In his recent working paper entitled “Vertical Information Restraints,” Professor John Asker studies minimum advertised price (MAP) policies that prevent retailers advertising “excessively low” prices.
When a retailer enters into a distribution agreement with a manufacturer, the agreement may impose ‘vertical’ restraints on the retailer that restrict price or non-price aspects of retailer activity. Price restraints include resale price maintenance (RPM), in which the manufacturer imposes floors and/or ceilings in retail pricing. Non-price restraints include exclusivity provisions or the imposition of sales territories. In his new paper, Professor Asker considers a third type of vertical restraint: information restraints and, in particular, MAP policies. These policies impose a floor on the price at which retailers can advertise a product, but, crucially, not the price at which it can be sold to a consumer. That is, even if a MAP policy imposes a floor of $10 a unit on advertised prices, nothing restricts the retailer from selling it to a consumer for $7.
To understand the way MAP restrictions work, and in particular how they differ from the price restraint embodied in an RPM restriction, it is useful to examine a typical MAP provision. As an example, consider the January 1, 2016, MAP policy of Samsung Techwin America (a manufacturer of security cameras and surveillance equipment). The MAP price is specified as a percentage of the manufacturer’s suggested retail price (in this instance, 40% of MSRP). The policy explicitly applies to all advertisements in all media, including online. The MAP restriction only applies to advertised prices and not to the price at which products are actually sold. In physical stores, this means that the posted price in the store is not affected by the MAP restriction. As regards online pricing, the policy states:
“Pricing listed on an internet site is considered an “advertised price” and must adhere to the MAP policy. Once the pricing is associated with an actual purchase (an internet order), the price becomes the selling price and is not bound by this MAP policy. Statements such “we will match any price”, and “call for price” are acceptable.”
In particular, such policies allow retailers to advise customers that they will be able to see the price when the item is in a (digital) shopping basket. Lastly, Samsung reserves the right to punish non-compliance with termination.
Professor Asker’s paper examines the pro- and anti-competitive impacts of MAP policies through the lens of a series of closely related models. Since, superficially, MAP and RPM policies appear similar, the economic impact of these policies are compared and contrasted. Two themes emerge. First, for MAP policies to have any market impact, consumers need to have an informational (search) friction that advertising helps alleviate. Hence, in every setting we consider search frictions are a central feature. Without search, MAP is irrelevant to market outcomes. Second, MAP policies soften competition by obscuring prices. Thus, consumers allocate themselves to competitors somewhat randomly, being unable to sort as they would if perfectly informed as to prices. By contrast, RPM softens competition by equalizing prices. When consumers, or retailers, are heterogenous, MAP is helpful in retaining the flexibility to profitably accommodate heterogeneity. Thus, MAP will have an impact on markets when search and heterogeneity among similarly situated economic actors are important features of the environment. This paper therefore suggests that the divergent policy stance of the courts with respect to vertical price restraints (like RPM) and information restraints (like MAP) may warrant reconsideration.