Resale Price Maintenance, or RPM, is a contractual arrangement between an upstream manufacturer (or importer) and a downstream retailer that specifies either a minimum or maximum retail price. These contracts are illegal in most antitrust jurisdictions, and viewed skeptically in the others.
So it was somewhat of a surprise that Australia's Competition and Consumer Commission (ACCC) allowed Tooltechnic, an importer of high end power tools, to specify a minimum resale price to prevent "free riding" by discount dealers on its high end Festool brand. Consumers had been shopping at the high end retailers, and then buying the Festool products are lower-priced retailers who did not provide as much retail service.
Festool products are complex, with a high level of features and functions, and are aimed predominantly at professional users. Tooltechnic believed that provision of retail services such as pre-sales technical advice, product demonstrations, and “try-before-you-buy” arrangements, as well as post-sales services such as customer training and provision of consumables and accessories, would help to expand demand for the brand even if retail prices included a margin sufficient to fund those services.
However, retailers who provided these services were increasingly losing out to competitors who chose a simpler no-frills model, and the problem of free-riding was exacerbated by the increased accessibility of on-line sales. Tooltechnic chose RPM as a solution after judging that other approaches, such as imposing detailed contractual obligations on retailers, granting exclusive retailer territories, or restricting on-line sales permissions, would be unworkable or less effective as a means of boosting sales.
Congrats to the the ACCC for reaching a reasonable decision, and to the Economists at RBB for their role in educating a skeptical government agency.
Reading about Tooltechnic, I believe this company understands how best to market their product for sale to the consumer. Manufacturers want to induce retailers to provide the level of services that would maximize the competitiveness of their product. (Garrett et al, 2008) The sales services and training provided by retailers are not a chargeable service to the customer, but a promotional service. High-end retailers cannot offer these services and be financially rewarded when there are free riders in the mix. Resale price maintenance (RPM) is a tool for the manufacturer
ReplyDeleteto encourage retailers to perform additional services.
Resale price maintenance (RPM) can provide price control over the distribution of a product. RPM incentivizes retailers to provide a high level of service. RPM may stimulate competition among manufacturers by reducing competition among retailers selling the same brand. RPM can also facilitate market entry for new firms and brands attracted to the minimum price restrictions. (Bona, 2014) A concern with RPM is the ability to price fix through collusion which would interfere with the market pricing.
References:
Garrett, D., Burtis, M., & Howell, V. (2008) Economics of Antitrust: An economic Analysis of Resale Price Maintenance. The Antitrust Review of the Americas.
https://www.cornerstone.com/GetAttachment/9f4ecd37-bed2-4bb3-8da7-7caf4f58420a/Economics-of-Antitrust-An-Economic-Analysis-of-Res.pdf
Bona, Jarod (10/2/14). Classic Antitrust Cases: Leegin and Resale-Price Maintenance Agreements. The anti trust attorney blog.
http://www.theantitrustattorney.com/2014/10/02/classic-antitrust-cases-leegin-resale-price-maintenance-agreements/
By Tiffany ESC id 0954241
ReplyDeleteManufacturers like Festool, that are concerned with maintaining a strong reputation for quality or durability with end customers may use minimum resale price contracts to prevent distributors from discounting products to their customers. When prices are discounted by wholesalers and retailers, the end customer may ultimately purchase the product at a price point that undermines the quality perception intended by the manufacturer. This can ultimately create repercussions because if consumers associate the lower price with lesser quality, retailers and distributors are less willing to pay well to acquire the product. RPM seems to be employed by many if not all high end retailers.
Kokemuller, N., (2015) Advantages & Disadvantages of Resale Price Maintenance., www.chron.com
Festool’s resale price maintenance (RPM) sounds like a license agreement for a special feature that increase their product service levels and is available to their distribution channels and resellers that can be pass through to their customers. Customers benefits from the added service because it limits exposure for testing the tools, gives them needed product training while lowering the costs for their approved distribution channels and resellers because it reduces the technical and marketing cost of selling Festool’s.
ReplyDeleteOn the other hand, the features involved may not attract customer segments that are price sensitive, or such as general contractors or others who have broader experience with tool usage and may not benefit from the learning curve support and the higher price that is associated from the bundling of the tools and services. General contractors may be more concerned with price and quality verses the added support levels of the festool products. Overall, the resale price maintenance supports and benefits the specialty channel but may not prove to increase sales from the broader customer segments because it does not mitigate the attraction of price point benefits offered by retailers who pricing models are driven by economies of sales to supply customer demand.
