Which price should you pay — manufacturer suggested or retailer listed?

In the U.S., it used to be that the retailer set the price while the manufacturer could only ‘suggest’ a price. The U.S. Supreme Court changed the rules in 2007.

History

In the US, the Sherman Act of 1890 had been interpreted by the courts to mean that the price should be set by the retailer. The courts said that it was illegal to set price floors per se. “Per se” means it was a blanket ban. The ban was codified in a 1911 case titled Dr. Miles.

The manufacturer could ‘suggest’ a price but the retailer could just ignore the suggestion. No manufacturer could force a retailer what price to charge — the producer could only suggest a price. The retailer could sell it for any price — including giving it away free.

The US Supreme Court changed the rules in 2007 It was a 5–4 split decision in a case called Leegin vs. PSKS, Inc.

The Leegin case

Leegin is a company that makes leather goods under the brand name ‘Brighton’. Leegin wanted to keep prices of it products high so that consumers can get a good buying experience, i.e., service plus product. During the court proceedings, Leegin claimed:

“[W]e want the consumers to get a different experience than they get in Sam’s Club or in Wal-Mart. And you can’t get that kind of experience or support or customer service from a store like Wal-Mart.”

In December 2002, Leegin discovered that Kay’s Kloset, a store in Texas, had been marking down Brighton’s entire line by 20 percent. Leegin asked Kay to stop. Kay refused, and Leegin stopped supplying Kay. Kay sued Leegin on the grounds that this was against the law, i.e., the Sherman Act.

Leegin argued that its policy of a floor price would increase competition. However, the District Court refused to hear this argument because of the blanket ban.

The Supreme Court decision

In its opinion, the Supreme Court wrote:

“The [District] Court has interpreted Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373 (1911), as establishing a per se rule against a vertical agreement between a manufacturer and its distributor to set minimum resale prices. See, e.g., Monsanto Co. v. Spray-Rite Service Corp., 465 U. S. 752, 761 (1984). In Dr. Miles the plaintiff, a manufacturer of medicines, sold its products only to distributors who agreed to resell them at set prices. The Court found the manufacturer’s control of resale prices to be unlawful.”

Further, the Court wrote:

“The District Court excluded expert testimony about Leegin’s pricing policy’s procompetitive effects on the ground that Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U. S. 373, makes it per se illegal under §1 of the Sherman Act for a manufacturer and its distributor to agree on the minimum price the distributor can charge for the manufacturer’s goods.”

However, the US Supreme Court overturned the rules established in Dr. Miles. The Supreme Court cited the argument put forward by the US Government:

“[T]here is a widespread consensus that permitting a manufacturer to control the price at which its goods are sold may promote interbrand competition and consumer welfare in a variety of ways”.

In its decision, the Supreme Court wrote that the:

“economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance, and the few recent studies on the subject also cast doubt on the conclusion that the practice meets the criteria for a per se rule.”

The Supreme Court said that vertical price restraints are to be judged by the rule of reason.

“Rule of reason” means that the courts must consider this case-by-case. In each case, the court should consider:

  • the costs of allowing the floor price to be fixed by the manufacturer — the costs are the higher prices the consumers pay,
  • the benefits of one more brand being present in the marketplace. And, then
  • the court should compare the costs and benefits.

The Supreme Court sent the Leegin case back to the District Court, to be decided based on the facts relevant to the case. In the end, Leegin won.

What’s the situation today?

According to a review in 2015, there is much confusion on the ground today:

  • People had though there would be many instance of companies doing what Leegin had done — setting, instead of suggesting a price. This has not happened.
  • Certain states, such as such as New York, Illinois, Michigan, Maryland and California, have declared Leegin-style price setting to be per se illegal. This means a return to the old rules in these states. This created a set of different standards and rules that varies by State.

Even if the retailer is free to set the price, a manufacturer can still set the minimum price a retailer can advertise. This is called the Minimum Advertised Price (MAP) policy. The review in 2015 noted that a company can adopt a MAP policy. This bans advertising a sales price below MSRP. The theory is if you cannot advertise a low price it does a retailer little good to discount since it will not be able to drive business to its store(s) based upon the discounted price.

Conclusion

It’s an area where lawyers, not economists, have the final word. It looks like most companies still follow the old rule — let the retailer set the price. But, in some cases, the companies can force, directly or indirectly, a retailer to sell at a pre-set price.


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