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Steve Chapman, Reason's newest columnist, asks whether the courts are trying to slap away the invisible hand.
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|3.29.07 @ 7:35AM|#
Sorry, Reason, but, so far, I'm not impressed by Steve Chapman. He sounds like a corporate shill. Despite an occasional snide remark, I admire your other writers, but Steve's column has the unmistakable ring of corporate boilerplate. I'd rather read Ayn Rand than this guy.
thoreau|3.29.07 @ 8:44AM|#
This part of the analysis strikes me as naive:
Why would a company making purses or televisions or running shoes want to keep prices at a certain minimum? Maybe to induce stores to offer exceptional service or technical assistance. A store can afford to do that only if it can charge a commensurate price.
There's another issue here: Branding. Keeping the products in a high-end price category maintains a high-end image, which can be to the long term benefit of a company that wants to pursue a strategy of high price rather than high volume. It maintains a certain "snob appeal" or luxury image for the product. The simplest explanation for writing minimum sale prices into contracts is simply to protect the brand.
That could very well enhance competition in many instances (by preventing one retailer from under-cutting all the others), but it could also keep the product in certain stores with certain clienteles.
I couldn't care less if a company wants to sign agreements with its retailers concerning minimum prices, but naive explanations ("They're just trying to get the best value and service for the customers! Obviously!") are annoying. This is about branding.
Honestly, the best argument here would be "Why should the government care if a designer of fasionable purses and shoes wants to only sell at high prices?" Even back in the days when I was a liberal and OK with economic regulation, I thought regulation should stick to bread and butter stuff like, well, bread and butter. Designer purses didn't seem like a thing worth regulating. Now that I'm libertarian I'm even more firmly of that mindset.
thoreau|3.29.07 @ 8:45AM|#
Clarification: I'm even more firmly opposed to regulations on luxury goods. But I'm no longer in favor of regulating bread and butter. I just realized that the last sentence might have conveyed a different impression.
|3.29.07 @ 9:01AM|#
Thoreau is a flip-flopper!! Ban him!!
|3.29.07 @ 9:19AM|#
Um, no, the collapse of the Soviet Union doesn't disprove the utility of antitrust law, which has existed as a part of our capitalist system since well before the Soviet Union even existed.
Targetting the college freshman demographic, I guess.
|3.29.07 @ 9:25AM|#
Agree with the general sentiment here. There are good arguments to be made about antitrust. That the soviet union collapsed isn't among them.
Guy Montag|3.29.07 @ 9:34AM|#
Hey! Good work getting this guy, I really liked that article!
|3.29.07 @ 10:04AM|#
ГДЙРЯ, ФТЭКМН БОДЦ!
Kevin B. O\'Reilly|3.29.07 @ 10:07AM|#
I haven't read the article yet and so won't comment on it specifically, but congrats to Reason for syndicating Steve Chapman. I've read him for years in the Chicago Tribune and he's one of the finest newspaper columnists in the United States -- and one of the few libertarian columnists.
|3.29.07 @ 10:12AM|#
That was my initial reaction as well.
Greg Mankiw has some interesting thoughts on this here.
He echoes a few of the same points that Chapman brings up, although without all of the drama.
Basic conclusion:
Dave W.|3.29.07 @ 10:29AM|#
Despite an occasional snide remark, I admire your other writers, but Steve's column has the unmistakable ring of corporate boilerplate.
I didn't encounter Reason until 2003 or 04, and did not read regularly or subscribe until 2005, but I get the feeling they have been steadily moving in a corporatarian direction for quite a while now. You can tell by who leaves and who replaces who leaves.
I think eventually the magazine will rediscover its roots, but, of course HnR remains fun (below the fold I mean) because they generally let any libertarians have their say, and you still see plenty of interesting viewpoints there (here).
BTW, there is no "invisible hand" in a massively consolidated marketplace, so the premise of the whole article is ridiculous, economically speaking.
|3.29.07 @ 10:41AM|#
Greg Mankiw, although undoubtedly smarter than I am, is still all wet. "Business practices that appear to reduce competition may in fact have legitimate purposes." Let's unpack that. Tanslated into English, it says "Business practices that reduce competition may possibly have purposes that interested parties would label 'legitimate,' whatever the f*ck that means."
If customers are willing to pay extra for good service, etc., then why don't stores run ads along the lines of "our prices are higher but you'll be glad to pay them!" In fact, such stores are common--Bloomingdales, for example. No one goes to Bloomies looking for bargains. This "legitimate purpose" that Dr. Mankiw and Mr. Chapman are so anxious to promote has already been taken care of--by the market!
Dave W.|3.29.07 @ 10:42AM|#
Ironically, perhaps, I almost never used to comment on Sanchez or Welch threads, or even Young or Howley threads, because what are you going to say: "uh huh, sounds good."?! I just nod yes and don't bother typing.
I mean, one time Welch did a paean to media consolidation, and it stuck out like a sore thumb in his oeuvre.
