Guest Blogger: Supreme Court Preview -- Resale Price Maintenance
Editor’s Note: The Supreme Court will hear oral arguments in Leegin Creative Leather Products, Inc. v. PSKS, Inc., No. 06-480, this Monday, March 26. Mr. Barile is author of the amicus brief submitted in support of Respondents by the Consumer Federation of
A fundamental rule of our free-market system is at stake in Leegin v. PSKS: the rule that manufacturers may not prevent retail discounting by colluding with dealers to fix the prices at which their products are sold at retail. The question presented is whether such minimum resale price maintenance (“RPM”) agreements should continue to be per se illegal or, rather, should be evaluated under a very lenient standard, which in antitrust parlance is called the “rule of reason.”
When employed, RPM prevents consumers from “shopping around” for the best price because it prevents retailers from putting on sale any and all types of products, including not only large purchases, but also everyday purchases—from groceries to gasoline. Because of the per se rule against RPM, consumers have saved hundreds of billions of dollars over the years, while the retailing industry has progressed from small shops to department stores to discount warehouses to, most recently, online commerce. Abandoning the per se rule in favor of rule of reason would provide cold comfort to American consumers; for it is widely recognized that to accord RPM a rule of reason treatment would effectively make RPM legal.
For nearly a century, since the Court decided Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), it has been a per se illegal “restraint of trade” under Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, for manufacturers and retailers to agree to fix a minimum retail price. During that time, the per se rule against RPM has safeguarded low consumer prices and an abundance of consumer choice, witnessing an unparalleled period of dynamic innovation in retailing by fostering competition at the retail and manufacturing levels. By preventing RPM, which is designed to discourage price cutting, the per se rule has set the stage for innovative retailers to continually enter the market, offering new and lower priced alternatives to consumers. By encouraging such entry, the per se rule has enhanced “intertype competition,” that is, competition among different kinds of retailers, such as boutiques, department stores, superstores, and online sellers—providing substantial benefits to consumers.
There is no good reason to abandon the venerable Dr. Miles rule.
This is especially true given the common law nature of antitrust, in light of America’s experience with the anticompetitive effects of RPM and the dynamic benefits of the per se rule; the expressed endorsement of the rule by Congress; and the widespread reliance on the rule by American consumers for decades. Experience has shown that RPM invariably raises consumer prices. Both empirical evidence and economic theory confirm that this is so. By facilitating cartelization and by giving rise to unilateral incentives for dealers and manufacturers to keep prices artificially high, RPM raises consumer prices. After a limited but failed experiment with “fair trade,” which legalized RPM under color of state law for a period of time, Congress passed the Consumer Goods Pricing Act of 1975, Pub. L. No. 94-145, 89 Stat. 801, which amended the Sherman Act to restore and to preserve the per se rule as part of an historic effort to combat inflation: President Ford’s Whip Inflation Now program.The plain language and the import of the Consumer Goods Pricing Act have been recognized by the Court on more than one occasion. By its express terms, the amendment provides that it was adopted “to provide lower prices for consumers,” and, therefore, precludes the application of a rule of reason to RPM, as it is undeniable that RPM actually imposes higher prices on consumers. The theoretical justifications proposed by Petitioners in defense of RPM—such as facilitating onsite presale dealer services and enhancing a product’s “brand image”—are quite limited in their application, can (and are) achieved without fixing prices, and are indeed belied by the real-world historical and empirical evidence demonstrating the anticompetitive effects of RPM and the benefits of the per se rule. These theoretical justifications can in no way offset the higher consumer prices, lower consumer choice, and stifled innovation that history teaches will follow the elimination of the per se rule.
Importantly, this case points a dagger at the heart of the most consumer-friendly aspects of the Internet. The Internet has shifted power to the consumer in two ways. First, it allows consumers to search for and gather information in a cost-effective, efficient manner. Second, it provides a low-cost means of retailing, making it easy for discounters to offer products to the public. This combination squeezes excess profits and inefficiencies out of product prices. Retail price maintenance seeks to short circuit this extremely consumer friendly process. By setting minimum prices, manufacturers can build in excess margins for themselves and for their favored retailers—prices that consumers have no choice but to pay.
