Something Borrowed--MAP Pricing

This is a piece I wrote for an attorney friend of mine who contacted me for more information about the issues below.  This is an area I have a lot of experience in, and I was able to help him on this topic.  I am posting it here as it may be relevant to my own readers.  

MAP Pricing and Anti-competitive practices

The holiday season is nearly upon us, and retailers are battling to capture market share.  Although price is not always the most important factor in a shopper’s buying decision, new programs and phone apps that allow customers to easily price compare make it so much more important for any retailer to be competitive on price.  This has become and even more contentious issue as Internet retailers continue to grab market share from more traditional “brick and mortar” stores.

In recent years, “MAP pricing” has gained a lot of attention in the business community, and has both staunch advocates and outspoken detractors.  MAP stands for “Minimum Advertised Price.”  In practice, this means that if a manufacturer establishes a minimum price, anyone selling their product cannot advertise that item for less.

Often when people hear this, their thoughts turn to price-fixing and they begin considering anti-trust violations.   However, MAP pricing was legitimized in 2007 when the United States Supreme Court ruled in Leegin that no longer were such practices per se violations, but instead had to be reviewed under the rule of reason standard.  In other words, any particular MAP pricing might be reasonable, or it might be a violation, depending upon the particular circumstances.

 

Why would anyone support MAP pricing?  After all, the general outlook in market economics is that competition is good, and that price supports are generally bad.  The idea here is that not all competition is necessarily good for the manufacturer.  Two examples:

First, you have an Internet retailer with little overhead, no store front to maintain, and no or very little inventory.  They are competing with a brick-and-mortar store that sells shoes.  As a consumer, you may want to try on several different types of shoe to see what looks best, and of course try different sizes to see which fits your foot the most comfortably.  You cannot do this easily over the Internet, but of course you can walk into a store and try on shoes for hours.  The store cannot stay in business if it sells the shoes for less than $99, for example, but the Internet site has the same shoes advertised for $89.  You find the shoe you like best, walk out of the store, and then go buy it on-line.  Obviously it won’t take long for the retail location to go out of business.

 

Second example, you have a retailer that is dedicated to being a “full-line merchant” of your products, let’s say bicycles.  They stock all sizes, all models, they can do repairs, and they have spare parts.  You can bring your bike in to be fixed and maybe be out the door in an hour or two.  The store down the street, or another Internet retailer, only carries a few of the best-selling models, and they advertise them for 15% less.  They know they can do well on a few hot items, and they don’t care about supporting the rest of the line.  Soon enough, the full-line store will likely have lost a significant part of their business, and will be left selling the odd-ball “specialty” items—if they can stay in business at all.

Neither scenario helps the manufacturer or the consumer.  First, the manufacturer suffers when people cannot come see, touch, and try on their shoes—or when their selection of merchandise is limited to a few popular bikes.  Many manufacturers have a diverse product line, and they may want to have their items in both shops and sold on line.  If they have and enforce a MAP policy, both the Internet retailer and the brick and mortar store can sell the products on a level playing field

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But what about the consumer?  Do they not suffer by paying higher prices?  Three things: first, this is only a Minimum Advertised Price.   Retailers of all stripes can ultimately sell the products for less so long as they do not advertise them below MAP.  Second, this presumes that price is all that matters to customers, and that they do not also benefit from better selection & service at the stores they shop in.  Finally, consumers benefit from the choice of being able to shop on-line, go to stores, etc.  If all that exists is a race to the bottom on price, the only retailers left will be the ones with a few popular products, big discounts, and little service.

 

Thus, whether or not you have a legitimate claim of price-fixing or an anti-trust violation will depend a lot on just what the circumstances are surrounding the particular price structure, and industry, that will be scrutinized.  The Federal Trade Commission routinely investigates these issues.  I can review your unique circumstances and advise you whether or not you have a MAP issue.