Supreme Court Takes On Price Fixing Question

from the the-very-nature-of-competition dept

It’s long been the law in the U.S. that manufacturers cannot force retailers to sell their goods at a particular price. That’s price-fixing and it’s an antitrust violation. However, this long-held standard is getting some scrutiny in the Supreme Court as the justices look at whether or not such price fixing shouldn’t automatically be seen as anti-competitive and should be viewed on a case-by-case basis. It’s definitely a tricky question, and from an economics standpoint, you can argue either side convincingly. On the one hand, price-fixing by the producer limits price competition and should drive higher prices. If anything, it’s basically tangible goods producers trying to build in the same sorts of controls that non-tangible goods producers like the recording industry have over their goods — where they have final say in how it’s priced and what buyers can do with it. And that hasn’t turned out to be particularly popular.

On the other hand, however, if the producer can structure such a contract with retailers, should that be allowed? After all, that’s part of free exchange, where you can set whatever contract terms you would like. If the retailers dislike the terms, then they shouldn’t enter into the contract. The fear, of course, is that the producer is too strong, and the retailers have no choice — which is why traditionally such price fixing is considered automatic admission of an anti-trust violation. However, there certainly could be cases where that wouldn’t be so — hence the lawsuit at hand. On the whole, the antitrust rules against price fixing seem likely to benefit consumers in the long run — and weakening that stance is likely to be abused by producers who know that being able to lock-in above equilibrium pricing for a while during any legal complaint may be worth it (again, look at the recording industry as an example). Producers would likely use a position of strength to browbeat customers into just accepting the terms, knowing they don’t want to deal with the time and money required for a “case-by-case” lawsuit. So while this isn’t as cut and dried as some have made the case out to be, it seems like it makes sense to leave the law as is.

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Comments on “Supreme Court Takes On Price Fixing Question”

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James says:

Personally I hope they rule against it

Two manufacturers, notoriously Apple and Bose, both are guilty of this practice. I realize there are probably a zillion more… I am just calling these two out.

These companies should sell their wares to retailers at the price they want to get (or can get), just like everyone else, and then let the market drive the price. Its rediculous that they have been able to get away with it for this long.

Wizard Prang (user link) says:

Re: Dunno about that...

In my view, Apple is free to supply whomever they want. They are also free to refuse to supply to whomever they want, for any reason.

The retailers are free to discount, but they cannot demand that Apple supply them with more product.

The consumer is free to buy Apple products or something else.

The key issue here is choice. If Apple were the only MP3 player on the market I would find their behavior repugnant. If they set up a price-fixing cartel with all of the other MP3 Player manufacturers (like the gas industry), or tried to place restrictions on the competition I would similarly find against them. As things are, they are simply another player – albeit a front-runner – in a crowded Industry.

Here’s another thought. Imagine that you were Steve Jobs, thinking of developing and releasing the iPod, and there was a law compelling you to sell to everyone and let the market determine the price. You now have too choices.

1) Raise the wholesale price so that your RRP is enforced by the back door.

2) Don’t bother developing the iPod.

So… I don’t believe that such a law would work.

My wife has an iPod that was given to her. She also has a PDA that plays MP3s. She prefers the iPod. Why? “it just works”.

I would not buy an iPod; they are too expensive, but that does not mean that there out to be a law.

“This is a battle you cannot win. But there are alternatives to fighting” — Obi-Wan Kenobi.

squik says:

I isn't like that at all.

If anything, it’s basically tangible goods producers trying to build in the same sorts of controls that non-tangible goods producers like the recording industry have over their goods — where they have final say in how it’s priced and what buyers can do with it. And that hasn’t turned out to be particularly popular.

Sigh… no it isn’t basically like that. The difference is the sale of property vs. the license of property. Those are different things. Don’t confuse the two.

Mike (profile) says:

Re: I isn't like that at all.

Sigh… no it isn’t basically like that. The difference is the sale of property vs. the license of property. Those are different things. Don’t confuse the two.

Yes, legally, those are two separate things — but what I’m saying is that *effectively* they’re trying to make it so tangible good sales act more like licensing of property…

Anonymous Coward says:

Tangible or intangible, my feeling is anytime a mfgr extends a contractual agreement to a reseller, the mfgr needs to allow the reseller to sell/license those goods at what ever price the reseller chooses to offer.

