Minimums Definitely Required

I don’t usually delve into the conservative quarter of the blogosphere, because whenever I do, I stumble across something like this that makes me despair for the future of the human race…

The basic premise: Maryland is soon to enact a new law – supported, surprise surprise, by Wal-Mart, Target, and Sears, among others – that will allow retailers to sue suppliers who have been “forcing” minimum-retail-price agreements on them. “Chad”, it seems, doesn’t quite understand, as he puts it, “the ‘need’ for government to regulate certain aspects of business”. Or, as he puts it, “all that stands between greedy suppliers having their way with Wal-Mart and their customers is the powerful hand of government stepping in to outlaw such practices?”

Here’s a hint: it really has nothing whatsoever to do with the suppliers, Chad.

Minimum-pricing agreements do serve the suppliers’ interests, to be sure, but they exist primarily for one reason: to level the playing field between big businesses like Walmart and smaller, privately-owned family businesses. In a lot of areas, those minimum-pricing agreements are pretty literally all that are keeping small family businesses afloat.

Walmart, being the good capitalists that they are, would very much like everyone who lives near one of their stores to shop there, and aren’t afraid to use fairly malicious tactics to ensure that long-term goal by forcing the competition out of business.

Suppose Walmart opens a new store in a small town with a popular, family-owned lawnmower dealership and small-engine-repair shop. Lawn mowers are basically commodity items; a Lawnmaster 120XE is a Lawnmaster 120XE, no matter where you buy it from. Suppose Lawnmaster has set the 120XE’s minimum retail price at $149.99; that’s the lowest Walmart and the family business can sell it for, and even if they do so, they’ll still turn a profit. (I’m unaware that any manufacturer has ever set a minimum retail price below wholesale cost; doing so wouldn’t make any sense.) It’s an even playing field for everyone, and Walmart’s success or failure in the local lawnmower business is going to have to ride on the success of their customer service and other related intangibles. Worst-case scenario, everyone in town has the same prices on the 120XE; more likely, the Walmart stops carrying the 120XE there and goes with the GrassKutter 1000, a Chinese-made mower with a 30-day warranty and that can be sold for a much lower price, like $89.99, and tries to compete apples-to-oranges on raw price alone.

Without that minimum pricing agreement, however – or if Walmart is able to sue their way out of the agreement – there’s absolutely nothing stopping them from selling the 120XE mower for, oh, $74.98. Sure, they will lose money on every mower they sell, but they can – and happily will – absorb it as a “loss leader” in the long-term because such a tactic will quite quickly force the small family shop out of business. And then, once they’ve eliminated the competition, you can bet the price of that mower will climb back up past $149.99.

Remember – minimum pricing agreements have nothing whatsoever to do with the wholesale price the retailer pays. If Walmart doesn’t like the price someone is charging them, they’re already free to, as Chad so eloquently puts it, tell them to “go pound sand”. That doesn’t change – all that changes is Walmart’s ability to sell that product at uncompetitive and unsustainable low prices.

Competition is good, because it eliminates monopolies, de-facto or otherwise. The new law in Maryland has nothing to do with preventing “greedy suppliers” from “having their way with Wal-Mart and their customers”; it’s all about big retail giants crushing the independent competition and screwing, in the long run, the customer.

Here in Minnesota, there’s a law on the books that forces businesses to sell gasoline at a minimum mark-up per gallon. (Something like nine cents, I think, but I could be wrong.) The law exists entirely because some big chain “box” stores, especially in small communities, used to sell gas, as well, and did so at ridiculously low, below-cost prices. (Often as part of some sort of gimmick – spend $25 on merchandise and save $0.25 per gallon on gas, or something like that.) Independent gas stations couldn’t compete with the loss-leader tactics of the big stores, and went out of business by the dozens. Government meddling with the markets? Or simply government leveling the playing fields? Well, here in Minnesota, your view on that probably depends on whether or not your car runs on ethanol or diesel fuels, which the big box stores generally didn’t sell.

Likewise, with the hypothetical lawnmower prices above, you might think that Walmart should be free to charge whatever they want, and if the family-run business fails, well, that’s just market forces at work, right? You might think that – right up until the day your lawnmower breaks, and you discover Walmart not only doesn’t do small-engine repairs, they just forced the only place within a hundred miles that did out of business. Obviously, Walmart thinks you should just buy a new mower… from them, naturally, since they’re the only game in town.

The only people who benefit from this new law in Maryland are big businesses like Walmart and Target. Everyone else – from small-business owners to average working-class Joes – gets royally shafted.

What’s not to get?

Published in: 'D' for 'Dumb', General | on May 4th, 2009| Comments Off on Minimums Definitely Required

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