PriceSCAN Blog

In a 5-4 decision, the sharply divided court just overturned a 96 year-old ban on agreements requiring retailers to sell at or above minimum prices fixed by manufacturers. Previously, such "minimum advertised price" (MAP) agreements were held to be violations of the Sherman Antitrust Act, restricting retailers from competing to offer consumers the lowest price.
Now, however, the Court has eliminated the ban on such price-fixing, meaning that even if a retailer is willing and able to cut prices, the manufacturer may forbid such discounting. And, rather incredibly, the majority argues that such price floors benefit you, the consumer.
How can this be? The reasoning goes like this: low-priced vendors (like many internet sellers) might be offering a more bare-bones sales process and less service, and without hand-holding and the soothing environment of a brick-and-mortar retailer, you might not come to fully appreciate the wonders of a given product. Thus, the product's manufacturer should be able to mandate a higher price, to insure you don't "make a mistake" and save money by buying from a discounter, only to have the enjoyment of your purchase diminished by poor retail support.
Of course, many of us have come to appreciate the superb technical knowledge and personal charm that the sales reps of high cost physical chains possess. Heck, most would probably be designing mission-critical systems for NASA were they not also such compulsively helpful "people persons". And who would deny the delightful, inviting atmosphere of most big-box retail fortresses?
Now, fortunately, if you're foolish enough to want to pass on all that just to save some silly money (about $750-$1000 per year for the average family of four, according to estimates noted by dissenting Justice Stephen Breyer, writing for a minority that included the pro-business David Souter), the Supreme Court has stepped in to save you from yourself. A manufacturer may forbid a retailer from offering you a discount as a condition of carrying its products.
How has the Court ill-served the consumer? I'd say let us count the ways, but they are so numerous that space here only permits me to hit the highlights:
Under minimum price agreements, small retailers who compete on price will lose their edge, no longer able to offer the choice of a discount versus the higher-touch service of giant chains. Large manufacturers and big-box retailers are free to legally collude on price, crushing competition. Unable to cut prices and with no other way to hedge against poor sales, many smaller players may be unable to take the capital risk of carrying such items, leaving consumers with only the large, high price stores to buy from. You're no longer free to choose the lowest possible price.
Some might argue that competition between manufacturers will save the day, as firms cut minimum retail price on similar goods to gain advantage. There is some truth in this, but serious problems as well. The ability to control retail pricing makes it far easier for manufacturers to effectively collude on price; the economic literature has long included studies of the ability of firms to establish de-facto pricing agreements between one another through behavioral signaling, eliminating the need for explicit (and potentially illegal) agreements. Further, for producers that enjoy effective monopolies on their products, through either intellectual property (e.g. patents, copyright) or compatibility/lock-in effects (e.g. operating systems) little or no such inter-manufacturer competition exists, so with discounters eliminated, the retail price stays high.
Speaking of academic studies… so as to justify minimum pricing agreements, defenders of this decision appeal to arguments of the so-called Chicago school of economics. Full disclosure; I got my doctorate from Wharton, where these theories are not unknown. I find much to admire in this rubric, and have published papers partially motivated by such reasoning. But it must be said that misapplication of Chicago logic lead some to defend indentured servitude and contracts requiring buyers of real estate to agree not to sell to people of certain ethnic and/or racial backgrounds. Milton Freidman's noble "free to choose" shibboleth has been sadly vulnerable to Orwellian distortion, so that some claim the "freedom" to oppress others. The legalization of monopolistic predation may not have quite the dark moral connotations of those other examples, but surely to defend the elimination of consumer choice in the name of free markets smacks of rank hypocrisy.
Adding insult to injury, the new policy is also inflationary. Breyer noted that only one thing is certain under this decision: higher prices, and, while many other factors may bring prices down, all things being equal (ceteris paribus, for all my econ pals), the dissenting justices are correct – this should not come as welcome news to a Federal Reserve fighting ongoing inflationary pressures.
Lastly, in what some might call a last, cynical coup de grâce, the majority acknowledged the possibility of harm to the consumer, and invited aggrieved parties to prove such damage by suing on a case by case basis. Can you imagine small-fry vendors spending years and millions in legal fees to sue some Fortune 500 manufacturer or retailer every time they are confronted by this newly-legalized price-fixing?
Before this decision, manufacturers could choose to control sales by opening their own retailers, and for those that provided some genuine benefit, this model allowed them to charge more when selling through such channels (think Apple, for example). There was nothing wrong with this, But to forbid discounting by third-party retailers tramples the rights of consumers and runs roughshod over fundamental rights of property and fair trade.
There’s some small irony that this insult to freedom occurs just before the anniversary of American independence. Now as then only Congress can remedy the situation, so if you value your freedom in the marketplace (not to mention your money), call or write your elected representatives and demand a ban on these anticompetitive manufacturer's minimum price agreements.