The Homa Files

Manufacturers Set Price Minimums That Retailers Must Follow or Risk Getting Cut Off

Excerpted from  WSJ, “Why Some Toys Don’t Get Discounted”, Dec. 24, 2008 

At a time when retailers are slashing prices to attract last-minute Christmas shoppers, many stores aren’t marking down certain popular gift items at all.

That’s because of little-known manufacturer agreements that require retailers to refrain from discounting, especially in any advertising. If retailers don’t comply, manufacturers sometimes stop subsidizing ads or cut off supplies altogether.

The companies say that they enforce MAPs (minimum advertised prices)To maintain the company’s “integrity and high standards of manufacturing, we must maintain the price integrity of our products,” the letter said.

This season’s products affected by pricing agreements include The latest James Bond game and Guitar Hero World Tour Band Kit from Activision.

Minimum-price agreements between manufacturers and retailers were once deemed automatically anticompetitive and thus illegal under a 1911 Supreme Court ruling. Pricing agreements related to advertising — which critics say are used to discourage any discounting at all — also have run into legal trouble in the past when federal officials found they resulted in higher prices for consumers.

But in a controversial decision last year, the Supreme Court opened the door for manufacturers to set minimum prices as a means to enhance a brand’s image and for retailers to make enough profit on their merchandise to provide better customer service. The 5-4 ruling reversed a 96-year-old precedent and said cases should now be considered on a case-by-case basis, weighing the impact of pricing policies against free-market principles. In the wake of the decision, many manufacturers have instituted pricing minimums for advertising or sales.

Opponents of the ruling, including eBay Inc. and Costco Wholesale Corp., are hoping the decision will be reversed … arguing  that minimum-pricing agreements violate the Sherman Act, the law that prohibits price fixing and bid rigging.

“However you want to dress up these policies with fancy legal language, these policies are obviously in the interest of business and not the consumer.”

Many traditional retailers favor minimum-pricing agreements because they help put a stop to what the stores view as unfair competition from online sellers, which can charge less because they have lower overhead costs.

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Markups are the difference in percentage between the wholesale price a retailer pays to a manufacturer and the retail price charged to consumers.

Retail markups generally have been around 50% “for the last 10 to 15 years, but recently they’ve fallen to about 42%.”  Catalog companies “like their markups at about 50%” because of their added expense of printing, postage and shipping.

Markup percentages among toy mass merchants are generally in the high 30s to low 40s.”Minimum-pricing policies level the playing field” by keeping every retailer’s markups the same.

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Sony Computer sets minimum-advertised prices for nearly two dozen products, including $499 for the PlayStation 3 with 80 gigabytes of memory and $49 for a wireless keypad, a PS3 accessory.

A survey stores — online and offline —  that sell Sony videogame products found that nearly all of them were advertising and charging the minimum prices.

Full article:
http://online.wsj.com/article/SB123007559680631543.html

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This entry was posted on January 7, 2009 at 7:30 am and is filed under Mktg - Pricing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.