Minimum Advertised Price

[Lemuel]

Minimum Advertised Price is a policy that some manufacturers impose on their retailers. Effectively the policy is that the retailer cannot publish a price for the mfr.'s products below a specific dollar value, whether in print, on the airwaves, or online. The retailer can still sell the product for whatever they want - they can give it away if they want to - but they cannot advertise below a specific price.

I wonder if anyone has written on this topic, and from an Objective, capitalist, practical perspective. I'm interested in knowing how this policy has worked out in the past, and instances where it has saved an industry or caused it's doom. Perhaps there exists some rational theory of how value is manifest in pricing.

<<< Bear in mind that this MAP policy is enforced by manufacturers in my industry and contractually agreed upon by their retailers. There are no requirements of state, Federal or other laws involved (... yet).

The only laws that come into play are those involving breach of contract, when a dealer consistenly violates MAP in their advertising (however the quicker, cleaner way to correct the problem is for the mfr. to exercise their contractually-protected right to terminate the relationship at any time). >>>

All that is to say that I'm cognizant of the issues involving antitrust and concepts of government intervention, and they're not what I'm looking for. What I seek is principled applications of capitalism, regarding pricing and the relationship between manufacturers and retailers.

Can anyone point me to some good resources? I'm beginning my hunt after I sign ... right .... now!

SynthLord

[DavidV]

I am not familiar with the practice, but I don’t see what the big deal is. It sounds like a way for manufacturers to guarantee a profit margin to the retailers. If the minimum is too high, the manufacturer will obviously lose market share. There are many more dubious ways to achieve the same goal. The one I am personally familiar with is manufacturers who keep the specifications of their products hidden in order to keep customers in the dark as to what they should buy or what the alternatives are. The most common way is simply to keep the factory price of your products secret.

[scottkursk]

It's the exact same thing as MSRP on new automobiles, Mont Blanc Pens, Yurman Jewelry among others. Manufacturers set what they think if a fair price for retail and then they sell them to through wholesalers or jobbers to retailers. From here, the lower than suggested price can come into play in 3 distinct ways.

1)Sanctity of the distribution channel: Most manufacturers sell their items to jobbers/wholesalers who then do the physical part of the distribution to the retailer. Some retailers are able to buy from another non-official source such as buying out the merchandise of an out of business retailer who sold it to them for pennies on the dollar. Since the retailer has purchased a license from the manufacturer that allows them to have access to the latest and greatest products they offer, then they also agree to not fall below the prices that are recomended. This basically gives the majority of merchants who are unable to acquire from non-official channels a chance to move their merchandise before the natural flow of the market place brings the price of the object down.

2)Price Exclusivity: The other reason manufacturers will demand a minimum advertised price is the idea of price exclusivity. People do tend to associate price with quality. So if eveyrone is advertising an item at price X and they then see it advertised at X-Y, then they'll question the logic of purchasing it at price X and is it really worth it. Since the majority of retailers can't sell it at price X and at a profit, then either it goes unsold and returned to the maker. Then, come next time the manufacturer comes out with something else, retailer won't buy it again.

3)Warranty and Repair: If you ever see an add for Rolex or Yurman jewelry, you'll see some that clearly stated that they are licensed to sell those products. The licensing also guarantees when you buy the item the manufacturer will honor their warranty since they are able to control the chain of custody so to speak. I bought a pen for about $500 which was a real discount but when I returned it a year later to the maker for service, they wouldn't touch it since I didn't buy it from an authorized dealer. It could have been a high quality fake or bounced around 1000 places before I bought it and fountain pens can be delicate.

It's the authorized dealers that actually distribute the manufacturers warranty at the point of sale. So what I didn't know at the time when I bought it I wasn't getting the warranty. Almost got a bracelet for my fiance that would have suffered from the same problem. I knew to ask the retailer if the maker would repair it and after much hemming and hawing they acknowledged that I'd have to find someone else to fix it should something ever happen to it. The retailer registers the piece with the jeweler at the time of sale. That way they can guarantee they don't repair good quality fakes or items that may have gone through a "bumpy" chain of distribution.

