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The Fight Over Who Sets Prices at the Online Mall

Brad Stone|The New York Times
Monday, 8 Feb 2010 | 2:15 PM ET

Where’s the price?

On some pages of e-commerce sites selling products like televisions, digital cameras and jewelry, a critical piece of information is conspicuously missing: the price tag.

Search results for Movado Men’s Esperanza Watch
Source: amazon.com
Search results for Movado Men’s Esperanza Watch

To see how much these items cost, shoppers must add the merchandise to their shopping carts — in effect, taking it up to the virtual register for a price check.

The missing prices are part of a larger battle sweeping the world of e-commerce. Wary of the Internet’s tendency to relentlessly drive down prices, major brands and manufacturers — and now, book publishers — are striking back, deploying a variety of tactics and tools to control how their products are presented and priced online.

“You are seeing firms of all types test the waters” with strategies to control online pricing, said Christopher Sprigman, associate professor of intellectual property at the University of Virginia School of Law and a former antitrust lawyer at the Justice Department. “They feel they have more freedom to do it now.”

In many cases that freedom stems from a 2007 Supreme Court ruling in the case of Leegin Creative Leather Products v. PSKS. The ruling gave manufacturers considerably more leeway to dictate retail prices, once considered a violation of antitrust law, and it set a high legal hurdle for retailers to prove that this is bad for consumers.

Ever since that decision, retailers say manufacturers have become increasingly aggressive with one tool in particular: forbidding retailers from advertising their products for anything less than a certain price.

For offline retailers like Wal-Mart Stores and Best Buy that means not dropping below those prices in the circulars and ads in newspapers. But online retailers have a greater burden. Manufacturers consider the product pages on sites like eBay and Amazon.com to be ads, and they complain whenever e-commerce sites set prices below the minimum price.

This leads the sites to replace prices with notes that say things like “To see our price, add this item to your cart.” One day last week, prices were missing on Amazon.com for an array of products like the Milwaukee Sub-Compact Driver drill kit, a Movado men’s Esperanza watch and an Onkyo 7.2-channel home theater receiver.

As a result, those prices also did not show up on search sites like Google Product Search and PriceGrabber.com. The trend has arguably weakened one of the implicit promises of e-commerce: that quick searches and visits to comparison shopping sites will yield the best deals.

Most online retailers complain that the missing prices confuse consumers and give an advantage to big chains like Wal-Mart, which do not bear the same burden in their stores. They also say the practice of enforcing minimum advertised prices has gradually spread from the consumer electronics business to companies in other industries like sporting goods and jewelry, which are also trying to stem the downward pressure of prices online.

Amazon declined to comment on the issue, but the company’s feelings on the matter are public. “Retailers like Amazon have the legal right to set their own prices independently, but some manufacturers place restrictions on how those prices may be communicated,” reads an explanation on Amazon product pages that lack prices. “We realize that this is an inconvenience and are regularly working to educate manufacturers on how their policies impact our customers.”

A few online retailers, like Buy.com, say advertising restrictions have not measurably affected sales. But most other e-commerce companies volubly protest.

“We think consumers are best served when the retail marketplace is open and transparent and retailers have an opportunity to offer the best prices and services, and are not controlled from above by manufacturers,” said Brian Bieron, eBay’s senior director for domestic government relations.

Manufacturers, of course, have a different view. They say the competitiveness of the Internet has unlocked a race to the bottom — with everyone from large corporations to garage-based sellers ravenously discounting products, and even selling them at a loss, in an effort to capture market share and attention from search engines and comparison shopping sites. They also worry that their largest retail partners may be unwilling to match the online price cuts and could stop carrying their products altogether.

“If there isn’t that back-and-forth between manufacturer and retailer, it’s just a natural tendency to drive the price down to nothing,” said Wes Shepherd, chief of Channel Velocity, which sells software that allows companies to scour the Web looking for violations of pricing agreements.

Who's in control?

Southern Audio Services, based in Baton Rouge, La., sets a suggested retail price of $80 for its Woodees Inner-Ear Stereo Earphones, while their minimum advertised price is $50. Most online retailers sell them for around $50, but Amazon sells them for $48.40, keeping the price off the product page.

“At the end of the day, it will become a race to zero if you don’t do anything to manage the issue,” said Jon C. Jordan, chief executive of Southern Audio Services. “Then you’ve devalued your product to the point where it’s difficult to get distribution and consumers lose interest in it.”

The battle may shift back to Washington. Companies like eBay and Amazon are asking Congress to override aspects of the Leegin ruling. One bill that would repeal provisions of the ruling is now being considered in the House. In October, 41 state attorneys general wrote a letter to members of the House Judiciary Committee, arguing that the court’s decision had resulted in higher prices for shoppers.

Just like other product makers, book publishers have also been emboldened by the Leegin decision. In their case, they want to prevent low prices on electronic books from cannibalizing their more profitable hardcover sales.

Instead of selling e-books wholesale to retailers like Amazon.com, the publishers want to sell them directly, setting prices and having the retailer act as an agent, taking a fixed 30 percent commission. Macmillan recently struck such an agreement with Amazon.com after a protracted dispute that led Amazon to remove, briefly, Macmillan’s electronic and physical books from its site. Deals with the other major publishers will most likely follow.

Book publishers “are using a different set of levers, and a different vocabulary, to get what they want,” said Scot Wingo, chief executive of ChannelAdvisor, which helps companies sell online. “But it’s the same outcome. Manufacturers are effectively controlling the price that the consumer sees on the Web."

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