The zombie hand of America’s undead, its corporations, rose in a power salute over Washington after the Supreme Court’s other major announcement today: companies, for the first time in 96 years, are now free to set minimum prices under some conditions. So much for the free market. Hello corporate communism.
According to the New York Times, the justices found the following reasoning from the bought and paid for big business shills regressive Bush administration and the economics faculty at the University of Chicago convincing:
The Bush administration, along with economists of the Chicago school, had argued that the blanket prohibition against resale price maintenance agreements was archaic and counterproductive because, they said, some resale price agreements actually promote competition.
For example, they said, such agreements can make it easier for a new producer by assuring retailers that they will be able to recoup their investments in helping to market the product. And they said some distributors could be unfairly harmed by others — like Internet-based retailers — that could offer discounts because they would not be incurring the expenses of providing product demonstrations and other specialized consumer services.
As if. If Best Buy wants to start charging admission to its sales floor because it is so valuable, that should be a market decision. The federal government shouldn’t allow command economy-style price fixing and cost-plus product launches by our largest retailers and producers. What does this say to the innovative new company with a better distribution system, or a lower-cost new product? In two words: get lost. The market should set prices, not secret back-room deals between oligopolies. This is America after all, not New Russia — except perhaps in the minds of the corporate communists in the Bush administration and at the University of Chicago.
SCOTUSblog the text of the relevant decision is here (PDF). It’s 55 pages long, so I haven’t had time to read it, but from the syllabus it seems to be a standard Sherman Act “rule of reason” analysis: RPM is not automatically a violation, but it can be.
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I understand that RPM can be analyzed as price fixing, and sometimes it can result in horizontal price fixing (which is per se a violation of the Sherman act), but it doesn’t necessarily result in horizontal price fixing.
I thought the only entity that can “allow command economy-style price fixing” … is the government.
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Try asking Staples if they can fix the price of anything — a ream of paper, a box of pencils. Even with their giant distribution system, and a handful of like-sized competitors, they’re hardly in a position to dictate prices, cut in secret back-room deals with, say, OfficeMax, to the American consumer.
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Check you definition of oligopoly. Isn’t that a market mix with a few producers, which affect but do not control the market, and many buyers? Gee, not even vaunted OPEC can set prices with any effectiveness. How can Best Buy?
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If Apple wants to set a minimum retail price for their phone, it’s ok by me (of course, I went to the Univ. of Chicago. All hail!) There’s plenty of other options. Not every phone manufacturer will adopt the same pricing practice, and, as a result, Apple may lose sales to alternative products sold at a lower cost.
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But maybe it’s a good thing, to protect Apple’s investment in their innovative product, and encourage others to risk R&D, that Apple be allowed to set a minimum price for their product.
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I agree with you that “the market should set prices.” But oligopolistic producers are part of the market along with buyers. They should be able to cut any pricing deal they want. Then suffer the consequences or reap the profit.
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The SJC made the right decision.
Apple has a unique product, protected by patents. They can sell it for whatever they want. The scenario we are discussing is more comparable to every mobile telephone producer agreeing that the $599.99 iPhone price was the lowest reasonable price for any telephone. How would you like them apples.
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If OPEC controlled most of the oil, not just less than half (41.7% to be exact), they could set prices much better. Many products that we use are produced by a much smaller number of producers than oil.
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As to Staples, the reason they can’t set prices now is in part because of laws like the one that was just overturned. Since they are a well managed company, I would expect them to be on the phone right now with Office Depot and the other major retailers figuring out how they can work together to collude on prices and increase profits.
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As to ExxonMobil and the guy at the pump being, “part of the same market,” … right, in the same sense that a bazooka and a pop gun are both guns. Exxon makes billions every quarter and has huge (and evidently increasing) political influence; most consumers live paycheck to paycheck and have no realistic way to resist collusive pricing.
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As to the University of Chicago, it is an excellent institution overall — its Art History Department leads the nation, for example, according to my understanding — but its economics department has become a refuge for corporate apologists. They have about as much credibility as Dick “The insurgency is in its final throes” Cheney does as an intelligence analyst or George “Mission Accomplished” Bush does as a commander in chief.
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Most fundamentally, here we see the limits of Republican interest in free markets. Free for the highest bidders to do whatever they want, including collude to set prices and make our economy less efficient. As for the public interest, two words will do: get lost.
“reasonable price for any teelphone”
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How do you make those gray boxes, anyway?
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These pricing agreements would not allow Apple to control the price of any phone. How could they control the price of a Nokia phone, that they neither manufacture nor sell?
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It would allow them to control the price of THEIR phones, so as to prevent some retailer from using them as a loss leader, which could dilute the value of the brand.
