A few weeks ago I happened across an article on the Stonemaier Games website, titled ‘What do Retailers Want?’.
This particular article by prolific blogger/publisher/designer Jamey Stegmaier was written in response to the news that industry colossus, Cool Mini or Not (or CMON Ltd. these days) – publishers of insanely popular miniature board games, has adopted a Minimum Advertised Price (MAP) policy in the US, while restructuring its distribution network for getting games through distributors to retailers to customers. Similarly, the US branch of iello did similarly, with the news breaking on boardgamegeek.com
So what is an MAP, and why should anyone care?
Here’s how wikipedia describes it:
Resale price maintenance (RPM) (US) or Retail Price Maintenance (UK) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance).
So basically, CMON are telling their retailers “Hey our games shouldn’t be sold for less than 80% of RRP/MSRP mmmk?”. The legal ramifications of this situation are seriously complex, with an outright contractual penalty for failing to adhere to this policy on the retailer’s part being illegal in most states in the US, but where retailers can legally reduce prices below the MAP without tangible penalties, meaning the only sanction available to the manufacturer/publisher being to refuse to trade with that retailer. This has the effect of essentially making the process of MAP entirely legal and effective from the perspective of the manufacturer/publisher where they are legally permitted to adopt this ‘grey’ policy. In the European Union, price maintenance is REALLY illegal, and many large corporations find themselves in hot water with the European Commission for this.
So what does this mean?
Realistically we can’t say whether this is ‘good’ or ‘bad’ in general, but what we can do is evaluate whether this kind of policy is good or bad for the publisher, distributor, retailer, and customer. Something that is good for the customer in the short term (like low prices) might not be good for a retailer (who’d make less money) and may end up in the long run going out of business (bad if this happens widely). So let’s dive into some GRAPHS.
For a bit of context, my partner Emily is conveniently a professional competition economist, which means this kind of stuff is her bread and butter. She kindly wrote the following explanation to help everyone understand how the MAP policy affects each party in the tabletop pricing pipeline.
What Monopoly Means to a Competition Economist
Emily Silcock, Handy Competition Economist
Listen carefully, this is about to get a tad academic.
We’ll start off with the concept of demand. Imagine we’ve got 10 people and all really want to buy NewSpeak (casual product placement). We can measure how much they want to buy NewSpeak by looking at how much they’d be willing to pay for a copy. If we line up all these people in a row, from the one willing to pay the most to the one willing to pay the least, we get a graph looking like this:
Scale this up to 10s of thousands of people and our graph looks like this:
This is known as a demand ‘curve’ (obviously it’s a straight line but more complicated ones can be all wiggly n stuff).
Say that to start off with, we sell NewSpeak at price p1. At this price, a quantity, q1 people will buy NewSpeak – because for them, their willingness to pay is greater than or equal to the price.
Say that it costs c to produce a copy of NewSpeak. Then our profits per game are p1 – c and our overall profits are q1(p1 – c) (i.e the profit per game multiplied by the number of people willing to pay the price p1). This total profit is represented by the hatched area on the graph.
Now let’s think about the person who has the highest willingness to pay for a copy of NewSpeak. They were willing to pay ph (where the demand curve meets the £ axis), and they’ve only had to pay p1, so we can assume they’re pretty damn chuffed. The difference between p1 and ph is known as their consumer surplus*. The next person, the one with the second highest willingness to pay, has a slightly smaller consumer surplus. And so it goes on all the way down to the person whose willingness to pay is exactly the same as p1. Summing together all these consumer surpluses we can see that the dotted area in the graph above shows the size of the total consumer surplus.
*(i.e. the distance between p1 and ph on the graph above)
Okay, so normally this thing called ‘competition’ means that a retailer can’t raise their prices, because if they did, then all the customers would just go buy somewhere else.
However if a supplier carries out Retail Price Maintenance (Resale Price Maintenance in the US oddly) they effectively force all retailers to raise their prices at once, meaning that there’s no point the customer shopping around as the price will be the same.
So what are the effects of this?
Time for another graph!
The price has now changed from p1 to p2 (it’s gone up, because the supplier – i.e. publisher, has instituted an RPM/MAP policy).
The first thing to note is that the quantity of people who buy the game goes down. This is because fewer people are willing to buy the game at this price.
