Resale Price Maintenance
Resale Price Maintenance
In the practice of resale price maintenance the manufacturer determines and enforces the price at which distributors resell his product. Hence, resale price maintenance is also known as vertical price fixing, as price protection, or as the practice of imposed prices. The term “fair trade” is an American euphemism. A manufacturer may set resale prices for either or both the wholesale and retail stages of distribution, and the prices may be fixed prices or minimum prices.
The practice is confined largely to branded goods but is also found in unbranded products such as various building materials (for example, in the United Kingdom). Among branded goods, resale price maintenance is or has been associated with drugs, proprietary medicines and toilet preparations, books and magazines, phonograph records, domestic electrical appliances, furniture, motor vehicles, tobacco products, liquor, confectionery, and office equipment. (The difficulty of controlling trade-in allowances has made price maintenance less effective in consumer durables.) The extent of the practice and the products involved differ greatly from country to country, being much affected by legal provisions. In the United Kingdom, where resale price maintenance has been extensive, it affected, at its peak, one-fifth or more of total consumer expenditure; in the United States the present proportion probably is well below 5 per cent.
Resale price maintenance, when it covers the bulk of a particular branch of trade, has the following effects on retailing (or, mutatis mutandis, on wholesaling): It eliminates or attenuates retail price competition, and it tends to make gross margins (the difference between selling prices and buying prices) and retail prices higher than they would be otherwise. Studies of the history of resale price maintenance and of its removal support this conclusion, as do statistical studies of prices in comparable states of the United States with and without price maintenance.
The removal of price competition directs retail competition into nonprice channels: the struggle for customers takes the form of the competitive extension of retail services, reflected in more expenditure on inventories, sales staff, provision of credit, amenities, and location. Nonprice competition tends toward a greater geographical dispersion of retail outlets and sustains a larger labor force in distribution. Competition of this kind ensures that the higher gross margins do not mean higher net returns on capital in retailing.
Resale price maintenance also tends to retard innovation and change in retailing. Historically, new forms of retailing have become established on the basis of competitiveness in price, achieved generally by a curtailment of retail services. Where resale price maintenance is effective and comprehensive, this way of entry is barred. The practice tends further to stabilize retailing in that it reduces the rate of growth of lower-cost firms by denying them the use of competitive price policies. It protects the less efficient, higher-cost firms.
The foregoing analysis helps to explain attitudes toward resale price maintenance. Historically, it generally owed its origins to the pressure of organized bodies of retailers (and wholesalers) anxious to avoid price competition, especially when threatened by new forms of retailing such as department stores and chain stores. Currently it enjoys its most vocal advocacy from such bodies of distributors. It also receives support from labor unions of distributive workers. In some Western countries these supporters of resale price maintenance constitute a strong pressure group. On the other hand, it is rare for consumer groups to advocate resale price maintenance, although many of the claims made for the practice purport to show that it is in the consumer’s interests.
It may seem as if manufacturers of branded goods should oppose retail price maintenance, since its general effect in raising retail prices is against their interests. Nevertheless, many manufacturers seem to support the practice and use it where it is permitted and can be enforced. It must be that in some situations the adverse effect on sales of the higher retail price is (or is thought to be) more than offset by favorable consequences stemming (or thought to be stemming) from the practice. Several types of situations may be identified.
The most common situation—and historically the most important—is one in which the retailers favoring the control of retail price competition are able to influence materially the sales of particular brands (i.e., where together they can shift significantly the demand schedule of particular brands). In these conditions resale price maintenance secures the support of such retailers; the concomitant increase in their gross margins can be viewed as a toll the manufacturer has to pay for access to the established and effective network of retail outlets. But if the manufacturers of competing brands of a product all use price maintenance, the sales-promoting effects of the practice are neutralized; if each pays the toll, none has the advantage. Except in the special circumstances discussed below, the demand schedule for the product is unaffected; and therefore the higher retail prices are unfavorable to the manufacturers collectively.
