[Mr. Peabody]

Supreme Court Ruling Could Raise CE Prices

Washington — The Supreme Court ruled Thursday in a 5-4 decision to make it easier for manufacturers to require retailers stick to minimum advertised prices (MAP), a move that could raise prices at retail, the dissenting justices said.

Manufacturers Must Follow "Rule of Reason" In Setting Floor Prices

Aug. 3, 2007 -- The United States Supreme Court has just cracked 100 years of antitrust jurisprudence in a decision that may profoundly affect the way consumer goods are priced in the future. This decision holds great promise -- but not without danger -- for manufacturers of virtually any type of consumer product. [Source at link]

Supreme Court Syllabus & Opinions: (PDF) HTML

JUSTICE KENNEDY delivered the opinion of the Court.

JUSTICE BREYER, with whom JUSTICE STEVENS, JUSTICE SOUTER, and JUSTICE GINSBURG join, dissenting.

Bio and ruling background of each current justice -- Cornell Univ. link

For CIV-DEB discussion:

Several years ago, manufacturer's who sought to help brick and mortar resellers achieve satisfactory profit margins against increasing competition from mail order, chain stores (Big Box stores) and now the internet, began to mandate Minimum Advertised Price (MAP or MAP pricing) for authorized resellers under threat of dealer termination for violations.

In order for some retailers to sell certain goods, the manufacturer (or distributor) may require a dealer agreement which specifies the terms of the agreement. One stipulation may be to agree to the MAP pricing policy of the manufacturer.

The question presented is whether vertical minimum resale price maintenance agreements should be deemed per se illegal under Section 1 of the Sherman Act, or whether they should instead be evaluated under the rule of reason. (Source at link)

In a 5-4 ruling the high court affirmed "Vertical price restraints are to be judged according to the rule of reason." [ibid at Court Opinion]



New York Times Coverage

Do you agree with KENNEDY'S or with BREYER'S answer of the question put to the court?

How might this ruling affect you as a consumer?

How might it affect you as a businessperson?

Mr. Peabody

[wacor]

I have not looked thru this but it seems to fly in the face of what I believe are long established anti trust laws??

How is this different from a group of contractors getting together to determine minimum charges for services?? For example members of trade associations can not even discuss what should be minimum charges for services. How does this differ from manufactures doing that? Same principle it seems

Seems to me they have opened up a gigantic can of worms and there will be lots of other examples where the same premise is used. And exactly what is the
"Rule of Reason" ??

[Mr. Peabody]

The links are provided to save time for those who want to base their opinions on the facts presented in the syllabus, background and the opinions of the justices. Common sense understandings often surpass the mutterings of intellectuals so I would hardly think that the reading is required.

The ruling does in fact have an impact on the Anti-Sherman Act in two dramatic ways: It imperils a law that sought to "control monopolies and dissolve those that had already established themselves". It also imperils 107 years of precedent set by a law which originated in 1890. The legal community is going to be busy with this one for a long time.

(Last year, before the decision was reached, I called in a question to three professors of law about how the Anti-Sherman Act applies to MAP pricing. These experts each expressed regrets that they were not familiar with "that aspect of the Act", which confirms the Act's complexity. While I readily admit I am not an expert, it appears the experts aren't either.)

Today's conservatives embrace the idea that the market is self correcting -- government intervention is not often needed. The guiding economic thinking is a developed application of Adam Smith's economic theory found in Wealth of Nations where the author laid the foundation for free trade and [i] the laissez-faire view.

In the laissez-faire view, the state has no responsibility to engage in intervention to maintain a desired wealth distribution or to create a welfare state to protect people from poverty, instead relying on charity and the market system. [ WIKI source]

My understanding: "Leave the market alone and everything will work out on its own." Further, the ills of a free market will be made "moral" by charities and unnamed features of the market.

By 1890 enough people realized that capitalism, like all economic theories, contains a fatal flaw: in a free market someone eventually wins. A monopoly results. Is the free market moral? I do not see how that could be since each member of the free market is a profit driven entity. If there is no obligatory commitment to morality as a defining attribute, it cannot be manifested in the output of the entity. The essence of capitalism is profitability, not morality.

We must assume Adam Smith did not anticipate the perils of monopoly for the subject is not presented in his book. (Who could anticipate today's economic challenges? In 1890, our world would read like science fiction!) If you read the links in this page you would have read that Smith opposed the guilds, the predecessor of the labor union. Unions interfere witih the free market.

