Price lock on halcyon products

[Rick Murchison]

The vast confusion over one company's pricing policies and "price fixing" - an entirely different matter, is interesting.
If I decide to manufacture widgets, I am free to price them as I see fit. I am free to hire my own salespeople or to subcontract with independent salesmen (often known as "authorized dealers") to sell my product at the price I dictate. I am free to write those pricing policies right into the sales contract, and I am free to fire or cut off any of my salespeople who violate our agreement. This is pricing policy within the company. As a manufacturer of widgets my goal will be to charge the full value to the public for my widgets, and I will take steps to increase the public's assignment of value to my widgets so I can actually sell them at the price I want to charge. This is called advertising.
Now, let us assume, for a moment, that there are just too many widgets out there to support my prices. If I'm honest, I must then take action. I can lower prices. I can introduce a "new, improved" widget that makes mine "better" and worth the price. If I'm really sharp I can start a clique with a cute name, say "TRW" (The Right Widget) and have my customers be my most vocal advocates... "You're not using TRW."
But if I'm dishonest, and can enlist the conspiracy of enough of the other widget manufacturers, I can get together with them for a secret meeting and we can agree as an industry to raise the price of widgets together, and avoid all that pesky "supply and demand" stuff. This is "price fixing" and is illegal.
But in the dive gear industry, there are plenty of choices, widgets galore, and no "price fixing" - only "pricing policies." If one company's pricing policy irritates you, buy a different brand - advertising, labeling and marketing schemes aside, quality products are available at better prices. When your price sensitivity meets your brand sensitivity, you'll have the right choice. Even if it isn't the "Right" choice.
Rick

 

[Genesis]

You're just plain wrong.

Your scenario demonstrates two kinds of price-fixing.

Horizontal price restraints (conspiracy between multiple sellers of similar but not identical products) is always illegal. In fact, just DISCUSSING it is illegal if there is an act taken in furtherance of the conspiracy to do so.

Vertical price restraints were once ALL illegal as well. A while back the US Supreme Court ruled that setting maximum prices is not always illegal, and that its legality would be determined by the effect on competition rather than strict scrutiny. The case in question had to do with gasoline prices; there were oil companies that set maximum prices for their gas, and their dealers had to honor it. Some sued, claiming a sherman violation, and after going all the way to the USSC, lost.

However, in that same decision, it was reiterated that setting minimum prices through contract or other restraint remained a per-se violation of the sherman act.

The only way that you, as a manufacturer or distributor, can legally restrain pricing by your dealers is by controlling the price at which you sell to your dealers. You cannot, legally, "protect" their margins by writing into your contracts restraints on what they may or do sell your product for, nor may you "punish" or "reward" dealers based on their selling prices.

Even first-sale pricing (that is, from you as a manufacturer to distributor or dealer), its imperfect control, in that in most states it is perfectly legal to sell below your cost, provided you're not doing so to drive others out of business (predatory pricing practices.)

It is flatly illegal to write contracts with distributors and dealers in which you demand that they sell at no less than some set price, at some set mark-up, or at no less than some discount from MSRP. It is flatly illegal no matter how you determine these "agency" relationships UNLESS the agents are all in fact employees of your company and you are selling DIRECTLY as a manufacturer (that is, all are "first" sales.) As soon as you put that product into distribution and invoice an independant company or individual as a "dealer" or "distributor", and particularly if that organization sells other products (besides yours), they are an independant entity and no amount of gerrymandering changes the fact that price restraints are illegal in that circumstance.

It IS legal to set "minimum advertised prices"; that is, what someone can print in a paper or publish in some media, such as on the Internet. What's not legal is controlling what someone can actually charge, whether such control is direct or indirect (by threatening to or actually revoking dealerships for violating your "minimum" prices.)

You folks who defend this practice ought to take a few business courses, or simply call up any corporate attorney and ask them about this practice. They will all tell you that the law is, for all intents and purposes, exactly as I described, and while many organizations try to find ways around it with various convoluted schemes, they frequently fail and often spectacularly so.

In the Scuba business there has already been one trade association put out of business by these practices, specifically, threatening to blackball a manufacturer who had the audacity to want to sell direct to consumers without the middleman - and mark-up. There is case law all over the various industries on various forms of price restraint, including such "brand names" as Nine West (shoes), the RIAA (which got sued for attempting to price-protect music on CDs) and others.

The Nine West case is particularly interesting as it is an almost exact analogue to what you claim is perfectly ok. They controlled minimum pricing, and permitted discounts from it only at certain times and within certain constraints (e.g. around the holidays.)

They got nailed.