The outcome of the case will not only be of great economic consequence to American consumers and the economy at large, but will also serve as an indicator for the future direction of the Court with regard to antitrust law in particular, as well as stare decisis and Congressional deference, as general matters. The Supreme Court has been all but unwavering in ruling for defendants and narrowing antitrust doctrine during the past three decades. The Court has increasingly embraced the
Written By:SKate On March 26, 2007 8:09 PM Written By:rooben On March 26, 2007 8:28 PM
Actually, the freedom here is for retailers to set their own prices. I would think your argument as manufacturers setting _retailer's_ prices as free trade would be invalid...manufacturers set their own prices, retailers need to be free to set their own prices.
Of course, we don't have a perfect capitalist economic system, where there is no law barring trade whatsoever...but who would want that??
"Free market" refers to freedom in the marketplace. Freedom does not include the right to take away the freedom of others (as freedom haters often claim).
Skate's viewpoint is only right on the surface. Manufactures have a right to control their pricing. Nobody is arguing that. If a manufacturer wants to raise their prices, that is fine and within their rights. They can lower their prices too.
But when one implies that this control can extend to what other people can resell a product for, I think that should be per se illegal. The free market is a common good and needs to be protected.
The real question is whether you want this to be a free market problem, or a freedom of contract problem. Right now, manufacturers are denied freedom of contract; there is a kind of contract they are not allowed to make, even if someone will willingly enter into that contract with them.
On the other hand, mom-and-pop shops are not generally in a position to negotiate contract terms with large manufacturers. Even if the Court overturns the 1911 decision, no one is forcing manufacturers and retailers to do business... but when the choice is "sign this contract or go broke," that's problematic.
So both sides have a point--libertarian freedom of contract and freedom of pricing are just at odds here. Don't be fooled into thinking this is purely a free market problem. Truly free markets naturally collapse into oligarchies and monopolies and cartels; totally controlled markets flat-out collapse. Maybe some economist can provide more detail, but it really looks like our current best understanding is to strike a balance.
most big manufacturers get around these laws by setting "minimum advertised price". That's why there's some many "add to shopping cart" deals on the web.
Sort of funny. When I was shopping for my wife's wedding ring, at each store I went to, I tried to negotiate them down. This was made by a large ring manufacturer, so it was the exact same product at each store.
At four stores, each one told me: "We have to sell it for what the manufacturer tells us to. We cannot haggle or risk our relationship with the manufacturer."
But at four stores, I got four prices. $2275, $1900, $1675, and $1500. The $2275 store was a hoity-toity Tiffany's wannabe, the two in the middle were a regional mid-range chain and a local "engagement ring store" chain. The last was an online retailer out of Texas.
When they told me that they had to sell it for what the manufacturer told them to sell it for, I said "that's illegal" and they assured me it wasn't. Years earlier, when I sold home theater at Circuit City, my manager told me (and customers) that we had a no-haggle policy on Bose because they enforced RPM. I said "that's illegal" and he assured me it wasn't.
Suffice it to say, whether it happens or not, there are lots of retailers claiming it does and using it as an excuse not to haggle.
I'm going to print out this article. If Dr. Miles Medical Co. v. John D. Park & Sons stands, I'll carry it with me every time I'm shopping for a big ticket item. When a retailer shoots me the "we can't bargain because the manufacturer won't let us", I can ask the retailer if they are really admitting to conspiracy to violate federal antitrust law. :-)
A business that provides low prices can also provide service which in fact is far better than the so-called full service stores. Seems like some on the court are not aware of this fact. If a retailers service does not meet a clients expectations they will purchase from another retailer or never buy from the same store again. What ever happened to a free market place?
There was a quote in the movie, "The Usual Suspects" that went something like, "The best trick the devil ever pulled was convincing the world he didn't exist." It reminds me of the neoconservative "free markets" movement. A free market is the last thing in the world they want, and they're best trick has been convincing the world that it is what they want. Neo-conservatives want a marketplace which has no rules against leveraging huge monopoly power in order to coerce smaller businesses and consumers into doing whatever the monopoly desires, while at the same time they wish to pass laws restricting the freedom of those small businesses and consumers to resist. That is their vision of a free market.
