Nearly 50 years ago, Karsten Solheim, working from his garage, developed the first PING 1-A Putter. PING’s innovative products and services, among them custom fitting and perimeter weighting, have since changed the industry. Even golfers who do not use PING products have benefited, as rival golf manufacturers have improved their products and services in competition with PING.
Custom fitting has been a key to PING’s competitive success. Over the years, PING has developed processes and products that assist a retailer in fitting a golfer with PING equipment. PING has trained thousands of retailers, bringing them to its Phoenix, Ariz., factory to attend custom-fitting courses.
But several years ago, some of its retailers began “free riding” on the PING brand name. They were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. This reduced the incentive of retailers to perform custom fittings and other services that give PING its competitive advantage. PING’s sales suffered.
One of the easiest ways for PING to control this kind of opportunistic behavior is to negotiate retail price with its retailers. But since 1911, such agreements have been illegal under the antitrust laws. Instead, PING could only terminate free-riding dealers, or talk to them through a staff of 12 full-time antitrust lawyers, both very costly options.
Last month, the Supreme Court, on a 5-4 vote, overturned the blanket prohibition against such price agreements, and said that they would be judged instead under a “rule of reason.” This means that the benefits of an agreement would be weighed against its costs to determine legality.
The four dissenters on the court, led by Justice Stephen Breyer, objected because they thought the change would result in higher prices. As the PING story illustrates, this is far from clear. The change will reduce PING’s cost of providing custom-fitting services through its dealer network, which may reduce price. Rival manufacturers may react by improving service or cutting price.
Granted, the change may reduce discounting by dealers who “free ride” on the brand (Justice Breyer’s concern), but this will increase other dealers’ incentive to provide services. Determining whether the benefits of the practice outweigh its costs is the type of analysis that the ruling permits.
Since many state antitrust statutes follow federal law, those states more inclined toward regulation, like California and New York, will try to “repeal” the Supreme Court decision with legislation. This could set up a conflict between the federal and state laws that would raise the cost of complying with a patchwork of different state and federal antitrust laws. Watch your state legislator. Any state law that increases demand for antitrust attorneys is probably a step in the wrong direction.
Luke Froeb was the Federal Trade Commission’s chief economist from 2003 to 2005 and now teaches management at Vanderbilt University. A brief submitted by Froeb and 24 antitrust economists was cited four times by the U.S. Supreme Court in support of their decision to overturn the blanket prohibition on price agreements between retailers and manufacturers. This op-ed was originally published in the July 21 edition of The Tennessean.
Media Contact: Amy Wolf, (615) 322-NEWS
amy.wolf@vanderbilt.edu