A sucker's season

How much did you pay for a "no-haggle" Christmas?

by Justin Wolff

So you like the ease, the slick convenience. It's so chic, so current, so savvy. Plus, it's cheap. Mail order and Internet shopping. It's saving you this holiday season. Sucker.

What consumers don't know -- or what they choose not to know -- is that remote shopping (that's shopping done from anywhere but the store itself) costs them money. And many retailers admit that the way it costs them money is unethical and almost illegal. Some retailers, in fact, would be happy to sell you, say, a DVD player for less money. So why isn't the Federal Trade Commission (FTC) on the case? Why aren't consumer groups hyperventilating? Why do shoppers keep falling for inflated prices? Because when it comes to shopping we're neat freaks, and we're happy to pay, it seems, for a tidy marketplace.

The culprit is minimum advertised pricing (MAP), which is an agreement, usually in the form of a contract, between a retailer and a manufacturer. Such agreements are ubiquitous. MAP dictates pricing nationwide in industries ranging from housewares to jewelry, though the agreements are particularly rampant in the electronic and computer industries. The practice comes about as close to price-fixing as a confused antitrust law permits. A man who owned a prominent Providence stereo retail store for 12 years -- and who insisted on anonymity, like many people with an interest in this story -- was more than happy to explain to the Phoenix exactly how MAP works.

"Have you ever noticed," he asks, "when shopping for a specific CD player, that it's advertised in every paper for precisely the same price? Ever wonder why the retailers weren't competing with each other? Well, as an authorized dealer for [a major brand], a retailer is given a list of specific models and their minimum advertised price. Retailers have no choice but to

advertise at the price. A manufacturer will enforce MAP on about 80 percent of their products and allow a retailer to discount the other 20 percent, which is usually the low-end stuff." A consumer might unwittingly pay $20 more than necessary for a component, but that adds up to huge profits for manufacturers -- "tens of billions of dollars for the electronics industry alone," according to the former retailer.

Manufacturers basically coerce retailers into adhering to MAP. If a retailer advertises the product at a price below what the manufacturer dictates, then the retailer stands to be punished. Besides revoking coveted dealership status, a manufacturer will withhold valuable perks, most notably money to subsidize the cost of expensive newspaper inserts and circulars. In other words, a manufacturer will pay for a retailer's print ads -- so long as they obey MAP policies. According to Bob Houk, the vice president for strategic planning at CoAMS, a Chicago company that manages advertising programs for manufacturers, "The biggest retailers routinely get 100 percent of their advertising paid for if they comply with minimum advertised pricing."

The former Providence stereo retailer adds, "Since the dealers need the advertising subsidy these funds represent and crave the higher profit they allow, competition is effectively stifled." Moreover, a consumer who is shopping remotely might mistakenly believe that the price is fixed and that the product cannot be bought for less. In fact, that product might be sitting on a shelf with a lower price tag, or a retailer might be happy to haggle.

If consumers aren't concerned about MAP, retailers sure are. All the smaller retailers I spoke with demanded anonymity, while the large chain stores refused to discuss the specifics of their MAP contracts. One man, who owns an aircraft electronics dealership in Lafayette, Indiana, is outraged by the practice and claims to have been forced into signing MAP contracts with manufacturers of radios and navigation equipment. According to the dealer, some of the manufacturers of the products he sells contacted himthree or four years ago. "Yeah," he remembers, "they called me up and said, `Hey, let's renegotiate our contract. We want to add some MAP provisions, and if you don't comply, we'll drop you as a dealer.' The main thing they insisted was that we not advertise the products they manufacture at prices below what they deemed a fair price -- and they send a list every now and then with those prices listed. Most of the dealers I compete with also signed on, of course. If we don't comply with the MAP agreement, they can also take away rebate money from us, which we use as incentives to sell our products. And the result, I think, is price-fixing. I mean, we all advertise the same product at the same price and that price is determined by the manufacturer.

