How Do Manufacturers Establish Retail Pricing?

Introduction

The concept of manufacturers establishing retail pricing began as an attempt to keep prices similar over distant and various retail outlets. The practice evolved into a marketing ploy where retailers could offer discounts to an artificially high "suggested" retail prices. After a 2007 U.S. Supreme Court ruling, retail price-fixing has evolved so that, in at least some cases, manufacturers can dictate a minimum retail price.

Price-Fixing and MSRP

For the roughly hundred years prior to 2007, U.S. courts rejected appeals by manufacturers to allow retail price-fixing, whether to maintain the status of their brands, to drive out competition, or increase profits. The concept of manufacturers establishing retail prices was dismissed per se, meaning regardless of the facts of the particular case. Nevertheless, manufacturers frequently suggested prices to retailers based on their own assessment of demand for the product and the expectations of the consumer.

Particularly in the auto industry, but also with regard to clothing and some other retail products, the symbiotic practice of advertising an MSRP, or manufacturer's suggested retail price, developed to give retailers the opportunity to make sales at what seemed to be deep discounts. In reality, the MSRP was artificially inflated and the supposed discounts were not as significant as made to seem. Both the retailers and the manufacturers would benefit from an increase in sales volume without sacrificing much in the way of price.

A New Precedent

The case that came before the Supreme Court in 2007 concerned a manufacturer who set a minimum retail price and refused to sell its product to retailers who sold below that level. The logic was that a higher priced item would seem to be more valuable to consumers and that discounting would harm the brand. A snubbed retailer brought an anti-trust suit alleging price-fixing. The trial court found that minimum retail prices were illegal per se and the appeals court agreed. The Supreme Court, however, reversed the finding and ruled that minimum price requirements are not necessarily uncompetitive and therefore not necessarily illegal.

In a competitive, free market system, prices are supposed to be set by the impartial forces of supply and demand. As a result of the Supreme Court ruling, manufacturers will gradually be able to maintain artificially high prices by discriminating against discount retailers. While certain products are by their nature designed for discount retail, and these may not be affected, others that are more connected with consumer aspirations as opposed to needs may increasingly rise beyond the affordability of middle class consumers.

Resources

• Retail Price Maintenance Policies
• Supreme Court Lets Manufacturers Set Prices
• Minimum Retail Price No Longer Illegal Per Se