The power of retailers favoring price maintenance depends on their relative strength (in terms of market share), their organization, their ability to influence consumer demand (through influencing the availability of the goods, their display, and point-of-sale advice or suggestions), and the absence of concerted action on the part of manufacturers to resist the retailers’ pressure. In several countries the necessary combination of conditions was lacking in the grocery and clothing trades but present in the drug and liquor trades at the time when the price maintenance movement began. Again, resale price maintenance is relatively unimportant where innovating and price-competitive retailers have little difficulty in launching new brands or unbranded varieties of the goods they handle. Groceries and clothing may in this respect be compared with books, automobiles, and cigarettes. The current long-term tendency toward impersonal methods of retail selling is likely to undermine resale price maintenance.
The influence of organized retailers is not the only reason why some manufacturers may find it profitable to have resale price maintenance. There are other ways, not dependent on dominant retailer support for price maintenance, in which the practice in certain circumstances may bring about favorable shifts of the demand schedule of a particular class of products, sufficient to outweigh the disadvantage of the increase in retail prices. While there is little difficulty in stating the conditions for an over-all favorable result for the manufacturers, it is not easy to discover whether these conditions are satisfied in any actual situation.
It is likely that consumer demand for some products is partly dependent on consumer access to the retail outlets that stock them and on information from retailers about them. Resale price maintenance stimulates sales insofar as assured bigger retail gross margins make possible and encourage more extensive and widespread stocking of the products and promote better-informed retail selling. It may seem, on the other hand, that in the appropriate circumstances—i.e., where the availability of the products and the provision of information are important in increasing demand— retailers have an incentive, even in the absence of resale price maintenance, to make the necessary investment in inventory and to incur expenditure on a knowledgeable sales force. But the incentive is weakened to the extent that consumers buy at lower prices from lower-cost shops after taking advantage of the facilities of higher-cost shops: retailers who provide the demand-creating services do not capture the full benefit of sales resulting from their outlays, which therefore tend to be reduced. (Incentive is also weakened to the extent —probably negligible in practice—that potential purchasers on impulse are deterred from buying by their knowledge that the price of the item in question is, or may be, lower elsewhere.) Resale price maintenance, by reducing the incentive for consumers to shop around for advantages, encourages the provision by retailers of the relevant before-sales services in the competitive search for customers. In such situations, the prevalence of which is debatable, manufacturers may wish to practice price maintenance. Resale price maintenance is, however, an undiscriminating method for encouraging retailers to follow desired inventory, display, and sales policies. In practice, it protects all retailers who are supplied with the products, irrespective of their trading policies, and stimulates the provision of services generally, not only presales services. Distribution through selected retailers is a more direct method for accomplishing the desired ends, and it can be achieved independently of resale price maintenance.
The conceivable advantages to be derived by the pricemaintaining manufacturers in certain circumstances have so far been considered in terms of favorable shifts in the consumer demand schedule. Other possible advantages may arise where the consumer demand schedule is unaffected by the practice. Thus it is often implied that price competition in the retailing of their products would provoke more intensive competition among manufacturers and affect their selling prices to the trade and that, though their aggregate sales volume would be greater, profits would be smaller. This sort of effect is feared by many price-maintaining manufacturers, although it is difficult to determine whether these fears are justified in particular instances.
The transmission of price competition from retailing to manufacturing could follow one of two lines. First, retail price competition might lead to the concentration of more buying power in the hands of successful large retail enterprisers, who could use it to undermine stable trade-price structures. Second, price competition among retailers might cause variations in interbrand (retail) price relationships and hence in the relative sales of the various brands. Such changes in market shares might cause the disadvantaged manufacturing firms to reduce their trade prices in an attempt to regain lost business. These adjustments would inject instability into the structure of trade prices and might result in more intensive and persistent price competition. The second possibility may be restated in this way: resale price maintenance may be necessary or useful to underpin a manufacturers’ horizontal price agreement or a noncollusive quasi agreement in tight oligopoly situations [seeOligopoly]. The need for resale price maintenance is more apparent and more direct in those cases where manufacturers agree not to compete in price and reach the final consumers both directly and through independent distributors. The objectives of the agreement might not be fully achieved without the participation of the independent distributors, which could be secured or enforced by the imposition of resale prices. In this context, as in others, resale price maintenance is a partial substitute for vertical integration by manufacturers into distribution.
