A sucker's season

providencephoenix.com /archive/features/99/12/16/MAP.html

December 16 - 23, 1999

How much did you pay for a "no-haggle" Christmas?

by Justin Wolff

So you like the ease, the slick convenience. It's so chic, so

current, so savvy. Plus, it's cheap. Mail order and Internet
shopping. It's saving you this holiday season. Sucker.

What consumers don't know -- or what they choose not to

know -- is that remote shopping (that's shopping done from
anywhere but the store itself) costs them money. And many
retailers admit that the way it costs them money is unethical
and almost illegal. Some retailers, in fact, would be happy to
sell you, say, a DVD player for less money. So why isn't the
Federal Trade Commission (FTC) on the case? Why aren't
consumer groups hyperventilating? Why do shoppers keep
falling for inflated prices? Because when it comes to shopping
we're neat freaks, and we're happy to pay, it seems, for a tidy
marketplace.

The culprit is minimum advertised pricing (MAP), which is an agreement, usually in the form of a
contract, between a retailer and a manufacturer. Such agreements are ubiquitous. MAP dictates
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pricing nationwide in industries ranging from housewares to jewelry, though the agreements are
particularly rampant in the electronic and computer industries. The practice comes about as close to
price-fixing as a confused antitrust law permits. A man who owned a prominent Providence stereo
retail store for 12 years -- and who insisted on anonymity, like many people with an interest in this
story -- was more than happy to explain to the Phoenix exactly how MAP works.

"Have you ever noticed," he asks, "when shopping for a specific CD player, that it's advertised in
every paper for precisely the same price? Ever wonder why the retailers weren't competing with each
other? Well, as an authorized dealer for [a major brand], a retailer is given a list of specific models
and their minimum advertised price. Retailers have no choice but to

advertise at the price. A manufacturer will enforce MAP on about 80 percent of their products and
allow a retailer to discount the other 20 percent, which is usually the low-end stuff." A consumer might
unwittingly pay $20 more than necessary for a component, but that adds up to huge profits for
manufacturers -- "tens of billions of dollars for the electronics industry alone," according to the former
retailer.

Manufacturers basically coerce retailers into adhering to MAP. If a retailer advertises the product at a
price below what the manufacturer dictates, then the retailer stands to be punished. Besides revoking
coveted dealership status, a manufacturer will withhold valuable perks, most notably money to
subsidize the cost of expensive newspaper inserts and circulars. In other words, a manufacturer will
pay for a retailer's print ads -- so long as they obey MAP policies. According to Bob Houk, the vice
president for strategic planning at CoAMS, a Chicago company that manages advertising programs
for manufacturers, "The biggest retailers routinely get 100 percent of their advertising paid for if they
comply with minimum advertised pricing."

The former Providence stereo retailer adds, "Since the dealers need the advertising subsidy these
funds represent and crave the higher profit they allow, competition is effectively stifled." Moreover, a
consumer who is shopping remotely might mistakenly believe that the price is fixed and that the
product cannot be bought for less. In fact, that product might be sitting on a shelf with a lower price
tag, or a retailer might be happy to haggle.

If consumers aren't concerned about MAP, retailers sure are. All the smaller retailers I spoke with
demanded anonymity, while the large chain stores refused to discuss the specifics of their MAP
contracts. One man, who owns an aircraft electronics dealership in Lafayette, Indiana, is outraged by
the practice and claims to have been forced into signing MAP contracts with manufacturers of radios
and navigation equipment. According to the dealer, some of the manufacturers of the products he
sells contacted himthree or four years ago. "Yeah," he remembers, "they called me up and said, `Hey,
let's renegotiate our contract. We want to add some MAP provisions, and if you don't comply, we'll
drop you as a dealer.' The main thing they insisted was that we not advertise the products they
manufacture at prices below what they deemed a fair price -- and they send a list every now and then
with those prices listed. Most of the dealers I compete with also signed on, of course. If we don't
comply with the MAP agreement, they can also take away rebate money from us, which we use as
incentives to sell our products. And the result, I think, is price-fixing. I mean, we all advertise the
same product at the same price and that price is determined by the manufacturer.

