Spring 1984 – Issue 31 - Stanford Lawyer - Stanford University

Turning to another area, you took a fairlystrong position that manufacturers can forbidtheir distributors to have any price competition.How do you feel about that?The position I have taken is that manufacturersshould be able to reach agreement with their distributorsas to how those products should be distributed.The U.S. Supreme Court holds a totally differentview.It did in 1962, which I guess was the last time theyspoke about it .. So maybe we will find out. I just argueda case before the U.S. Supreme Court that may causethem to address themselves to that issue again.It is perfectly clear a manufacturer cannot go to aretail store and say, "Here is my product, I insist thatyou buy it. And I insist that you market it the way I wantyou to market it." The manufacturer can proceed onlyby seeking out retailers or wholesalers, dependingupon the configuration of the distribution system, andreaching agreement with them- offering them a satisfactoryprice for the merchandise and entering intoessentially a consensual relationship.But the retailer's situation is quite different. At thepresent time, the retailer can tell the manufacturer,whether the manufacturer likes it or not, that he isgoing to distribute goods the way he wants to. Andthere's no particular reason to think that that's asensible way to run a world; indeed, it's fairly clear, Ithink, that with respect to some kinds of products atleast, unless the manufacturer can control the characteristicsof his distribution system, that the productcan't successfully be developed and marketed. This isespecially true with respect to technically complexconsumer goods, usually relatively new products.Like Apple Computer?Like Apple Computer. Photographic equipment. Ordigital turntables.No one is going to spend two-thousand dollars on adigital turntable unless there is someone at the storewho can explain exactly why it works the way it works,why it is superior to other turntables. And that requiresa retailer to invest a lot of money in inventory to keep allthis expensive stuff around - and that he have technicallytrained salespeople there on the floor who will bestanding around on one foot or the other most of theday, but who will be there to answer questions whenpeople come in.But if people can go into the store, take advantage ofthe display inventory, cross-examine the technicallytrained salespeople for an hour-and-a-half, and then,when they finally understand what this equipment cando for them, walk out, say, "Thank you very much, andI am going to get it from the discount store" -why, youcannot sustain the distribution system under those circumstances.You never find a discount store wanting to market abrand-new product. They are only interested in aproduct after someone else has built a reputationaround it.What's wrong with that?No one will invest in building a reputation for aproduct if the product is going to be rendered unprofitablethe day they complete the process. So the incentiveto develop and attempt to market complex new productsof that kind will be greatly weakened under thosecircumstances.Well, I can see that argument in some ways. Itprotects Apple or whoever is manufacturing aproduct. But it disallows the consumer tosomehow enjoy the competition that occursbetween distributors.No. The consumer enjoys the competition betweenApple and IBM, between Apple and DEC, betweenApple and Control Data, Apple and Adam-there's allthe competition in the world out there. The only competitionthat is eliminated is the competition betweentwo different retailers selling Apple. And even there itis not eliminated unless the manufacturer wants toeliminate it.And why would the manufacturer want to eliminatecompetition between two different retailers? By andlarge, he would like his product sold by his retailers atthe lowest possible cost. The manufacturer has everyincentive in the world to do business with discounters.The notion that discounters would somehow be cut offSpring 1984 Stanford Lawyer15