Maybe I am not fully understanding the issue here but why on earth would a certain manufacturer want to control the price that the retailer sets for their goods, with an agreement such as RPM - When the manufacturer itself controls their own wholesale price? I don't beleive that if I am retailer who buys something for $10 I will be willing to sell it for $5 , unless I am deliberately trying to go out of business!! This just does not make any sense , RPM should remain illegal.
What were the arguments made for RPM in this case?
It's not so much that a manufacturer wishes to set a minimum price, as that it is willing to do so for the benefit of existing retailers. That way, the retailers get the benefits of a price-fixing conspiracy without the actual conspiracy: it becomes impossible for discount retailers to enter the market. As a result, the consumer surplus -- the difference between what a consumer is willing to pay and the free-market price -- ends up going to the existing dealers (and the manufacturer, depending on how discounts are set). When discount dealerships exist, the consumer can buy from them and keep the surplus.
The "manufacturers should be free to set their own prices" argument ignores a critical point. Even under the Miles rule, retailers *are* free to set their own prices. They can sell their product for any price thay choose. What they can't do is control the price at which purchasers resell their product. So, RPM isn't an exercise of free-market rights; it's an attempt to prevent free and open price competition, which is the essential element of a free market.
It occurs to me that manufacturers have a vested interest in the perceived value of their products, thus an interest in controlling retail pricing. Consider the adage "it's only worth what someone will pay for it". Should the Miles rule fail to be upheld, I would expect to see a lot more product that "fell off the truck" available.
Having actually lived (and suffered) under this rule as a smaller manufacturer operating on a national level for decades. It has had a real and, in some cases, meaningful financial impact on my life.
This rule caused us lots of harm and prevented the growth of my small, self-funded entrepreneurial businesses. As a manufacturer, having local resellers is a less expensive alternative to hiring our own sales force. The distribution channel is essentially a way to outsource sales, which if you are a small start-up is often a key enabler to getting your business off the ground. Resellers are crucial to us because they call on customers, demonstrate our products, answer questions, do local support and even run local ads. That's why they are worth the ~30% margin I build in to our business model to pay them. Dealers also assume credit cost/risk and aggregate a bunch of onesy/twosy orders into volume purchases that our small company can handle. To me that 30% is a necessary cost of making and selling my product just as much as parts and assembly. If the dealer didn't make that investment on my behalf, then I would have to raise that much more money and pay to do that work myself. That's the benefit of a distribution channel. I don't have to fund that pre-sales and distribution expense up front out of my pocket. My reseller partners essentially go into business with me, do the work and get paid for their work with increased margin. It's a wonderful enabling option for me as an entrepreneur - except it doesn't work because of this rule. I can't ensure that my reseller will actually be repaid for their investment and work to build our mutual business.
The problem is that as soon as my product starts to get momentum (thanks in part to the up front legwork invested by my resellers), an internet or mail-order 'box house' starts listing the product for a markup of only 15% (they often don't even order any inventory until a sale comes in). Those box houses provide literally no value to the consumer (like product knowledge or pre-sales support) or to me the manufacturer (like marketing or generating demand), yet they take 15% of the value of the product - for nothing. They merely order from a distributor to fulfill demand that was generated by someone else's investment. Prospective customers still learn about the product from the local sales calls, ads or trade shows our 'real' dealers invest their money to do. And prospects still phone the 'real' dealers for pre-sales questions and demos but when it comes time to order many of those same prospects end up buying from the box house because they do a Google search before placing their order - and discover the product for 15% less. The product can only be cheaper because those box houses 'cheat' by not investing in the market development, product knowledge and pre-sales work a reseller is being paid (with margin) to do to help the product succeed. The box houses are basically 'leeching' the payment that was built into the price to repay the up front investment made by my 'real' reseller partners. The box house profits unfairly by diverting half the money to their own pocket and offering up the other half as a reduced price to entice sales. Sadly, box houses often attract customers who don't understand that the money they are saving today comes at the cost of an even larger reduction in local services and support tomorrow. Yes, some purchasers see a small windfall in the short-term but in the long-run it's a lose-lose proposition for everyone except the box house - who brings no value to the table in the first place. Keep in mind that I'm the product's creator and if it would have made the product more successful or provided better value to end-users to reduce the selling price by reducing the cost and quality of pre-sales support, I would have designed the pricing structure that way to start with. It's true that with some products it may be appropriate to offer virtually no pre-sales support but with other products professional pre-sales support is essential and well worth the increased cost. Unfortunately, I don't have the freedom to choose this aspect of my products - my hands are tied by the government.
