Manufacturers' Resale Price Maintenance Practice Should be Allowed

OHASHI Hiroshi
Program Director and Faculty Fellow, RIETI

Japan's consumer prices, which have been on a modest downward trend, are finally beginning to show signs of a pick-up, but the Bank of Japan's goal of achieving a "2% inflation rate in two years" is still nowhere in sight. Against this backdrop, recent news reports have said that the government began reviewing its policy for the retail industry as a means to overcome deflation. This can be interpreted as reflecting a shift in the government's focus from macro policy to micro policy (at the corporate and industry levels) now that the first arrow--a monetary easing policy--seems to have completed its flight.

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Japan's distribution system began to draw attention around the time of the Japan-United States Structural Impediments Initiative (SII) talks in 1989-1990. At the SII talks aimed to address the trade imbalance between the two countries, the United States pointed out the closed nature of the Japanese market as a reason for the U.S. companies' unsatisfactory performance in exports to Japan and demanded improvements to the business practices of the distribution industry. At the time, disparities between domestic and overseas prices were becoming a social problem in Japan, and manufacturer-led distribution networks, often criticized for excluding foreign rivals from the Japanese market, were blamed as the cause of higher domestic prices.

In Japan at the time, it was generally perceived that distribution networks were controlled by manufacturers. It was therefore thought that some sort of constraint would need to be imposed on manufacturers' pricing and distribution strategies in order to open up distribution channels for foreign products and lower domestic retail prices for Japanese consumers. It is against this backdrop that the Japan Fair Trade Commission (JFTC) set out the Guidelines Concerning Distribution Systems and Business Practices in 1991. For more than 20 years since then, the JFTC guidelines have been in operation without undergoing any significant changes.

Take a look at what happened in the consumer electronics industry as an example. The term "list price" virtually disappeared because resale price maintenance (RPM), a practice in which manufacturers set retail prices for their products, is in principle considered illegal under the guidelines. Likewise, the practice of selecting a specific distribution channel and instructing the selected distributor to follow a specific selling methodology, which used to be employed by many manufacturers as a way to establish brand identity among consumers, seems to have been abandoned generally out of the fear that such act might constitute a violation of the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (hereinafter, the "Antimonopoly Act"). As such, the JFTC guidelines have had substantive effects on the behavior of companies regardless of the actual application of the guidelines.

The retail and distribution were already undergoing major changes when the guidelines were introduced in 1991. With the rise of large-scale retail stores and multiple-store chain retailers amid the emergence of global distribution networks, manufacturers became less inclined to build their own distribution networks. Then came the age of the Internet, where online price comparison sites provide up-to-date information on which retailer offers the lowest price. With this, the reversal of the power balance between manufacturers and retailers became conclusive.

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In view of the current oligopolistic structure of the retail industry with greater bargaining power to retailers relative to manufacturers, the JFTC's guidelines appear no longer capable of dealing with the reality of distribution business practices, and it is imperative to take prompt action toward substantial revision. In doing so, the following three points are quite important.

First, it is necessary to bring in the perspective of economics. The perception underlying the JFTC's guidelines is that the free business activities of "weak" retailers must not be infringed upon by "strong" manufacturers. Indeed, this is a common idea underlying all regulations governing "unfair trade practices" such as an "abuse of a dominant bargaining position."

One problem with this perception is that the criteria for the determination of illegality leave much room for the discretion of government agencies, for instance, as to how power relationships between parties to a transaction should be defined and where to draw the line to separate contracts that would restrict the freedom of choice in business from those that would not. Also, the incorporation of business interests, which are unrelated to consumer interests, into the regulatory criteria seems to be a qualitative deviation from the mainstream anti-monopoly law thinking overseas.

In economics, the impact of corporate behavior on market competition is evaluated from the perspective of consumer interests. In this approach, special attention needs to be paid to the fact that seemingly-similar corporate behavior could do good or bad to market competition depending on the transaction environments in which such behavior takes place. The selection of a specific distribution route, for example, can be seen as a competition-inhibiting practice intended to restrict business partners' freedom of choice or as a competition-facilitating practice intended to boost brand value by focusing on a specific group of customers.

