If you are a manufacturer or brand, having a say in the selling price of your product is extremely important in order tomaintain profit margins. Since consumers typically price-compare before buying, the ability to suggest a minimum advertised price is a valuable tool to prevent increased consumer expectations of a cheap product.
A minimum advertised price (MAP) policy sets a bottom limit on the price a reseller may advertise, but it does not dictate the price of the final sale. As many manufacturers are aware, monitoring of resellers is essential to ensure compliance.
MAP policies have legal implications, however. In order to comply with antitrust laws at the state and federal level, manufacturers must take care with the implementation and enforcement of MAP policies.
MAP policies often have certain legal issues. Generally, those can include antitrust laws, price fixing and vertical price agreements and horizontal agreements and market allocation strategies.
MAP policies must be created in a way that abides by both state and federal antitrust laws. The manufacturer is required to write their policy while complying with these laws to ensure that the terms of the MAP are legal. The best way to ensure that a MAP policy doesn’t have these legal issues is to consult with an experienced antitrust lawyer who can review it. If the attorney determines any problems, the policy can be tweaked so that it follows state and federal law.
Price fixing and vertical price agreements also carry some legal implications. However, a MAP policy is always vertical as retailers are obligated to abide by the minimum advertised price as set by the manufacturer and cannot impose their own pricing. However, some sellers violate MAP policies by engaging in price fixing. This occurs when a seller chooses to ignore the manufacturer’s minimum pricing requirement and sets prices even lower. Not only is this illegal, but it’s also unethical as it gives that seller a distinct advantage over others who advertise the same product or brand. This makes for unfair competition, which hurts the manufacturer, legitimate sellers, consumers and the market as a whole.
MAP policies are considered horizontal agreements because they outline the manufacturer’s desired minimum price on their brand or products for advertising purposes. These prices are generally stable across similar products to maintain fairness in the market. However, if minimum advertised prices are not unilaterally determined for all, it creates a legal issue in stifling fair competition across the marketplace. This also equates to a MAP policy being a vertical agreement, which is unlawful.
In general, MAP policies are set by the manufacturer or supplier. The supplier may insist upon a minimum advertised price for the product, sometimes in exchange for a contribution to the reseller's advertising costs, although this is not standard practice across the board. Crucially, MAP policies are implemented on a "take it or leave it" basis. A manufacturer does not hide its intent to institute a MAP policy and the reseller is not obligated to stock the product.
MAP policies should not overreach. They typically can't place restrictions on in-store advertising, for example. If a court reasons that the restrictions reduce competition in the marketplace, it may sanction the parties because of the actions that resulted from the MAP policy.
At first glance, one might think MAP policies violate antitrust legislation. The practice does resemble price fixing, but it is not if implemented correctly. To understand why, it's important to define "horizontal" and "vertical" price fixing.
Federal antitrust laws prevent horizontal price fixing, where competitors have made an agreement to keep prices above a certain level. In a typical MAP policy, however, a manufacturer is acting unilaterally and not in agreement with a competitor.
Vertical price fixing is, similarly, an agreement between manufacturers and resellers in the supply chain to keep prices at a certain level. As a result of a 1919 case, United States vs. Colgate & Co., a MAP policy is not considered a form of vertical price fixing as long as the manufacturer acts independently. The Colgate Doctrine reinforces the right of businesses to choose with whom they do business.
This is where "take it or leave it" becomes important. In order to avail themselves of The Colgate Doctrine, manufacturers must not have an agreement with the reseller to keep prices at a certain level. They must simply announce their MAP policies in advance and refuse to deal with any reseller who does not comply.
However, certain states look at MAP policies with a more critical eye. A supplier or manufacturer may successfully use the defense of the Colgate Doctrine in terms of federal antitrust laws. Some states, however, may see a MAP policy as a kind of vertical agreement that runs afoul of state legislation until it is demonstrated the manufacturer instituted the policy independently. State laws prohibit resale price maintenance (RPM), or insisting on a minimum price at the checkout.
Interestingly, the Federal Trade Commission has taken the position that MAP policies actually benefit consumers, because they create competition between manufacturers. The FTC admits it may simultaneously reduce competition between resellers of the same product, although they may compete on different variables, such as service and overall customer experience instead of product price.
In spite of the provisions of a MAP policy stating that partner sellers must only advertise a manufacturer’s products at their set minimum price, there is nothing that prevents them from selling those goods below that price point. While this is legal, they can feel negative impacts if unauthorized sellers start to advertise the same products or brands at much lower prices. This creates a problem with keeping competition fair and can damage the manufacturer’s brand and reputation.
As a result of these issues, the manufacturer can take legal action against unauthorized sellers, ensure retailer compliance with the MAP policy and control the impact on brick-and-mortar stores and luxury brands.
