Online MAP Enforcement: Evidence from a Quasi-Experiment

Ayelet Israeli

doi:10.1287/mksc.2018.1092

Abstract

This paper investigates a manufacturer’s ability to influence compliance rates among its authorized online retailers by exploiting changes in the minimum advertised price (MAP) policy and in dealer agreements. MAP is a pricing policy widely used by manufacturers to influence prices set by their downstream partners. A MAP policy imposes a lower bound on advertised prices, subjecting violating retailers to punishments such as termination of distribution agreements. Despite this threat, violations are common. I uncover two key elements to improve compliance: customization to the online environment and credible monitoring and punishments. I analyze the pricing, enforcement, and channel management policies of a manufacturer over several years. During this period, new channel policies take effect, providing a quasi-experiment. The new policies lead to substantially fewer violations. With improved compliance, channel prices increase by 2% without loss in volume. The reduction in violations is particularly stark among authorized retailers with lower sales volume, those that previously operated unapproved websites, and those that have received violation notifications for the specific product before. Moreover, low service providers improve their service. At the same time, there is an increase in opportunistic behavior among top retailers, or retailers that received notifications for other products, and for less popular products via deep discounting. Data and the online appendix are available at https://doi.org/10.1287/mksc.2018.1092 .

Highlights

Manufacturers today are finding the task of controlling their brands and products increasingly challenging.In the era of omni-‐channel retailing and intense online distribution, customers can purchase the same items through many different outlets at the same time
This paper focuses a different lens on digital enforcement by investigating whether manufacturers can decrease violations among their legitimate retailers through improving their ability to digitally monitor and enforce Minimum Advertised Price (MAP) policies
The second subsection describes the data and provides summary statistics. 3.1 Institutional Details and the Manufacturer’s Policy Change To improve their efforts to monitor MAP compliance in online marketplaces, manufacturers typically hire third-‐party companies to track MAP prices on the Internet. These companies search the Internet for instances where a product under a MAP policy is offered for sale, and record the retailer’s identity and the advertised price

Summary

Introduction

Manufacturers today are finding the task of controlling their brands and products increasingly challenging. This change allowed the manufacturer to correctly identify websites of retailers that do not have a distribution authorization agreement, namely unauthorized retailers This step improved transparency and the credibility of the manufacturer’s ability to monitor MAP. 3.1 Institutional Details and the Manufacturer’s Policy Change To improve their efforts to monitor MAP compliance in online marketplaces, manufacturers typically hire third-‐party companies to track MAP prices on the Internet These companies (such as Channel IQ, or Market Track) search the Internet for instances where a product under a MAP policy is offered for sale, and record the retailer’s identity and the advertised price. I compare the difference in outcome variables such as violation rates before and after the policy change between authorized (“treated”) and unauthorized (“control”) retailers. I study changes over time (before versus after the policy change) in outcome variables, such as violation rates, between authorized and unauthorized retailers in a difference-‐in-‐differences setting. Online Appendix B further explores the effect of the notification emails both before and after the policy change, and concludes that those emails are more effective once the terms of engagement were changed as well via the new policy

The Effect on Manufacturer’s Profit

Findings

Conclusion