As part of designing, cost-estimating and raising capital to build a product, we have to come up with a projected ASP (Anticipated Selling Price). This is what we estimate a typical consumer will typically pay for the product. We use this to determine if the product will be a good competitive alternative in the market and if customers will actually buy the product. In the ASP we balance all the costs such as the bill of materials, design engineering, cost of sales and customer acquisition costs. Because the "cost of sales" is a big part of the ASP, we must figure out the distribution model for the product before we build it - in fact it's a key part of the spec. The range of possible distribution models is vast, including single tier, two tier, high margin value-added resellers and low margin mass retailers. The different options have different associated benefits and costs. Which one is right for a given product is dictated by market research into the needs of the target customer. Because our products can be complex, they tend to need higher value distribution. That's why we spend a lot of time studying each product's anticipated reseller margin (the difference between the wholesale cost a reseller pays and the ASP). Each reseller's margin requirements are slightly different but what I'll call the "high-value" resellers in our markets tend to need similar margins to stay in business because they offer similar services which have similar costs. The high value resellers we need to attract require more “margin” than the low-end box resellers. Of course, our high value resellers would always like more margin but we carefully set the margins low enough to encourage them to be efficient but high enough to make sure the reseller remains adequately motivated. The bottom line is that the margin needs to be sufficient to compensate the resellers to do the work we need them to do to make the product successful. It's always a balancing act but getting it right can be the key to staying in business. It sucks that I create a product by my own hand and give it life (so to speak) but then this rule makes everything harder by limiting how I can bring my product to the marketplace, how I can implement my distribution partnerships, and how I grow my business.
In my view the rule is government interference with my right to enter into certain kinds of mutually agreed contracts with my distribution partners. It also quite literally limits what products I can consider creating and offering to consumers. I have to avoid making products that will likely need a lot of face-to-face explanation, demonstration and support to succeed. There's no way I can justify raising the capital from my investors to fund local sales offices and, unfortunately, this rule makes it very risky for local resellers to go into partnership with me and invest up front in building the market. Why? Because I can't assure them that they'll be reasonably compensated with margin for doing so.
If I want to set the end-user price for my product, apparently my only alternative is to cut out my reseller partners and shift my business, capital structure, staffing and core competency to sell direct to consumers. Only then am I legally free to set the price an end-user pays for the product I make. But what if I don't want to operate on Dell's model? What if that model doesn't fit my products, market and customers? Why am I free to enter into pricing contracts with my "manufacturing outsourcing providers", but if I dare outsource my distribution to be more efficient - then the government restricts my freedom to enter into pricing contracts with my "distribution outsourcing providers" (resellers)? Yes, I can decide not to sell to certain resellers, *but* it's illegal for me to consider the markup a reseller adds to the final customer price as one of the criteria for choosing my distribution partners. Another way to think of resellers is as independent, commission-based sales people. It's completely legal for me to set the commission rate I pay my internal commission-based sales people but if I don't have the capital to hire more sales people as employees or open offices everywhere and instead decide to grow with *independent* sales contractors (resellers), today it's illegal for me to set the commission rate they make. It's just illogical.
This rule seems so incredibly unfair that when my lawyer first told me about it, I went and got a second opinion from another lawyer because I couldn't believe that my freedom as an independent businessperson could be so harshly limited in this country. The result is that the resellers that are actually helping me build my business by investing their capital to our mutual benefit by funding local sales, support and product knowledge (such as flying their staff to my training seminars) lose their incentive because to keep selling they have to match the smaller margins of 'no-value' box houses. When my resellers start to lose money because their investment is not returned, they drop our products. Then demand for my new product falls because no one is investing locally in generating demand. The final insult in this vicious cycle is that then the 'box houses' stop listing the product too - because there's there is no demand being generated. In the end we, the entrepreneurial company, are harmed or grow more slowly. To me it appears that the government is keeping me from doing what is best for my customers and my business, investors and employees. Just like the product itself, whether the distribution structure I've designed for the product is good (or not) should be left to the market to decide. If my reseller pricing strategy is bad, well, the credit line from the bank is always secured by my personal assets including my house. Since I'm putting everything on the line as an entrepreneur, it seems only fair that I be set free to succeed or fail without artificial distribution/pricing limitations on how I bring my products to consumers.