"A MAP agreement," the aircraft electronics retailer continues, "may say that I cannot advertise a product at a price less than $900, even if I am happy to sell it at $800. But I cannot advertise that price. I get phone calls from people who say, `Where should I send the check?' And they haven't even haggled." So where's the hurt? "Minimum advertised pricing bothers me because in order to be an authorized dealer, I have to play ball and price as they want."

The retailer explains that for a small operation like his, profits are not always contingent on higher prices. "Often," he says, "I just want to move a product, sometimes even at a loss." The man may be free to advertise or sell any product at any price; what concerns him, though, is that he can lose his dealership status for making advertising decisions based on his particular needs. "When I wrote an article complaining about this and posted it at my Web site," he explains, "I got a call from a manufacturer demanding that I remove their name from the site or they would nail me for breach of contract. My lawyer said they had me -- in the fine print of the contract it said that I could not disclose any information about my MAP agreement."

The former Providence stereo retailer opposes the agreements on the same principle. "When that guy walked in my store with his MAP story, I was pissed. I mean, I was supposed to be a discount store and he was telling me I couldn't advertise at discount prices. I was worried."

Many retailers, of course, are more than happy to sign MAP agreements -- after all, they mean more profits. "In the end, I made a lot of money on MAP," the former stereo retailer admits. In another instance, in November 1996, Musicland Stores Corporation -- which is based in Minnetonka, Minnesota, and operates Sam Goody stores and other retailers -- was struggling after dismal earnings reports. When the music industry moved to keep CD and cassette prices stable with MAP policies, the company's profits surged. But discounting also generates profits, so this November, Circuit City posted a press release at its Web site stating that better deals can often be found in its stores. Morgan Stewart, a spokesman for Circuit City, which is based in Richmond, Virginia, refused to discuss anything about its use of MAP agreements or its contracts with manufacturers. He did acknowledge, however, that the store's "local managers are free to change their shelf prices to match a local competitor's prices, but such discount prices will not be reflected in national print ads."

An ad that appeared in the Boston Globe on December 2 exemplifies the ramifications of such a scenario. In the full-page ad, an Epson printer was listed at $149. Beneath the ad were the names of 18 large national chains, including Circuit City, and Epson's toll-free number. As far as the consumer knows, there is no way to get this printer for less money. Other Epson dealers might be happy to sell the printer for less, but Epson did not include their names in the ad.

Some retailers are fighting similar strategies of so-called "resale price maintenance." In a recent case that received national attention, Ross-Simons, a Rhode Island-based national jewelry retailer with a large mail-order business, filed an antitrust suit against Baccarat, the French crystal manufacturer. In 1994, Baccarat accused Ross-Simons of selling its crystal at hugely discounted prices, thereby damaging its reputation as the manufacturer of a luxury product. The next year, Baccarat refused to renew authorized-dealer status for one Ross-Simons store, a decision that the retailer challenged. In September, the chief US District Court judge in Providence, Ronald R. Lagueux, ruled in favor of Ross-Simons, stating that Baccarat had breached antitrust law and tried too hard to set the price of its products on an open market. Ross-Simons, the judge determined, does a better business without pricing constraints and the rewards of that success should be passed on to consumers.

Darrell Ross, the president of Ross-Simons, says that the primary purpose for resale agreements like MAP is for manufacturers to manage their image. "The issue," Ross explains, "is one of public perception. Manufacturers want retailers to present their product in a good light, in an ambience that signals quality. They want the public to perceive that their product comes with good technical support and from a store with smart employees. If a retailer wants to undersell at a particular store in Cranston, so what? That has little impact on the public perception of the product. But ads are another story. They are public."

To reduce this line of reasoning to its essence, manufacturers don't want the public to think that their products are cheap.

