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 expectation 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.
How Do MAP Policies Work?
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.
Are MAP Policies Legal?
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.
How to Create a Legal MAP Policy
In order to devise a MAP policy that will survive legal challenge, 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 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.
How to Enforce a MAP Policy
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 independent 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.