturer's warranty it does now. It would just mean that you were no longer on the hook for warranty work they would have to contact the manufacturer. Just like I would if I bought a PS3 or Xbox at Target I don't expect Target to do warranty work I contact Sony or Microsoft.
It is still collusion in my book.
Wallyworld and CostMe are agreeing to sell a product for a minimum price, their just going though a middleman to make the arrangement (the product manufacturer).
Troll, Troll, go away and flame again some other day
Er, last I checked Halo wasn't a "musical-rhythm matching game"...
On the other hand my wife had an Internet gift business reselling popular collectibles, and we went out of business because an Internet competitor that was down the street from the manufacturer had a back-door deal and undercut us terribly. Their retail was lower than our wholesale, and we were approved vendors meeting the quantity requirements.
Between the economy and these kinds of problems, I don't know how anyone makes a living in retail sales these days, except the well funded big box/internet stores reselling high volume low margin imported junk, and of course paying the salespeople almost nothing.
It's the long term behavior that counts - if retailers make a habit of dropping prices to end competition then jack them up other sellers will stay in the market because they know that the. price will rise.
That is simply not true. It is hard now to believe that even you seriously think that is true.
LARGE COMPANIES HAVE MORE MONEY. I normally dont like to yell, but that basic fact is one that you are completely overlooking. Small companies generally have very low cash reserves. They can only operate in the red for relatively short periods of time compared to large companies. The reason that large companies can continue to lower prices to push out small business is because they can outlast them. Smaller retailers already know the prices will eventually go up, but they simply cannot wait the big guys out.
Not only do big companies have larger cash reserves, they have more stores. If the larger corporation has 50 other stores, they can use the profit of those stores to cover the losses in the store that is currently in a price war. A small business cannot do that. It is so simple that it really shouldnt have to be explained.
-- All that is necessary for the triumph of evil is that good men do nothing. -- Edmund Burke