Adam Smith was best known for his "laissez-faire" economic theory that denounced guilds in 18th century Europe. Smith believed in the right to influence your own economic progress freely, without the puppet strings of guilds and/or the state. His theory caught on in proto-Industrialization Europe, and changed much of Europe into a free trade domain, allowing the emergence of the entrepreneur. He is also known as "The Father of Economics".

[source]

In addition (or perhaps foremost) was Smith's attempt to argue that capitalism was a "moral" system.

Your question about ethical/legal limits on discussions over pricing between members of a trade association are not affected by this ruling. Something more sinister is about. It is however, as you suggested, similar. How so? For that I will have to expand a bit. Let me use another post for that.

Adam Smith has his supporters and critics and I am not qualified to be either. I have but a common man's understanding -- government is best which governs least. [ The Ever-Quotable Thomas Paine]

I believe it is naive to embrace this libertarian view. Smith's economic theories were never intended for us (since he could not possibly understand or anticipate today's economic challenges.)

Do try to read the brief of the case. It is not long.

Mr. P

[wacor]

I should have made my point clearer. I did not really pose my question correctly.

Current law prohibits members of a trade association from discussing pricing. It is illegal and one can get into huge trouble if a group decided to set minimum rates for services.

If now manufacturers can set minimum prices then why would this ruling not allow contractors the same rights??

[Mr. Peabody]

No, your question was ok, it's just that this issue is complex and I have to work through a lot of background before you can get to the contentious stuff.

If now manufacturers can set minimum prices then why would this ruling not allow contractors the same rights??

A few bullets and housekeeping--

Manufacturers can now engage in "price fixing". Contests will be handled on a case by case basis using the "Rule of Reason". (For now I will assume 'Rule of Reason' means that they can fix pricing if they can later defend their action as reasonable and beneficial to the free market.)

CORRECTION The ruling overturned the "Dr. Miles rule" (1911) which made price fixing illegal. (So it isn't a 107 year old precedent -- just a mere 96 years.)

In the assent, KENNEDY explained, Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding...Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most effective way to expand the manufacturer's market share by inducing the retailers and allowing it to use it's own expertise and experience in providing valuable services."

In dissent, BREYER'S said, "the only safe predictions to make about today's decision are that it will likely raise the price of goods at retail and it will create considerable legal turbulence as lower courts seek to develop workable principles. I do not believe the majority has shown new or changed conditions sufficient to warrant overruling a decision of such long standing."

So now, as to your question. Let's understand this much -- Kennedy's position is idiotic.

Second, this ruling confirms that manufacturers have been acting outside the law, with impunity, by installing MAP policies. The judgment is in their favor, but all prior actions that preceded this ruling should be considered illegal.

The Court ignores the fact that the manufacturers were engaging in illegal practices, and have instead given them permission to do so in the future.

Why can they do it, and you can't? Because of the principle of vertical integration. The Court is making a distinction -- retailers cannot be trusted to set prices for the good of the market, but manufacturers can.

How did this come about?

Ok, here is my understanding. Getting back to Adam Smith and the omission of the discussion of monopoly -- we now know that it is possible to secure enough capital to create big box stores that can put small Mom & Pop dealers out of business. Check out any mega-retail corner and find the national chains -- Chili's, Wal Mart, Office Depot, Home Depot and on and on...

These stores are in major markets, many are in secondary markets, and some have smaller stores in tertiary markets. They buy in quantity so they get quantity discounts from manufacturers -- OR they integrate vertically and import or manufacture their own goods, thus cutting out the middle man.

The elimination of small dealers actually hurts the manufacturers because the Big Box stores cannot cover all market areas adequately. Manufacturers NEED small dealers too. However, any consumer can now pick up the phone (or visit a website) and learn of prices that are lower than those offered by their local Mom & Pop store. And in many cases, the retail price offered by the Chains is lower than the wholesale price the Mom & Pops are charged for that particular good.

So that creates a problem for Mom & Pops, who complained bitterly to reps and through their associations, that Chains are putting them out of business (the monopoly effect).

Ok, the manufacturers realized there was an inequity and tried to resolve it by creating policies that mandated minimum advertised prices. Now there are some problems with this.

