Marketing Operations Strategy Nov 2, 2015

When Retail Prices Cross the Line

Man­u­fac­tur­ers should be strate­gic in enforc­ing min­i­mum adver­tised price policies.

Yevgenia Nayberg

Based on the research of

Ayelet Israeli

Eric T. Anderson

Anne T. Coughlan

Savvy shop­pers scour the Inter­net for the low­est price on a dig­i­tal cam­era. But new research shows that equal­ly savvy man­u­fac­tur­ers use sophis­ti­cat­ed chan­nel-pric­ing poli­cies to con­trol down­stream prices and com­pe­ti­tion from unau­tho­rized resellers.

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Man­u­fac­tur­ers of durable goods like elec­tron­ics, house­wares, toys, and sport­ing equip­ment often set Min­i­mum Adver­tised Price (MAP) poli­cies for retail­ers to fol­low. These poli­cies help man­u­fac­tur­ers coor­di­nate prices across online and brick-and-mor­tar retail­ers, and pro­tect their brand from being per­ceived as too cheap. They also grant man­u­fac­tur­ers greater con­trol of the mar­gins avail­able to their down­stream retail chan­nel part­ners, so that retail­ers do not have to skimp on pro­vid­ing ser­vice and train­ing to cus­tomers. Man­u­fac­tur­ers would not want Dad to leave the store with­out know­ing how to work his new smart­phone, for example.

In return for com­ply­ing with MAP pric­ing, man­u­fac­tur­ers might offer an autho­rized retail­er some finan­cial help in the form of shared adver­tis­ing fund­ing, or pref­er­en­tial treat­ment when new prod­ucts are released. In some cas­es, com­pli­ance is a con­di­tion for a retailer’s con­tin­ued access to the manufacturer’s goods, with vio­la­tors los­ing ship­ments of prod­ucts to sell.

Unau­tho­rized retail­ers — those with no for­mal rela­tion­ship with the man­u­fac­tur­er — are not bound by MAP poli­cies. But even they can be pun­ished indi­rect­ly if they lose prod­uct ship­ments from an autho­rized (but MAP-vio­lat­ing) sell­er fur­ther up the sup­ply chain that has been out­ed as their sup­pli­er and sub­se­quent­ly penalized.

Still, not all retail­ers, autho­rized or oth­er­wise, adhere to MAP poli­cies. MAP com­pli­ance is exam­ined in new research con­duct­ed by recent Kel­logg doc­tor­al grad­u­ate Ayelet Israeli (now at Har­vard Busi­ness School) and Kel­logg School mar­ket­ing pro­fes­sors Eric Ander­son and Anne Coughlan.

The researchers note a great deal of vari­abil­i­ty in terms of com­pli­ance with MAP pric­ing. Twen­ty per­cent of retail­ers in the researchers’ dataset always com­plied, while near­ly forty per­cent nev­er did. So which retail­ers com­ply? And what can man­u­fac­tur­ers do to stamp out noncompliance?

Map Pric­ing for Autho­rized vs. Unau­tho­rized Retailers

Researchers first inter­viewed a series of man­agers about their beliefs about MAP vio­la­tions and then ana­lyzed a dataset (from a large man­u­fac­tur­er that sold 226 unique prod­ucts through over 900 autho­rized and unau­tho­rized retail­ers) to test these beliefs.

They found that con­ven­tion­al wis­dom among man­u­fac­tur­ers is that autho­rized retail­ers are less like­ly to vio­late MAP. After all, they have the most to gain from play­ing by the rules. Con­ven­tion­al wis­dom also holds that unau­tho­rized retail­ers are the most like­ly to vio­late MAP and thus should be the focus of enforce­ment efforts, because when they low­er their prices, all retail­ers, both autho­rized and unau­tho­rized, fol­low suit and the man­u­fac­tur­er los­es con­trol of pricing.

When man­u­fac­tur­ers impose pun­ish­ments that seem too dra­con­ian, retail­ers do not believe that they will be pun­ished upon vio­lat­ing MAP, which leads to MAP violations.”

Think about a dig­i­tal cam­era whose man­u­fac­tur­er sets a MAP price of $200 and whose autho­rized retail­ers com­ply. Now sup­pose unau­tho­rized retail­ers on Ama­zon or eBay start sell­ing that cam­era at $190. Man­u­fac­tur­ers believe that once this hap­pens it cas­cades through the entire mar­ket, and so more autho­rized and unau­tho­rized retail­ers will start to price below $200,” Israeli says.

She and her col­leagues found that unau­tho­rized retail­ers are indeed more like­ly to vio­late MAP agree­ments than autho­rized retail­ers. Fifty-three per­cent of unau­tho­rized retail­ers vio­late the poli­cies, while just fif­teen per­cent of autho­rized retail­ers do so.