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You don’t want to pay $500 for a mobile phone? Don’t buy an iPhone. Buy a different phone.
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That is not monopolistic. The phone market is as competitive as ever. If Apple has made a poor pricing decision, then they will suffer the consequences.
So, basically, before this decision companies couldn’t set prices of products that they made.
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Now, at least in some cases, they can?
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So, is that why the tags always said, “suggested retail price” instead of the actual price?
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Furthermore, what are the real implications of this? Just more expensive products for consumers?
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Sorry for playing the 20 question game, it’s just something I know almost nothing about. No one can be an expert on everything =p
If you are a company and you have a product but, say, no sales force, and you want to have, say, Best Buy sell your product for you, then previously you could not say “at a minimum of $50.00”. (It would be considered anticompetitive)
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Now, I guess, you can.
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I agree with the previous poster that Bob has it backwards.
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Then your theory is that allowing collusion in the market — for example, all the internet resellers in the country gang up and decide that $200 per month is the only reasonable rate to charge for net access — is actually an example of a market that is more free. Maybe you too are a member of the University of Chicago’s Economics Department. That sounds like something they might argue, especially since the major internet providers are large corporations.
…you seriously do not understand what RPM is.
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This
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…Then your theory is that allowing collusion in the market — for example, all the internet resellers in the country gang up and decide that $200 per month is the only reasonable rate to charge for net access…
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would be an example of horizontal price fixing, which would still be unlawful per se as a violation of the Sherman Anti-trust Act even under today’s ruling.
Sorry, I should have said, decided $200 was the minimum retail price for internet service. Just to be clear, here is how the NYT described it:
To stick with our Apple iPhone example, Apple MAY choose to fix the price that any distributor down the line may charge for an iPhone. This is “vertical” fixing of the price. Manufacturer, distributor, retailer, consumer. That is a “vertical” progression.
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Apple MAY not cut a deal with Motorola, Kyocera, Nokia, etc. to fix a price for all of their phones. This is “horizontal” fixing of the price and is verboten. Apple, Nokia, Kyocera. Note they are all manufacturers, and there is no progression toward the end user or consumer. Hence “horizontal.”
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So, to answer Ryan above, this does have to do with the MSRP. I guess since Bob Barker doesn’t need it anymore, the MSRP may pass on into history.
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Please note that just because the manufacturer MAy enter these agreements doesn’t mean that it should or will. Wal-Mart uses groceries as a loss leader. If P&G decides to fix the price of Crest and Wal-Mart doesn’t like it, Colgate Palmolive is going to find itself with a sudden increase in market share.
…the NYTimes has had a number of problems with veracity over the last, I’ll put it bluntly, the last century. But the fact is that there is a difference between horizontal price fixing and RPM. The former is a per se violation of the Sherman Anti-Trust Act, and rightly so. Why RPM should be a per se violation of the Sherman Act never made any sense. Not when I took anti-trust law 35 years ago. And not when I worked in the Ohio AG’s anti-trust office while in law school.
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What the US SupCt did was to merely take RPM out of the per se category and make it a “rule of reason” issue. Which is where it should be.
Sure hate to see the U of C used as an epithet along with the Bush administration and Russian oligarchs.
We are not all dispassionate economists, and our economists are actually quite to the left of the Bushies out there, if anything favoring a corporation over another especially with government policy, especially with government policy setting prices, all of this conflicts with the free market ethos.
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Leave UofC alone, we’re a lot smarter than Harvard and the Ivies thats for damn sure, we dont give MBAs to spoiled sons!
Proof: a non-English speaking Japanese classmate of mine at Chicago’s B-school actually got better grades than me because one doesn’t need to speak and read and write English.
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Only Greek letters and mathematical notations.
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My only advantage was that I had seen 6 feet of snow on the ground before and he hadn’t.
…just to let you know…
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a non-English speaking Japanese classmate of mine at Chicago’s B-school actually got better grades than me…
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…should be
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a non-English speaking Japanese classmate of mine at Chicago’s B-school actually got better grades than I.
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No wonder you flunked.
Is in general an excellent institution, I certainly agree about that. I just don’t think their Economics Department lives up to the fine reputation of the school overall.
…it was associated with Fermi Labs, named after Enrico Fermi, the scientist who was the first (as far as we know) who achieved a controlled nuclear reaction.
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Economics? That isn’t even a science. It’s politics in sheeps’ clothing.
…it should be social “science.”
Sadly for this argument, the decision, as I wrote, effectively throws the government’s weight toward the price setters: suppliers and retailers of America unite! you have nothing to lose but the chains of a competitive free market.