"A MAP agreement," the aircraft electronics retailer continues, "may say that I cannot advertise a
product at a price less than $900, even if I am happy to sell it at $800. But I cannot advertise that
price. I get phone calls from people who say, `Where should I send the check?' And they haven't
even haggled." So where's the hurt? "Minimum advertised pricing bothers me because in order to be
an authorized dealer, I have to play ball and price as they want."

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The retailer explains that for a small operation like his, profits are not always contingent on higher
prices. "Often," he says, "I just want to move a product, sometimes even at a loss." The man may be
free to advertise or sell any product at any price; what concerns him, though, is that he can lose his
dealership status for making advertising decisions based on his particular needs. "When I wrote an
article complaining about this and posted it at my Web site," he explains, "I got a call from a
manufacturer demanding that I remove their name from the site or they would nail me for breach of
contract. My lawyer said they had me -- in the fine print of the contract it said that I could not disclose
any information about my MAP agreement."

The former Providence stereo retailer opposes the agreements on the same principle. "When that
guy walked in my store with his MAP story, I was pissed. I mean, I was supposed to be a discount
store and he was telling me I couldn't advertise at discount prices. I was worried."

Many retailers, of course, are more than happy to sign MAP agreements -- after all, they mean more
profits. "In the end, I made a lot of money on MAP," the former stereo retailer admits. In another
instance, in November 1996, Musicland Stores Corporation -- which is based in Minnetonka,
Minnesota, and operates Sam Goody stores and other retailers -- was struggling after dismal
earnings reports. When the music industry moved to keep CD and cassette prices stable with MAP
policies, the company's profits surged. But discounting also generates profits, so this November,
Circuit City posted a press release at its Web site stating that better deals can often be found in its
stores. Morgan Stewart, a spokesman for Circuit City, which is based in Richmond, Virginia, refused
to discuss anything about its use of MAP agreements or its contracts with manufacturers. He did
acknowledge, however, that the store's "local managers are free to change their shelf prices to match
a local competitor's prices, but such discount prices will not be reflected in national print ads."

An ad that appeared in the Boston Globe on December 2 exemplifies the ramifications of such a
scenario. In the full-page ad, an Epson printer was listed at $149. Beneath the ad were the names of
18 large national chains, including Circuit City, and Epson's toll-free number. As far as the consumer
knows, there is no way to get this printer for less money. Other Epson dealers might be happy to sell
the printer for less, but Epson did not include their names in the ad.

Some retailers are fighting similar strategies of so-called "resale price maintenance." In a recent case
that received national attention, Ross-Simons, a Rhode Island-based national jewelry retailer with a
large mail-order business, filed an antitrust suit against Baccarat, the French crystal manufacturer. In
1994, Baccarat accused Ross-Simons of selling its crystal at hugely discounted prices, thereby
damaging its reputation as the manufacturer of a luxury product. The next year, Baccarat refused to
renew authorized-dealer status for one Ross-Simons store, a decision that the retailer challenged. In
September, the chief US District Court judge in Providence, Ronald R. Lagueux, ruled in favor of
Ross-Simons, stating that Baccarat had breached antitrust law and tried too hard to set the price of its
products on an open market. Ross-Simons, the judge determined, does a better business without
pricing constraints and the rewards of that success should be passed on to consumers.

Darrell Ross, the president of Ross-Simons, says that the primary purpose for resale agreements like
MAP is for manufacturers to manage their image. "The issue," Ross explains, "is one of public
perception. Manufacturers want retailers to present their product in a good light, in an ambience that
signals quality. They want the public to perceive that their product comes with good technical support
and from a store with smart employees. If a retailer wants to undersell at a particular store in
Cranston, so what? That has little impact on the public perception of the product. But ads are another
story. They are public."