I hope I've shown how entrepreneurial manufacturers like me need and deserve the freedom to set end-user selling prices by contract. In my case it will help me ensure enough margin to provide adequate ROI to pay for valuable services performed by my reseller partners. Of course I want that margin to be as low as possible because I want to sell more product. In fact, I'm always working to squeeze every penny possible out of the total cost a final consumer pays for my products - from parts and assembly to advertising and reseller margins (because it helps me be more successful). At the same time, remember that each of the costs that make up the end-user price is there because I designed those costs into my product, including the pre-sales and reseller support that I chose to put in the product and its price. In my business, the distribution strategy (and the cost of that strategy) are a design choice/trade-off that I consciously make. It's no different than choosing the price/performance of any other critical component in the product. How well I make those choices and trade-offs determines the success of my product and ultimately my destiny. That's why I want the freedom to evaluate my customer's needs and then set adequate reseller margins to fund the local sales, support, advertising and demonstration costs that I've decided to make part of every product I put my name and reputation behind.
My last point is that always leaving it to resellers to set their margins works the other way too. When I bought my last car the dealer demanded $5,000 over MSRP. The manufacturer, Acura, didn't have enough inventory to meet demand in the first year so the dealers were gouging customers like me. I actually complained to Acura and they said they hated it too but they couldn't "fix" the price because it would be against the “rule”. It was bad for Acura because they didn't see any additional money from the increased demand, the dealer kept the windfall (even though it was Acura's work and investment that created the extra value) and Acura also got a PR black-eye even though they wanted to stop the gouging to preserve their reputation.
To Mark R.:
You admit one thing in your very long post, that you want your resellers to "flying their staff to my training seminars". Ie. you expect them to use that extra cost to pay you for more training; ie. give you more money.
You're just crying for your own sick mother. If your resellers buy into your semi MLM system, then of course they need more income to pay for the overhead.
You also say that the consumer loose in the long term. What kind of product is this? How would they benefit from being loyal to a reseller? Perhaps in the US it might be good, but in the EU consumer protection laws would protect the buyer regardless to the point of returning non-functioning products for a full refund within 5 years.
To Paul:
My industry doesn't do any MLM-type business and I've never charged a reseller anything except for the product itself. The training that we put on for resellers was also completely free, all the resellers did was pay their own travel. We paid for the food, equipment rental and meeting hall. We spent our money doing this to educate resellers so they could better sell, service and support our products and customers. Interestingly, not one internet or mail-order store sent any of their staff. It was all local stores from around the country.
The products we're talking about are video editing tools. Such tools require pre-sales and post-sales support from knowledgeable resellers, such as knowing which cameras and PC hardware is compatible, how to interface video tape recorders, etc.
In my business resellers perform much of their value before the sale. My best resellers would visit customers regularly and demo new video production tools at the customer's office. Often they would leave demonstration units with the customer for a week and answer the customer's questions in follow-up phone calls - only to have the customer place an order over the internet at the last minute. Worse, the customers would call the local reseller a few weeks later when they couldn't install the cards properly in their PC and ask for help - because the internet shop didn't know anything about the the product, they could only take orders!
When considering legal rules like this we should keep in mind that there are sales and distribution scenarios beyond the consumer buying mass market books, CDS and PCs over the web.