The real problem arises when resellers have certain volume commitments to meet with mfgr’s in order to enjoy higher discounts and co-op dollars with that mfgr. Some resellers resort to selling that volume of product into the unauthorized black/grey market in order to meet their volume commitments. Then the unauthorized black/grey market sells the product often times below the cost of other authorized resellers who don’t have as high volume commitments with the mfgr causing problems for the mfgr’s distribution program and their resellers ability to keep their margins up.

While there will be casualties, it’s better to let the free market system work. Trying to control pricing is opening up a pandora’s box of problems.

Anonymous Coward says:

The issue for the manufacturer, in the current and some similar cases are keeping up the brand name of the product. they do this by trying to keep its products out of the hands of discounters (walmart, target etc) and keeping the brand name from being associated with “special sales.”
However, it’s not a simple issue. True price fixing is a horizontal contract between retailers to keep prices at a certain level. No one involved is arguing that. the question is, can the manufacturer do for the retailers what the retailers can not do for themselves. (verticle price restraints).
However, As Apple and Bose have figured out, there are legal ways of getting around this law. (If you sell for below a certain price, we will not sell our next product to you.)

Todd says:

recalling my I.O. Class at Chicago


Resale price maintenance agreements are, in fact, legal when the manufacturer gives a store the exclusive right to sell merchandise in a territory. The reasoning is simple: the manufacturer could operate a store themselves in that area, but likely at sub-scale so granting an exclusive license to a retailer gives that manufacturer local presence at a lower operating cost, while having the exclusive gives the retailer access to a line they wouldn’t otherwise get. Case law is pretty clear on this.

Not sure of the specifics on this purse purveyor, but wanted you to be aware that your lead-in is a bit off: there are cases indeed where RPM is legal.

Funny side note: some manufacturers give retailers overlapping territories — mattress industry is one of the most blatant. You can’t find the exact model from retailer A at retailer B down the street because they have RPM agreements for similar, but different lines.

Jay says:

price fixing

How about getting winblows at circuit city vs best buy, oh wait, it’s the same price, and the same price… everywhere else… wonder if there is price fixing going on. How about being able to buy a computer without winblows on it at best buy? circuit city? frys? wal-mart? I know, before any of the sheeple say anything “you can buy one online” how about that… for many years you couldn’t. Why? if you bought a computer with an intel chip, it had to have MS on it…. but there is no monopoly.. no anti-trust…. no price fixing…..

|333173|3|_||3 says:

Price fixing

Also legal is the practice amongst petrol stations of matching prices with each other, without an agreement to do so. I had even seen a TV ad. which stated that the company did that (they called it “constanly reviewing rival’s prices to ensure competitive prices”), so that all the petrol stations within an area have exactly the same price within minutes of each other. Added to that is the fact that petrol prices go up immediately when the price of oil increases, but takes about 2 weeks to come down again.

Wizard Prang (user link) says:

Re: Competition or collusion?

When all of the gas stations set the same price, it ain’t competition.

Their idea of “competition” is when the BP on the corner lowers its price by one cent.

You’re confusing vertical (manufacturer-wholesaler-retailer) agreements with horizontal (BP/Amoco/Shell). The latter is clearly anti-competitive and needs to be investigated, preferably on a regular basis, because, historically, that is what keeps the Oil Companies (what passes for) honest.

M&M says:

Real World

I own a mattress specialty store. Tempur-Pedic is on my floor and “suggests” that I sell their product at a price of their choosing. Not an issue for me at the beginning because I was the exclusive dealer in my area. However, the consumer had no option but to purchase at the fixed price. Tempur-Pedic then floods the market by placing their line in as many retail outlets that will say yes to them and agree to maintain the “suggested” price. As any retailer will tell you, competition puts pressure on them to create more value than the next guy. That’s when ads with no sales tax, free financing, free delivery, free pillows, etc. show up. Good for the consumer, but wait!!! TP says no to all that. Retailers then offer in store credits, trade in credits, credits for being blonde, maid service, etc. Retailers try to hide all these transactions from TP. Retailer feels like he is doing something illegal but must do so to keep his market share. Better for the consumer but they are still paying inflated prices. Bottom line, let the market do it’s thing. Cosumers end up paying what the product is really worth as opposed to the “suggested” retail price, the retailer lives or dies depending on how good a merchant he is and the manufacturer (TP in this case) still gets his wholesale price from the retailer. Adam Smith lives!!!

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