Friday, January 21, 2011

California AG wants retailers to compete with manufacturers

The California Attorney General's office sued a small cosmetics company for stoppiing its own retailers from selling its products online at a discount.

Instead, prices must be set independently -- and competitively -- by distributors and retailers. Ostensibly this is supposed to help consumers, but as we know from Chapter 23 of our textbook, when two firms selling complementary products compete with one another, price is likely to rise.  Note that here the two complementary products can be thought of as the wholesale good and retail services required to sell it.

This is called the "double marginalization" or "double markup" problem, and is addressed by contracts like the one outlawed by the attorney general.  These contracts are one way to align the incentives of retailers with the goals of the manufacturer.

Another aspect of the retailer/manufacturer incentive conflict is brought up by attorney Jeffrey Zuckerman in the online discussion:
It would be hard to imagine products more in need of protection from free riding, and therefore more legitimately subject to RPM, than skin care products from a small company.  The California AG probably picked on Bioelements because they are too small to fight back.  Heck, I might have been willing to defend the company pro bono, just to keep the California AG from getting an undeserved victory.  
Can anyone on this list explain how consumers as a group have been injured because Bioelements imposed RPM on the Internet distributors of its "cosmesceuticals"? 
Here Mr. Zuckerman is referring to the promotional and retail services undertaken by brick and mortar retailers.  The manufacturer has an obvious incentive to stop internet retailers from undercutting the brick and mortar price, and "free riding" on the promotional efforts of brick and mortar retailers.

No comments:

Post a Comment