Business Perspectives

April 11, 2012

Unilateral pricing policy not good news for consumers

Is it price-fixing, or a producer’s privilege?

Is it price-fixing, or a producer’s privilege?

Sony, Panasonic, Samsung, LG and other electronics manufacturers recently announced a plan to limit retailers’ discount selling of their products by imposing a unilateral pricing policy. This raises two questions: What are the economics of such actions? And don’t they violate the antitrust laws of the United States?

There are at least two economic aspects to consider. The first is whether society as a whole is harmed if a manufacturer will sell its products only to retailers that agree not to sell them at prices cheaper than the manufacturer desires. The second is whether society is harmed when either manufacturers or retailers agree to act together to keep prices high.

On the impact on society, opinion is mixed.

Our economic and legal traditions long supported the idea that any individual who produces some good or service and sells it directly to customers himself has the clear right to ask whatever price he wants. Potential buyers can choose to pay the price and get the good or not pay and not get it.

Many philosophers and even theologians would see this right as an inherent aspect of human autonomy. Economists would see it as essential to having price reflect the true marginal cost to society, a prerequisite for efficient use of resources.

Things are less clear when a larger producer sells through wholesalers or retailers rather than directly, but still wants to control pricing. Apple, for example, has long specified prices for its products. From one philosophical point of view, controlling what its distributors can charge is an extension of the producer’s right to price one’s own product. But others argue such restrictions limit the freedom of other entrepreneurs – the wholesalers or retailers – to conduct their own business as they see fit. The autonomy embodied in unlimited control over pricing by one market participant inherently limits the autonomy of another.

From an economic point of view, such “price maintenance agreements” reduce competition, at least marginally, and thus are less efficient. That is another way of saying that resources get wasted.

However, such a contractual limit between one manufacturer and one or many retailers usually does not have the same detrimental effects as when many manufacturers get together to impose a uniform price-maintenance limit on all retailers. That seems to be the kind of price fixing that brought about passage of the Sherman Antitrust Act of 1890 and the Clayton Act in 1914.

According to the Sherman Act, “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”

The new unilateral pricing policy imposed by the electronics manufacturers strikes many as just the sort of “combination in restraint of trade” that U.S. anti-trust law banned. How can they get away with it?

The answer is that the real-world application of laws depends on their judicial interpretation. For nearly a century after the Supreme Court’s 1911 “Dr. Miles” case, in which a maker of proprietary medicines had attempted to set the prices at which druggists could sell them, U.S. law severely limited mandatory price maintenance requirements. But with the “Leegin Creative Leather Products” decision in 2007, the court broadly re-established the legality of such manufacturers’ contract clauses.

Between these two decisions, there was considerable variation in the specifics of the law and enforcement, not to mention state laws and New Deal policies that actually favored price maintenance.

Historically, retail-price maintenance served to protect traditional Main Street businesses or full-line chain retailers like Sears from high-volume specialty retailers like Best Buy. But now it is the big-box retailers that want protection from online businesses, which have less money tied up in real estate and often don’t have to charge sales taxes.

The UPP is a form of cartel, and like all cartels, is subject to internal tensions. The agreement between participating manufacturers is to impose a uniform set of price maintenance policies on retailers. But it does not fix individual manufacturers’ prices of electronics products themselves. Each company will still set its own prices to retailers. If one manufacturer loses market share, it can cut prices. But it can also cheat on the agreement by keeping its own prices the same but secretly encouraging retailers to discount its own products to the disadvantage of its competitors. Of course, this is a violation of the agreement, but the history of OPEC and other cartels shows cheating occurs frequently.

Exactly how this will all work out for electronics makers is unclear. At one time, Japanese manufacturers dominated the sector. But they eventually began to lose market share to cheaper Korean competitors. Now there are Chinese firms, not party to the UPP, that may repeat such a coup.

In the meantime, the new agreement is not good news for consumers.

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