Baccarat was trying to fix the price of its products, and that's illegal. MAP agreements, however, are not illegal because they are able to dodge antitrust laws by fixing the advertised price, not the actual retail price. Nevertheless, the FTC is wary of MAP agreements. An FTC employee from the Bureau of Competition, who refused to be identified, explained to the Phoenix that laws regarding price-fixing are general and allow for some abuses. In the 1970s, fair trade laws that prevented retailers from selling below cost were criticized as being anticonsumer and were repealed. But during the 1980s, in the spirit of Reaganomics, trade laws that restricted manufacturers from influencing pricing were eased. In 1987, the FTC rescinded an earlier policy that outlawed what it calls "cooperative advertising programs," or programs that withheld or restricted advertising subsidies to punish discounting. The FTC opted instead to monitor MAP agreements with a discretionary eye, with what it calls "the rule of reason." One indication that the FTC is not terribly comfortable with its own position on the matter emerged this November, in a summit on antitrust issues in electronic commerce held in Columbus, Ohio. At the meeting, David A. Balto, assistant director of the Office of Policy and Evaluation in the FTC's Bureau of Competition, read from a statement that said, "The commission did not say it would treat cooperative MAP restraints as per se legal -- they remain potentially troublesome, and that potential is realized when they amount to, or play a role in, actual resale price maintenance," meaning price-fixing.

The FTC source adds, "This is most problematic, of course, in those markets where print advertising is the primary form of advertising -- computers and electronics, for example. But we prefer to remain agnostic on the issue -- sometimes it's bad, sometimes it's good, sometimes it's neutral. Though we don't say it's illegal right now, we would listen to a consumer complaint." Oddly, though, consumers don't complain, neither to the FTC nor to consumer advocacy groups.

In the end, the FTC has decided to permit MAP agreements, the source says, because "We generally believe they help retailers more than they hurt consumers." As the argument goes, by giving smaller retailers the financial means to advertise their goods in the same market as larger retailers, it's giving them a chance to survive.

Deborah Pearlstein, a partner at the New York law firm of Weil, Gotshal & Manges, which helps manufacturers navigate antitrust laws, is another advocate for MAP. "I prefer to say that dealers are incentivized, not constrained. We can defend the agreements," she says, "because they encourage competition at the manufacturer level rather than the retail level. If Epson says, `Hey, we don't want that printer advertised below that price,' then maybe it opens a market-entry opportunity for Lexmark." While Pearlstein thinks MAP agreements don't receive much attention from antitrust watchdogs, she admits that the more general practice of resale price maintenance is an area of antitrust law that deserves to be monitored. "There are consumer concerns," she says.

Manufacturers that require MAP agreements from their retailers have erected a large enforcement infrastructure. Besides the kind of intimidation mentioned by the aircraft electronics dealer from Indiana, manufacturers contract agencies to monitor print ads for retailer compliance with the agreements. Jim Streibich, president of Market ADvantage -- an Evanston, Illinois, company that watches for retailer breaches of MAP contracts -- believes that a fair MAP price is the key. "If it is fair," he says, "then it will allow smaller retailers a piece of the advertising pie. In the short-term, consumers will be at a disadvantage; in the long-term it allows for the survival of smaller stores. So, I support MAPs with a qualified yes." Qualified, Streibich says, because "These agreements skirt price-fixing laws and force most retailers to comply. Wal-Mart, for example, is so big that it can forgo the agreements and price below desired minimum price, and this is what other big retailers fear -- another retailer, even bigger, that can undersell them." Wal-Mart, by the way, claims that they do adhere occasionally to MAP, but a spokeswoman refused to elaborate. I asked Streibich if he didn't think that the issue had less to do with retailer protection than with the fact that consumers might be paying too much for goods. "Oh, that's interesting," he said. "Well, yes, that's a big concern."

