Monday, December 16, 2002

CD Price fixing

A while ago, the RIAA was sued for conspiring with retailers to keep the prices of CDs high. The suit centered around "minimum advertised prices" where the distributors (RIAA) would pay for retailers' advertising in local media, provided the retailers did not advertise CD's at a sale price below a minimum established by the distributor. This has been settled in favor of consumers.

Long time readers of this site will know how I feel about the content cartel, but in this case I do not feel the judgement was correct (I've taken the opposite position here and here but I think I was wrong before). Collusion amongst horizontal market participants (i.e. they are all in the same industry and do the same thing) is pretty straightforward -- coordinating action lets you restrict quantity, raise price, and earn monopoly rent. But it's tempting to cheat, and since you cannot contract to enforce the cartel, your best bet is to get Congress to pass legislation that does, usually through some "just and reasonable" non-discrimination clause. (Telecom and media regulation is rife with this sort of thing.)

Collusion amongst vertical market participants (i.e. one is a wholesaler who sells to the other, who is a retailer) is a different matter altogether. Since the wholesaler can perfectly control the wholesale price, why bother the retailer with some minimum price requirement (as the RIAA did under their "minimum advertised price" regime)? After all, if I want you to sell CDs for at least $15, why don't I simply charge you $15 for them?

The answer is that wholesalers think they would be best served if the retailers invested in selling the product also. In the CD example, this could include things like 1) stocking a wide selection of music (not just the hits), 2) keeping a clean store, 3) hiring knowledgeable salespeople, 4) investing in listening booths etc. By setting a minimum retail price above the wholesale price, the RIAA has restricted record stores' ability to compete by discounting, meaning they have to compete on service instead. And being good, greedy capitalists, they've figured out that they can sell more stuff through better service than through lower price (this is not always true -- sometimes low price is the way to go). This type of thing also happens in the electronics business, where high-end audio is offered under a minimum retail price so customers can't go to one store, learn all about the system, and then buy it from a discounter.


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