As the impact of distribution practices on consumer interests differs from one case to another, a regulatory approach that determines the illegality of a certain business practice based on its form, rather than its substance, will not help safeguard consumer interests. Instead, whether or not a specific business practice can be justified by economic rationale should be used as the evaluation criteria for the purpose of competition policy, and, accordingly, the JFTC guidelines must be revamped to make them more consistent with the economics-based approach. The problems noted above are not limited to practices covered by the JFTC guidelines but also apply to the entire scope of unfair trade practices. In a similar development, the U.S. Federal Trade Commission (U.S. FTC) has begun reviewing the definition of "unfair methods of competition." It seems that the time has come for Japan to begin discussions as well.

The next point at issue is manufacturer-designated RPM. Because of the possibility of facilitating cartels, the term "RPM" may carry a negative connotation. However, in the world of economics, it has long been acknowledged that manufacturer-designated RPM has some pro-competitive aspects. For example, the setting of maximum retail prices as a way to prevent retailers from charging higher prices than those stipulated by manufacturers or the setting of minimum retail prices as a way to boost incentives for retailers to invest in the improvement of their services in selling new products would lead to a desirable outcome for consumers.

In response to this claim by economists, a recent court decision in the United States ruled that manufacturer-designated RPM should not be deemed "unlawful per se ," while competition authorities in Europe have changed their policies to allow RPM as long as it encourages the sales of new products (see Table). As discussed in the first point of my argument, Japan needs to take steps to permit RPM, a practice that seemingly restricts the free business activities of "weak" retailers, when it is deemed beneficial to consumers.

Table: RPM Regulations
Japan Illegal in principle. (Article 2, paragraph 9, item (iv) of the Anti-Monopoly Act)
United States Formerly deemed to be "unlawful per se." However, the 2007 Supreme Court decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. ruled that Leegin's setting of minimum resale prices for accessories for women is not unlawful, thereby declaring a shift from the per se rule to case-by-case adjudication under the rule of reason.
European Union Formerly illegal in principle. However, RPM is no longer considered illegal if it is deemed to serve for the benefit of consumers, e.g., by encouraging the introduction of new products. (2010 Guidelines on Vertical Restraints)

Source: Created by the author based on materials released by the JFTC and the Ministry of Economy, Trade and Industry (METI).

The final point of discussion concerns Internet shopping services. It is often pointed out that online shopping sites that serve as a platform for sellers and purchasers of goods and services tend to hinder competition through such means as retaining a large number of customers and excluding specific suppliers selectively. At the same time, however, it is an unquestionable fact that Internet shopping services have enhanced consumer convenience significantly by serving as a hotbed for innovative new services. As such, there is no established view on the effects of Internet shopping services from the competition policy perspective.

To begin with, our knowledge on transactions taking place on the Internet is generally limited, and this poses a danger for the competition authorities to make wrong decisions based on incorrect information. It is thus necessary to carry out an extensive fact-finding survey of Internet shopping services to establish a coherent view of Internet shopping services from the competition law perspective.

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Price levels at the micro level are determined by two factors: (1) balance between supply and demand and (2) bargaining power of buyers and sellers. Manufacturers' RPM discussed in this column, together with recently-legislated measures designed to facilitate the proper pass-through of the planned consumption tax increase into prices, can significantly influence the second factor, i.e., the bargaining power of sellers and buyers. It is thus believed that allowing such manufacturers' practice can help to some extent to ensure appropriate price formation.

At the same time, restoring the balance between supply and demand is also crucial to breaking out of deflation. With regard to demand in particular, renewed attention should be given to a series of problems plaguing Japanese companies that are often mocked for winning at technology but losing at business. A report compiled by the Committee on Consumption Intelligence, an informal advisory panel for METI, points to the lack of integrated marketing functions in Japan as one factor behind Japanese companies' failure to come up with products which consumers want to buy.

Viewed from the micro level, deflation is not merely a price problem but a complex mix of problems arising from Japan's social, industrial, and administrative structures. To break free of deflation and reinvigorate the Japanese economy, not only is a bold growth strategy for resolving the structural problems facing Japan needed, but also a careful re-examination by private-sector companies of their own earnings structures and corporate climates would be required.

>> Original text in Japanese

* Translated by RIETI.

August 1, 2013 Nihon Keizai Shimbun

October 8, 2013