Price fixing

The Sherman Antitrust Law prevents a manufacturer from enforcing a set retail price (MSRP) with its vendors. As a practical matter, the practice has long existed. If a retailer discounts products beyond a level that a manufacturer finds acceptable, the manufacturer ceases to sell to the non compliant retailer. While technically illegal, relief was only available to stores willing to bear the expense of a lawsuit. Last March, such a suit was brought before the U.S. supreme Court in the case of Leegin Creative Leather Products vs PSKS Inc aka Kay’s Kloset, a suburban Dallas boutique. From WWD (sub):

In an attempt to compete against larger brands, Leegin a decade ago began requiring retailers to adhere to a minimum price. Kay’s balked at the policy and, in 2001, began selling the firm’s leather goods at a 20 percent discount. The brand pulled its product from the store and a lawsuit ensued that was at first decided for Kay’s, which won damages of $3.6 million.

It would appear that changes are afoot; the Supreme Court appears willing to reexamine the tenets of the Sherman Antitrust Act which would -as a practical matter- enable manufacturers to enforce price points in an effort to protect the exclusivity of their brands. While it is understandable that retailers want the flexibility to establish pricing, it is also likely that enforced MSRP policies could also benefit them. If large discount operations (such as Wal-Mart) had to sell at certain pricing levels, this would level the playing field for smaller independently owned stores who offer better service.

Do you think manufacturers should have the right to protect the exclusivity of their brands by enforcing price points? Take the poll.

Edit 11/23/12
Vizu polls have closed down. Below is a screen capture of the poll results.

Amended 3/8/11
The Supreme Court determined manufacturers have the right to enforce price points. If a customer discounts the price of new merchandise, you have the right to refuse future sales. That said, as a matter of fairness and pragmatism, you can’t expect a retailer to not discount product that isn’t moving.

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  1. dawn says:

    Seems to me very simple…if you sell something to a retailer, it then belongs to them. They can sell it for what they want. If they want to make retailers sell it for more, why don’t they just charge them more?

    “Brand” identity shouldn’t have to do with just price. A crummy product can be over priced. It should have to do with quality.

  2. Miracle says:

    My early experience in clothing retailing was in off price merchandise. Now it’s internet retailing. So, I am biased. Frankly, there are internet retailers who only know the business model of discounting, they do not know how to create value otherwise. So they discount in season, fresh merchandise. I prefer to only buy lines that won’t support this practice, because it’s a lose-lose for everyone.

    I have seen companies sell to anyone, without investigation or restriction, only to deeply regret that practice down the road, once their brand was more established. It’s hard to reign in pricing once you’ve let it get out of control.

    I could see it being a very good thing, however, I can also see it having many drawbacks (one of which is creating more department store chargebacks from unsold merchandise).

  3. Alison Cummins says:

    Hm, this is tricky. I have absolutely no problem with someone using price fixing to artificially create a shortage of luxury goods, or of a particular brand of a widely available ordinary good.

    I do, however, see problems with manufacturers deciding that low-volume high-margin is an easier and more fun model for producing, say, pharmaceuticals.

  4. irene says:

    Retailers should be able to set prices however they want. Once they’ve bought a product from a manufacturer, they own it.
    But, there’s no reason a manufacturer can’t refuse to sell a product to a retailer if the retailer won’t comply with their terms of sale. It’s their product, they can sell to whoever they want.

    Besides, isn’t price fixing generally when two companies conspire to keep prices high, to eliminate competition? Like oil companies who check each others prices every few hours?
    This sounds more like price management than price fixing to me.

    The ethics of a free market don’t neccessarily apply in the case of pharmaceuticals, since people’s lives are at stake. Although I will say that drug companies do need a financial incentive to keep innovating.

  5. J C Sprowls says:

    I’m generally against legislating “good behavior”; and, I think this falls into that category. I don’t feel that an MFG should be liable for refusing to sell to any Retailer. Likewise, I don’t feel the MFG has authority to force the Retailer to adopt a specific pricing strategy.

    I believe the MFG should set the MSRP as a ‘tone’ for the market the product should play in. After all, without researching the target market, how can you ensure the product fits? Regardless, it’s the Retailer’s prerogative to follow suite on the MSRP or not. If they want to cut their nose off or argue with their neighbors that’s their business.

    I think a MFG also needs to be firm in their pricing. I mean, if 60% of your customer base is buying at $3 per piece and is satisfied with their margins, why cave when Big_Name_Dept_Store asks for $1.80 per piece?

    Please: tell me why I should incur the wasteful expense of acquiring a factor and allowing Big_Name_Dept_Store a greater margin than everyone else? Tell you what… you wanna terms, you-a pay the Factor fees :-) You wanna discount, you-a pay 50% cash upfront!

