Online commerce is fraught with competition, and there are times when the pressure to generate sales leads to massive price cutting. This is a fairly effective strategy since consumers are better than ever at finding the lowest price for something. However, even if it drives up business at first, it often means harmful long-term consequences for the brand.
Minimum advertised price (MAP) policies are exactly what they sound like – agreements that force retailers to avoid openly advertising a certain brand's products below the stated price. If violated, the manufacturer will usually enforce penalties, or even terminate the business relationship altogether.
Do such agreements hinder competition? On the contrary, they are actually beneficial to everyone involved.
The most obvious reason to enforce MAP policies is because large discounts hurt the perceived value of a brand. Consumers will become unwilling to pay full price for the company's new products, as they subconsciously think that they are now being overcharged.
While some retailers might grumble about not being able to dictate their own prices, a well designed MAP policy protects them too. There is no risk of a price war happening, which maintains everyone's profitability.
It allows everyone to compete on a level playing field, rather than all sales going to the few sellers who can afford to have razor thin margins. Relying on steep discounts is also a crutch that prevents long-term growth, as low prices alone don't create loyal customers.
At first glance, MAP policies look slightly unfavorable for consumers. Preventing retailers from selling below a certain price means that customers will have a harder time finding really good deals. But in the long term, customers benefit from good pricing consistency as well.
Since retailers aren't able to compete just by undercutting the competition, they are heavily incentivized to provide great customer service. A lot of stores get away with late deliveries, lack of communication, and other things because they simply charge lower than their competitors. At the end of the day, a well thought out MAP policy really does work wonders.