The OTHER part of "price restraint" is that it is illegal, as a manufacturer or distributor, to discriminate on the price you charge to retailers based on non-objective criteria. That is, if Joe and Jane each want to buy 50 of your product, and you cannot find an objective difference in their orders, you cannot charge Joe and Jane a different amount of money for those 50 units. This is called the Clayton Act, and it too is part of US Antitrust law. You CAN give Joe a bigger discount if he gives you a BINDING purchase order for 200 units, but only wants 50 of them now (and the other 150 over some reasonable amount of time), or some other objective criteria, all of which must be demonstrable to directly affect your actual operations (in practice, anything other than pure order flow is very, very difficult to justify if someone comes after you.)

I have personally beaten a couple of multi-billion dollar firms over the head with the Clayton Act - this is an area that I have experience with, as the business I used to be in was (and to some extent is) full of yahoos who have lots of letters on their resumes (MBA, etc) but were either sleeping or snorting too much coke during both their business law and business ethics classes. One of those beatings saved me, as a retailer, over $50,000 in one quarter alone - savings that were passed on to my customers in the form of lower prices and better services.

Finally, ANY person or organization who suffers a loss as a consequence of such practices is entitled, under the law in the US, to bring suit for three times their loss PLUS their attorney's fees and costs. The organizations or individuals involved in conspiring to fix prices in these manners can also be prosecuted under federal felony statutes.

These laws apply to any product or service that travels or is sold in interstate (or international) commerce. There is no escape for the manufacturer, dealer or distributor UNLESS all design, manufacturing, distribution and sale is wholly contained within one state, and even then you have to be careful - source so much as a wire tie from across state lines (directly or indirectly, even if you don't know about it at the time!) and you're deemed to be operating in interstate comemrce.

 

[Genesis]

Ok, here's a good example of how it works in real life....

Let's say that I get so upset with the various BCs out there that I decide I'm going to design Karl's BC - the ULTIMATE buoyancy compensator - and take the world by storm with it!

Ok.

I do my design work, apply for my patents, set up a machine shop and assembly line. Maybe I hire people, maybe I install a bunch of robots. No matter - I now have a factory that can crank these things out, and they're the bomb compared to everything on the market (at least I think so!)

Now I have to sell them, right?

So I put out a shingle, set up a storefront, and start buying advertising. I hire a couple of employees to staff my store, and sell "Karl's BC - the Ultimate".

I can charge whatever I want for it.

Pretty soon it appears that I really do have a nice product, and its selling well. But I can only cover a small area with one store, right? I decide that selling on the Internet stinks, so instead, I open another store - and hire more staff.

I can still charge what I want.

Over a couple of months or years I have a nice network of shops, all an integral part of "Karl's BC Inc." I have maintained absolute pricing power for my product at the retail level, because all I have ever done is first sales.

One day Jane saunters into one of my shops. Jane owns a scuba store on the Left Coast, and she's heard of my BCs. She rents one, goes diving, comes back all smiles and declares that its the gosh-darn nicest BC she's ever used.

She'd like 1000 of them, thank you very much.

Now I have a problem.

I can sell her those BCs at my usual price, but of course Jane doesn't need 1000 of them for herself. She'd like to resell them to HER customers over on the Left Coast - but she definitely doesn't want her customers deciding to call me on the phone and order them directly for less. If she paid full retail for them, there would be quite the incentive for her customers to do that, wouldn't there, as she'd have to mark them up by some amount for it to be worth her while....

So she negotiates a price with me - after all, 1000 BCs might be my entire production run for a month - or six! Now THAT's some business, and its very, very hard for me as a manufacturer to say "no" to her.

So I say "yes", and sign the deal.

But, and this is the important point, the instant that I say "yes" and invoice Jane for the BCs, I've lost my pricing power through other than my own store(s), and in fact I have a serious problem in that Jane might undercut MY store! No matter how I write my contract with Jane, if I dictate or attempt to dictate what Jane charges for those BCs in HER shop, I'm breaking the law.

The only control I can legally exert is by my decision as to what I charge Jane for the product. I cannot condition her dealership on her pricing policy for that product, nor can I deny warranty service on that BC if Jane doesn't do what I want with her prices on the product she buys from me.

Now fast-foward a bit...

John comes into my shop. He's seen my BCs at Jane's, and wants to sell them in New York. Jane has been buying 1000 of these a year from me, and John would like 1,000 of them a year too. HE offers me the exact same order flow that Jane is providing me.

I cannot, legally, give John a different price, unless I can find an objective reason to do so. I cannot, in fact, protect Jane's pricing or sales by charging John more for the same order flow and product. If, on an objective basis, the two buyers appear to be similarly situated, I cannot discriminate in my pricing between them.

Just about the ONLY way I can do it would be to make Jane a DISTRIBUTOR, declare her territory the entire United States, and then send John to HER. But now SHE has a problem, because now SHE can't discriminate against John in favor of Jack!

