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Tuesday, March 27, 2007

 

Should price floors always be illegal?

A retailer in Texas ( Kay's Kloset) was selling products from Leegin Creative Leather Products in their store. To maintain competitive pricing with other larger retailers they discounted the products 20%. Leegin demanded that they and other retailers offering the discount prices put the prices back up or leegin would no longer ship them products. All of the retailers but Kay's Kloset raised the prices. Leegin, as promised discontinued sending them products. Kay's Kloset lost half of their business. The lower court ruled in favor of Kay's Kloset and awarded them $3.6 million. Kay's Kloset was suing for price fixing. Leegin holds that the prices were pro-competitive because they fostered competition with other brands. The Bush administration holds that it is inappropriate to automatically prohibit price floor agreements when they are not necessarily anti competitive. The case is now before the supreme court.

There are several things that I take issue with in this case. First lets look at the seller buyer relationship. Leegin was unhappy with the market for their products. They seem to feel that their products are worth more. The retailers seemed to disagree. Once the retailers have bought the goods they are theirs and should be allowed to resell them as they see fit. If the manufacturer wants the goods to sell for more they should make their selling prices higher forcing the prices that they want to be charged. After the retailer has possession of the goods I do not believe that the seller should hare anything further to do with the transaction. Furthermore, The retailer opted not to charge the higher prices and so no longer received shipments. Certainly, a manufacturer has the right to their goods and who they sell them to. The retailer opted not to fit into that criteria they have no right to compensation. If the prices that the seller wanted to charge were too high then people would not have bought them and the seller would lose money and change its prices. All indications of this case seem to suggest that the market should be allowed to correct itself.

Now we need to consider if the government is correcting a market failure? Price floors and price ceilings seem to go along with monopoly power. Is the regulation of this particular price floor within the scope of governments power? It does not seem to me that the manufacturer is trying to create a monopoly. If their claims are true and they are just trying to stay competitive in the market then there are substitutes for their goods. Entry into the leather market is not particularly difficult. the retailer claims to have lost half its business so it would seem that perhaps the prices asked for are in fact the market prices. No other retailers had a problem charging the higher prices. Perhaps I am mistaken but it seems to me that there is no cause here for government intervention. The actors made market choices and they should be allowed to play out. I cannot see that this price floor is of the kind referenced in the Sherman Anti Trust Act. People may chose to buy other leather products.

Comments:
Great blog! I just finished reading the article and another one that I found(http://online.wsj.com/article/SB117493307547749274.html?mod=home_law_middle). I was not aware that there are already price floors in place because of the Dr. Miles case in 1911 that requires Manufacturers Suggested Retail Price (MSRP) or price floor. If the SC ruled in favor of Leegin this price floor ruling would be overturned. I am not a proponent of overturned Court cases, but this would re-open market competition of prices and possibly bring back a natural economy to the market. The WSJ article says that Scalia is considering overturning the Dr. Miles case (no surprise).
 
Good blog.

I agree that the government should not get involved. Firms should always be allowed to set price floors for themselves, and try and enforce them if they wish, but they are typically only hurting themselves if they do that.

While some might say that it looks a little bit like a cartel it is not and so should not be regulated by Sherman anti-trust.

A cartel would be when competitors are conspiring to raise price. This is different. Competitors have a mutual supplier who is trying to get them to raise price. now if this supplier is unable to raise price (as is the case with Kay's Kloset) then he obviously does not dominate the market. There are obviously suitable substitutes.

I agree that government shold not interfere.
 
It seems to me the news article uses terms in a confusing way.

It seems to me the reference to the term "price floor" is incorrect. At least for an economist a "price floor" is imposed by government.

The case at issue does not involve a government imposed minimum price or price floor.

Instead, the case at issue involves, perhaps, an effort by a manufacturer to FIX PRICES. So the news article begins by talking about whether "price fixing" is always illegal, and then later refers to the act of price fixing as a price floor. Confusing stuff. Every time the article refers to price floor, you should think instead about price fixing by business, and not about government forced minimum price.

There may be a few details missing from the news story, I'm not sure.

But, consider the idea that someone sells a good to another person. The good then becomes the property of this other person, and this other person can presumably do whatever she wants with the good, including selling it for less than the retail price or even selling it for a lower price than she paid for it. It seems to me this applies between two businesses, just as it would between a business and a consumer.

But, also consider that the manufacturer should be able to sell to anyone he chooses. So, the manufacturer looks around and says, "Hey, look you guys, if you are going to discount those things I sold you, then in the future I'm not going to sell any more to you." On the face of it, that seems okay to me.

But, notice that the news article made reference to the manufacturer threatening to "cut them off" if they discounted prices.

What I think might be missing from the story is whether there is some contractual relationship between manufacturer and retailers. Could it be that the manufacturer sold the items and the retailers bought the items subject to a contract that says they would sell at the manufacturer's suggested retail price? Given the language in the news article I'm suspicious that there is some thing else to this story.

So, maybe we should ask this question: Would selling a product to a retailer only under the condition the retailer promised to sell to customers at a certain price be likely to represent a manufacturer's effort to restrain trade?
 
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