Thursday, May 23, 2013

The Flipside of Showrooming

Nancy Thomas, President of the Retail Merchant's Association of Richmond, wrote an editorial in the Times Dispatch in support of the recent bill Marketplace Fairness Act. She outlines the problem with online retailers not having to pay sales tax and is in favor of having an equal tax liability for brick and mortar stores and online retailers. One of the examples of showrooming she uses is a restaurant GM attempting to order bar stools from a restaurant supplier. The GM sat down with the supplier and spent some time going over the different furniture, but decided to order from an online retailer, pointing out the lower online price. The restaurant supplier matched the price, but still had to add on sales tax to the transaction which was a deal breaker. The online retailer got the sale.
Economists would say that this is an example of a free rider problem because the B&M restaurant supplier provides a service, in this case the sales staff, that costs them wages and time, and yet the transaction ultimately occurs with an online retailer that doesn't incur those costs by not providing those services.
Resale price maintenance was intended to combat this because it's an agreement between manufacturers and distributors/retailers that the goods they sell won't be below a certain minimum price. This allows retailers to charge more for goods with the addition of having better service, and discounters would find it very difficult to undercut prices because of the fixed minimum price.
There's only one problem. Resale price maintenance has been illegal since 1911. The argument against it was, obviously, that setting a minimum price prevents competition and therefore should be illegal. Greg Makiw has more to say about it on his blog, and points out that the service is considered a public good and that price resale maintenance is one way of increasing that public good.
I don't know of any previous challenges to the anti-trust ruling, but there's one currently going on right now and it will be interesting to see which way the Supreme Court decides.
And as far as the idea being kicked around in Henrico and Richmond for a meals and prepared food tax? You run into the issue equality versus efficiency. Hopefully they take a close look at the luxury tax enacted by Congress in the early 90's and understand what it is that they want.
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