Saturday, July 07, 2007

Supreme Elasticity

Today in microeconomics we discussed how people respond to price changes. The recent Supreme Court ruling on if manufacturers could sell to retailers on the condition the retailers sell at that price. We could not, however, exactly recall what the existing law was. And we were confused why a manufacturer would want to rob a particular retailer of flexibility.

As it turns out, the court overturned the existing rule that retailers could not be locked into a price. (I mistakenly thought the reverse was happening.) The case was brought by Leegin Creative Leather Products who wanted to establish a minimum price on its goods sold. These seems to confirm one of the more plausible arguments mentioned in class concerning why a maker would want high prices: to maintain the brand. I doubt it would look good for a maker of "creative leather products" if that creativity saw its way to the discount bin.

And yet we should remember that most goods are elastic: manufacturers generally want to keep prices low because the increase in quantity demanded more than makes up for the lower price. Revenue increases. Let us also remember that this is an option, not a universal decree. Manufacturers don't have to set a retail price. I doubt many will because retailers would be less inclined to buy goods where they have to agree on such a control. (I imagine only high-end quality manufactures will be truly upset if their high end goods hit clearance.) If those leather products aren't selling, the store has to throw them away to make room in the warehouse. They can't cut losses and would be much less willing to take a chance.

The laws were originally couched in anti-trust logic. One cannot allowed one company to have pricing influence over the other, contract or no. Consumer groups are worried by the ruling and think the price on all goods will immediately rise. Such conclusions might have a bit of truth to them but they forget the basic substitute that all goods have: you don't have to get it and that includes the retailer.

HT: Matt Huber

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