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The Supreme Court ruling means that you pay more for things you buy online December 4, 2008

Posted by jeremyliew in Ecommerce, MAP, pricing.
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Amazon launched on the back of its discount pricing of books and music, and changed an industry. Blue Nile (my partner Peter Nieh led an investment in Blue Nile) built a business and a brand on better pricing for diamond engagement rings. Price has always been one of the key value propositions for ecommerce.

However, a supreme court ruling last year could level out price competition and force etailers to compete on other dimensions. Notes Internet Retailer:

Just as millions of consumers are turning to the web to find the lowest prices, online retailers in many categories find they no longer can compete on price. That’s because a growing number of manufacturers are setting minimum prices on their goods, and in some cases cutting off retailers who sell below those prices.

They are taking advantage of a June 2007 U.S. Supreme Court decision known as Leegin Creative Leather Products Inc. vs. PSKS Inc. that gives greater legal protection to such minimum pricing policies…

…many online retailers are finding suppliers mandating minimum prices, particularly on higher-priced goods with strong brands. But manufacturers’ enforcement of these policies—often referred to as MAP, for minimum advertised price—has been uneven. Many online retailers complain that, while they abide by MAP pricing, their competitors do not.

Business abhors a vacuum, and the WSJ notes that some companies have sprung up to help manufacturers monitor for Minimum Advertised Price (MAP) violations where etailers sell at a discount:

Tiny firms like NetEnforcers Inc. — with only 56 staffers jammed into a dim, spare cubicle farm here in Arizona — wield economic power far beyond their size. These companies scour hundreds of thousands of Web sites daily, looking for retailers offering bargains below the “minimum advertised price,” or MAP, set by manufacturers on an array of consumer goods.

When NetEnforcers finds goods like cameras, handbags or ovens for sale at too-low prices, as it claims to do 5,000 to 10,000 times a day, it alerts its clients, including Sony Corp., Black & Decker Corp., Cisco Systems Inc., JVC Kenwood Holdings Inc. and Samsung Inc.

For discounters, the consequences of not respecting MAP are usually speedy and decisive. If the seller is an authorized dealer of the product in question (which means it is bound to honor a MAP agreement), it gets a notice from the manufacturer or NetEnforcers and typically brings its price into line within hours, the company says…

If the seller isn’t an authorized dealer — for instance, a discounter that acquired the goods via a distributor — NetEnforcers says other tactics are used to try to force a lowball price off the Internet. In these cases, they can allege that the discounter’s use of the product’s name or image constitutes trademark or copyright infringement, in an effort to force the seller to stop listing the discount.

While not all industries employ MAP rules, many do, especially industries with high ticket items like electronics. These rules threaten etailers ability to compete on price. Convenience and selection become more important differentiators for online retailers.

Etailers are fighting back through lobbying for new laws notes the WSJ:

Hoping to roll back a Supreme Court decision that allows manufacturers to set minimum prices on products, opponents launched a campaign that will include use of eBay Inc.’s popular Web site to garner consumer support.

At a closed-door meeting whose attendees included representatives of auctioneer eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law. EBay offered free use of its site for the campaign so it can reach many consumers, participants said.

But perhaps more importantly, even large etailers are skirting the edges of the rules:

Some retailers try to circumvent pricing restrictions by listing a product at the MAP price but telling shoppers to click an additional button — or to add the product to their shopping cart — to see a discount price.

Indeed, Circuit City’s online price for the TV moved up to the $1,699 MAP level soon after NetEnforcers noticed the lower price. But more recently, the item had a “see price in cart” notice next to it. Clicking on that opened another window displaying a discounted price of $1,439.99.

This supreme court ruling has turned out to have far reaching consequences for online retailers.

Comments»

1. Adam - December 5, 2008

And yet, here in Europe, that practice is still illegal.

Surely, in a Free Market, the only way that a manufacturer could completely remote-control prices of goods AFTER they’ve sold them on to 3rd parties is through the existence and leverage of the illegal-kind of cartel or monopoly? (just looking at this theoretically)

Next step: I predict US consumer goods law will be changed so that all goods are “licensed, not sold”, and purchasers lose the right of resale (and – via loss of the right of ownership – lose pretty much all their other rights too). Why not? It’s a fairly small step up from allowing a manufacturer to dictate price at all points in a resale chain…

2. Drew - December 5, 2008

This article has a very misleading title. The Supreme Court doesn’t “want” you to pay more. The ruling that is allowing this is from many years ago and the case wasn’t really about MAP at all. It has had some side effects and yes, that’s a problem. But it’s an issue that will likely be solved in additional court cases to come. There’s certainly no active agenda by the justices to raise internet prices.

3. jeremyliew - December 5, 2008

Good point Drew. I’ve amended the title accordingly

4. prfx - December 5, 2008

MAPs are artificial price floors and are a fairly common practice particularly regarding luxury goods. It applies to traditional retailers too. Personally, I find the practice distasteful and it runs counter to my ideals of a competitive marketplace.

5. Top Posts « WordPress.com - December 5, 2008

[…] The Supreme Court ruling means that you pay more for things you buy online Amazon launched on the back of its discount pricing of books and music, and changed an industry. Blue Nile (my partner […] […]

6. Q dub - December 9, 2008

MAPS do address a very important problem created by e-tailers:

That they can offer lower prices because of their lack of physical locations and services, creating an unsustainable scenario where consumers go to high-end retailers to touch&feel + get serviced, then turn down the sell and buy online. This is often unacceptable to a manufacture who views that the service element is important to continued brand building and sales.

7. James - May 8, 2009

The internet was defintely a game changer in price wars. Physical stores have alot more overhead.


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