Posted June 28, 2007 10:28 pm by with 5 comments

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Today’s Supreme Court ruling allowing manufacturers to set minimum retail prices is a very big deal, and has huge ramifications for many internet retail businesses.

To understand what could happen as a result of this decision, you must first understand the impact that the Internet has made on retail. In a nutshell, it has created a consumer-friendly environment in which both online and offline retailers engage in suicidal price-cutting wars. The reason for this is simple–instead of consumers having maybe only one or two choices of where to buy specific merchandise, they now have thousands of options, and retailers have to fight furiously for their piece of the pie.

I do not know for sure how much gross margin percentages in retail have shrunk since the Internet became popular, but the change has been dramatic. Today’s Supreme Court decision is going to possibly relieve some of the pressure on retail. Specifically, it is going to help retailers that have something to offer rather than the cheapest price.

On the other hand, there is a breed of internet retailers that may be in trouble–specifically, the ones that compete solely on price and have no other differentiation factors. I will be the first to admit that I do not feel too sorry for those guys, and I say that as both a manufacturer as well as a retailer.

Because we own the Vitabase brand as well as other brands, we have long understood the dangers of price-cutting on a brand, and we have fought (successfully) to keep our products priced appropriately and fairly for all of our resellers. I can think of no quicker way to kill a brand than allow price-cutting to get out of control.

On the other hand, we sell other brands at Vitabase, and have been frustrated in the past by price-cutting competitors who effectively kill retail opportunities for good products. Just today, I spoke to a manufacturer who wanted us to carry their products. Our research showed us that because our largest competitor was selling those products at a 70% discount, we would have had to assume a large inventory just for the opportunity to have a tiny gross margin. We passed on the deal, as well as many others.

So, I think today’s ruling is good for retail, and ultimately, good for the consumer, though it may initially lead to higher retail prices. Here is why the consumer will benefit–I believe that monopolies are starting to form in many retail industries. The dominent retailers are the ones with the deepest pockets who are willing to lose money while price cutting in order to eliminate competition. If manufacturers are required to enforce their minimum price without preference to any retailers, it will help prevent those monopolies from forming. Of course, there is no question that monopolies are not good for consumers.

  • Isn’t this going to hurt consumers more than help them? Some consumers may have only cared about getting the lowest price, while others may have been happy to pay more, for better service. Now that choice has been taken away somewhat. Is that a fair observation?

  • Alton

    Basic economics and non-politically motivated economists, history and horse sense agree: when the government enables and enforces the price setting abilities on products the result is higher prices for consumers in the best of cases, black markets and violent crime when things get tough. This is not a good development.

    That you passed makes sense for you, so pass. Those in your position, based on good judgment, should allow others better prepared or dedicated to that kind of e-tailing to go for it.

    When lower prices are possible elsewhere (for instance, abroad -even with shipping), people will tend to buy from there. What then? More legislation?

    As stated: this is not good.

  • It’s going to be interesting to see which manufacturers take steps to set a minimum retail price. Online retailers have to account for a huge amount of revenue at this point, and I would imagine that a well organized company isn’t going to want to alienate either their online or their retail sellers.

    On the topic of the ruling, it seems to be about the most un-capatilistic ruling that I have ever seen come out of a supreme court level. This could have a very large impact on the overall growth of online retailing.

    If I had to choose between monopolies forming, and minimum retail prices, I think I would have to take the monopolies. Consumer satisfaction can still keep a monopoly in check, but nothing is going to help if the price can’t go any lower!

  • Price competition will not disappear because this rule. It just means that the manufacturer will have some control over their retailers. If a product is not moving in today’s environment, the retailer lowers the price. In the future, the manufactuer will lower the minimum price.

    I am surprised someone would rather have monopolies than this law. Our business phone bill is twice what it used to be because of only one vendor now in the area. Have we forgotten long distance costs and plane ticket costs during the 1980’s?

    I can understand the concern about this ruling from a capitalistic standpoint. However, this issue is much more complex than it initially appears. I really believe that in the long term (not short term), this kind of law will lead to lower prices, not higher ones.

  • Hello,
    Where can I get a complete copy of this ruling so I can send it to some of my vendors. I would like to have a copy of this.