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New at Reason
Steve Chapman, Reason's newest columnist, asks whether the courts are trying to slap away the invisible hand.
|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 @ 9:19AM|#
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.
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|#
There's another issue here: Branding. Keeping the products in a high-end price category maintains a high-end image
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:
The example of resale price maintenance illustrates an important principle: Business practices that appear to reduce competition may in fact have legitimate purposes. This principle makes the application of the antitrust laws all the more difficult.
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|#
The assumption is that if you let manufacturers control retail prices, they'll hose consumers for their own profit. But if they wanted to hose consumers, they could just raise the wholesale price they charge to retailers.
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|#
I wouldn't rule out branding as being a part of the phenomenon either.
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 @ 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.
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