    [/soapbox OFF]

  6. Vesta says:

    We’ve talked a lot about this issue, and this case, amongst the sling makers. My take is the same as Irene’s, with our nuance thrown into the mix. I really don’t care what people sell my product for in person. Truly. What I care about is what they *advertise*, which includes all web listings, since it’s public info.

    I have a MAP (minimum advertised price) policy, which I enforce by refusing to sell to anyone who publicly undercuts our MAP (other than occasional sales, promotions, etc). I don’t see it as price fixing either. Someone can buy from me and do with the product as they please. Once. But no one can force me to ship to them again. That’s what’s crazy about this Kay’s Kloset case. Are they going to force the MFG to sell to this store?? Ain’t. Besides, I can always find a reason to stop selling to someone. Just tell them we’re saturated in their market, e.g. This whole case is strange to me.

  7. J C Sprowls says:

    There’s always ways of losing unwanted customers…

    “saturated market”,
    never get the order right,
    always be extremely late with shipping,
    suddenly move their PO to ‘backorder’ status while filling a favorite order, first,
    OOH! refuse to honor chargebacks(!),
    etc, etc, etc.

  8. Esther says:

    One thing I am confused about is end of season or promotional sales. How does forced MSRP’s affect that? Every retailer ends up with merchandise that they have have to reduce just to move it. Enforcing a fixed price is nearly equivalent to guaranteeing a sale at that price. What manufacturer can truly do that?

  9. Miracle says:

    One thing I am confused about is end of season or promotional sales. How does forced MSRP’s affect that?

    It usually allows for end of season or out of season discounts. What it attempts to avoid is discounting recent, in season, merchandise, off the bat (i.e. never selling at full retail).

  10. Oxanna says:

    I didn’t vote; I’m not completely certain. But I think, like Irene, that a retailer shouldn’t have to charge the MSRP if they don’t want to. On the other hand, the manufacturer should be free to stop selling to the retailer if they don’t like that practice.

  11. Eric H says:

    Sherman does not explicitly outlaw the practice. Section I, upon which the court findings have been based, says, “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” Everything else is derivation and interpretation of that sentence.

    The problem with the doctrine is that a manufacturer cannot restrict the output of competitors by this (in order to obtain monopoly power), nor are they likely to pursue the policy solely to put profits in the pockets of their distributors (unless we are willing to accept the altruist theory of corporate behavior, which I think JC has just-a refuted). The most likely justification left, then, is that the practice leads to greater efficiency. This is an institutional response to the free rider problem: one retailer goes to the trouble of advertising and providing informed sales staff and post-sales follow-up, while another does not. The former creates value, in Miracle’s terms, by bringing customers in, informing them, reassuring them that someone will deal with potential problems, and then the customer walks across the street to the non-advertising, non-sales-staff-training discounter across the street (or on the web).

    I think Irene points out exactly the problem with dawn’s point: yes, once you buy it, it is yours to do with as you wish. But the manufacturer should have just as much freedom, should they not? If you agreed to certain terms in the course of the purchase, you have an obligation, and the manufacturer should have recourse (like not selling to you anymore).

    Vesta’s nuance is interesting: she has basically endorsed rebating, another controversial practice that brought about Sherman in the first place (railroads would advertise one price to everyone, and then cut that to their largest customers by giving them rebates). Alison, on the other hand, has just struck down both the patent laws and the Harrison Narcotics Act of 1918 (introducing prescriptions and giving physicians the power to write them), the Food, Drug, and Cosmetic Act of 1938 (extending the FDA’s power beyond merely making sure the labels were accurate), and the Durham-Humphrey Amendment to it that finally gave the world’s most powerful cartel (the AMA) the gatekeeper power over your health because you obviously can’t be trusted with it. I agree with both of them, with certain caveats of course (like, do I really want heroin to be freely available to little kids? No, but that’s getting even more off-topic than I already am).

  12. Eddie says:

    a retailer might own the product, but never the brand. there is a critical difference between the two. pricing is another part of the message of your brand, like any other attribute of your product. i sell long lasting red widgets that cost $9.95. can the retailer paint it blue? no. why should they be able to choose the price?

    of course if you are talking about commodities it is a different story, but obviously this is not the context here…

  13. Kathleen says:

    This just in from WWD

    WASHINGTON — The U.S. Supreme Court today struck down a 96-year-old ban on minimum pricing agreements between manufacturers and retailers.

    The 5-to-4 decision shifts the balance of power to brands, giving them the right to set minimum prices and reshaping the relationship between vendors and retailers.

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