First the links.

The case: Leegin v. PSKS

Some news links from a variety of sources

Salt Lake Tribune

Business Week

Picture Business (??)

NJBIZ

Surprise surprise it was a 5-4 decision. In it a 1911 interpretation of the Sherman Anti-trust act was revised to allow manufacturers to set a price floor below which retailers are not allow to sell their product.


The questions for debate are:

Do you agree with this ruling? Why or why not

What do you think the impact will be on consumer prices?

What will the major effects of this decision be on the US economy? (Try to source your opinions with supporting evidence)

It's another "we are not overturning precedent but really we are" ruling. The antitrust act's Section 1 doesn't make a vertical price restraint exception for manufacturers that want to provide consumers with exceptional quality. Congress could easily overrule SCOTUS but neither party will.

We don't have choice. We have the illusion of choice thanks to brand and royalty protections that have been extended from a quarter century, to a century, to infinity thanks to the lobbying efforts of Bono, Disney, etc. Contrary to Quintin Reigel's assertion, manufacturers don't have to compete; they need to cooperate. Will it be Pepsi or Coke? Have you noticed that both manufacturers never have a sale at the same store on the same days? Today the best a successful entrepreneur can hope for is having his business partially or wholly bought by a larger competitor.

This ruling is going to open federal courts to more antitrust litigation until the new precedent becomes settled law. I'm sure the circuit courts are going to look forward to that. This won't be the last time SCOTUS hears a antitrust-but-not case, either.

This is a textbook example of "confirmation bias", or perhaps simply regional variations. Believe me, hereabouts, every three day weekend, New Years, Independence Day, etc, both Coke and Pepsi are on sale.

As for the questions, I have some passing familiarity with the ruling, but haven't really looked into it. For those interested in some lawyerly perspectives, I would suggest going to Overlawyered.Com, ProfessorBainbridge.Com and/or the Volokh Conspiracy to do some reading on it.

Maybe its the fact that I'm reading over this at 4 in the morning, but some things, besides the basic economic implications, make little sense to me.

First, why would a manufacturer care about the spread between the wholesale price and retail price. The manufacturer gets the same amount no matter what the retailer charges. If producer X sells widgets to retailer Y for $14, why does producer X care whether retailer Y sells it to the general public for $19 or $15 or $2. Assuming the manufacturer does not get a cut from retail sells, it has no reason to maximize revenue for someone else. Perhaps that assumption is not correct?

Second, claiming this decision "increases competition" by making quality customer service viable is ludicrous. If there was a significant demand for more customer service at a higher price, retailers would have been able to capture more of the market by charging higher fees and providing more customer service. Thus, the solution is provided in the competitive free market without a gimme.

Assuming that the manufacturer has some reason to profit maximize for the retailer, basic monopolistic theory comes into play. Also, I take for granted that the limit of competitive discourse will shift from the wholesale price to the minimum price.

Commodities and products with close substitutes will be relatively unaffected. To use our Coke and Pepsi example, if Coca Cola decided to elevate its minimum prices, Pepsi would be in a position to capture the soda drinking market by keeping its minimum price lower. Some people might prefer Coke over Pepsi, but not a lot of people are willing to let their wallets get hurt over it. In economic jargon, we call that high elasticity of demand, which is typical of close substitutes.

The problem would become more apparent in products that are highly differentiated and have little or no substitutes. For instance, if you want an iphone or want to play World of Warcraft theres only one game in town. In this case, prices will inevitably rise as most people who want an Iphone are willing to pay any price to get one. Apple can maximize retailer profits across the board by making sure competing retailers cannot undercut each other.

Lets say Apple sells its Iphone to retailers X and Y for $80. There are 10 customers, each of whom is willing to pay $100 for the phone (We assume when prices are equal, half go to X and half go to Y). The typical competitive price structure would work like this, retailer X and Y start out selling their phones for $100. Retailer X would rather sell 10 phones for $99 than 5 phones for $100, so they slash their prices. Retailer Y would slash their prices to $98, etc. This would occur until the price of each phone at both stores would equal the original $80 plus the cost of retail operations. For simplicity, lets assume this cost is zero, in which case, across the market the Iphone would net $800.

But what if Apple decrees no store can sell their phone for less than $95? The slashing competition between X and Y would occur all the way to $95. Here the Iphone nets $950.

There is an interesting application to game theory here which I will save, but suffice to say, Apple is basically enforcing a collusion between retailers X an Y. The Nash equilibrium is never reached, and both retailers are better off.

My hope in illustrating this is to demonstrate how the competitive pricing system is bypassed if manufacturers have the ability, and have a reason, to set minimum prices. It in effect centralizes the price generating mechanism.

In many cases with inelastic demand for a product, bidding the price down by retailers is the last thing preventing monopolistic pricing.

The macroeconomic effect is quite simple and, ironically, the exact opposite of what right-wing business are supposedly all about.

Inefficient businesses, by making economic profits (profits beyond those normally alloted), are allowed to survive.

Lets tack on a cost of running the retail business. Retailer X has to charge $1 per phone to run his store, and retailer Y has to charge $2. In the competitive market scheme, Retailer X can provide the same Iphone with the same level of service for a cheaper price: $81. Retailer Y, due to excess inefficiencies must charge $82. Everyone flocks to retailer X, and Retailer Y shuts down. This is how its suppose to go, as X can provide the exact same good, retail services, for a cheaper price.

But at a mandated $95, Retailer Y can survive. Thus, even though X provides the most benefit to the economy, Y is allowed to remain.

It ties back to brand management. Price is part of a products image. The perceptual difference between "great value" and "cheap crap" can be pretty thin.

That may be true in some instances, but not in all of course.

The only places I can see this really hurting are the deep discount big-box stores, and the warehouse style places, like Walmart, Home Depot, etc.

For example: Let's say Sears, Walmart, HD and Best-Buy all sell clothes washers from Westinghouse. Let's say further that a particular model costs each store $100. Sears and Best-Buy currently are at somewhat of a disadvantage, because of the additional services they render with regard to setup and installation, repairs, etc., that HD and Walmart don't have, so their retail prices may be somewhat higher.

With Westinghouse able to now enforce a minimum retail price, it may help Sears and Best-Buy, because they may be able to sell the same item that Walmart does, now for the same minimum retail price, and still make money. In addition, it will allow them to tout the fact that there is nobetter price on that item anywhere in town, and that they provide better service after the sale.

I think the measure here shouldn't be what's best for the manufacturer or the retailer, but best for the consumer.

There are some markets where enforced (or strongly-supported recommended) retail pricing is a good thing. One that I have direct personal experience of is the UK magazine market, where superficially anti-competitive practices (regional wholesaler monopolies in a publisher-funded sale-or-return market) have resulted in greater consumer choice in retail stores, and a greater variety of such retailers of news & magazines, than is the case in comparable countries with different systems (either market free-for-all, giving smaller ranges, fewer retailers and less retail variety; or forced distribution on "free speech" grounds, which also results in fewer retailers and less retail variety, and ranges so large that they cannot be displayed in a shoppable manner).

I am not sure that the consumer benefits any from manufacturer-led pricing in shoes. Presumably the manufacturer in this case thinks that price is not an issue to their target customer?