I can push down the distribution "tree" as a manufacturer - but I can't do conspire to favor one like-situated retailer over another, other than to refuse to deal with them at all for an objectively-defensible reason.

 

[Rick Murchison]

Apples and oranges.
If a salesman is working for me, I can set my price, I can dictate what he charges. I am not obligated to allow him to sell for whatever he wants to set as a price. The purpose of the "authorized dealer" structure is to turn the shop into my agent, my salesman working on commission. "Agent" and "commission" are key, and the laws against price restraints on independent companies don't apply. Now comes the sticky wicket... if I sell to and accept money from my "agent" for my product, is he still my agent? Was he ever my agent? I don't think so, and you're right - I can't set the price he charges for property he's rightly bought, and any contract to the contrary is null & void.
I think we agree... the key is in the relationship between the wholesaler and the retailer. If the retailer pays for the product before he sells it, he owns it and he isn't an agent anymore - he's free of any contract rerices, but if the wholesaler doesn't accept their cut until after the retailer has made the sale (title hasn't moved) then the case for the retailer as agent remains intact.
How're we doin' now?
Rick

 

[Bob3]

Just get yerself a FredT backplate. An informal study done on owners/users of both FredT and Halcyon plates indicated a 2 to 1 preference for the FredT plates.

Study had a small sampeling, but it is good enough to see which way the wind is blowing. Most folks would rather not pay an extra $100 for a label.

 

[Dryglove]

I had originally planned to go the fredt route with a halcyon wing.Its actually cheaper to buy the entire halcyon mc 36lb system.The one advantage of going fredt is that i could use a 9lb BP instead of the standard halcyon 6lb which would be great.So i have to decide if a 3lb heavier backplate is worth 50.00 or more to build or save 50.00 or more and get the halcyon piooneer mc system.

 

[Genesis]

BUT, and this is the key, title really has to remain with the manufacturer, AND the "agent" must really BE an agent - effectively and legally an employee and representative of the company - not an independant operator.

This gets ugly, as suddenly any representation that this "dealer" makes becomes binding on the manufacturer, since they are legally an extension of your firm. Worse, if this "dealer" was to do something in their shop that was off-color (say, they sexually harassed a fellow employee) the aggreived could go back at the manufacturer!

Can you say unlimited liability and no control over it?

As a manufacturer you can't CALL someone an "authorized dealer", but then demand they give you a purchase order for product, or try to distance yourself from them in a legal sense.

That is and will be recognized instantly as an attempt to evade the law.

You can't invoice the "dealer" for the product either - there IS no invoice in this scenario. You can pay them a commission on product actually sold, yes.

The risk of loss, damage, shrinkage, etc must remain with you as the manufacturer. If you attempt to shift any of this to the "dealer", then you are likely to be deemed to have sold the product, since you are attempting to shift the essence of title and legal possession for the purpose of gaming the system.

Essentially, other than the risk of losing their "job", the "dealer" in this scenario operates in a risk-free position, and you, as the manufacturer, assume all risk and liability.

That's ugly stuff and frankly I can't imagine many companies being willing to accept it, particularly when the general public is involved. (This kind of format IS somewhat-common with electronics parts manufacturers, for example, but they never stock product - you order, they ship from the factory. That's the common "factory rep" structure in various manufacturing circles - the common thread is that the sales are all happening in volume and to industry, not to the end user.)

That scenario is indeed legal, but there are very, very few industries where this is a practice that can be adhered to and which work in the real world when the sale in question is at retail to consumers. I seriously doubt that any of the scuba-related lines sold in the United States actually operate in this fashion; it requires extraordinary financial flexibility to actually do in a retail environment, as all the product sitting at your "dealers" is a liability on your balance sheet and is uncompensated during the entire time it sits there.

If I have 100 such "dealers", for example, and they must each have at least two of something, I now have at least 200 units outstanding at any given point in time that I cannot invoice and for which I must assume all risk for. I end up in the position of having to insure my inventory at 100 locations, get involved in property insurance and underwriting for every one of those sites, monitor them very closely, and accept that if one of those "dealers" steals one of my products or their building burns down I may end up eating it!

In effect I am delayed in recognizing revenue for anything sold until the retail sale takes place. For any company operating on an accrual basis (which is any firm with annual sales over $5m) this is a nearly-impossible situation to stomach, simply due to the effect that such unfunded and impossible-to-control liabilities have on my balance sheet, never mind all the contingent liabilities that I cannot possibly control.

In fact, it makes almost no sense to set up like this as a manufacturer. If I'm going to assume all that risk, I may as well make all the profit, and ditch the commission structure entirely. But now we're back to either direct sales or setting up my own shops.