Gadgets for Sale ... or Not

How come the prices of some gadgets, like the iPod, are the same no matter where you shop? No, the answer isn't that Apple illegally manages prices. In reality, Apple uses an accepted retail strategy called minimum advertised price to discourage resellers from discounting. The minimum advertised price (MAP) is the absolute lowest price of a product that resellers can advertise. Marketing subsidies offered by a manufacturer to its resellers usually keep the price at or above the MAP. Stable prices are important to the company that is both a manufacturer and a retailer. If Apple resellers advertised the iPod below cost, they could squeeze the Apple Stores out of their own markets. The downside to the price stability is that by limiting how low sellers can go, MAP keeps prices artificially high (or at least higher than they might otherwise be with unfettered price competition).

Source: Slate, December 22, 2006

1.Describe the practice of resale price maintenance that violates the Sherman Act.

2.Describe the MAP strategy used by Apple and explain how it differs from a resale price maintenance agreement that would violate the Sherman Act.

3.Why might the MAP strategy be against the social interest and benefit only the producer?