When we talk about setting price floors on products, it references government intervention. Government has no conflict of interest. It's aim is to safeguard the market. However, as it regard MAP pricing, it is the manufacturers who are now empowered to intervene, and they DO have a conflict of interest.

We know that Conservatives (and Libertarians) do not like to add layers of bureaucracy to the free market. Liberals, on the other hand, recognize that business will always act in its own self-interest and at the peril of consumers. Caveat emptor

Manufacturers were actually acting in the best interests of the Mom & Pops (imo), but they also derive a distinct benefit of securing their channels of distribution. Not true though...

Chain stores will still be able to buy at quantity and will still operate with a higher gross margin -- and with MAP pricing, they will still absorb more market share through expansion.

Imagine one chain store for every type of product category. Imagine a country without individual ownership. Oh sure, you can open a dry cleaners, or a pizza parlor -- but what chance would have opening a hardware store or an office supply house?

One of the features of a monopoly is something called "barriers to entry". The cost of opening a business, like a utility company, would simply be too expensive. How many other retail categories does that apply to today, and how many more will it apply to as the momentum of our economy continues to mature and approach the monopoly factor?

Critics will say (correctly) that there are always new products and new technologies which will lead to new markets and new opportunities. Correct, but what if you really want to open a hardware store, or a public utility company? No chance. The range of stores that will be easier to start will be those which serve local markets that are deemed unprofitable for the bigger chains -- but then, there is always the internet and mail order!

In truth, consumers are sending a strong signal to retailers. Price matters. Moreover, it is more difficult today to convince consumers that the intangible benefits providing by local dealers is worth the extra bucks these stores must charge. Consumers come into your store to find products, or receive product demonstrations, then go home and shop price on the internet. Consumers, unwittingly, are the force behind which chain stores can profit. Arguably, this is a natural and favorable occurrence in a free market -- the consumer is in charge. it also means local stores are going to have to really sell the intangible benefits of buying locally. No matter, the face of retail is changing dramatically. Manufacturers will still lose distribution and the chains will still gain market share. And when one of those major chains goes bankrupt, as they do from time to time, it will leave a major hole in the market. (All of this is quite normal though, not doom and gloom).

The Libs are right. Prices will rise. Consumers won't have a clue why. But there is a bigger picture here -- the principle of free market economics has a glaring flaw -- monopoly. Manufacturers are self-interested, profit motivated companies. Giving them the power to enforce minimal pricing policies interferes with the free market and puts the fox in charge of the hen house. Conservatives and manufacturers may be trying to save a sinking ship (retail as we know it), but consumer preferences for internet and mail order buying are blowing holes in the bow of the ship quicker than either concerned party can bail.

But is this "rescue" attempt grounded in sound economic policy?

Did the conservatives make an adequate case for reversing this law?

Is a solution apparent?

Would it be better for government to intervene, or is it better not to intervene at all (manufacturer or government) and just let the market respond as it might (even though it might mean the end to many retailers)?

Do you think the Supreme Court acted in the best interest of the pubic, or business, or both?

Those are the $64 questions.

Mr. P

(Sorry if I still did not answer your question, but I am trying to reduce this so others can join in. It is a complex issue but it clearly demonstrates the error of conservative economic thinking (eventually...I hope))

[wacor]

I still see nothing in this other than what appears to be a condemnation of conservatives and that is ok

Again for anybody else to answer I do not see what is the difference in general between the Manufacturers setting price floors or contractors agreeing to price floors. This does seem like government meddling and I do not agree with it. There are lots of issues where meddling is needed but the system is designed to let things sort themselves out. we saw what government intervention did when they closed down Ma Bell. Lot of good that did.

[linskyjack]

Yet another instance of the so-called free marketer conservatives on this court, bending over backwards to assure the dominance of corporate America. Its yet another form of price fixing----but since it benefits the large companies, these hypocritical judges have no problems with it. It really is amazing how these wolves in robes have pretty much used judicial activism to further the goals of their patrons.

[jmosmith]

Originally Posted by linskyjack

Yet another instance of the so-called free marketer conservatives on this court, bending over backwards to assure the dominance of corporate America. Its yet another form of price fixing----but since it benefits the large companies, these hypocritical judges have no problems with it. It really is amazing how these wolves in robes have pretty much used judicial activism to further the goals of their patrons.

LINSKY!!!

...now where you been hiddin'???

[LauraMJ]

Mr. Peabody, I edited the line you wanted.