To reduce this line of reasoning to its essence, manufacturers don't want the public to think that their
products are cheap.
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Baccarat was trying to fix the price of its products, and that's illegal. MAP agreements, however, are
not illegal because they are able to dodge antitrust laws by fixing the advertised price, not the actual
retail price. Nevertheless, the FTC is wary of MAP agreements. An FTC employee from the Bureau of
Competition, who refused to be identified, explained to the Phoenix that laws regarding price-fixing
are general and allow for some abuses. In the 1970s, fair trade laws that prevented retailers from
selling below cost were criticized as being anticonsumer and were repealed. But during the 1980s, in
the spirit of Reaganomics, trade laws that restricted manufacturers from influencing pricing were
eased. In 1987, the FTC rescinded an earlier policy that outlawed what it calls "cooperative
advertising programs," or programs that withheld or restricted advertising subsidies to punish
discounting. The FTC opted instead to monitor MAP agreements with a discretionary eye, with what it
calls "the rule of reason." One indication that the FTC is not terribly comfortable with its own position
on the matter emerged this November, in a summit on antitrust issues in electronic commerce held in
Columbus, Ohio. At the meeting, David A. Balto, assistant director of the Office of Policy and
Evaluation in the FTC's Bureau of Competition, read from a statement that said, "The commission did
not say it would treat cooperative MAP restraints as per se legal -- they remain potentially
troublesome, and that potential is realized when they amount to, or play a role in, actual resale price
maintenance," meaning price-fixing.

The FTC source adds, "This is most problematic, of course, in those markets where print advertising
is the primary form of advertising -- computers and electronics, for example. But we prefer to remain
agnostic on the issue -- sometimes it's bad, sometimes it's good, sometimes it's neutral. Though we
don't say it's illegal right now, we would listen to a consumer complaint." Oddly, though, consumers
don't complain, neither to the FTC nor to consumer advocacy groups.

In the end, the FTC has decided to permit MAP agreements, the source says, because "We generally
believe they help retailers more than they hurt consumers." As the argument goes, by giving smaller
retailers the financial means to advertise their goods in the same market as larger retailers, it's giving
them a chance to survive.

Deborah Pearlstein, a partner at the New York law firm of Weil, Gotshal & Manges, which helps
manufacturers navigate antitrust laws, is another advocate for MAP. "I prefer to say that dealers are
incentivized, not constrained. We can defend the agreements," she says, "because they encourage
competition at the manufacturer level rather than the retail level. If Epson says, `Hey, we don't want
that printer advertised below that price,' then maybe it opens a market-entry opportunity for Lexmark."
While Pearlstein thinks MAP agreements don't receive much attention from antitrust watchdogs, she
admits that the more general practice of resale price maintenance is an area of antitrust law that
deserves to be monitored. "There are consumer concerns," she says.

Manufacturers that require MAP agreements from their retailers have erected a large enforcement
infrastructure. Besides the kind of intimidation mentioned by the aircraft electronics dealer from
Indiana, manufacturers contract agencies to monitor print ads for retailer compliance with the
agreements. Jim Streibich, president of Market ADvantage -- an Evanston, Illinois, company that
watches for retailer breaches of MAP contracts -- believes that a fair MAP price is the key. "If it is fair,"
he says, "then it will allow smaller retailers a piece of the advertising pie. In the short-term,
consumers will be at a disadvantage; in the long-term it allows for the survival of smaller stores. So, I
support MAPs with a qualified yes." Qualified, Streibich says, because "These agreements skirt
price-fixing laws and force most retailers to comply. Wal-Mart, for example, is so big that it can forgo
the agreements and price below desired minimum price, and this is what other big retailers fear --
another retailer, even bigger, that can undersell them." Wal-Mart, by the way, claims that they do
adhere occasionally to MAP, but a spokeswoman refused to elaborate. I asked Streibich if he didn't

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think that the issue had less to do with retailer protection than with the fact that consumers might be
paying too much for goods. "Oh, that's interesting," he said. "Well, yes, that's a big concern."

