Retail Price Maintenance

Can retail price competition ever harm manufacturers? Imagine you are a producer of high-end tennis rackets. You had been selling rackets for $150 each to retail stores, which in turn sold them to customers for $300 each. Retail customers bought your expensive rackets only after handling them and consulting with knowledgeable salespeople. Consequently, the retailers needed a high markup to cover store expenses.

Imagine that an Internet sports business starts up that sells your rackets for only $240 each. This net store still pays you $150 per racket. Should you have any objections to their reduced price? Normally, manufacturers benefit when independent retailers set low prices for their goods, since low prices result in higher sales.

This Internet retailer, however, wouldn’t offer services to customers. It certainly couldn’t give customers the opportunity to touch your rackets. A rational customer might therefore go to a brick-and-mortar store to try out your racket, and then if he likes it, buy the good over the Internet. Obviously, if enough customers adopt this strategy, physical stores will stop stocking your rackets, so the discount virtual store could actually reduce your total sales.

When retailers compete on price, service suffers. This is especially true when customers can enjoy the services at high-end stores and buy your product at the discount outlets. To reduce price competition, many retailers try to impose minimum prices on their goods. When retailers can’t compete on price, they might compete on service. Consequently, when deciding if you should encourage deep Internet discounts you need to ask, which do my customers value more, low prices or high levels of service?

Price Competition

Compete on quality, service, brand names, or product color but always strive to avoid price competition. When firms compete on price, high profits become unsustainable. Try to reach implicit agreements with your rivals to limit pricing wars, but remember even if these agreements are successful, they might simply attract new rivals who won’t play by the rules. If you must compete on price, adopt confusing pricing plans so customers can’t directly compare.