And, no, Ray Ray, this ain't about branding. You are correct about the economics of branding, but that is a side show and a mere distraction here.
Windypundit|3.29.07 @ 10:56AM|#
Ahh, but if the manufacturers raised wholesale prices, the retailers would be limited in their ability to pass that increase on to customers because the retailers are selling into a competitive market. With inventory costs rising and profits falling, retailers would reduce their orders. Beyond a certain point, the loss of orders would exceed the increased profits due to the higher price.
If the goods being sold are high-end goods, there's probably plenty of room to raise the retail price because the customers are probably the kind of people who are willing to pay a lot for the product. However, competition from other retailers keeps the price low.
What retailers need is a cartel. They need to get together to set a minimum price for their goods so they can keep prices high. This has two problems: First, it's illegal, and second, if even one local retailer holds out and refuses the price, they will face price-lowering competition.
However, if the manufacturer enforces a minimum retail price, that gets around the legal problem (for the retailers, anyway) and the hold-out problem, allowing all retailers to coordinate a higher price and earn a greater profit. And with this greater profit, they are less likely to reduce their orders if the manufacturer raises wholesale prices.
In short, the retailers are paying the manufacturer to enforce a cartel for them.
That's at least as good an explanation as Chapman's, and which sounds more believable? That manufacturers are trying to encourage better customer care for people who by their products? Or that manufacturers and retailers are conspiring to get customers to pay more?
thoreau|3.29.07 @ 11:01AM|#
which sounds more believable? That manufacturers are trying to encourage better customer care for people who by their products? Or that manufacturers and retailers are conspiring to get customers to pay more?
Quick: Somebody misquote Adam Smith! Or just yell demand curve!
Seriously, good points, VM. Although I wouldn't rule out branding as being a part of the phenomenon either.
Windypundit|3.29.07 @ 11:34AM|#
No, and I wouldn't totally rule out the customer care angle. There's no reason it can't be a combination of all three. It probably is.
Gosh, I hope the court can figure all this out.
Russ 2000|3.29.07 @ 11:40AM|#
Forgetting the "liberty" angle for just a moment... Is anyone surprised when a price support system gets cheated?
thoreau|3.29.07 @ 11:45AM|#
No, and I wouldn't totally rule out the customer care angle. There's no reason it can't be a combination of all three. It probably is.
Well, customer care would probably be a matter of branding. They would want their product associated with the service that you get at a high end store. But that's really a branding strategy to justify higher prices, rather than an act of benevolence.
|3.29.07 @ 11:55AM|#
You guys are bringing up good points. Windy's was particularly interesting, as I had not read an analysis along those lines yet, "outsourcing the cartel", definately hard to push aside.
I am still pretty inclined to the branding aspect. After all what is the marginal utility in a designers name anyway?
Does this appear in other sectors? Are there retail price contracts between wholesale and retail in DVDs for instance? If anybody's got something, I am definitely interested.
....DEMAND KURV!!!!!!!!
|3.29.07 @ 12:23PM|#
Along the cartel lines...I have a friend who is the sole U.S. importer of a motorcycle accessory manufactured in the U.K. He sells it for retail on his website and wholesales it to various motorcycle shops. To control the retail price, he uses the method of "suggested" MSRP and cuts off any shop selling below that price. The reason for this is that he profits more on the product when it sells through his website than when he wholesales it to bike shops. If the bike shops retail the product for less than he does himself, then he's competing with his own product. If everyone sells it for the same price, then customers have the option of either buying it from him and waiting for it to show up in the mail, or running down to the local bike shop, buying it for the exact same price, and having it installed that same afternoon.
The bike shops are perfectly happy with this arrangement because they make a few bucks on the product and often get the customer to pay them for installation as well.
Personally, I think he should set a wholesale price and let the bike shops sell it for any retail price they want so he can make the money on volume, but since it's literally not my business...
thoreau|3.29.07 @ 12:26PM|#
Oops, for some reason I mistook Windypundit for VM. Probably the whole Windy City thing.
My apologies.
Private Attorney General|3.29.07 @ 12:37PM|#
Along the cartel lines...I have a friend who is the sole U.S. importer of a motorcycle accessory
Could we get a name or web address here? Thanks in advance.
|3.29.07 @ 1:18PM|#
Analysis with no opinion:
I think that part of the reason that the courts are unwilling to strike down legislative enactments is related to the academic and popular criticisms of substantive due process. Lochner v. New York started it all by finding that there is an implicit right to contract in the Constitution, and therefore New York's labor laws did not allow workers to bargain for their services. The precedent set by this case (that freedom to contract for one's services trumps the state's right to regulate wages and hours) was eventually disregarded, but the idea that some rights are "implicit" in the Constitution stayed with us, eventually leading to the doctrine of substantive due process (some call it "making up rights").