FlipSideDown
This is a timely post. I recently purchased a home and looked at a Festool sander to redo my kitchen cabinets. However, their price for a small orbital sander is about $300 to $400 depending where you shop. I initially looked into this sander because it received excellent reviews. However, the price compared with other comparable brands is significantly higher. This comparison was based on functionality only and not extended services. Since I’m a novice, I elected to go with the less expensive Dwalt sander. It is interesting that the ACCC sided with Tooltechnic as it may seem anti-competitive. Clearly, Tooltechnic is utilizing a differentiation competitive strategy of quality product with specialty services for its customers and potential customers. This means higher costs are associated with the producing the product (cost of producing higher quality and offering more services) which justify the higher price. Before the ACCC decision a bit of arbitrage was taking place causing Tooltechnic to lose customer surplus, thus lose out in margin. Also, prior to the ACCC ruling, lower priced retailers were in conflict with the apparent image Tooltechnic is attempting to maintain. Also, Tooltechnic is targeting the professionals through indirect price discrimination. If the ACCC had sided with lower priced retailers, it would have impeded Tooltechnic’s ability to compete effectively
ReplyDelete"While there are many legitimate means of increasing market power, the antitrust laws prohibit conduct by a single firm that unreasonably restrains competition by creating or maintaining monopoly power" (Lomax & Short 2014). “Antitrust enforcers look for durable market power that gives a firm the long-term ability to raise price or exclude competitors... Obtaining substantial market power through superior products, innovation, or business acumen is legal, but the same result achieved with exclusionary or predatory acts can raise serious antitrust concerns" (Lomax & Short 2014).
ReplyDeleteOne of the behaviors of newly integrated entities with more substantial market presence includes vertical restraints such as resale price maintenance (RPM). RPM includes “requirements placed on dealers by manufacturers, as well as most favored nation (MFN) clauses enforced against suppliers. Exclusive dealing contracts and MFN clauses that make specific references to certain rivals may undergo greater scrutiny and could cause antitrust enforcement officials to question the procompetitive business purpose for the arrangement” (Lomax & Short 2014). Tooltechnic’s RPM solution proved to be the most effective approach to working with Australia's Competition and Consumer Commission.
References:
- Lomax, D., & Short, F. (2014). Managing and minimizing antitrust risks in dealings with competitors (part 3). Inside Counsel. Breaking News
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ReplyDeleteThe resale price maintenance (RPM) can be define as the process by which business and it distributors consent to sell business’s goods and services at a certain agreed prices. Resale Price Maintenance may occur when a supplier stipulate or determine the lowest or highest price at which the goods or service should be resold to its customers. This can be an everyday and accepted custom for business to set a low price for its merchant to sell their goods and services.
ReplyDeleteFactors contributing to the resale price maintenance (RPM) are:
1. RPM give backings and guidance to smaller business that want to stay in business and remain profitable, but cannot afford to buy in bulk.
2. RPM can facilitate business to award shops to foster and encourage their product through advertising.
3. RPM can help stop price wars with retailers who are undermining each other to race to the bottom.
4. RPM can assist retailers to be more profitable.
Even though the essential principles of resale price maintenance may be difficult and tough to support, the internet has generate less expensive goods with some unfortunate aftereffect. Some small retail business who may offer a high quality of personal service can lose out. I believe the retail sector is moving more and more towards lower cost online purchases, but we may regret some of the personal service we may lose, on the drawback. The internet has really made it difficult and almost impossible to reinforce any reversal and return to the resale price maintenance.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Buzzell, Robert D. (1970) Harvard Business Review - Can You Standardize Multinational Marketing?
The resale price maintenance (RPM) can be define as the process by which business and it distributors consent to sell business’s goods and services at a certain agreed prices. Resale Price Maintenance may occur when a supplier stipulate or determine the lowest or highest price at which the goods or service should be resold to its customers. This can be an everyday and accepted custom for business to set a low price for its merchant to sell their goods and services.
ReplyDeleteFactors contributing to the resale price maintenance (RPM) are:
1. RPM give backings and guidance to smaller business that want to stay in business and remain profitable, but cannot afford to buy in bulk.
2. RPM can facilitate business to award shops to foster and encourage their product through advertising.
3. RPM can help stop price wars with retailers who are undermining each other to race to the bottom.
4. RPM can assist retailers to be more profitable.
Even though the essential principles of resale price maintenance may be difficult and tough to support, the internet has generate less expensive goods with some unfortunate aftereffect. Some small retail business who may offer a high quality of personal service can lose out. I believe the retail sector is moving more and more towards lower cost online purchases, but we may regret some of the personal service we may lose, on the drawback. The internet has really made it difficult and almost impossible to reinforce any reversal and return to the resale price maintenance.
Reference:
1. Frobe, McCann, Ward and Shor. (2014) Managerial Economics – A Problem Solving Approach.
2. Buzzell, Robert D. (1970) Harvard Business Review - Can You Standardize Multinational Marketing?
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ReplyDelete