The Slippery Slope of Price Fixing

A recent ruling by the Supreme Court, reversing a nearly 100 year old statute outlawing price setting, is in the spotlight for retailers, lobbyists and economic theorists. For the past 96 years, retailers have been protected under an umbrella of antitrust laws prohibiting the collusion of manufactures from establishing and maintaining minimum prices for retail and consumer goods. The implications of the new ruling present a significant change to the relationship between price, value and demand in the U.S. market.

After nearly 100 years of legislation supporting free-market pricing philosophies — where price is set by the market in a complex but efficient dance between value, need, availability and cost the market could bear — the Supreme Court overturned existing law in June 2007. The new ruling opened the door for manufacturers and domineering retailers to discuss pricing strategy.

The Effect of Price Fixing

Price fixing is a complex agreement encompassing a variety of factors such as: price agreement with competitors, sharing markets, imposing minimums on distributors, agreement of purchase prices and cutting prices below cost. The most significant effect of price fixing is the elimination or narrowing of competitive products and companies. Coordinating pricing for the mutual benefit of the manufacturers at the expense of the buyers puts a stranglehold on retailers.

Without the protection of a free market, retailers are not able to be innovative, offer promotions or differentiate themselves, making it hard to survive within the strict manufacturer guidelines, especially in a tight economy. The competitive bidding and pricing process only works successfully when enterprises set prices honestly, independently and in alignment with the free market. Consumers benefit from free and open competition by getting the best goods and services at the most competitive prices.

When the free market does not control price, consumers are confronted with deflated product lines in narrow price ranges. Suppressed competitive pricing policies eliminate variety from product offerings. Bid suppression, bid rotation and market division are all tactics used to control availability and diversity of product lines. Regulating price limits innovation because companies are no longer motivated to continue to improve upon or develop new products. Price regulations discourage new, creative companies from entering into the marketplace.

Additional Impacts

Retail channels atrophy when product lines shrink and competitive pricing is eliminated. With less competition and fewer channels to leverage, retailers have their hands tied, making it hard to compete without compelling product offers at reasonable or even advantageous prices.

The outcome is a giant leap backwards for the U.S. market. Retailers and consumers have been steadily evolving. The introduction of the Internet and other new retail channels (TV shopping networks, auction venues, etc.) has resulted in an efficient exchange of goods that are both available from the retailers and in demand by the consumer.

Without competition and diverse product lines, a stagnant economic marketplace smothers retailers’ ability to offer strategic promotions and incentives to the market. When the price of one commodity is established, it becomes imperative that the prices of other related commodities be adjusted, triggering a chain reaction ultimately affecting promotional and incentive strategies. Price gouging and setting below cost are two crippling side effects often disguised behind flashy marketing and promotional campaigns.

Dangerous Precedent

Set pricing, limited product lines and deceiving promotions restrict retail competition and impact the consumer negatively. The June 2007 ruling does not automatically make it legal for manufacturers and dominant retailers to set pricing structures, product offerings and promotional strategies, but it does open the door to numerous negative implications at a time where the U.S. economy is already struggling to regain its strength.

Price setting moves our retail economy away from diverse and evolving retail channels that today bring variety to the consumer and create opportunity for manufacturers and retailers to offer a vast array of products at varying price ranges to the benefit of the consumer.

What is available to retailers to counter brand enforcement tactics? The answer is nothing. Ultimately, prices, product options and competition will become flat if not allowed to be shaped by the market. Finding ways to compete effectively with limited resources and heavy restrictions is imperative for retailers in any economy, especially a down economy like ours, when there are fewer options to deliver compelling products and prices to the consumer.

What can retailers do to remain competitive?

Competitive intelligence initiatives are key for retailers to ensure their offerings are competitively priced and attractive enough to create demand with their targeted prospects.

Strategic pricing and revenue initiatives, product mix optimization and auditing are three critical components to the foundation of competitive intelligence. Regular access to competitor price changes and product offerings across multiple channels allows retailers to monitor both manufacturer and competitor price changes in relation to their own pricing schedules. Analyzing competitors’ expanding and contracting product lines will help retailers determine what products to protect to ensure they are offering a diverse and compelling product line. Auditing quality assurance, inventory levels, sales and other incentives will provide the retailer with a holistic view of the product and pricing landscape giving them the tools needed to compete within a tight economy and under manufacturer pricing mandates.

Today, value retailers are taking action and lobbying Congress to reverse the June 2007 ruling that threatens an important and enduring component of U.S. economic legislation. Reduced competition, minimized product lines and deceptive promotional strategies directly affect the consumer, eliminate boutique retailers and limit competition. In this fist-fight to secure a share of the dwindling consumer dollar, the top priority of retailers is to maintain satisfaction at all levels of interaction with the consumer. Reversing time-tested progress will adversely affect us all — consumers, retailers and eventually even the manufacturers who seek more control of the market.