Minumum Retail Price Agreement

by Azreel | July 1st, 2007

Flashback to Bob Barker rattling off the “Manufacturer Suggested Retail Price is $19.95, YOU WIN!”

Manufacturer Suggested Retail Price, or MSRP. These probably ring a bell for many people, even if only from The Price Is Right. But to business owners and low cost discounters, this little akronym has a deep meaning.

MSRPs are the price given to retailers by manufacturers as the price point at which the item should be sold. However, most retailers price their items below the MSRP in order to be competitve with other retailers offering the same item.

When the item in question remains on the shelves and stubornly refuses to be sold, the price is lowered again to the sale price in order to get the item moved out. Sometimes items are even sold at a loss to the retailer just so that they have more room on the shelves to stock new items that are in greater demand.

Manufacturers and distributors often don’t like this practice because it can impact their bottom line and influence public opinion of the product. To combat the practice, many try to require their retailers to abide by minimum price agreements.

In the past, this was considered, if not outright illegal, a strong arm tactic by manufacturers to prevent retailers from quickly liquidating product that won’t move. In some retail industries, such as book publishers, retailers are allowed to “return” unsold merchandise in exchange for credits with the publishing company, but they are not generally allowed to discount the books.

Of course, big internet discounters such as Amazon often do offer substantially lower prices, often times at peril of losing access to the publisher/manufacturer. Most manufacturers will overlook these indescretions due to the volume of merchandise that Amazon moves. It’s much easier to go after smaller retailers and demand that they raise their prices or risk losing wholesale price access.

Yesterday, the SCOTUS ruled that it is no longer automatically unlawful for manufacturers and distributors to agree on setting minimum retail prices. For consumers, this may mean grossly higher prices on the internet and at close-out stores (ala Big Lots, Tuesday Morning) since those retailers may be under more pressure to sell items at a minimum price demanded by the manufacturer.

For the past 96 years, it was automatically assumed that such agreements were illegal under the Sherman Antitrust Act. “No more,” says Justice Kennedy, who wrote that “it is a flawed antitrust doctrine that serves the interests of lawyers — by creating legal distinctions that operate as traps for the unaware — more than the interests of consumers — by requiring manufacturers to choose second-best options to achieve sound business objectives.”

In reality, this ruling changes very little. It merely takes away the per se assumption that any such agreement is price fixing and thus in violation of Antitrust laws, thereby disallowing treble damages to those who prove in court that such an agreement was not legal based on some other merit.

As a capitalist, I’m a little divided in my opinion of this ruling. Sure, businesses are free to play ball as the market will allow, but this ruling, in my opinion, strikes a heavy blow to the small store’s ability to compete with the big boys. Manufacturers can now push retailers to raise prices and have less to fear in court since damages won are no longer automatically triple the award. Consumers might pay more, Justice Breyer claims as much as $1000 more per year, but one can hope that the end result is that manufacturers now have more capital to pour into product improvement and development. After all, many many products are never even brought to market simply because they don’t provide enough porfit incentive.

I suppose one can only wait and see. I just always get nervous when the courts step into the economy.

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