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Supreme Court Pricing Ruling Unlikely to Affect DVD

5 Jul, 2007 By: Chris Tribbey

DVD is a little different than designer handbags, and a Supreme Court ruling June 28 that overturned a ban on price-fixing — allowing manufacturers to set minimum prices and forbid discounting — won't likely have any major impact on DVD, antitrust law and home entertainment experts agree.

A retailer sued designer-handbag company Leegin Creative Leather Products Inc. after Leegin demanded that its bags be sold at a certain price. The Supreme Court ruling overturned a lower court's judgment in favor of the store. Before the ruling, it was automatically illegal for manufacturers and retailers to agree to minimum resale prices.

Clark C. Havighurst, a professor emeritus of law with Duke University and an expert in antitrust law, praised the Supreme Court ruling and said the change gives manufacturers more flexibility.

“Competition among the originators of products will still operate to keep prices competitive,” he said. “The producer of a product will have new freedom, however, to decide whether he wants his dealers to compete on the price in reselling the product or, instead, to work hard in other ways to sell the product at a fixed price because of the extra profits they can hope to earn for themselves [and for the producer].”

Bo Andersen, president of the Entertainment Merchants Association, said because DVD consumers don't shop by studio and retailers don't organize store shelves by studio, “Leegin may be less significant than it at first blush appears.”

“Under the Supreme Court's reasoning, minimum resale pricing arrangements work best and are perhaps most pro-competitive when they promote interbrand competition for consumers,” he said. “With respect to packaged home entertainment products, interbrand competition is not a dominant form of competition … interbrand competition does not provide an incentive for suppliers and retailers to agree on minimum retail prices.”

He added that retailers who sell DVD and video game products would be hesitant to agree with suppliers not to sell below a suggested retail price.

“Competition is the lifeblood of retailing, and price competition is obviously a powerful competitive tool in DVD retailing,” he said. “Retailers will want significant concessions or considerable additional value to cause them to agree with their supplier not to engage in price competition below a minimum price.”

Andersen said that if DVD suppliers were to reach too high on retail prices, they may risk more returns.

“Restrictions on price flexibility at retail may generate more returns, as would setting retail prices above optimum levels for consumer demand,” Andersen said. “There is always a risk that a retail price set by the manufacturer may not be the best business strategy for any given retailer.”

Aaron Edlin, a professor of law and economics and antitrust law expert at the University of California, Berkeley, said the law, which had been effect since 1911, needed to be changed.

“It was wrongheaded for the law to assert, as it used to, that minimum retail prices are always bad for consumers,” he said. “Retailer margins can support valuable services, for example.

“Time will tell whether this ruling will mean that minimum retail prices are always legal; that would be an extreme in the opposite direction. The effects of this ruling will surely vary by market and are unpredictable. I wouldn't expect anything too dramatic, though, because there were ways around the law before.”

The Consumer Electronics Association has also come out in favor of the ruling, with President and CEO Gary Shapiro saying in a press release that “reasonableness has come back to antitrust laws.”

“The Supreme Court holding that the ‘rule of reason' should apply to the legality of manufacturer pricing decisions, means simply that all the facts will be examined before a finding of illegality — replacing a black and white rule of illegality in every case,” he said.

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