What is Vertical Price Fixing?

Vertical Price-Fixing involves agreements to fix prices between parties at different levels of the same marketing channel (e.g., retailers and vendors). The agreements are usually to set prices at the Manufacturer’s Suggested Retail Price (MSRP). So pricing either above or below MSRP is often a source of conflict.

Resale price maintenance laws, or fair trade laws, were enacted in the early 1900s to promote vertical price-fixing and have had a mixed history ever since. Initially, resale price maintenance laws were primarily designed to help protect small retailers by prohibiting retailers to sell below MSRP. Congress believed that these small, often family-owned, stores couldn’t compete with large chain stores like Sears or Woolworth, which could buy in larger quantities and sell at discount prices. By requiring retailers to maintain manufacturers suggested retail prices, however, prices to the consumer may have been higher than they would have been in a freely competitive environment.

Due to strong consumer activism, the Consumer Goods Pricing Act (1975) repealed all resale price maintenance laws and enabled retailers to sell products below suggested retail prices. Congress’s attitude was to protect customer’s right to buy at the lowest possible free market price even though some small retailers wouldn’t be able to compete. For instance, in a 2000 settlement, Nine West, the women’s shoe marketer, agreed with the Federal Trade Commission (FTC) not to fix the price at which dealers may advertise, promote, offer of sale or sell any product. The firm also agreed to pay $34 million to state attorneys general. The money is being used to fund women’s health, educational, vocational, and safety programs.

Unfortunately, some vendors coerce retailers into maintaining the MSRP by delaying or cancelling shipments. A less risky tactic from a legal perspective is for a vendor to simply announce it will

only sell to full-price retailers. If any of its retailers violate that policy, the vendor can terminate the discounters without discussion or negotiation. In this way, the vendor exercises its right to choose with whom it will deal but avoids forming an illegal agreement with its dealers to vertically fix prices.

Some retailers, on the other hand, want to be able to price above MSRP. For instance, Harley- Davidson motorcycles are so popular that some dealers have sold them over the manufacturer’s suggested retail price. Large manufacturers and franchise companies are generally against pricing above MSRP. They argue that their brand’s image can be damaged if retailers price above MSRP. Retailers like the extra profit potential and argue that competitive conditions may vary by locality.

The Supreme Court ruled in 1997 that price ceilings would not necessarily violate federal antitrust laws. This was the first time the Court had carved an exception to the general ban on vertical price-fixing. From now on, each case will be judged on whether it restricts competition.

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