Man­agers were also cor­rect in their belief that MAP vio­la­tions cas­cade across the mar­ket. How­ev­er, the researchers’ analy­sis sug­gests that vio­la­tions by autho­rized retail­ers lead to vio­la­tions by oth­er autho­rized retail­ers, while vio­la­tions by unau­tho­rized retail­ers do the same for oth­er unau­tho­rized retailers.

In oth­er words, autho­rized and unau­tho­rized retail­ers oper­ate large­ly inde­pen­dent­ly of one anoth­er. Thus, it is not the case that pesky unau­tho­rized retail­ers are entire­ly respon­si­ble for low com­pli­ance among autho­rized retail­ers. If man­u­fac­tur­ers want to keep their autho­rized retail­ers in line — those over whom they have the most lever­age — they need to focus their efforts on delin­quent autho­rized retailers.

Ship­ping Out

The researchers’ thor­ough exam­i­na­tion of MAP poli­cies, the first of its kind, also revealed that autho­rized retail­ers who car­ry a wide range of prod­ucts from a man­u­fac­tur­er are less like­ly to vio­late MAP than those with a much nar­row­er range. This is because the ben­e­fits of com­pli­ance, or pun­ish­ments for lack of com­pli­ance, are greater for retail­ers who are very com­mit­ted to the man­u­fac­tur­er. (This is not the case for unau­tho­rized retail­ers, where no rela­tion­ship with the man­u­fac­tur­er exists.)

The researchers fur­ther looked at the rela­tion­ship between ship­ping charges and MAP vio­la­tions. The major­i­ty of retail­ers in the study offered free ship­ping. How­ev­er, those who charged for ship­ping were more like­ly to vio­late MAP poli­cies than those with free shipping.

The mar­gins they lose because they offer a low­er price are gained back through over­charg­ing you with ship­ping,” Cough­lan says.

It seems these retail­ers tacked on ship­ping costs to obfus­cate the actu­al price cus­tomers were pay­ing for a prod­uct. Online retail­ers often reveal ship­ping charges only at the very end of a trans­ac­tion, after a buy­er has clicked through mul­ti­ple check­out pages, which reduces con­sumers’ ten­den­cies to aban­don the purchase.

Crime and Punishment

So how can man­u­fac­tur­ers get more retail­ers to fol­low their MAP poli­cies? Israeli’s ongo­ing work focus­es on this question.

Cred­i­ble pun­ish­ments help. That is, man­u­fac­tur­ers can main­tain bet­ter con­trol by ensur­ing the pun­ish­ment fits the MAP-relat­ed crime.

When man­u­fac­tur­ers impose pun­ish­ments that seem too dra­con­ian, retail­ers do not believe that they will be pun­ished upon vio­lat­ing MAP, which leads to MAP vio­la­tions,” says Israeli. Today, many man­u­fac­tur­ers threat­en first-time offend­ers with small or mid­dling pun­ish­ments, with the expec­ta­tion that pun­ish­ments will increase for sub­se­quent vio­la­tions. This real­ly helped in mak­ing the pun­ish­ment itself seem more cred­i­ble,” she says.

More­over, a lit­tle flex­i­bil­i­ty in MAP pric­ing def­i­n­i­tions can ben­e­fit all par­ties. Man­u­fac­tur­ers increas­ing­ly under­stand that retail­ers are com­pet­ing for busi­ness and that low­er­ing prices is one way to attract cus­tomers. So a man­u­fac­tur­er might stip­u­late that a retail­er is in vio­la­tion only if it prices a spe­cif­ic prod­uct at least $10 low­er than the MAP. Such flex­i­bil­i­ty might help direct man­u­fac­tur­ers’ lim­it­ed resources at more egre­gious MAP vio­la­tions. Sim­i­lar­ly, man­u­fac­tur­ers rou­tine­ly imple­ment MAP hol­i­days” dur­ing high-vol­ume shop­ping peri­ods such as the pre-Christ­mas sea­son, to facil­i­tate sales in the com­pet­i­tive online environment.

Over­all, the researchers urge man­u­fac­tur­ers to focus on both autho­rized and unau­tho­rized retail­ers when it comes to MAP vio­la­tions. You can’t real­ly assume that address­ing the vio­la­tions only through elim­i­nat­ing the unau­tho­rized chan­nel will help you with your autho­rized chan­nel,” says Israeli.

Featured Faculty

Eric T. Anderson

Hartmarx Professor of Marketing, Professor of Marketing, Director of the Center for Global Marketing Practice

Anne T. Coughlan

Polk Bros. Chair in Retailing, and Professor of Marketing

About the Writer

Andrew Zaleski is a Philadelphia-based journalist and reporter.

About the Research

Israeli, Ayelet, Eric T. Anderson, and Anne T. Coughlan. Forthcoming. “Minimum Advertised Pricing: Patterns of Violation in Competitive Retail Markets.” Marketing Science.

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