The FTC, Pearlstein, and Streibich all believe that MAP policies promote the spirit of competition by
providing smaller retailers with advertising power. The agreements allow manufacturers to reassure
their retailers that other dealers won't sucker punch them. True, we should worry about vanishing
mom-and-pop stores, and these agreements do appear to provide a modest amount of protection
against discount giants. Darrell Ross, however, warns, "The perception that these agreements
protect smaller retailers is misleading. Larger retailers, of course, have an easier time flouting the
agreements." Retailer protection, then, is the euphemism that manufacturers use to justify
maintaining their image through higher prices. In the end, by often paying more than we should, it's
consumers who pay for a product's image. Also, by relying increasingly on remote shopping,
consumers contribute to the scuttling of small retailers. In the consumer electronics industry, for
example, the top 100 retailers are all chains, with Best Buy and Circuit City sharing about 25 percent
of the market. There aren't even that many smaller retailers left for MAP to protect.

If, as the former Providence stereo retailer maintains, we are paying 10 percent more for electronic
goods when we buy them from a retailer in a MAP agreement, that equals huge profits for the $70
billion consumer electronics industry. "When I was selling CD players," he explains, "I was operating
on a 30 percent profit margin because of minimum advertised pricing. I didn't need that much." That
extra money paid by the consumer profits retailers and helps to maintain a product's market image.

Strangely, MAP agreements are largely ignored by consumer advocacy groups. One, the National
Consumers League in Washington, D.C., hadn't even heard of them. "You have to pick your issues,"
was the curt response to my questions. Another group, the New York-based Consumers Union, which
publishes Consumer Reports, ignored my queries altogether. But Mark Cooper, director of research
at the Consumer Federation of America (CFA) in Washington, D.C., is aware of MAP practices. He
claims, though, that he can't move against them. "We think the practice is anticonsumer, but it has
become a tough antitrust principle to battle in court. The businesses have invested a great deal of
money in defending resale price maintenance. Demonstration of consumer harm in court has
become a very high hurdle. The manufacturers insist that they cannot develop quality products or
technical support for those products if discounters bottom them out. But the manufacturers make
profits and clearly prices would be lower without MAP agreements. But the antitrust laws have no
teeth. I bet the Department of Justice hasn't seen a MAP case in a long time." The Antitrust Division
of the Department of Justice would not share any figures with the Phoenix, but public records indicate
that only a handful of antitrust cases in the last 10 years had to do with MAP abuses.

Anthony D. Becker, an expert on antitrust violations in retail practices and an associate professor of
economics at St. Olaf College in Minnesota, stops short of calling this judicial stasis negligent: "If
legislators are looking for a place to tighten antitrust laws," he says, "these agreements are a good
place to start."

Despite the current lag in legal action against advertising agreements, some people in the business
think that manufacturers should be careful with their MAP policies. CoAMS, the Chicago-based
company that manages advertising agreements, posted a warning to their clients at their Web site.
"Given the way that FTC policy has zigzagged on this question in the past," the message states, "it
seems reasonable to assume that there may be future zigs. We therefore recommend that MAP
policies be implemented only if your market situation leaves you no other alternatives, and that, in
any case, such a policy be written and enforced with extreme caution."

The main reason the government does not legislate against MAP agreements is that there is almost
no consumer pressure placed on them to do so. Very few consumers even know about MAP
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 agreements, though most of us who have ever shopped remotely must have noticed that advertised
prices seem fixed. Why don't consumers realize that there is something unsettling about that? We
are happy to pay, it appears, for an orderly marketplace. We prefer to become rich by making more
money rather than saving what we have; walking into a store and haggling for lower prices distracts
us from that purpose. For a country founded on the principles of free enterprise and competition, we
seem oddly fearful of negotiating in the marketplace. Saturn's "no-haggle" policy is a perfect
example. Saturn cannot fix the price of its cars, but the manufacturer strongly encourages its dealers
to sell at a suggested retail price, or at least to not discount whatever sticker price they decide on. A
Saturn retailer, the company explains, "should give you the same price regardless of your bargaining
skills." Well, that sucks. That a car company can don a mantle of integrity when it claims that its non-
negotiable prices favor consumers testifies to how little we value haggling. Ease, it appears, is where
value lies.

Justin Wolff can be reached at jwolff@phx.com.

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