Minimum Advertised Price (MAP) policies have been used by manufacturers and brands for years, but in the last decade their importance and their prevalence have grown dramatically. Part of this is thanks to the Supreme Court decision in 2007 (Leegin v. PSKS), which provided the legal framework that supports the case for enforcement of MAP policies. The growth of MAP also ties back to the nature and the evolution of the new world economy, which if I had to pick a genesis was somewhere around 1776.
The Godfather of Capitalism
Most modern day economists willingly tip their tweed caps to 18th-century rock star, Mr. Adam Smith — a.k.a. the godfather of capitalism. Some of Smith’s greatest contributions to the field of economics were his foundational ideas around free markets and the famous ‘invisible hand.’ Contrary to common opinions in the mid-1700’s, Smith’s invisible hand would self-regulate markets even as players acted in their own self interests. Free market competition would benefit everyone by helping keep prices low and ensure a wide variety of products and services from which to choose.
After more than 200 years, I think it’s safe to say that the invisible hand worked out pretty well for us.
Then the Internet happened and all hell broke loose.
Online Marketplaces
The ultimate free market, the early Internet spawned present day heavyweights such as eBay and Amazon in the U.S., followed by Alibaba in China and Rakuten in Japan. One distinguishing feature of all of these companies is their third-party marketplaces where nearly any seller — big, medium, or small — can set up (virtual) shop and sell pretty much anything. The proliferation of these marketplaces of third-party sellers is mind boggling. By some estimates, annual worldwide sales through these marketplaces have already topped $1 trillion (Internet Retailer’s 2017 Online Marketplaces Report).
How did these go from zero to $1 trillion in the span of just 20 years? Well, two things mainly: low prices and giant selections. Tip of the cap to you (again), Adam Smith!
Following in the footsteps of Amazon and eBay, several other major online sellers have opened their own 3rd-party marketplaces, including WalMart, Google, and NewEgg. Even Sears has gotten into the game. As a result, consumers today have virtually limitless outlets from which to buy everything from TVs and smartphones to shampoo and dog food. And when hundreds of sellers compete for the opportunity to sell you your next TV, there’s really only one thing that can help them stand out from the crowded marketplace — lower prices. Right again, Mr. Smith!
Making the Invisible Hand Visible
Herein lies the rub. According to classical free market theory, greater competition and lower priced widgets should benefit everyone, right? Everyone, that is, except sometimes the people and companies making said widgets. These companies invest considerable time and mountains of money building out their brands, and they spend even greater mountains of money innovating, inventing, designing, iterating, and producing great products with premium features and benefits. Unchecked and unauthorized price discounting not only undermines a brand’s value, but it also hurts the other legitimate sellers who partner with the makers to form a healthy value chain. This is precisely where the invisible hand needs to become much more visible.
Enter stage right: Minimum Advertised Price Policy
The principles of a MAP policy are very basic: sellers avoid publicly listing a price below a certain baseline, and manufacturers help fund the seller’s marketing efforts. But the lure of lifting demand can sometimes be too tempting for some.
The actors engaged in this wild-west of price discounting have few scruples when it comes to following the rules. Some are rogue distributors, some are gray-marketers, and some are downright thieves. Some are authorized sellers but many are not, and it is the job of the very visible and strong hand of minimum advertised price enforcement to preserve the value of a brand, the value of its products, and perhaps most importantly–maintain healthy channel partner margins, without which the entire value chain collapses.
Critics Cry Foul
But this is America! We practically invented capitalism! This is the greatest, most open free market on earth! How is restricting a seller’s choice and right to advertise lower prices by enforcing minimum advertised price policies any different than price fixing?
Contrary to these arguments, U.S. courts have decided that MAP policies are not price fixing and not illegal so long as they are explicitly unilateral. They are not uncompetitive and they aren’t collusion–not even by Russian standards!
Those entities who do try to game the system and attempt to lure consumer demand are often doing so unfairly either by subverting rules and regulations, ignoring contractual agreements, or in some cases by flat out cheating.
MAP Policies Benefit Everyone
Strict MAP enforcement has many benefits for both makers and sellers. Manufacturers can ensure consistent pricing and value throughout its network of sellers, which helps buyers maintain confidence in the the value of the brand itself, and it also mitigates or eliminates free riding. From a seller’s standpoint, MAP policies help protect margins and profits, they guarantee a steady stream of marketing funds, and they allow the seller to focus on the things that are most important to their customers including service, selection, and convenience.
For more than 15 years, gap intelligence has served manufacturers and sellers by providing world-class services monitoring, reporting, and analyzing the 4P’s: prices, promotions, placements, and products. Email us at info@gapintelligence.com or call us at 619-574-1100 to learn more.
