Distribution, Competition, and Antitrust / IP Law

Price Erosion and Restricting Online Distribution Rights

English: Vegetables reseller at rue Mouffetard...

An early vegetables reseller. (Photo credit: Wikipedia)

A reader who works with clients who sell online asked me to address online distribution restrictions.  This is more-or-less the reverse of the question I addressed in “Can My Supplier Refuse to Sell Products to Me?”  As always, I offer general thoughts here, not specific legal advice.

First, to frame the issue a bit further – if you sell products online, particularly through third-party sites such as Amazon, eBay, etc., then you very well may have concerns about controlling not only product quality and service but also price.  Many online sellers are seeing price erosion caused by multiple distributors or resellers, and they want to know what they can do about it.

Before getting to the several possibilities below, keep in mind that if you – or anyone in your distribution chain – is a monopolist or near-monopolist, many of these possibilities may be problematic.  It’s often more difficult than you might think to figure out if a firm is a monopolist, but you can use market share as a sort of rough proxy.  A share above 40% starts putting you in the potential yellow zone.  A share above 60%-70% is often (though not always) evidence of monopoly power.

But let’s assume that neither you, nor your supplier (to the extent you have one), has a market share close to these levels.  In that case, what can you do to control product distribution – and particularly product pricing – on third-party Internet sites?

Exclusive distribution

First, you can be appointed (or appoint yourself) as the exclusive distributor of the product.  You can define the rights as they best work for your business.  You could have the exclusive rights to:

  • Distribute product anywhere;
  • Distribute product online; or
  • Distribute product on certain third-party sites (like Amazon).

By having exclusive distribution rights, you can of course maintain better control over product pricing.  (Note – I’m not talking here about actual price agreements – only the natural result of having a limited distribution network.)

Online distribution “territories”

You can appoint distributors, sub-distributors, or resellers for limited purposes – for example, you can have a single authorized sub-distributor for Amazon, another for eBay, etc.  Again, by limiting your distributors, you should see less intra-brand price competition.  Because the antitrust laws are designed to encourage inter-brand competition, a loss of intra-brand competition is not usually a matter of significant (or indeed any) concern.

Minimum advertised price programs

If you use a number of sub-distributors, or if you are one of many sub-distributors, you can use minimum advertised price (“MAP”) programs.  These do not limit actual consumer pricing (e.g., the pricing in an online checkout cart), but they impose limits on what prices can be advertised.  Sometimes advertising coop dollars are awarded for compliance with the program and withheld for non-compliance.  It is important to properly structure any MAP program.  If structured properly, they are lawful throughout the country.

Resale price agreements

This one is a little tricky.  Under federal law, agreements on resale prices are no longer per se unlawful.  They can still be condemned if they are anti-competitive, but it is usually quite difficult to establish that they are.

The problem is that at least several states still consider agreements on minimum resale prices to be per se unlawful.  So before entering into such agreements, you need to consider whether you are going to be selling or distributing products in those states.  If you’re selling on a national platform like Amazon, you may have to assume that you will be selling in all 50 states.

Price discrimination

Can you offer (or be offered) different (e.g., better) pricing than other distributors or sub-distributors?  Maybe, maybe not — there is a complex law called the Robinson-Patman Act that governs such price “discrimination.”  The law makes discrimination unlawful, but there are many exceptions, and I don’t have space to get into all of them here.

Terminations for price

If your sub-distributor is pricing product in a way you don’t like, you can always terminate him/her (putting aside any contract rights he may have).  However, it is very important that you make a clean termination – promises, commitments, and suggestions followed by a reinstatement can amount to an agreement, which again may still be per se unlawful in several states.

Conclusion

There are a number of options for limiting online distribution to maintain better control over product placement and pricing.  Keep in mind, however, that you should never agree on such options with your competitors – or else you may have a horizontal agreement on pricing, which can be extremely problematic.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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