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Unit 12: Merchandise Pricing

only sell to full-price retailers. If any of its retailers violate that policy, the vendor can terminate Notes
the discounters without discussion or negotiation. In this way, the vendor exercises its right to
choose with whom it will deal but avoids forming an illegal agreement with its dealers to
vertically fix prices.
Some retailers, on the other hand, want to be able to price above MSRP. For instance, Harley-
Davidson motorcycles are so popular that some dealers have sold them over the manufacturer’s
suggested retail price. Large manufacturers and franchise companies are generally against pricing
above MSRP. They argue that their brand’s image can be damaged if retailers price above MSRP.
Retailers like the extra profit potential and argue that competitive conditions may vary by
locality.
The Supreme Court ruled in 1997 that price ceilings would not necessarily violate federal antitrust
laws. This was the first time the Court had carved an exception to the general ban on vertical
price-fixing. From now on, each case will be judged on whether it restricts competition.

12.3.3 Horizontal Price Fixing

Horizontal price-fix involves agreements between retailers that are in direct competition with
each other to have the same prices. As a general rule of thumb, retailers should refrain from
discussing prices or terms or conditions of sale with competitors. Terms or conditions of sale
may include charges for alterations, delivery, or gift-wrapping, or the store’s exchange policies.
If a buyer or store manager needs to know a competitor’s price on a particular item, he or she can
check advertisements or the Internet or send an assistant to the store to check the price. But the
buyer or manager shouldn’t call the competitor to get the information or personally visit the
store for fear that this information would be used against him or her in a price-fixing case.
Further, retailers shouldn’t respond to any competitor’s request to verify those prices. The only
exception to the general rule is when a geographically oriented merchants association, such as
a downtown area or a shopping center, is planning a special coordinated event. In this situation,
a retailer may announce to other merchants that merchandise will be specially priced during the
event, but the specific merchandise and prices shouldn’t be identified except in advertising or
through in-store labeling and promotion.

12.3.4 Comparative Price Advertising

A department store in Denver was selling two cutlery sets on sale, reduced from original or
regular prices of $40 and $50. The true regular prices were $19.99 and $29.99. The store sold few
at the original price for two years. This common retailing practice, known as comparative price
advertising, compares the price of merchandise offered for sale with a higher regular price or a
manufacturer’s list price. Consumers use the higher price, known as the reference price, as a
benchmark for what they believe the real price of the merchandise should be.

This practice may be a good strategy, since it gives customers a price comparison point and
makes the merchandise appear to be a good deal. Retailers, like the one in Denver, may use
comparative price advertising to deceive the consumer, however. To avoid legal problems,
particularly with state governments that have been actively prosecuting violators, retailers
should check for local rules and guidelines. Generally,
1. The retailer should have the reference price in effect at least one-third of the time the
merchandise is one sale.

2. The retailer should disclose both how sale prices are set and how long they will be offered
and how the reference price was determined.

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