Decision to let manufacturers set price ceilings gets mixed reviews

The Outlook

November 09, 1997|By Samantha Kappalman

IN WHAT IS being called one of the most important business decisions of its 1997-1998 term, the Supreme Court last week unanimously ruled that manufacturers and wholesalers in some instances may set ceilings on retail prices.

The decision overturned its 1968 ruling that such price ceilings were illegal under the federal antitrust law.

Whether such a ceiling is legal should be analyzed under the commonly used "rule of reason" governing antitrust cases, the court said.

The ruling represented a major victory for the Justice Department, which had argued that maximum-price restrictions are likely to be pro-competitive and should be considered on a case-by-case basis. Economists also hailed the ruling, saying banning price ceilings hurts both consumers, who pay more, and manufacturers, who often sell less.

Retailers like auto dealers and gasoline stations, however, said the ruling will allow big companies to squeeze the profit margins of small distributors and independent sellers.

What is the impact likely to be? Which industries are the most affected? Will consumers benefit? What about retailers?

John Lewin

Antitrust lawyer and senior partner, Venable, Baetjer & Howard, Baltimore

The court permits for the manufacturer to dictate to the retailer a price above which he can't sell the manufactured product. It has nothing to do with retailer discounting.

The most likely areas this will come to benefit consumers in is with hot merchandise like a new car with a fancy design that has a lot of popular appeal.

I don't see any benefit to the retailer. That's what the Supreme Court had ruled was wrong, and in the most recent case they have reversed themselves.

There may be some long-term benefit because consumers can get irritated with retailers that get caught up in the moment and overcharge for products. The consumers can decide not to go back, but that's very theoretical.

William L. Reynolds

Professor of antitrust law, University of Maryland Law School, Baltimore

I think that the decision will not have a great deal of impact because there probably will not be many maximum resale prices entered into.

Where the manufacturer has market power, it will be in the company's interest to keep down prices so as to increase distribution and therefore advertising revenue. So it will be in those markets where we are likely to see an effect.

Retailers in competitive markets should not feel a pinch because their prices will be dictated by market forces.

Retailers in captive markets, such as newspaper distributors, may complain but the relevant question is not whether the retailers will be hurt, but whether consumers will benefit. Consumers should benefit in almost all cases.

Quentin Riegel

Deputy general counsel, National Association of Manufacturers, Washington

It's too early to tell the impact. Manufacturers will begin to look at whether it makes sense to impose price ceilings on their products at the retail level.

It's a difficult business decision that has to be based on international and national competition as well as local market conditions and the effect on the retailer. No manufacturer wants to reduce the number of outlets for his or her product. In some cases, it might make it more difficult for retailers to realize as large a profit as before. This may be good for consumers, but whether or not it's good for a manufacturer depends on many of these factors.

Primarily, consumer products such as food, pharmaceuticals, health and beauty aids and consumer electronics will be affected. A price cap would restrict a retailer's ability to raise prices, thus promoting inter-brand competition and keeping prices down for consumers.

Barry Rosen

Antitrust attorney, Gordon, Feinblatt, Rothman, Hoffberger & Hollander, Baltimore

I think in the short term, consumers will benefit. Some manufacturers will try to have their goods priced at a level that is lower for consumers.

Over the long term, however, I'm not convinced that this decision will in fact be pro-competitive.

Once the ceiling is set, it is possible that it will always be the price and you won't ever see anyone below the ceiling. Over time, the price won't go down any further.

In fact, that was the historic view as to why this was illegal because ceilings become the norm instead of being a ceiling.

The Supreme Court was convinced that as long is there is sufficient inter-brand competition that these potential downsides won't happen.

In the long term, I'm concerned that the old theory will stay true. There have been swings over the years back and forth on this issue. I wouldn't be surprised if in 20 years that another Supreme Court flips again.

Pub Date: 11/09/97

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