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Minimum Pricing Legislation Doomed to Fail

The Wall Street Journal’s Joseph Pereira recently reported Maryland was considering legislation that would ban minimum pricing agreements between manufacturers and retailers.  These agreements allow product manufacturers to guarantee their products will be sold for a minimum price over the wholesale rate, and the tactic is often employed to protect the brand value of luxury goods.

While the law may seem sensible on the surface, we must consider the unintended consequences of such legislation.  Successful manufacturers spend a lot of money on market research and product development.  It is their business to know how much consumers are willing to pay for their products.  These companies have made huge investments in their brand image, and will likely do whatever is necessary to protect the value of their logo.  If these manufacturers are no longer allowed to guarantee the minimum price through contracts with retailers, they will simply change tactics.

As it is unlikely many retailers will routinely sell products under cost, manufacturers may choose to raise the wholesale prices for their goods.  As the wholesale price rises, retailers would be forced to pass the cost increase to the consumer in order to remain solvent.  While consumers might see a price decrease in the short term as manufacturers sell off old stock, this trend would quickly reverse as retailers struggle to maintain an acceptable margin when their stockpiles are depleted.

While this may seem like “common-sense” legislation to protect consumers, a law banning minimum pricing agreements is actually far more likely to increase consumer costs.  While the intent of Maryland’s legislators may be sincere, only consumers can dictate the price of their goods.  As long as people are willing to pay extra for a particular brand, manufactures will continue to charge extra for it.  When brand image no longer matters, and consumers stop purchasing luxury items, then, and only then, will we see a true decline in retail pricing.

Sources:

Pereira, Joseph.  “State Law Targets ‘Minimum Pricing.'” The Wall Street Journal.  28 April 2009: D1+.

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