Gadgets for Sale \(\ldots\) or Not How come the prices of some gadgets, like the iPod, are the same no matter where you shop? No, the answer isn't that Apple illegally manages prices. In reality, Apple uses an accepted retail strategy called minimum advertised price to discourage resellers from discounting. The minimum advertised price \((\mathrm{MAP})\) is the absolute lowest price of a product that resellers can advertise. Marketing subsidies offered by a manufacturer to its resellers usually keep the price at or above the MAP. Stable prices are important to the company that is both a manufacturer and a retailer. If Apple resellers advertised the iPod below cost. they could squeeze the Apple Stores out of their own markets. The downside to the price stability is that by limiting how low sellers can go, MAP keeps prices artificially high (or at least higher than they might otherwise be with unfettered price competition). Source: Slate, December 22, 2006 a. Describe the practice of resale price maintenance that violates the Sherman Act. b. Describe the MAP strategy used by Apple and explain how it differs from a resale price maintenance agreement that would violate the Sherman Act.

Step by step solution

01

Understand the concept of Resale Price Maintenance (RPM)

Resale Price Maintenance (RPM) is a practice where a manufacturer sets the minimum price at which a reseller can sell its product. This practice aims to prevent retailers from selling the product at a lower price and is considered illegal under the Sherman Act when it restricts free competition by forcing retailers to sell at a fixed price.

02

Analyze why RPM violates the Sherman Act

The Sherman Act is designed to promote fair competition for the benefit of consumers. RPM violates this act because it restricts the ability of retailers to set their prices independently, thereby reducing competition and potentially leading to higher prices for consumers.

03

Understand the Minimum Advertised Price (MAP) strategy

The Minimum Advertised Price (MAP) strategy allows manufacturers to set the lowest price at which their products can be advertised, rather than sold. This strategy discourages retailers from advertising prices below a certain threshold, but it does not directly control the final sale price.

04

Identify how MAP differs from RPM

The key difference between MAP and RPM is that MAP regulations only control the advertised price, not the actual selling price. Retailers can sell the product at a lower price if they choose, but they cannot advertise it at a price below the MAP. This maintains a level of competition while still offering some price stability.

05

Explain the strategic advantage of MAP for manufacturers like Apple

MAP helps maintain brand value and prevents price wars among retailers, which can erode profit margins. For a company like Apple, which operates its own retail stores, maintaining stable prices through MAP prevents other resellers from undercutting their prices, protecting both the brand and the company's profitability.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Resale Price Maintenance (RPM)

Resale Price Maintenance (RPM) is a controversial and often misunderstood pricing strategy. This practice involves a manufacturer setting a minimum price at which a reseller can sell their products. The aim is to keep prices stable across different retailers. However, RPM is considered illegal under the Sherman Act in many scenarios because it can limit free competition. By enforcing a fixed minimum resale price, RPM can prevent retailers from setting their own prices and competing freely. Thus, it may lead to higher prices for consumers, disadvantaging them.

Sherman Act

The Sherman Act is a cornerstone of antitrust laws in the United States. It was enacted in 1890 to ensure fair competition in the marketplace. The Act prohibits business practices that restrain trade or result in monopolization. When it comes to resale price maintenance, the Sherman Act views it as an anti-competitive practice. When a manufacturer enforces RPM, it restricts retailers' freedom to set their prices independently. This anti-competitive behavior can reduce market competition and potentially increase prices, hurting consumers. Hence, RPM is often deemed illegal under this Act.

Minimum Advertised Price (MAP)

Minimum Advertised Price (MAP) is a strategy where a manufacturer sets the lowest price at which a product can be advertised by resellers. Unlike Resale Price Maintenance (RPM), MAP only influences the advertised price, not the final selling price. This means retailers can sell a product below the MAP if they choose, but they cannot advertise it at that lower price. MAP helps maintain the perception of brand value and can prevent excessive price competition among retailers that could erode profit margins.

Price Competition

Price competition refers to the competitive strategy where retailers try to offer the lowest prices to attract customers. While price competition can benefit consumers through lower prices, it can also lead to price wars that hurt the profitability of retailers and brands. Strategies like MAP are used to manage price competition effectively. By setting a minimum advertised price, manufacturers can prevent aggressive discounting that might devalue the brand and ensure that retailers have a fair playing field. This helps in maintaining a balance between competitive pricing and brand integrity.

Brand Value

Brand value is a crucial aspect of any business, representing the worth and perception of the brand in the minds of consumers. Strategies such as Minimum Advertised Price (MAP) play a vital role in preserving this value. When prices are consistent and not subject to excessive undercutting, it helps maintain a high-caliber image of the brand. For example, Apple's use of MAP ensures that its products are seen as premium, reinforcing the brand’s value in the eyes of consumers. Maintaining stable prices through strategies like MAP ensures that the brand is not devalued through aggressive discounting, supporting long-term profitability and sustainability.