A test of the Free Market

[widebody911]

It should be interesting to see how this plays out.

http://www.nytimes.com/2007/06/29/business/28cnd-bizcourt.html?ex=1340769600&en=190350e79de0ed9a&ei=5124&partner=digg&exprod=digg

[cowtown]

That's interesting, and I'm surprised it wasn't on the front page of the paper.

My take is that it won't make a huge amount of difference these days, except in the rarified niches making distinctive products, like high fashion, where the brand's value is directly tied to high prices.

Almost every "normal" segment I can think of, like consumer electronics and lower-end clothing, has a bunch of competitors, and is more worried about competing with foreign producers than American producers. And I doubt foreign producers will set price floors.

In really competitive markets like cars, I bet floors never get set. It will be interesting to watch.

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Article:

WASHINGTON, June 28 — Striking down an antitrust rule nearly a century old, the Supreme Court ruled today that it is no longer automatically unlawful for manufacturers and distributors to agree on setting minimum retail prices.
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Supreme Court's Decision

The decision will give producers significantly more leeway, though not unlimited power, to dictate retail prices and to restrict the flexibility of discounters.

Five justices said the new rule could, in some instances, lead to more competition and better service. But four dissenting justices agreed with the submission of 37 states and consumer groups that the abandonment of the old rule would lead to significantly higher prices and less competition for consumer and other goods.

The court struck down the 96-year-old rule that resale price maintenance agreements were an automatic, or per se, violation of the Sherman Antitrust Act. In its place, the court instructed judges considering such agreements for possible antitrust violations to apply a case-by-case approach, known as a “rule of reason,” to assess their impact on competition.

The decision was the latest in a string of opinions this term to overturn Supreme Court precedents. It marked the latest in a line of Supreme Court victories for big businesses and antitrust defendants. And it was the latest of the court’s antitrust decisions in recent years to reject rules that had prohibited various marketing agreements between companies.

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.

A majority of the court agreed that the flat ban on price agreements discouraged these and other marketing practices that could be helpful to competition.

“In sum, it is a flawed antitrust doctrine that serves the interests of lawyers — by creating legal distinctions that operate as traps for the unaware — more than the interests of consumers — by requiring manufacturers to choose second-best options to achieve sound business objectives,” the court said in an opinion by Justice Anthony M. Kennedy and signed by Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.

But in his dissent, portions of which he read from the bench, Justice Stephen G. Breyer said there was no compelling reason to overturn a century’s worth of Supreme Court decisions that had affirmed the prohibition on resale maintenance agreements.

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

During the period from 1937 to 1975 when Congress allowed the states to adopt laws that permitted retail price fixing, economists estimated that such agreements covered about 10 percent of consumer good purchases. In today’s dollars, Justice Breyer estimated that the agreements translate to a higher annual average bill for a family of four of roughly $750 to $1,000.

The dissent was signed by Justices John Paul Stevens, David H. Souter and Ruth Bader Ginsburg.

The case involved an appeal of a judgment of $1.2 million against Leegin Creative Leather Products Inc. after it cut off Kay’s Kloset, a suburban Dallas shop, for refusing to honor Leegin’s no-discount policy. The judgment was automatically tripled under antitrust law.

Leegin’s marketing strategy for finding a niche in the highly competitive world of small leather goods was to sell its “Brighton” line of fashion accessories through small boutiques that could offer personalized service. Retailers were required to accept a no-discounting policy.

After the United States Court of Appeals for the Fifth Circuit, in New Orleans, upheld the judgment and said it was bound by Supreme Court precedent, Leegin took the case to the Supreme Court. Unless it is settled, the case, Leegin Creative Leather Products v. PSK Inc., will now be sent down to a lower court to apply the new standard.

The Supreme Court adopted the flat ban on resale price agreements between manufacturers and retailers in 1911, when it founded that the Dr. Miles Medical Company had violated the Sherman act. The company had sought to sell medicine only to distributors who agreed to resell them at set prices. The court said such agreements benefit only the distributors, not consumers, and set a rule making such agreements unlawful.

Justice Kennedy said today that the court was not bound by the 1911 precedent because of the “widespread agreement” among economists that resale price maintenance agreements can promote competition.

“Vertical agreements establishing minimum resale prices can have either pro-competitive or anticompetitive effects, depending upon the circumstances in which they are formed,” he wrote.

But Justice Breyer said in his dissent that the court had failed to justify the overturning of the rule, or that there was significant evidence to show that price agreements would often benefit consumers. He said courts would have a difficult time sorting out the price agreements that help consumers from those that harm them.

“The upshot is, as many economists suggest, sometimes resale price maintenance can prove harmful, sometimes it can bring benefits,” he wrote. “But before concluding that courts should consequently apply a rule of reason, I would ask such questions as, how often are harms or benefits likely to occur? How easy is it to separate the beneficial sheep from the antitrust goats?”

“My own answer,” he concluded, “is not very easily.”

[widebody911]

Originally posted by cowtown
My take is that it won't make a huge amount of difference these days, except in the rarified niches making distinctive products, like high fashion, where the brand's value is directly tied to high prices.

I can't count the number of times I've been told by a retailer that insert brand here won't let them give a discount - I guess technically that would have violated the Sherman Anti-Trust act...