There are many examples in other industries beyond mine. There was a local photography retail store in my town that sold digital SLRs, lenses and accessories. They had very knowledgeable staff at the counter and carried a large inventory. I could take my Canon DSLR camera there and actually put different lenses on and try them out in the store. If a regular customer bought a camera or lens that they didn't like, the store would sometimes let them exchange it for another (no restocking fees!). The shop was always crowded with camera enthusiasts like me. Of course, this store had higher overhead to pay for their local storefront location and knowledgeable staff, which resulted in prices higher than the internet. But the shop provided a valuable service that to me was well worth paying 15% extra for. I appreciated being able to try things, learn things, be supported, and have products in my hand the day I wanted them - all ten minutes from my front door. Unfortunately, the shop went out of business this year because too many people went to the store to ask questions, see cameras and try lenses but then went home and ordered on the internet. The internet is fine, it's not the problem here - the problem is that Nikon, Canon, Pentax, Fuji etc. didn't have the freedom to choose a distribution model that would keep the internet box shops from undercutting the price of local resellers who have higher costs but offer higher value.
A truly free market would allow manufacturers to offer choice to consumers. Some manufacturers might decide to focus on serving customers who want the lowest price by selling via low-overhead internet stores. Other brands might choose to differentiate their products by selling through higher-service local resellers. Unfortunately, this rule doesn't allow the manufacturer - and ultimately the customer - that choice. I sure wish I still had the option of paying 15% more locally when I discovered I needed a new battery for my camera flash the day I was leaving on a trip.
This rule was made in a different era when there was little free flow of market information and the competitive pace was much slower. Today the rule is excessive and antiquated government regulation that hurts the market far more than it helps.
The manufacturer (in this case Creative Leather Products) has a vested interest in maintaining set prices because they are a retailer as well. And for several years now they have been opening their own stores after the "Mom and Pops" set the groundwork. Not only have they helped themselves to the "Mom and Pop" customer data bases (as a result of mandating the registering of handbags for warranty purposes) but they have granted discounts to "so-called employees" (anyone who works in the airports where they have opened stores). If a "Mom and Pop" operation tried to do the same for these so called "employees" who work at the airports, the manufacturer would terminate the business relationship and perhaps seriously damage the business health of the "Mom and Pop". This argument is not just about who controls the retail price, but also who will ultimately control all the retail business.
To Mark R:
The situation with the camera store I can relate to, this is happening here in Norway as well, but, if you buy mail order here you can return any thing bought online within 14 days for a full refund, no questions asked. That is the law. So, in theory, but I think a lot of peopled doesn't do it, you can try out stuff by ordering it online and have it at home for two weeks before legally returning it (filling in a standard form which by law has to be sent out with the bought equipment).
You have to pay for the return yourself, of course.
As for video editing I can't see that it is much different from say 3d software. Those using the software will be loyal to a certain brand of software, but not neccessarily a specific seller.
For a company paying that 15% extra is a good idea, as long as they receive something for it. For me personally, paying 15% extra is stupid. I can find all the support and help I need online.
But, I understand that because people are loyal to a certain product, due to learning curves, investments in infrastructure and often in plug-ins and extra software, the producer would like to make inroads, and there the resellers are important.
I can see your problem, especially when video editing are dominated by Adobe, Apple and Avid (at least here in Norway) for pros, and mostly Avid subsidiaries for home and semi pro, IIRC.
To Mark R:
The situation with the camera store I can relate to, this is happening here in Norway as well, but, if you buy mail order here you can return any thing bought online within 14 days for a full refund, no questions asked. That is the law. So, in theory, but I think a lot of peopled doesn't do it, you can try out stuff by ordering it online and have it at home for two weeks before legally returning it (filling in a standard form which by law has to be sent out with the bought equipment).
You have to pay for the return yourself, of course.
As for video editing I can't see that it is much different from say 3d software. Those using the software will be loyal to a certain brand of software, but not neccessarily a specific seller.
For a company paying that 15% extra is a good idea, as long as they receive something for it. For me personally, paying 15% extra is stupid. I can find all the support and help I need online.
But, I understand that because people are loyal to a certain product, due to learning curves, investments in infrastructure and often in plug-ins and extra software, the producer would like to make inroads, and there the resellers are important.
I can see your problem, especially when video editing are dominated by Adobe, Apple and Avid (at least here in Norway) for pros, and mostly Avid subsidiaries for home and semi pro, IIRC.
"A fundamental rule of our free-market system is at stake in Leegin v. PSKS: the rule that manufacturers may not prevent retail discounting by colluding with dealers to fix the prices at which their products are sold at retail. "
One could also argue that a "free market" is one where the manufacturers are free to control their pricing. There is no one definition of a "free market."