Something that starts out as reasonable as allowing citizens to work as much as they goddam please turns into a free for all.
|3.29.07 @ 1:49PM|#
Isn't Lamar smart and dreamy?
|3.29.07 @ 2:17PM|#
Windypundit,
You raise a number of good points. However, how would those problems be any less likely to occur with non-price vertical restraints (e.g. exclusive territories)? What special danger requires minimum price restraints to be analzyed under the per se rule but doesn't exist with non-price vertical restraints so they can be analyzed under the rule of reason?
|3.29.07 @ 2:38PM|#
AC:
I don't like a per se rule either, but the idea is that non-price vertical restrictions leave much more room for flexibility, efficiency and innovation while still passing price signals through to the consumer. Price restrictions do not leave flexibility and make the retailer into more of a franchisee.
|3.29.07 @ 3:14PM|#
non-price vertical restrictions leave much more room for flexibility, efficiency and innovation while still passing price signals through to the consumer.
In the particular market at hand in this case, the "price signal" that people are trying to pass is, "This is an expensive luxury item that you may as well buy at the highest end store you can because you won't find it any cheaper elsewhere. And, by the way, you are not one of the hoi polloi who runs whining to the government anytime something costs more than you think it should."
Artificial restrictions on RPMs prevent that price signal from being sent.
Windypundit|3.29.07 @ 3:27PM|#
AC, I'm just saying what I think might be going on. I have no clue how to apply anti-trust laws, of which I am deeply suspicious. That said, I've always wondered about exclusive sales territories.
|3.29.07 @ 8:11PM|#
Yes National Association of Manufacturers, please make that check out to Mr. Chapman. Reading about this case this weekend I thought to myself "how long before a Reason writer takes up the Orwellian position that shopkeepers can't set their own prices is the libertarian position on this." Oh, but they contracted to give up this basic freedom so it's ok right. And if someone contracts themselves to lose a pound of flesh if they default their loan then we should go along with that too I guess. Here's the "logic": liberty, the ability to do what you want is good. And if what one wants to do with their liberty is to contract away their liberty and this goes on to the point where there is a great deal of constraint on everyone's liberty, then that's OK. If the government steps in to keep people from contracting away basic liberties then that is bad. And this is libertarian how?
|3.29.07 @ 8:43PM|#
Lamar (nee Ms. Rosh),
My problem is that exclusive territories where a retailer competes with no other doesn't "leave much more room for flexibility, efficiency and innovation while still passing price signals through to the consumer," either. However, those receive rule of reason analysis instead of per se. What makes minimum vertical price restrictions so much worse than exclusive territories? If the potential for abuse and resulting evils are the same, why the different treatment?
Ken,
If you had included "for a magazine called reason..." you would have made the regulars drink 5 times.
|3.29.07 @ 9:37PM|#
I fail to see the State's compelling interest in interfering with RPMs. Lot of paranoid anti-corporatism here, but no one has explained the how the manufacturer benefits financially from controlling the resale price. After all, he gets paid the same even if the retailer decides to take a loss. It's just possible that stated reasons are the real reasons: he doesn't want his product to be known as a discount brand; he doesn't want other distributors to drop the product because discount outlets are poaching their customers.
It's quite possible for a discount store to increase their market share by lowballing the item and cause other stores use their shelf space for something else. In other words, that one store might move more units, but the overall sales drop because other stores in the area decide it isn't worth carrying anymore.
I think thoreau is also on to something with his "branding" argument. Retailers have gotten into the practice of establishing "price points," in which a product is singled out for advertising with an absurdly low price. This is intended to bring traffic into the store and gull shoppers into thinking that this store probably has the lowest prices on everything. But once the promotion ends, the consumer is disappointed to see the same item at its regular price. Even though the store might have taken a loss on its promotional price, the consumer doesn't know that. Thereafter he thinks of the product as a cheap item marked up absurdly high whenever it sees it at the MSRP.
If I owned a factory I would definitely take that factor into account when I negotiated retail agreements and try to establish a price floor. I don't think that makes them monsters.
|3.29.07 @ 10:02PM|#
And if someone contracts themselves to lose a pound of flesh if they default their loan then we should go along with that too I guess.
Ken, I trust you can grasp the difference between cutting out a pound of flesh because you fail to abide by a contract and returning some merchandise to the manufacturer because you refuse to abide by a contract.
Calling this an issue of basic liberties is laughable...
|3.30.07 @ 2:53AM|#
BTW, there is no "invisible hand" in a massively consolidated marketplace, so the premise of the whole article is ridiculous, economically speaking.
[gasp] You noticed?
You think it's bad now? Wait until Bill Gates gets the financing worked out and buys The Market. Yep, the whole things.
MS Markets 1.0 is on
its way.
At which point, I may as well become a Castro hailing communist.
Dave W.|3.30.07 @ 9:39AM|#
You think it's bad now? Wait until Bill Gates gets the financing worked out and buys The Market.
Yeah, yeah, I know the drill here at HnR
Market consolidation = monolopoly
Anything less than monopoly = free market
Can I get an AMEN?