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Special Report
Price Fixing
The misguided crusade against manufacturers’ minimum prices.
On October 1, it became illegal in Maryland for manufacturers to set the minimum prices at which retailers may sell their products. Sen. Herb Kohl (D-WI) has introduced federal legislation that would do the same thing nationwide.
Legislators allege that when manufacturers prohibit their products from being sold below a certain price, they are hurting consumers. Discounters can’t discount as much as they would like. Consumers have to pay more for the same products. Sen. Kohl’s bill is subtly named the Pricing Consumer Protection Act.
What consumers really need is protection from politicians, not manufacturers. Contrary to popular thinking, minimum price laws can actually help consumers; conventional wisdom is not always wise.
Here’s how these manufacturer price restraints work. When a manufacturer sells its goods to a retailer, part of the contract states that the retailer has to sell them to consumers at or above a given price, usually determined by a certain profit margin.
This minimum profit margin is typically on the high side. Since these price restraints are built into all sales contracts, no-frills discount retailers can’t swoop in and offer a lower price. This is why some people think minimum prices are anti-competitive. They are not thinking beyond stage one.
It is worth asking: Why do some manufacturers use minimum-price requirements in the first place? After all, they help somebody else’s bottom line, not their own. The answer is that they want retailers to compete with each other on non-price features — such as superior service, product demonstrations, and advertising.
Lots of goods, from high-definition televisions to cars to golf clubs, tend not to sell very well unless consumers can learn a lot about the product first. These products have high information costs. In-store displays, demonstrations, and knowledgeable sales staff are essential for getting consumers the information they need to pick exactly what they want.
Providing these services is not free for retailers. The extra profit margin built into a manufacturer-restrained price is what covers those costs. The investment pays off by increasing sales in the long run. If consumers see up close that a certain type of television is to their liking, they are more likely to buy it than if they don’t get to try it out.
Up-close and personal product inspection by consumers also puts pressure on manufacturers to deliver high-quality merchandise. A well-informed customer can be very demanding. And when customers demand something, they are more likely to get it. Minimum-price agreements speed the process.
If a manufacturer couldn’t require minimum-price agreements for all retailers carrying its products, then a consumer could take advantage of a free demonstration of a sound system in a specially built sound room, then buy it from a discount store that doesn’t offer that kind of hands-on service. It’s a classic example of what economists call a “free-rider problem.”
It is also unfair competition. Without minimum price agreements, retailers who go the extra mile to inform consumers would essentially be subsidizing their competitors who don’t. Why bother to inform consumers at all, then?
It is not just the economics that are unsound with the bills that Maryland has passed and Sen. Kohl has proposed. In 2007 the Supreme Court ruled that minimum-pricing agreements are legal in most cases under existing antitrust law.
The Maryland law also applies to Internet sales — even if the retailers are located out of state. In our federal system, states are only allowed to regulate entities within their borders. The bill may not survive a legal challenge.
The economy is too regulated as it is. More than 30,000 new rules came onto the books during George W. Bush’s presidency, and we have been paying the economic price. Proposals to ban minimum-price agreements are just more of the same. They would keep shoppers less informed and make the marketplace less competitive. They are bad for the economy, and bad for consumers.
About the Author
Ryan Young is Fellow in Regulatory Studies at the Competitive Enterprise Institute.
Letter to the Editor View all comments (36) | Leave a comment
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Dan Hirsch| 10.7.09 @ 8:56AM
" The economy is too regulated as it is." Congrats on a true, correct, sensible and defensible statement. It does however contradict the rest of your piece.
How laughable that the government should enforce someone's profit margins! They should also set costs of materials and wages, oh yea, they do that don't they. One fundamental concept of the market is that through time, more will be done with less, more efficiently using the scarce resources available to us all. If one's competitor, either a manufacturer or a retailer, is selling a product cheaper than you can, then it's time to figure out how to deliver it cheaper. If customers walk into your showroom to get the look and feel of a product and you do not close the deal, shame on you. It is cost competition that drives better deals to consumers; whenever the government starts "regulating" prices they invariably raise them to consumers. What was cheaper a long distance call in 1970 or in 2009? (Now correct for 39 years of inflation!)
Read what you write, then believe it: "The economy is too regulated as it is."
In Senator Kohl's Wisconsin, they haveused their minimum price laws in the last year on a couple of occasions to shut down gasoline retailers who were selling gasoline to consumers below the official price. What kind of showroom and sales efforts does one need for gasoline? I think a big sign with the price and a self checkout pump are pretty low cost and efficient. Nobody can afford to pay the minimum wage to somebody to stand next to a pump to "sell" gasoline.