The second point is that the profit increases. Remember that previously profit was the areas between D and E (that hatched area – q1(p1-c) ). Profit is now the difference between price (p2) and cost (c) multiplied by quantity (q2), which is the areas B and D. As you can see in this example, B is bigger than E, so the retailer is better off as they’re making more money!
Thirdly, recall that with the price p1, the consumer surplus was equal to A + B + C. Under price p2, the consumer surplus is equal to A, which is clearly smaller. This means that extra profit comes at the expense of ‘consumer surplus’. People are less chuffed with their purchase (though still happy to buy at the price).
So the retailer is off and customers are less well off. How do we weigh these two effects against each other? At the moment Retail Price Maintenance just looks bad for the customer and good for the retailer, but overall fairly neutral.
However this is NOT the case. We can compare the total surplus (extra value) across both scenarios, with an without the policy, and see if the industry in general (customers and retailers) benefits more or less.
When the price is p1 total surplus equals A + B + C + D + E ( total profit for the retailer ( D+E ) and consumer surplus ( A + B + C ))
However, when the price is p2, under the RPM policy, total surplus is only equal to A + B + D. This means that the ‘world’ as a whole is worse off under price p2. The consumers have been made less happy without a corresponding gain to the retailer/publisher. In economics, this is known as a deadweight loss. In this case the deadweight loss is equal to C + E.
This deadweight loss is why Retail Price Maintenance is illegal in the EU. There is an incentive for the retailer to use it to raise prices because it increases their profits but it directly damages consumers and the economy at large. Don’t do it, kids.
Disclaimer: I am acutely aware that I have glossed over/simplified a lot of issues here, but did you really want me to go into more detail? If so, let me know!
Ok, so we now have a good understanding of how the economics of Retail Price Maintenance works, what’s the effect on our industry rather than just in general.
We’ve seen that this particular policy directly harms consumers (by artificially raising prices through limiting price competition), and that the economy of the industry as a whole is worse off, but we should look at all the effects not just the isolated economic considerations. There a few things that are obviously bad about RPM, i.e. consumers paying more for something than they could do, and less people playing those games.
That said, there are a few things that you could infer from the policy that are potentially positive. By instituting a price floor on those games, retailers are protected from price wars with rivals (particularly a problem perceived by brick and mortar retailers with respect to deep discounts on online-only stores), games are not rapidly devalued from shock price drops like seasonal sales and conventions – this helps publishers sell their games more consistently over time to retailers as they don’t suddenly lose a load of customers. That said, small publishers are unlikely to be able to institute an RPM policy, as they present less value than a larger publisher like CMON or iello (which means this does directly disadvantage entrance and growth within the market).
The interesting part of this issue, however, is what effect it has on the community. Gamers definitely care about their games, and in general care very deeply about their local gaming scene – usually centred on a game store, game cafe or similar. The effect of the RPM policy, while directly harmful to consumers in terms of artificial price inflation *potentially* could signal a shift in approach from large publishers. If online-only retailers are prevented (or at least strongly disincentivised) from deeply discounting staple gaming products, this could be argued to benefit brick and mortar stores, and in turn the strength and permanence of the gaming community as a whole. Sure, there are gaming clubs, meet ups and the like all over – but the humble Friendly Local Game Store has a special position within the gaming community as both a hub for play and a physical presence to bring more people into the hobby.
The question then is, does this decrease in consumer surplus as a result of this policy get returned in value by the publisher/retailer in terms of community support?
I don’t think we’re going to know until it’s had time to run its course, but it could be the case that the incentives for retailers and publishers to invest in community support falls short of the short termism of price protection, or at least the efforts to invest back into the community are insufficient to promote the equivalent amount of growth in the community.
It’s certainly not a cut and dry issue, and with the pace that the industry, and community, is growing, it’s hardly going to get any simpler – but what we can take away from this is that economic decisions taken by large companies within our industry can, and do, have a significant impact on the behaviour of smaller companies, those looking to enter into the market as a newcomer (hello other Kickstarter creators and newbie designers!), and the health of those parts of the economic system of the tabletop games industry that drives the social phenomenon we’re lucky to be a part of.
What I hope comes out of this is a reevaluation of publisher’s responsibility to the gaming community to invest in support for game stores to provide a strong in-person experience at a store, to make it more than just a place to buy goods, but to function as a hub for the gaming community. Similarly, I hope that gaming stores share this view, and are willing to invest time and resources into supporting publishers carry this out, so that EVERYONE is better off.
If we can pull that off, then we’ve got a stronger industry, and a stronger community.