Exclusive With Harvard Professor: How Retailers & Consumers Benefit from MAP Policy Enforcement

Spurred by the availability of extensive new data, a study of MAP pricing and policy compliance addresses "the urgent need of managers to understand the evolving online marketplace." The study, Minimum Advertised Pricing: Patterns of Violation in Competitive Retail Markets -- out of the Kellogg School of Management at Northwestern University and set to be published in the Journal of the Academy of Market Science -- documents and explains how retailers vary in their propensity to violate MAP policies and the depth by which they do so.

"Despite the fact that MAP policies have been legal and used in the US for almost 100 years (since 1919), there is very little existing research on this matter," says principal researcher Harvard Business School professor, Ayelet Israeli. "And," she continues, "although times and circumstances have changed dramatically since MAP policies were first introduced, they are still very relevant today."

Some of the study's findings:

  • Violations of MAP are common in practice.
  • Authorized retailers are more likely to comply with MAP than are unauthorized partners.
  • Authorized and unauthorized markets are largely separate.
  • Violations in the authorized channel have small association with violations in the unauthorized channel.  

In a special interview with Upstream Commerce, Prof. Israeli shared more about the study's implications...

UC: How do MAP pricing and policing function in today's "wild west" setting?

AI: One distinction between the way MAP policies worked before the 'dotcom era' and today is that the differences between advertised price and retail price are blurred. In the old days, any ad -- radio, TV, newspaper, store circular, etc. -- would be considered advertising, and only brick-and-mortar in-store prices would be considered retail prices. Today, any price you see on any website could be considered an advertised price.

While manufacturers expect retail partners to comply with MAP, there is no law or rule defining what exactly is or isn't bound by a MAP policy in an online setting. A manufacturer can define this in their policy (for example, some manufacturers treat “in cart” prices as “retail prices” and hence we see that some websites require consumers to “add item to cart to see price”, while other manufacturers consider “in cart” prices to be advertised prices). Thus, manufacturers and their legal teams are left to define what is considered an advertised price and what is not.   

UC: What are the advantages of having MAP policies?

AI: In today's omnichannel world where manufacturers' products are available in many different channels at the same time, one of the main advantages of MAP is the ability to coordinate prices across channels. This could help reduce showrooming since consumers won't have a reason to buy online if prices are the same. This is similar to the traditional advantages of these policies, but it is accentuated in this era due to the many different retailers that offer the same product, the ability of consumers to easily find them, and also because of aggregator websites that collect and display prices from various retailers in one place.

UC: What are the disadvantages of MAP policies today?

AI: For a MAP policy to work, a manufacturer has to monitor and enforce it. Moreover, they have to enforce it equally among all of their retailers. This becomes difficult when retailers have a lot of power in the channel because, as a manufacturer, you have to decide whether to forgo action or take action against that powerful retailer, even if they are your best customer.

UC: How Does MAP benefit consumers?

AI: From a consumer standpoint, these policies sound like they would hurt consumers if they were a mechanism to maintain higher prices, but MAP could potentially benefit consumers by leveling the playing field in terms of competition on other elements.

First, margin protection allows products to be available at many types of retailers. Imagine, for example, intense price competition that leads to only a few high discounters carrying the product… causing specialty stores (that provide more information, service, and have trained employees), to drop out of the market because they simply cannot compete on price. And, if that happens, it's possible that consumers that really need service might not be able to buy the product at all. Second, if there is no longer competition on prices, competing on service may lead to better service.

UC: How is MAP Policy applied?

AI: By law, a manufacturer can set up terms by which their retailers do business with them. MAP policies are typically set unilaterally by the manufacturer and apply to all its authorized dealers and distributors. MAP policies typically include clear guidelines of what is a violation, the consequences of violations and benefits of compliance, etc.

If the manufacturer does not enforce the policy, there is very little compliance because if there is no enforcement, then the policy is essentially non-existent.

A common practice by manufacturers is to monitor (and sometimes enforce) violations by use of a third party company that checks for -- and sends the manufacturer reports of violations.

Some companies also provide manufacturers with enforcement tools such as an email to a violating retailer with a screenshot of the violation and a reminder of the policy.

Also, using sophisticated competitive intelligence solutions, retailers can also alert and show manufacturers about violations of competing retailers.      

Another advantage of having a third party company track, monitor, and determine violations mitigates some concerns about coercion or collusion between retailers and manufacturers.

UC: What about the relationship between manufacturers and unauthorized retailers?

AI: So far we have been talking about the relationship between manufacturers and authorized retailers. Unauthorized retailers are a whole other problem: It is difficult to find them and difficult to figure out how they received your product. Then, unfortunately, because they are not authorized, none of the policies apply to them and it is hard to rein them in. Manufacturers may try to pursue legal action (trademark or IP violations) against these retailers or try to identify how they got the product in order to eliminate distribution to them, but these options are hard to implement.

UC: Your research results stated: "Violations from authorized retailers are more likely to prompt violations by other authorized retailers," while "violations by unauthorized retailers do the same for other unauthorized retailers."  Please explain:

AI: One speculation is that these two markets operate independently but we cannot confirm the reason. It is especially frustrating for legitimate retailers, since consumers usually have no idea who is authorized and who is not.

Bottom Line For Your Bottom Line:

"MAP levels the playing field to coordinate prices across many different retailers and channels, to maintain brand image and to prevent products being used as loss leaders," says Prof. Israeli. "All of this, in the long run, can help with the brand image, which, in turn, can help both manufacturers and retailers 'make the sale'."

"A central implication of our study," Prof. Israeli continues, is "we cannot conclude that eliminating the unauthorized channel or bringing it to compliance will also bring the authorized channel into compliance. Managers who want to improve compliance among authorized retailers should direct enforcement efforts directly toward the authorized retailers. At the same time, we find that the intuition regarding who is a good channel partner is correct – retailers who are authorized, who have higher assortment sizes, carry the manufacturer’s product for a long period of time, and who provide better service to consumers are also more likely to comply with MAP."

"I also believe that not everything has to be about the lowest price. Many consumers value high quality luxury products or experiential services and are willing to pay for them. MAP can help support those as well."

"So even though the competitive environment has changed and is constantly evolving, MAP policies are relevant today, and manufacturers and retailers (and perhaps also legislators), need to learn more about how these changes affect their practices."  

Ayelet Israeli, PhD, is an Assistant Professor of Business Administration in the Marketing Unit at the Harvard Business School. Professor Israeli's research focuses on pricing and pricing policies, channel management, and online marketing. Her work has been cited in The Wall Street Journal, The Atlantic, Time, and MSN Money.

Copyright 2016 Upstream Commerce. Contents and quotes can be used or reproduced with express written permission of Upstream Commerce.    

 

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Naomi K. Shapiro

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A seasoned market communications specialist, Naomi headed public information for several academic and professional associations and was the founder and CEO of award-winning agency, Creative Brilliance Strategic Marketing Communications. She created and published Brilliant Ideas for Publishers Magazine and authored popular newspaper trade reference, The Brilliant Book of Promotions, Sales Tools & Special Events. Simultaneously, Naomi savored the world as an adventure travel writer that included trekking on glaciers, fishing with saltwater crocodiles and swimming with piranhas. Naomi holds her M.A. from the University of Wisconsin, including participation in a unique industry-science-technical writing program.
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