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The Unauthorized Dealer Scam Over?

by June 28, 2007
Supreme Court Overrules Price Fixing Law

Supreme Court Overrules Price Fixing Law

The Supreme Court today overturned an 87 year-old anti-trust law that prevented manufacturers and distributors from setting minimum pricing for products. This change is going to dramatically affect online retailers and give consumer electronics manufacturers the ammunition they need to finally "come out of the closet" about the whole "unauthorized dealers" who sell their products at below SRP. In fact, one would wonder if the term MSRP (Manufacturer's Suggested Retail Price) will go away and instead be replaced with something akin to MMRP or (Manufacturer's Minimum Retail Price).

Over the years we've seen a lot of crazy manipulation of pricing, products and policies to get around this issue of minimum retail pricing.

Here are just some of the scenarios that we've personally witnessed brought about by attempting to circumvent this law over the past several years:

The "We Have No Idea How That Got There" Scenario

Many manufacturers have a policy that they will not support or warranty products that are not sold through "authorized dealers". Here's the idea - manufacturers have product lines that sell particularly well through retailer, dealer and installer networks and companies. If an online company were to simply order tons of products and sell them online, all of these retailers and installers would be left with inventory that is priced much higher than the "going rate".

Competition, in this sense, is awesome for the consumer but creates absolute havok for dealers.

The solution to date seems to be a policy whereby manufacturers deny warranty coverage to consumers who purchase the products through unauthorized dealers. But HOW does this happen? Do manufacturers truly lose tens of thousands of products (each month) out the back doors of warehouses to the likes of online Internet companies everywhere? Why aren't these companies shut down? Why aren't manufacturers absolutely incensed enough to track down these violators or, (gasp) pick up the phone or order cease and desists?

Rest assured, manufacturers are most certainly NOT losing inventory on a large scale like this. They simply don't enforce the rules and turn a blind eye to what goes on - until it becomes so obvious that it draws the ire of custom installers or larger retail chains. Why are they turning a blind eye? Because the manufacturer makes a profit on ANY product sold at dealer cost or higher. Remember, it's the retailer that makes money above that point. As a result, manufacturers allow the practice to continue because... they LIKE the sales they get from the Internet - they just can't admit it.

Of course, that also means that these companies should warranty all of their products, not just those sold by "authorized" dealers. Under the current law, I believe that unless a manufacturer is actively in lawsuits again unauthorized dealers they should be required to warranty a product the same as they would for an installer or warrantied product. If they are letting it go unpunished then certainly the consumer shouldn't bear the brunt of their desire to keep the profit machine running.

One positive thing that just might come out of this overturned law is the restoration of warranties on unauthorized sales and better management and control of inventory through price controls that are legal. Since there is a trade-off (potentially higher prices) this may not be a welcome change to all.

Hocking Fake "A/B-Stock" Through Esoteric Audio Classifieds Website

For years now companies we will not mention (just start doing searches, you'll find them) have been allowing their dealers to sell products at below MSRP through one of the esoteric audio classifieds sites. At one point we realized that this esoteric audio classified site was selling so much of certain manufacturers' equipment that it MUST be the largest dealer for these companies period. This was also confirmed by several industry insiders as an accepted practice of certain companies in order to get around the "we don't sell online" mantra that they hand out to their dealers.

Here's the problem: Either these companies are selling online on purpose, or they have no problem with the fact that their b-stock inventories from particular dealers outnumber their new, retail products. Folks, there just ain't that many 9/10 and 10/10 b-stock products out there - it's simply a business model - but one they won't admit.

Sell It at MSRP or We Break Your Legs

Some companies, like Apple Computer, seem to consistently (and successfully) circumvent the old rule entirely. Anyone who sells Apple equipment at less than the suggested or approved Apple rates gets to meet Steve Jobs... in a dark alley... alone... Seriously, just try to find new Apple products at less than Apple Store prices. Bose is another company who is just as efficient at "legal" price-fixing.

How do they do it? Simple. They limit their dealers so dramatically that anyone who violates their suggested retail pricing models gets cut - never to sell another iPod or $750 clock radio ever again. Harsh consequences + high demand + good inventory management = the ability to maintain high prices and keep the perceived value high as well I might add.

What Will Happen Next?

So will all these business models go away? Are discounted Internet sales doomed? And, more importantly, will I be strung up by a lynch mob for revealing these little-known secrets of AV manufacturers?

No, No, and gosh I hope not.

One thing that has to factor in to all of this is market forces and the current pricing trends within the industry. If there is anything we've learned it's that the CE industry moves pretty slowly when it comes to sweeping changes. Prices on consumer electronics may rise, but consumers can simply determine - as always - what they are willing to pay for products. If consumer delays spark a mini-recession in AV purchases, then you can bet manufacturers will lower the retail process and the system will balance itself.

