Practical Ecommerce

Price Fixing Cartels

As the rise of the bedroom sellers continue, a new problem has arisen. Suppliers have gotten into the act. Now whilst some suppliers do not care who they sell to, nor how low retailer margins go, other suppliers are more and more concerned about maintaining the quality value of their products. They do not like seeing their brands cheapened by heavy discounters. So they are looking at ways to stop this from happening. Some of these ways however need to be treated with great caution.

The most obvious thing for a supplier to do is to stop selling to those retailers who sell online. Other suppliers allow online sales, but not on Amazon or Ebay. These practices will naturally tend to stop the small hobby seller and likewise tend to reduce the volume of sales, but it will increase the margins of what is sold and maintain the perceived quality of the brand. For some suppliers this is enough.

The problem I am currently having is a couple of my suppliers going one step further. They have asked me to sign a contract stating that I will not sell their goods at below the Recommended Retail Price (RRP). This is retail price fixing. As this is price fixing in a vertical market, there is some possibility that they can get away with it in the US, but in the EU and especially in the UK it is very very illegal. Companies can get fined up to 10% of their global turnover and individuals can get up to 5 years in jail as well as a fine.

It is generally the smaller suppliers who attempt this. Mainly in ignorance of the law. They are doing their best for their brand and trying to combat the problem of over discounted products cheapening their brand image. The problem being that they, and some of their retailers, may all sign this agreement and effectively form a cartel. This is a group of two or more organisations who collectively agree not to sell below a certain minimum and thus reduce price competition. Once this is done, government organisations can fall heavily on them. In the UK the job of enforcing this falls on the Office of Fair Trading. They have been given far reaching powers. Any organisation suspected of being in a cartel can be raided and documents, e-mails, computers etc. seized at no notice. The consequences of such a raid on a small business can be more devastating than any fine subsequently imposed. Just ask yourself, if a law enforcement officer came into your office NOW and took all your computers for the next few months, how long would your business survive? Do you have full off site backups of all your accounts etc?

If these suppliers had stopped at saying general things like “sellers should be working on quality and detailed descriptions, inventive and creative keywords and titles, quality and unique images, and proactive marketing, advertising and promotions of the products”, then I would wholeheartedly agree. But they went one step further and said “Prices should be at least the RRP stated on the website”, and this crosses the line between what is lawful and what is not. Their ignorance of the law stops me from signing the agreement.

In order to promote products properly, have good photos and descriptions etc. you have to invest time and money. This would automatically eliminate the cheap hobby seller so there should be no need to price fix. The requirement to add value and quality would enable the supplier to have a reason to stop supplying the hobby seller without needing to mention price. By making the mistake of price fixing, the supplier is putting not only their own business at risk but also all the retailers who sign the agreement.

In not signing the agreement they have subsequently refused to supply me. Thus giving yet more evidence of price fixing to the authorities. I just loose a few lines of stock, they could loose everything.

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  1. Toolstop June 6, 2013 Reply

    I am all for large brands stipulating prices their distributors sell at online. By levelling the playing field the cream will rise to the top, and by this I mean those distributors with good customer service, fast delivery etc, the consumer will know what price he will pay regardless of where he buys and he will search for an online store which stands out on service.

  2. HK June 6, 2013 Reply

    This used to be illegal in the US but the conservatives took care of it and handed the win to the big boys. Now they set prices and enforce it by not shipping to those that do not cooperate. The real test is to whether the suppliers will still ship to Amazon- the most infamous of the MAPP violators. I know of one company that turned down a 5 million dollar order from Amazon because of it- let’s see if it will stick and who else will follow. Having dealt with this for over 18 years, you can squawk all you want, but you need to deal with it if you want to participate in retail.

  3. mindconnectionllc June 6, 2013 Reply

    First of all, you do not understand what price fixing is. It is when competing companies agree to a pricing scheme to avoid competing with each other. Yes, that is illegal. What you are referring to is legal, however.

    When a manufacturer sets minimum pricing for its sales channel, it is not secretly meeting with its competitors to avoid competition. Courts have upheld the legality of MAP and similar arrangements (look it up).

    Far from what you erroneously claim, a company has the legal and ethical right to ensure that those who represent its products to its customers meet certain minimum standards. Meeting those standards takes resources. In a "lowest price takes all" situation, only the worst companies will be the face to the customer. Good companies are driven out.

    This principle is why Senator John Glenn got legislation enacted to eliminate lowball insurance rates. People "saved money" on their premiums, but the lowballers had no resources to actually pay claims.

    It is not your suppliers who are ignorant of the law. I suggest you brush up on it.

    You can differentiate your business in many ways. If you think winning a low price race is the way to do that, then you will sadly and painfully discover your plan was not a good one.

  4. Richard Stubbings June 8, 2013 Reply

    I am sorry mindconnectionllc I suggest you re-read my post. I am in the UK. UK law is different from US law. I have brushed up on my law.

    On the one hand I have a lot of sympathy with the supplier. I would love to sell on good/great margins. On the other hand I cannot sign a document that leaves me liable to up to 5 years in jail. The law in the UK is 100% clear on this. The examples and guidelines from the Office of Fair Trading could not be more clear. It says that an anti-competative agreement may "involve a retailer agreeing with its supplier not to sell below a particular retail price".

  5. Richard Stubbings June 8, 2013 Reply

    Overall I am in complete sympathy with suppliers and manufacturers who want to maintain the quality image of their products. Indeed it is very much to retailers benefit to sell at proper margins and exclude the hobby sellers who damage the reputation of the brand and can cause other retailers to go out of business.

    The problem is how do suppliers and manufacturers defend their brands and stay within the law. As you say, in the USA some degree of vertical price fixing is allowed. However in the EU and in my case the UK, this is very illegal. Both suppliers who try it and retailers who agree to it can be fined and imprisoned.

    What is frustrating for me is that there are plenty of other ways to maintain quality and value without specifically targeting price. Retailers can support such efforts completely. It is just when the supplier goes out on a limb and tries price fixing, a UK/EU retailer has to say no.

  6. lyvonne June 18, 2013 Reply

    Thank you for the article.

    Does UK law distinguish between agreeing not to SELL below a particular retail price and agreeing not to ADVERTISE below a certain retail price?

  7. Richard Stubbings June 22, 2013 Reply

    The law relates to selling price. Personally I am not a fan of sites which say things like "contact us for the latest prices"