Good grief! Read what you write.
Dan Hirsch
Paris WI
PJ Doland | 10.7.09 @ 9:43AM
I think the law is idiotic, but I disagree with your reasoning.
For just about everything I buy, I can find much better product information online from impartial sources than I can get from some schmuck salesman. Very little added value occurs at the actual point-of-sale.
Pingback| 10.7.09 @ 10:21AM
Regulation of the Day 57: Minimum Price Agreements | OpenMarket.org links to this page. Here’s an excerpt:
PBH Alverson| 10.7.09 @ 10:44AM
Sorry, this is the lamest excuse for producer protection I've read in quite some time. Unfair competition? Buzz words SEIU or ACORN might use.
Poster Doland is spot on, but prior to the internet, we had magazines* (remember them?) like Stereo Review, Consumer Reports and Computer Shopper that provided all the information the authors' safety margins *might* provide.
Finally, the authors appear not to have visited an electronics showroom recently. Many manufacturers typically build two (or more) levels of product, one for discount retail and a more feature laden unit for the higher end showrooms. How will protection protect protectees in this environment?
dougfoot | 10.7.09 @ 11:28AM
I think some of the commentors are missing something here... the Maryland law is forbidding manufacturers from telling their retailers what the minimum price is that they can sell their products at. A contract is a contract, you negotiate with a manufacturer to sell a product, they say your price can't be lower than X, you agree to sell no lower than that price. What's wrong with that?
Government shouldn't be in the business regulating the prices of anything, be it goods and services or wages.
Etiquette Man| 10.7.09 @ 12:22PM
As a libertarian, I truly hate to say this but this is a rare instance in which I support the government's intervention in private transactions. The government does indeed have a role in ensuring that commerce is truly free, and mandatory minimum prices are not an example of free commerce.
This article does a remarkably poor job of making its case.
Just Askin'| 10.7.09 @ 5:54PM
EM, you seem to be overlooking
1. As dougfoot tried to clarify, what we're talking about here is gov't interference with private contracts, not gov't itself setting the price; well, maybe you got that although Doland & Alverson didn't, so for you the following point,
2. Don't overlook that "competition" comes from other manufacturer's items, as well as canabalistically from other (similar) items from the same manufacturer, not only from different retail outlets. Because min-price is ALLOWED doesn't mean it is REQUIRED, so if you don't like it as public policy, then buy from manufacturers who don't go that route (and of course, retailers who carry their products). Although, if the fixed-min-price guy's product turns out to be the best value for your needs & budget, I would think the libertarian thing to do would be to buy it...no?
Gazinya| 10.7.09 @ 4:45PM
Remember the Sunday cartoon called "There Outta Be A Law?" Well there outta be a law that if a polititian can't think of a way to fix a problem or can't find some spending to cut then they can't just sit on their butts and think up new laws. From mayor to president their is no shortage of people who can come up with new laws that cover old laws but when it comes to shrinking debt or laws these same jerks are stupified.
Mike| 10.7.09 @ 7:32PM
Read the article folks. The government is not setting minimum pricing, the manufacturer is. One industry that I am familiar with that practices this is the furniture industry. They set pricing floors because they want multiple retail outlets for their products and to protect their reputations. Thomasville doesn't want their products sold at discount stores.
This is why there are bunches of interior design shops selling furniture. The manufacturer has created a situation where the retailers added value is service and design and not just price. It has created choice for the consumer. Otherwise one or two large retailers could force the rest of the shops out of business and then when they are the lone provider raise their prices to the detriment of the consumer and the manufacturer.
It is very shortsighted to think that the only value a customer wants is price. The citizens of Maryland are the loosers here. Soon they will be traveling to PA and VA to shop for furniture and paying more for the distance it takes to ship it to their homes. I would also bet that manufacturers will raise their wholesale pricing to that minimum price level hurting consumers and retailers.
Politicians, jeesh! Is it in the Constitution somewhere that you have to turn in your common sense upon the oath of office?
Mike Johnston
SFC USA (RET)
Dan Yntema| 10.8.09 @ 9:45AM
Minimum pricing is a device used to prevent market forces from reducing the price of a product. Kudos to Maryland for defending free-market economics.
Justin Byma| 10.8.09 @ 2:19PM
Minimum price laws always hurt consumers. They result in higher prices and less than optimal consumption and production. This issue shows that the CEI cares more about business than about freedom.
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