MAP Policy Enforcement in an Omnichannel World

Coming out soon in Marketing Science is a paper by researchers at the Kellogg School of Management at Northwestern University titled, Minimum Advertised Pricing: Patterns of Violation in Competitive Retail Markets.

In an exclusive interview with lead researcher Ayelet Israeli (now professor of business administration in the Harvard School of Business), Upstream Commerce learned that violations of minimum advertised pricing (MAP) are common in practice; authorized retailers (i.e., those that have formal agreements with a manufacturer) are more likely to comply with MAP than are unauthorized retailers; authorized and unauthorized markets are largely separate from each other; and violations in the authorized channel have small association with violations in the unauthorized channel, and vice versa.

Prof. Israeli explained that MAP policies are, by law, terms that are typically set unilaterally by the manufacturer and apply to how authorized dealers and distributors do business with them. MAP policies typically include clear guidelines of what is a violation, the consequences of violations and benefits of compliance, among other things.

"Although MAP policies have been legal and used in the U.S. since 1919, there's very little existing research on this matter," Israeli notes, quickly adding that MAP policies are still very relevant today, including:

1. The urgent need of managers to understand the evolving online marketplace.
2. There's no law or rule defining how MAP policy is bound in online settings.
3. A primary advantage of MAP in today's omnichannel world is the ability to coordinate prices across channels.

"With the advent of the internet," Israeli explains, "differences between advertised price and retail price are now blurred. Any price you see on any website could conceivably be considered an advertised price."

Israeli says for a MAP policy to be effective, a manufacturer has to enforce it equally among all of its retailers, which can be hard for it to do against a powerful retailer which may be its best customer. On the other hand, if the manufacturer doesn't enforce the policy, there's very little compliance, rendering MAP policy essentially nonexistent and becoming a free-for-all among all the retailers carrying that product.

"From a consumer standpoint, MAP policies may sound like a mechanism to maintain higher prices, but MAP could potentially benefit consumers by leveling the playing field in terms of competition on other elements," Israeli adds.

For example, specialty stores that provide more information and services from trained employees can play up these services when price is the equalizer. In fact, all retailers may offer better service if MAP becomes the equalizer.

Monitoring MAP Violations by Third-Party Solution Providers
A common practice by manufacturers is to monitor (and sometimes enforce) violations using a third-party solution that checks for and documents violations. These companies also provide manufacturers or retailers enforcement tools such as an email with a screenshot of the violation and a reminder of the policy. Therefore, retailers have some leverage in being sure that everyone honors the MAP policy.

Since we've been talking about manufacturers and authorized retailers, we asked Prof. Israeli about "unauthorized retailers" — i.e. those that have no formal relationship with the manufacturer, and thus may slip the net of enforcement.

"Unauthorized retailers are a whole other problem," says Israeli. "It's difficult to find them and figure out how they received your product. Then, unfortunately, because they're not authorized, none of the policies apply to them and thus it's hard to rein them in. Any sanctions are hard to implement."

And although these two markets operate independently, consumers probably don't have any idea who is authorized and who is not.

Bottom Line
"Violations from authorized retailers are more likely to prompt violations by other authorized retailers, while violations by unauthorized retailers affect other unauthorized retailers," notes Israeli.

Manufacturers that want to improve compliance among authorized retailers should direct enforcement efforts directly towards the authorized retailers.

Another point made by Prof. Israeli is "not everything is about the lowest price … there are certainly consumers out there willing to pay for high quality in certain product categories such as luxury items, experiential products and more.

"Finally, MAP enforcement is important because manufacturers realize that retailers that are authorized, have higher assortment sizes, carry the manufacturer’s product for a long period of time, and provide better service to consumers are also more likely to comply with MAP."

Naomi Shapiro is strategic market communicator at Upstream Commerce, a provider of cloud-based, automated predictive pricing and price optimization solutions.