[softwareNerd]

There are laws (which should not be on the books) which do not allow manufacturers from forcing a final retail price. That is the reason for the word "Advertised" in "Minimum Advertised Price". It is also the reason why the word "Suggested" is inserted into "MSRP".

David and Scott gave reasons why a manufacturer would want to maintain a minimum retail price. Sometimes manufacturers are right to do so, sometimes they are wrong (from a business perspective). However, it should always be legal for them to do so and they should have the legal right to "enforce" their decision through the courts.

Unfortunately, the law prevents manufacturers from setting this condition for sale of the product that they have produced. This is done in the name of "consumer protection".

[Scott_Connery]

It also leads to the dreaded (by me) "Prices too low to advertise!" or "P.O.R" advertisements.

[TomL]

Philosophically, a manufacturer needs to provide no justification whatsoever for the terms upon which it sells its products. If it says you have to jump through a fiery hoop and bark like a dog or it won't sell to you, then those are its terms and you can take 'em or leave 'em. Your only choice is: is it worth the product (or future profit) to have to jump through that particular hoop?

[scottkursk]

Philosophically, a manufacturer needs to provide no justification whatsoever for the terms upon which it sells its products.  If it says you have to jump through a fiery hoop and bark like a dog or it won't sell to you, then those are its terms and you can take 'em or leave 'em.  Your only choice is: is it worth the product (or future profit) to have to jump through that particular hoop?

The most militant of manufacturers about the whole MSRP, ad pricing, etc are things like Rolex, Mont Blanc, and David Yurman. I've got a family member that sells all three legally and they have to kiss some real tuckus to keep the manu happy. There are stories (mostly horror) about Yurman himself walking into someone's store and secret shopping them, not being happy about the way they represent his jewelry, and freaking out on them. He gets especially unpleasant towards retailers who sale and advertise they sale his wares if they haven't bought a license from him.

All the above items have some decent markup as well as a near religious following amongst customers. When it comes for amount of crap you have to deal with for the amount of return, I'd rather sell Rolex than Swatch. Sure, a good Swatch shop probably outgrosses a small indie Rolex shop but the people you deal with though some view as being higher maintanance, they are actually less trouble.

The others are auto makers. Most cars are effectively drop shipped (from what I understand) so the dealers have no chance to genuinely undercut anyone. Just like McDonald's; you don't actually own the restaurant per se, you just have the right to operate it for the parent company.

[erik]

I actually know a lot about this issue as MAP policy is in effect with everything I sell. I agree its up to the manufacturer to do what he wishes with his products but

I personally don't think its a very good policy in practice for either the manufacturer or the dealer. That is unless you are the largest dealer in a given market and you can use the MAP policy to protect yourself from competition. Also the MAP price is an arbitrary # made up by a sales dept. It has no bearing at all with what someone will pay for the item. So sometimes its way too high and that will scare off a potential customer. Or if its a large item that incurs a lot of shipping it might be too low and you might just break even at MAP.

We sell far below MAP ( email or call for price of course ) and the items that we would break even at MAP we don't even bother to sell. Some companies will even try to enforce a minimum sell price. We usually dump those companies. Its funny those companies always go out of business, or just fade into obscurity. They think that they can just pull a # out of the air and magically people will start paying it. Not in my experience. I would love to make magical profits like that but for the most part its just not that easy. You have to compete on price, you have to have good service, you have to have a good reputation, you have to stock deep, you have to advertise, you have to keep doing it for years and years, etc, etc. This goes for manufacturers and dealers/stores alike.

I can see where maybe a handmade watch like a Rolex where MAP policies may work. They have been around forever, and they are a famous brand. Thats all the time I have for today bye.