From the antitrust mailbag: manufacturer-imposed requirements

Here’s another common question we receive from retailers: A manufacturer is placing restrictions on the way I price its products. I think this is anticompetitive. Is it a violation of the antitrust laws for a manufacturer to tell me what price to charge?

In most situations, a manufacturer’s requirements imposed on retailers are legal, so long as they are limited to the sale of that supplier’s products. Such requirements are usually legal because they may make that manufacturer’s products more desirable as compared to the products of competing manufacturers.

As we explain in our Guide to the Antitrust Laws, federal antitrust law generally views most supply chain arrangements—such as those between a manufacturer and a retailer—as beneficial to the overall marketplace because they often reduce costs or improve product quality or service for consumers. For instance, manufacturer-imposed restrictions that reduce competition among dealers in the same brand (“intrabrand competition”) can serve to sharpen contrasts between brands (“interbrand competition”), and as a result, enhance price, quality, and service competition between different brands for the net benefit of consumers. The bottom line is that the antitrust laws primarily protect and promote interbrand competition and evaluate any restrictions on intrabrand competition through that lens.

Retailers I talk to often wonder about this distinction between interbrand and intrabrand competition. In particular, they want to know: how can restrictions on competition among retailers be good for competition and consumers?

Any restriction in a supply chain relationship that is independently imposed (that is, not the result of an agreement among competing suppliers or competing retailers) is tested for reasonableness by analyzing in detail the overall interbrand market for the product. In other words, the relevant marketplace for close analysis is the interbrand arena where the various brands compete with each other.

Here’s how this works in practice, using the example of high-end handbags. Let’s say one manufacturer hopes to improve its chances of selling more bags by requiring retailers to have certain amenities in the store or to display its bags in a certain prized location. These days, this might include playing classical music or placing the items in a special display case.  The manufacturer may also decide to sell only to those retailers who are willing to sell its handbags at the manufacturer’s suggested retail price, a price sufficient to support provision of the desired amenities. In the manufacturer’s view, these policies encourage consumers to view its bags as a luxury good, which is how it hopes to compete against other handbag manufacturers and to increase its sales. Or, consider another example. A manufacturer of high-end electronics may suggest relatively high retail prices and sell only to those retailers who follow those prices in order to encourage retailers to hire and train knowledgeable sales staff.

From an antitrust perspective, even though such restrictions limit how the retailer might prefer to price the products or run its business, the manufacturer’s requirements may be viewed as reasonable restrictions that allow the manufacturer to more effectively compete to sell its products. Without these restrictions, a retailer might charge a lower price by forgoing the amenities and take a “free ride” off the expenditures of the full-price retailers.

As with any general rule, there are exceptions. As we explained in a previous blog post, in certain unusual situations, some dealings in the supply chain can cross the line and unreasonably harm interbrand or intrabrand competition. And in some states, state law bars manufacturers from dictating minimum resale prices, so it pays to check with your state’s Office of the Attorney General for local standards.

As always, contact us to report a suspected antitrust violation, or if you have a question or comment about an antitrust issue.