Minimum Advertised Pricing: Patterns of Violation in Competitive Retail Markets

Manufacturers in many industries frequently use vertical price policies, such as minimum advertised price (MAP), to influence prices set by downstream retailers. Although manufacturers expect retail partners to comply with MAP policies, violations of MAP are common in practice. In this research, we document and explain both the extent and the depth of MAP policy violations. We also shed light on how retailers vary in their propensity to violate MAP policies and the depth by which they do so. Our inductive research approach documents managerial wisdom about MAP practices. We confront these insights from practice with a large empirical study that includes hundreds of products sold through hundreds of retailers. Consistent with managerial wisdom, we find that authorized retailers are more likely to comply with MAP than are unauthorized partners. By contrast to managerial wisdom, we find that authorized and unauthorized markets are largely separate, and that violations in the authorized channel have a small association with violations in the unauthorized channel. Last, we link our results to the literatures on agency theory, transaction cost analysis, and theories of price obfuscation.