Why Retailers May Not Have to Fear Price Fixing

Last year, the Supreme Court ruled that manufacturers can compel retailers to sell their products at a minimum price. The Wall Street Journal reports on the fallout from that ruling: More manufacturers are adopting minimum-price fixing, much to the chagrin of discount retailers who say the policy is "anticompetitive" and should be barred by federal antitrust laws.

When large businesses use their market share to fix prices, it is usually not a good thing for small businesses. But these minimum-pricing schemes might not be as bad as they sound.

First, when this case was first decided, Harvard economist Greg Mankiw quoted from his textbook on this very issue (Superduper Electronics stands in as a generic manufacturer):

...economists believe that resale price maintenance has a legitimate goal. Superduper may want its retailers to provide customers a pleasant showroom and a knowledgeable sales force. Yet, without resale price maintenance, some customers would take advantage of one store's service to learn about the DVD player's special features and then buy the item at a discount retailer that does not provide this service.

So if a bunch of retailers that share the same supplier all have to sell a certain product at the same minimum price, those retailers have to compete over who can have things like better customer service or a better shopping experience rather than who has the lowest prices. Smaller businesses tend to shine in the area of creating personal connections with the customer, while larger retailers have the capital to undercut competitors with prices. So this might be a boon to small retailers—if they can improve their service in the right way.

Second, manufacturers might not have that much monopoly power to throw around and force retailers to accept their prices. The WSJ article gives an example of how one small business has responded to minimum-price fixing:

Retailers and customers might rebel. One such spat broke out between Old Mother Hubbard Dog Food Co. and Morris Sussex Pet Supply, a Succasunna, N.J., pet shop.

In April, the president of Old Mother Hubbard, Michael Meyer, wrote to the shop to complain that it was selling 30-pound bags of its dog-food brand, Wellness Chicken Super5Mix, at 20 cents below the minimum $39.99 price. Mr. Meyer said Old Mother Hubbard would stop shipping the brand to the store for as long as six months if price-cutting continued.

The pet-supply shop fought back. It placed a billboard in front of its store urging customers to "Boycott Wellness Pet Food for Price Fixing," and aggressively steered customers to other types of dog food.

"Our suppliers can set pricing policies all they want—but it's their loss, not ours," says Nancy Ruiz, the store's manager. Morris Sussex persuaded 85% of its Wellness customers to switch to another brand, Ms. Ruiz says. It now sells only a handful of Old Mother Hubbard products.

The bottom line: If retailers can diversify the products they sell, then they have the power over the manufacturers, not vice versa.