Are there better deals than the “Minimum Advertised Price?” More often than you think.

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Are there better deals than the “Minimum Advertised Price?” More often than you think.

CATONSVILLE, MD, June 10, 2016 - Certain products like Bose headphones and Sonos speakers never seem to be advertised below a certain price. That is because many manufacturers insist on a minimum advertised price (MAP) for their products. Ever wondered if it is worth searching for a lower price for such products? Using data from manufacturers across a range of industries, a forthcoming article in the INFORMS journal Marketing Science finds that it may actually pay to search as prices below the MAP are fairly common not just across unauthorized retailers, but even across authorized retailers.

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The research, conducted by Ayelet Israeli of Harvard University, Eric Anderson and Anne Coughlan of Northwestern University uses data from over 1.25 million observations of daily online prices over a one-year period from around 1000 online retailers for over 200 product SKUs from a manufacturer with products in the electronics and music category. They find that unauthorized retailers price below MAP as much as 50% of the time. Surprisingly, even authorized retailers price below the MAP about twenty percent of the time.  And the median discount from the MAP for authorized and unauthorized retailers are around 5% and 13% respectively. Violation rates are robust even with data from seven manufacturers across a broader set of industries.

Manufacturers often use MAP to control their brand image—as aggressive price cutting by retailers can negatively impact consumer perceptions of the brand. To that end, the authors surveyed manufacturer beliefs about how retailers respond to MAP and compare this with actual retailer pricing in the market.

Manufacturers rightly believe that unauthorized retailers are far more likely to price below MAP than authorized retailers. “What surprised us is that unauthorized retailers do comply with MAP about 50% of the time, across a variety of manufacturers, despite the fact that they are not bound by the manufacturers’ policies,” said Anderson.

Other manufacturer beliefs about MAP compliance by retailers were inaccurate. For example, manufacturers believed that retailers sell below MAP at sites such as Amazon or Ebay, but not at their own websites. This turned out to be untrue. Manufacturers also believed that MAP violations by unauthorized retailers created pricing pressure on authorized retailers to violate MAP. Hence ensuring compliance by unauthorized retailers would induce authorized retailers to fall in line. “But we find that authorized and unauthorized retailers are largely separate and that violations in the authorized channel have only a weak association with violations in the unauthorized channel,” said Israeli. “MAP enforcement efforts therefore need to be separately targeted towards both the authorized and the unauthorized channel.” 

The authors caution that finding a price below MAP may not be as good for the consumer as it might appear at first glance. “Violating MAP means lowering prices and hence margins. But having attracted consumers by offering them lower prices on the core product, these retailers then gain back the lost margin through overcharging the consumer on shipping,” Coughlan explained. “Online retailers often reveal these additional shipping charges after the buyer has entered the checkout process and is more likely to complete the transaction, despite the overall higher price.” This means that the seemingly cheapest option can end up costing more.

To cite this study:

Israeli A, Anderson ET, Coughlan AT (2016). Minimum Advertised Pricing: Patterns of Violation in Competitive Retail Markets. Forthcoming, Marketing Science

About INFORMS

With nearly 12,000 members from across the globe, INFORMS is the leading international association for professionals in operations research and analytics. More information about INFORMS is available at www.informs.org or @informs.