According to the ruling:

The decision will give producers significantly more leeway, though not unlimited power, to dictate retail prices and to restrict the flexibility of discounters.

Five justices said the new rule could, in some instances, lead to more competition and better service. But four dissenting justices agreed with the submission of 37 states and consumer groups that the abandonment of the old rule would lead to significantly higher prices and less competition for consumer and other goods.

There is also the possibility that companies like Apple and Bose will now simply have the legal authority to come out of the closet with respect to their price fixing and other manufacturers may simply continue business as usual.

States will determine, on an individual case-by-case level whether any one company's minimum pricing policies will fall into the area of anti-trust laws and need to be limited.

Rule #1 is simple: Don't Panic! Life will go on and no one is going to force you to pay $750 for a clock radio if you don't want to. You don't want to, do you?

About the author:
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Clint Deboer was terminated from Audioholics for misconduct on April 4th, 2014. He no longer represents Audioholics in any fashion.

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Recent Forum Posts:

fmw posts on July 05, 2007 11:35
This probably is not an earth shaker. Minimum advertised prices have been legal since the mid 1990's. The manufacturers don't care what price is offered to consumers as long as it isn't advertised publicly. The purpose of MAP is to protect the dealers from each other. It is a good thing for dealers and a bad thing for consumers.

I'm an e-merchant in another industry. I was involved lightly in the audio business about 5 years ago. At that time, the manufacturers refused to sell to e-merchants regardless of the prices. I offered to sell at list price and was denied time and again. So the issue wasn't price, it was dealer and dealer terrory protection. This law won't change that at all.

I think you can yawn about this particular ruling.
zhimbo posts on July 02, 2007 16:49
In the amateur astronomy market, it's exceedingly rare to find different prices for an item - and I think it's great.

For all the talk about “price fixing”, there actually IS competition: among manufacturers/brands on price and quality of the product, and among retailers on service, shipping, and “extras”. So, you pick the product that gives the best value, and you buy it from the person who gives you the best service. It's an artificially constrained market, sure, but I think it works. There are quality products at a wide range of prices, so no one need go broke to get quality equipment, and retailers are more directly rewarded for quality service.

The audio/video market is much, much larger, and maybe it can never work the same way; but I think this ruling could all in all be a good thing for consumers.
budbrande posts on July 02, 2007 14:14
As an independent dealer myself I realize what it takes to stay in business and have adapted through the years. I buy locally as much as I can as long as I am within $100-$150 of the internet price because I like keeping the local companies around when I need something. I have no problem with my customers coming in and asking for a deal because this allows me to do two things that can encourage them to buy from me. The first thing is they can find out about the product in detail before they buy and many times I have allowed my customers to take a product home to test in their home before they bought it! Not many internet dealers can offer that service. The second thing is service. There have been occasions that a customer bought something from me and had a problem that they could not fix and since I am in town I could easily drop by their house and offer assistance. No internet dealer offers that service. You see, little things like that might not seem like a big deal until you need the dealer and only then can you respect the fact that they are there for you!

Another service we offer that few local dealers do is installation of equipment not purchased from me! Sure I charge more when the equipment comes from someone else but it never fails that the customer will need cables or something and I profit from these sales as well. I charge $125 per hour plus parts for the average install and depending on the job it might even be more! What some dealers don't realize is the next time this customer needs something they usually call me.

Again, I do not fault a consumer for shopping a deal. I always do my very best to keep my price as close as possible to the internet guys and hope that the additional services I offer convince them that shopping with me is the best deal in the end.
darien87 posts on July 02, 2007 11:51
trivee, post: 280581
We want to have prices that are good and aggressive, and fair, however we need to make a bigger percentage than the guys that can deal on volume, or that are small time middle men in the basement making there 10-15% while still in their underwear……………


—-sorry for venting there

I feel your pain man, and as you can see in my post, I was willing to pay $100 over the internet price on that Denon 2807, but the guy at Magnolia said he couldn't even go THAT low. I'm sorry, but I feel that I did more than what was fair as a consumer. I gave the local guy a fighting chance to make the sale. It just doesn't make sense to pay $200 more for something than I need to.
Nick250 posts on July 02, 2007 10:57
Here is a “being fair” strategy. First thing when you go into the B&M say “my receiver budget is very tight so I will have to check prices on line before I make my purchase so I don't want to take up your time if you stick close to list price.” I bought a TV that way once with the twist being I paid a bit more for the TV, but they sold me a Denon DVD player I wanted at cost to make up for it. And if I have a problem they are just down the street. We have an established relationship now and they work with me to make purchases workable for both of us.

Nick
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