The FTC, Pearlstein, and Streibich all believe that MAP policies promote the spirit of competition by providing smaller retailers with advertising power. The agreements allow manufacturers to reassure their retailers that other dealers won't sucker punch them. True, we should worry about vanishing mom-and-pop stores, and these agreements do appear to provide a modest amount of protection against discount giants. Darrell Ross, however, warns, "The perception that these agreements protect smaller retailers is misleading. Larger retailers, of course, have an easier time flouting the agreements." Retailer protection, then, is the euphemism that manufacturers use to justify maintaining their image through higher prices. In the end, by often paying more than we should, it's consumers who pay for a product's image. Also, by relying increasingly on remote shopping, consumers contribute to the scuttling of small retailers. In the consumer electronics industry, for example, the top 100 retailers are all chains, with Best Buy and Circuit City sharing about 25 percent of the market. There aren't even that many smaller retailers left for MAP to protect.

If, as the former Providence stereo retailer maintains, we are paying 10 percent more for electronic goods when we buy them from a retailer in a MAP agreement, that equals huge profits for the $70 billion consumer electronics industry. "When I was selling CD players," he explains, "I was operating on a 30 percent profit margin because of minimum advertised pricing. I didn't need that much." That extra money paid by the consumer profits retailers and helps to maintain a product's market image.

Strangely, MAP agreements are largely ignored by consumer advocacy groups. One, the National Consumers League in Washington, D.C., hadn't even heard of them. "You have to pick your issues," was the curt response to my questions. Another group, the New York-based Consumers Union, which publishes Consumer Reports, ignored my queries altogether. But Mark Cooper, director of research at the Consumer Federation of America (CFA) in Washington, D.C., is aware of MAP practices. He claims, though, that he can't move against them. "We think the practice is anticonsumer, but it has become a tough antitrust principle to battle in court. The businesses have invested a great deal of money in defending resale price maintenance. Demonstration of consumer harm in court has become a very high hurdle. The manufacturers insist that they cannot develop quality products or technical support for those products if discounters bottom them out. But the manufacturers make profits and clearly prices would be lower without MAP agreements. But the antitrust laws have no teeth. I bet the Department of Justice hasn't seen a MAP case in a long time." The Antitrust Division of the Department of Justice would not share any figures with the Phoenix, but public records indicate that only a handful of antitrust cases in the last 10 years had to do with MAP abuses.

Anthony D. Becker, an expert on antitrust violations in retail practices and an associate professor of economics at St. Olaf College in Minnesota, stops short of calling this judicial stasis negligent: "If legislators are looking for a place to tighten antitrust laws," he says, "these agreements are a good place to start."

Despite the current lag in legal action against advertising agreements, some people in the business think that manufacturers should be careful with their MAP policies. CoAMS, the Chicago-based company that manages advertising agreements, posted a warning to their clients at their Web site. "Given the way that FTC policy has zigzagged on this question in the past," the message states, "it seems reasonable to assume that there may be future zigs. We therefore recommend that MAP policies be implemented only if your market situation leaves you no other alternatives, and that, in any case, such a policy be written and enforced with extreme caution."

The main reason the government does not legislate against MAP agreements is that there is almost no consumer pressure placed on them to do so. Very few consumers even know about MAP agreements, though most of us who have ever shopped remotely must have noticed that advertised prices seem fixed. Why don't consumers realize that there is something unsettling about that? We are happy to pay, it appears, for an orderly marketplace. We prefer to become rich by making more money rather than saving what we have; walking into a store and haggling for lower prices distracts us from that purpose. For a country founded on the principles of free enterprise and competition, we seem oddly fearful of negotiating in the marketplace. Saturn's "no-haggle" policy is a perfect example. Saturn cannot fix the price of its cars, but the manufacturer strongly encourages its dealers to sell at a suggested retail price, or at least to not discount whatever sticker price they decide on. A Saturn retailer, the company explains, "should give you the same price regardless of your bargaining skills." Well, that sucks. That a car company can don a mantle of integrity when it claims that its non-negotiable prices favor consumers testifies to how little we value haggling. Ease, it appears, is where value lies.

Justin Wolff can be reached at jwolff[a]phx.com.