No discussion of the economics of resale price maintenance is complete without some consideration of “loss-leader” selling. This ill-defined practice refers to selective deep price cutting by a retailer of a few well-known items, in order to attract customers to his store. Loss-leader selling is often and influentially claimed to furnish a good reason for the legalization of resale price maintenance. It is said that the price reductions involved are so limited in scope as to be of little benefit to consumers; that the practice is misleading in creating a possibly spurious impression of generally low prices; that it promotes monopoly in retailing; and that it causes meaningless fluctuations in the sales of brands selected as leader items, which disrupts their economical production. Since resale price maintenance removes the brands or products from the scope of loss-leader selling, it is said to protect both consumers and manufacturers. Precise evidence of the extent of undesirable loss-leader selling and of its alleged detrimental effects is, however, lacking or elusive. Resale price maintenance is in any event a crude method of stopping such selling: it precludes all forms of retail price competition, not only loss-leader selling, and the latter would presumably persist unless all products suitable for loss-leader tactics were price-maintained.
Public policy toward resale price maintenance takes a variety of forms in different countries, as a few examples will show. It has been prohibited in Canada since 1951 as a restrictive practice against the public interest. The most common method of enforcing resale prices, the withholding of supplies from offending distributors, is prohibited (save in special circumstances specified in an amending statute of 1960). In the United States resale price maintenance is authorized in some but not all the states, and also in interstate commerce between “fair-trade” states. Differences in state laws and restrictive judicial interpretation of fair-trade laws have contributed to difficulties of enforcement and the collapse of the practice in the electrical goods and some other trades. In some states there is mandatory resale price maintenance in the liquor trade. The relatively favorable attitude toward resale price maintenance is regarded as anomalous by many observers in view of the per se illegality of horizontal price fixing, and the fact that resale price maintenance produces the main effects of horizontal price fixing in those retail trades in which it is comprehensive. In Sweden the practice has been prohibited since 1953, with provision for specific exemptions by a statutory body in cases where it is satisfied that such price maintenance reduces costs, benefits consumers, or otherwise promotes the public interest. The initial exemption of books is being terminated, and that of herrings has already been withdrawn.
In the United Kingdom enforcement of resale prices by manufacturers individually was facilitated by legislation until 1964, although a commonly used and powerful method of enforcement, the collective withholding of supplies by groups of manufacturers, had been prohibited in 1956. Legislation introduced in 1964 prohibits resale price maintenance, except for classes of goods specifically exempted by a special court. Exemption is granted only where the court is satisfied that the practice injures the interests of consumers or users less than it promotes them. As is the case in Canada, the legislation allows manufacturers individually to withhold supplies from dealers engaging in loss-leader selling of their goods.
Resale price maintenance is unimportant in underdeveloped countries, partly because enforcement is particularly difficult where there are several successive stages of distribution between supplier and final consumer, and also because the practice is inexpedient for manufacturers where their goods are resold in widely varying circumstances.
B. S. Yamey
[see alsoInternal Trade.]
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Bowman, Ward S. Jr. 1955 The Prerequisites and Effects of Resale Price Maintenance. University of Chicago Law Review 22:825–873.
Canada, Restrictive Trade Practices Commission 1955 Report on an Inquiry Into Loss-leader Selling. Ottawa: Department of Justice.
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Gould, J. R.; and Preston, L. E. 1965 Resale Price Maintenance and Retail Outlets. Economica New Series 32:302–312.
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Yamey, B. S. 1954 The Economics of Resale Price Maintenance. New York and London: Pitman.
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