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As to your argument. First, the Bush administration seems not to agree with you, since they cited the “Chicago School,” based at your fine university, in their argument. Second, ease off on the defensiveness: you are the only one comparing yourself to Harvard and the Ivies.
This is the ONLY school that causes me to be automatically impressed by a graduate by dint of his or her having gone there. In my experience, alumni are far less likely to attempt to use to impress than alumni of any Ivy, yet they would be more justified in doing so.
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Good luck to you.
I am currently unemployed this summer if your interested in hiring, another disadvantage to the UC is that we end pretty late after all the good jobs are taking and a ten week quarter leaves us little time to apply to jobs since we have to study (and yes occasionally party).
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As to David I think rules of grammar and punctuation need not be enforced on the internet, if we can use lol we can abuse commas.
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As to Bob I am fairly certain either I misread the article or you don’t understand the definition of a free market. If I am correct the government is currently setting a minimum price on an item which is in fact a price control and therefore a complete violation of free market principles at least according to basic definitions of capitalism as articuled in Adam Smiths Wealth of Nations. I really would rather not quote my paper on the subject of what governments are allowed and not allowed to do under a true capitalist system but if need be I shall.
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Also whoever said they don’t respect our econ department, well thats too bad since its widely considered the best in the world and the monetary policies advocated by our department have essentially been those of the US and the world for quite some time now. Galbraith and Keynes were dangerously wrong even if their ideas are still considered dogma at econ departments at other schools like Harvard. People born with silver spoons can afford to sustain welfare states, but more often then not the real burden falls on people like me paying higher interest rates on my student loans or having a harder time finding employment because the economy has been mismanaged by idealists.
I understand that the basic principles of the free market are against this type of action. However, recent developments in our economy, specifically the rise of Wal-Mart, have affected the free market in a more negative way. This type of policy could assist manufacturers in battling the big box stores, who routinely force manufacturers to move oversees in order to meet the prices they dictate.
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I will give one quick example from a good book I read recently, The Wal-Mart Effect.
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Vlasic pickles was doing business with Wal-Mart, selling of course pickles of various cuts and size jars. One of the Wal-Mart buyers saw this one gallon pickle jar that Vlasic produced mostly as a gimmick, for company BBQs, as gag gifts, that sort of thing. Vlasic typically sold these for around $3.50 for the gallon jar, but the number produced was low. So was the profit on the jar of pickles. It turns out that most of the profit for the pickle industry is in the cutting. So while a gallon of uncut pickles sold for $3.50, an 8 ounce jar of sliced pickles sold for $3.39 or something in that area.
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Well Wal-Mart decided they wanted to sell these gallon jars of pickles in all of their stores. Great. A big order for Vlasic, although not as profitable as a smaller order of cut pickles. Then Wal-Mart says they want to sell it for under $3. This meant only pennies of profit per gallon. But Vlasic did it, thinking it was only a gimmick type of thing. The problem is that Wal-Mart?s low prices have the power to change the market. People started buying the gallon jars for their normal pickle use and cutting the pickles themselves. The problem is that a typical family could only each about 1/4 of the jar before they would go bad. But the price was so low, they didn’t care. They would each 1/4 of the pickles, throw away the rest when they went bad and buy another gallon.
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This presented all kinds of problems for Vlasic. One, the gallon sales were cutting into there more profitable slice jar sales, even in stores other then Wal-Mart that didn’t carry the gallon jars. They were also going threw cucumber supplies extremely quickly and were having to take product that was below their standards. Growers were having a hard time growing enough quality cucumbers. And keep in mind that on average, 3/4 of the pickles sold were being thrown away.
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Vlasic reached a breaking point. They went to Wal-Mart and asked for a 45 cent increase in the price. Even that little would do worlds of good for Vlasic. But Wal-Mart said no. Vlasic asked to reduce the size of the jar to a 1/2 or 1/4 gallon based on consumer waste of the product. Wal-Mart again said no. Then Vlasic said they would simply stop selling the gallon jars. Wal-Mart responded by saying that if Vlasic did not continue to supply the gallon jar, then Wal-Mart would not carry any Vlasic products. Wal-Mart has approximately 19% of grocery sales nation wide. That would be a big hit to Vlasic?s business. So what was Vlasic to do in this case?
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Wal-Mart affected the market. They set an artificially low price, forcing the demand for the product. Then Wal-Mart stopped the process of supply and demand from affecting the price by forcing the manufacturer to keep the artificially low price. Of course this is just one example. The book was filled with many others where Wal-Mart forced the closing of American factories to keep prices cheep. Wal-Mart usually forces manufacturers to reduce there price on an existing product by 5% each year. At some point you just can’t be more efficient and your only choice is to move to places like China where a month?s wages for factory workers is less then $100. You can?t compete with that even paying minimum wage, never mind health care costs, possible unions, etc. I am not saying that this policy could fix this type of problem but it seems to me to be a step in the right direction.
