Wednesday, February 23, 2011

Impact of vertical price restraint on Filipino consumers

Foreign multinationals in the Philippines, such as Nestle Philippines, which are in the habit of setting minimum prices for their products to be sold by local distributors and retailers, without factoring actual distribution costs, actually threaten to short-change consumers.

When the multinational sets a low price, the local distributor and retailer has to work harder to erase that market impression that a cheap product is of inferior quality. The Filipino SME, which is typically the distributor or retailer for such giants like Nestle, are pressured to more aggressively market the goods so that consumers will associate those goods with a high level of service and high quality.

In the end, unfortunately, only the manufacturer benefits from such vertical arrangements. On the part of the distributor, profit margins remain at a minimum as they have to pour in more for marketing and promotional initiatives – in addition to the distribution and operational costs. Bearing costs for these aspects also means that the distributor may no longer have the means, manpower, and capabilities to actually provide the high level of service associated with how the products are marketed. The Filipino end user, or consumer, ends up paying more for goods because of aggressive marketing, only to receive lower quality service simply because the distributor is not equipped to provide anything better in the first place.

These vertical agreements, most commonly executed through the practice of vertical price restraint, are prejudicial to all parties concerned – except for the manufacturer. Otherwise, such arrangements will just result in productive inefficiency. Productive inefficiency occurs when there is higher production costs incurred, with no competitive forces to reduce costs to the lowest possible level. This is precisely why there is such a strong and urgent need to pass a stronger and tougher anti-trust law to monitor and safeguard against such vertical arrangements.

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