[Porsche-O-Phile]

Interesting. It does open the door for manufacturers in certain segments (as cowtown alluded to) to instill a certain amount of "upscale" factor into their products by establishing a floor. For example, let's say Sony and Panasonic are competing by selling a certain type of clock radio and are worried about getting undercut by some el-cheapo Chinese knock-off. They can establish a floor for their pricing which adds a certain "value" to their product versus the competitor. The customer is left to ask, "why are these two (or three, or four, or five) brands all price $40 and up and this other one is only $12? What does that say about the quality?"

Interesting.

[Neilk]

Or on the other hand, it will hurt some companies with their inability to set their own prices. If Sony decides to enforce a price floor, why shop at Best Buy over Circuit City if you know the prices are exactly the same? Everyone's low price guarantees will be worthless.

[Superman]

Uh huh.....

Let me get this straight. A now more conservative Supreme Court has elected to limit the freedom of retailers to set prices. And this is considered pro-competition?

Lemme get this straight. A 96 year-old rule is going down in flames. I wonder why this rule was in place for 96 years. It usually takes us less time than that to forget why a regulation was created in the first place. Those who do not study history are doomed to repeat it.

Lemme get this straight. This decision is supposed to benefit who? Consumers? No, not consumers? Then who? And why?

A great deal of national damage has been done these past several years and that damage will take decades to repair.

[Porsche-O-Phile]

No the Supreme Court has elected to increase the freedom of retailers to set prices - including implementing price floors if that's their prerogative.

[cowtown]

Originally posted by widebody911
I can't count the number of times I've been told by a retailer that insert brand here won't let them give a discount - I guess technically that would have violated the Sherman Anti-Trust act...

Huh...I can't remember anyone ever saying that to me. Of course, I don't exclusively buy Armani and Rolls Royce like you do Thom.

I wonder if that was the truth, or just a convenient thing to tell customers when they didn't feel like making a deal.

[teenerted1]

try seeing it from the retailers side....now they know they won't be undercut on pricing from some discount retailer, and can focus on the SERVICE they can provide the consumer.

if everyone has the same stuff and the value is the same, you can now support a vendor that actually would like to help you and appreciate that you are shopping in their store.

some products need to be sold thru a specialty store to ensure that the product is properly assembled so that there aren't future problems with the product...

[Superman]

Originally posted by Porsche-O-Phile
No the Supreme Court has elected to increase the freedom of retailers to set prices - including implementing price floors if that's their prerogative.

You don't understand the decision.

[Porsche-O-Phile]

How do you figure?

It seems to me there's still a way for a discounter to come in and undercut prices. They don't HAVE to participate in any sort of collusion between different manufacturers.

Most stuff is made in foreign countries now anyway, so I doubt this will REALLY affect things too much.

[Neilk]

Originally posted by Porsche-O-Phile
How do you figure?

It seems to me there's still a way for a discounter to come in and undercut prices. They don't HAVE to participate in any sort of collusion between different manufacturers.

Most stuff is made in foreign countries now anyway, so I doubt this will REALLY affect things too much.

How do you figure that? Say Sony comes out with an awesome digital camera and says NO ONE can sell it under $599. How will there be any competition. Sure one retailer can throw in an extended warranty, but other than that, everyone will be forced to pay the same high price when before, some retailers were able to knock off 10%.

[Porsche-O-Phile]

A competitor will make a comparable unit and undercut the cost.

[Rick Lee]

Originally posted by Porsche-O-Phile
A competitor will make a comparable unit and undercut the cost.

Exactly. Don't buy it then. Sinn is one of my favorite watches and the have only one US distributor. What are the odds they'll ever offer a discount? Why should they? But if I want to buy a Breitling, even though every dealer in the US claims to have the same price on them, they will wheel and deal with you. But then Breitling says they won't honor a warranty unless the watch was bought IN PERSON from an authorized dealer. So they're basically forcing you to buy from their dealers at their prices. Don't like it? Buy something else. Plenty of other excellent brands out there. Costco is even selling them cheaper now, but Breitling won't honor the warranty since Costco isn't an AD.

[Superman]

And this benefits the consumer how? I would appreciate an explanation of how the following principle works in this instance:

"What's good for corporations is good for consumers."

[ronin]

Originally posted by Superman
You don't understand the decision.

sorry Supe, but this time the misunderstanding is on you

[Rick Lee]

Well, it sure isn't good for consumers if corporations go out of business because of government regulations. It leaves consumers with fewer choices. So making a healthy profit to stay in business can be very good for consumers. I know I am happy to pay a premium for a good product with minimal hassle. If someone can make money selling that to me, good for both of us.

[widebody911]

Originally posted by Rick Lee
Well, it sure isn't good for consumers if corporations go out of business because of government regulations.

Has any corp ever gone out of business solely due to government regulations?

[Neilk]

Originally posted by widebody911
Has any corp ever gone out of business solely due to government regulations?

Asbestos manufacturers, whaling companies...

[Superman]

Originally posted by ronin
sorry Supe, but this time the misunderstanding is on you

Nice jab in the side Ronin, but the SCOTUS ruled that manufacturers can dictate prices to retailers. If you really want to make a point in one of our conversations, bring one.