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Yes, I initially saw the decision as bad, but after reading a few comments, particularly about Best Buy and Wal*Mart, I think this could be a good thing for the little guy. It could stop large corporations from offering goods at such low prices that the little guys can’t compete with.
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The downside is that goods might cost more money, but if that happens, that means there is more room for others to enter certain markets. This is a lever for manufacturers to prevent 100-lb gorillas from grabbing all the share in a market, and then using that share as leverage to consume the manufacturer.
So what was Vlasic to do in this case?
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…refuse to deal with Wal-Mart at the retail level. If Vlasic had done so, they might have suffered a short-term drop in revenue, but it is obvious that they would not have suffered much of a drop in profit. And in a “free market” profit is the important thing, not revenue.
Wal-Mart has approximately 19% of grocery sales nation wide.
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Can you show me one business that could afford to take 1/5 of their total revenue away without having to do massive layoffs? What should they do, close their factory one day a week?
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By the way, that is eventually what Vlasic did and Wal-Mart eventually came back to them for normal business. (And what Snapper did on their own.)
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My point is that large retailers like Wal-Mart, Best Buy, Home Depot, etc. can effect the market by creating demand where there is none or removing you from a large section of the market. I am not saying that this law is the exact right thing to do, just that when you now look at our economy including these large box stores, we need to rethink just how we much interference in the free market are we willing to allow them to make before we decide that what they are doing is bad for the economy.
They must have had some dot com refugees.
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They were losing money on these gallons, but decided to stick with it to maintain market share. We have negative margins, but make it up on volume!
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I agree with raj, profitability is more important than market share.
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How the heck long does it take for a pickle to go bad? I mean, sheesh, they’re pickled!
How the heck long does it take for a pickle to go bad?
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…probably years. Vinegar, being acidic, is a preservative. Particularly if they sre stored in a refigerator.
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What I can’t figure out is why anyone would want to store a gallon jar–which probably has fewer pickles (accounting for slice) than an 8 or 12 oz bottle, in his or her refrigerator or basement for years.
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The only thing I can figure from this anecdote is the old adage “penny wise and pound foolish.”
Let the market work. I don’t feel sorry for Vlasic at all, especially since I like pickles and want the best possible quality at the lowest possible price. Nothing like the taste of a 35 year old pickle 😉
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What this decision will do, however, is make salutary examples of market efficiency like this rarer and rarer (the bottom line of this story, after all, was more pickles at a lower price for American shoppers).
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Vlasic will set higher required minimum prices and the other pickle manufacturers will follow their lead (horizontal price fixing regulations be damned, to your point raj: all you need is an effective market signal, which this decision makes much easier than before … I should have clarified my position on that last night, but I was too sleepy). Any producer that dares to try to break the cartel will get shut out, I predict.
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Markets require competition and rules to work effectively and this decision is basically anti-competitive and a regressive rule change in MHO.
As has been pointed out elsewhere in the thread, sellers do not dictate prices to Walmart, ever. They simply do not have the leverage. If Vlasic attempted to hold the line on the RETAIL price of its pickles in the way that you wish to be illegal, Walmart would simply drop Vlasic and stock more pickles from Heinz. Vlasic is free — and has always been free– to charge whatever it wants WHOLESALE for the pickles, so long as it finds a buyer. That freedom is likewise restricted by Walmart’s leverage.
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But it is true that any seller that attempts to deliver an ultimatum to Walmart is going to suffer a huge and rapid decline in market share.
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Back to what Vlasic should do: As described by JK, continuing to sell in gallons to Walmart sounds suicidally unsustainable. In other words, if Vlasic chose to keep on with Walmart in order to keep the customer, it would eventually cease to be. Under these circumstances, it can evaluate its own operations to increase efficiency and productivity (Though denounced by union types, this has been a huge benefit of Walmart on the economy), or, if there is no further efficienct gains to be had, let the customer go, downsize, and build somewhere else.
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I’m not sure that all this has to do with vertical price controls, though. To the extent that such controls are dangerous “market signals” that you seem to fear, they are one among millions, and the only way to control the supposed problem would be to assign all price fixing power to the government.
The point was that Vlasic didn’t try to make it up in volume on the gallon of pickles, they didn’t want to have 20% of the grocery market removed from them. And as I mentioned, the effect of the low cost pickles at Wal-Mart was also affecting their business in non-Wal-Mart stores.
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By the way, this market share for Wal-Mart is low for groceries compared to some of their other goods. In some cases they are over 50% of market share.