If unauthorized sellers advertise a manufacturer’s products, they will do so using significantly lower prices than what’s allowed in the manufacturer’s MAP policy. In that situation, the manufacturer can take legal action against them. This can start with a cease and desist letter and go as far as consulting with an antitrust lawyer to prohibit unauthorized sellers from advertising or selling their products or entire brand.
Retailers are required to comply with manufacturers’ MAP policies. According to the terms of MAP pricing, retailers are not allowed to advertise a manufacturer’s products lower than what they specify in their MAP policy. If they don’t comply, however, it allows the manufacturer to take action. They can start with a letter reminding them of their obligation to adhere to the policy’s minimum advertised price and that warns of actions they can take if the retailer fails to comply.
Brick-and-mortar stores and luxury brands face impacts when manufacturers have MAP policies in place. Because of minimum advertised price requirements, brick-and-mortar stores and luxury brands can continue selling at competitive prices. This helps encourage healthy competition among similar retailers and products from luxury brands. In turn, it helps improve reputation and value.
In order to devise a MAP policy that will survive legal challenges, manufacturers must act unilaterally. As such it should not be in the form of a contract with a reseller, which implies a "meeting of the minds," or mutual agreement to keep prices at a certain level.
The MAP should only apply to advertised prices and not actual resale prices. A court may look favorably upon language in a policy that explicitly states that end-sale prices are unaffected by the MAP policy. The policy should be enforced universally, across brick-and-mortar and online businesses alike. The universal enforcement, applying to all resellers, offers a court further evidence that there is no agreement with a particular reseller to keep prices high and thus no vertical price-fixing.
While creating a legally compliant MAP policy is one thing, enforcing it at the reseller level is another. As your product grows in popularity, more and more resellers will want to add it to their inventory. The more resellers you have, the harder it is to keep everyone in line and ensure a good policy adoption rate.
A recent study cited by Kellogg Insight found authorized dealers are much less likely to violate a MAP policy, in part because the retailer has more to lose when it is dependent on the manufacturer to supply one, or several, lines of product and the manufacturer has the power to shut off this supply.
In order to maintain positive relationships, Kellogg recommended enforcement when the violation is within a certain range, for example, $10 or more less than the MAP, with exceptions for high volume shopping seasons such as the winter holidays.
Kellogg reported that unauthorized and authorized violations work largely independently of one another, although price drops that go below MAP in each segment have ripple effects in the respective markets. In order to demonstrate there is no vertical price-fixing it's important for the policy to apply to both authorized and unauthorized resellers.
Suppliers and manufacturers must have ongoing, detailed monitoring of where their products are being sold so they can stop supplying the product in the case of a violation -- or several violations, in the event that the supplier chooses to first issue a warning.
However, not all resellers of the product are getting their supply from the original manufacturer. Sites like eBay and Alibaba are populated with people reselling the product that they may have received second or third hand. In these cases, brands have a few other legal tricks up their sleeves.
For example, through eBay's Verified Rights Owner (VeRO) program, brands can request listings that infringe their trademark be removed. EBay has a simple form on its website for this purpose.
If this is unsuccessful, brands can also claim trademark infringement in court if the goods sold by unauthorized sellers online are materially different than the original product. Something as simple as a removed SKU may qualify as a material difference. Similarly, the use of product descriptions, logos or other brand identifications on websites such as eBay and Alibaba may qualify as copyright infringement.
Working at the consumer level, original manufacturers can encourage consumers not to buy products from unauthorized resellers by emphasizing that those products will not be covered by warranty.
Although minimum advertised price is legal in the United States, it is considered unlawful in the United Kingdom and viewed as a violation of competition regulations. As a result, companies have been fined in the UK for attempting to use MAP policies.
The legal minimum price on a MAP policy refers to the lowest possible price by which a manufacturer will allow a seller to advertise their product. This only refers to advertising and has no bearing on the price the seller wishes to place on the product for selling purposes.
There are various examples of a minimum advertised price policy. One is a luxury jewelry brand that requires its diamond rings to be advertised at no less than $8,000. Meanwhile, when retailers sell those diamond rings, they can do so at higher prices such as $10,000 or however they see fit.
Another example of a minimum advertised price policy can involve much cheaper products. For example, a manufacturer of young women’s clothing may set a price of $25 for advertising a line of dresses. Sellers are allowed to place higher prices on those garments when selling them online and in physical stores.
A binding price floor causes the price of a product to increase above the equilibrium price, which leads to a decrease in demand and an increase in supply.
A legal minimum price is one that can be considered a price floor in the market. This is a regulation created by the government or a group that states minimum prices for products. The rule means that the items can’t be sold for any lower prices.