Pricing strategy & practice
Porter’s generic strategies as applied toward
e-tailers post-
Leegin
Marianne K. Collins
Department of Marketing, School of Business, Winona State University, Winona, Minnesota, USA, and
Brian Winrow
Department of Business Administration, School of Business, Winona State University, Winona, Minnesota, USA
Abstract
Purpose – The purpose of this paper is to evaluate the applicability of Porter’s model of generic strategies as applied toward online retailers following
the United States Supreme Court’s decision in
Leegin,
which appears to signal greater tolerance for minimum vertical price maintenance agreements.
Design/methodology/approach – The paper is based on a review of the literature and examines cases relating to minimum resale price maintenance
agreements. Relying heavily on Porter’s framework, it explores the strategic implications of the recent decision in
Leegin
for on-line retailers, many of
whom rely on a cost leadership competitive advantage.
Findings – Since the increased likelihood that vertical minimum price maintenance agreements will be permitted, thereby lowering the barriers to entry,
online retailers may be deterred from utilizing low costs to under-price traditional retailers. As a result, the
Leegin
holding has devalued the feasibility of
pursuing a cost leadership strategy, and e-tailers may need to adopt alternative or integrative strategies for securing a competitive advantage.
Originality/value – The paper incorporates literature pertaining to Porter’s model of generic strategies, online pricing strategies, as well as recent
court cases.
Keywords Pricing, Anti-trust law, Cost accounting, Electronic commerce
Paper type Conceptual paper
I. Introduction
The US Supreme Court’s decision in Leegin[1] appears to
signal greater tolerance for vertical resale price maintenance
(RPM) agreements, in which the manufacturer imposes a
minimum price level on its resellers. A brand seller would
likely pursue such an agreement in order to protect its
resellers’ margins, thereby attracting qualified downstream
retailers; to protect brand image and exclusivity; and to
prevent free riding by low price retailers who take advantage
of the promotional activities of others. Further, a minimum
RPM agreement will suppress intrabrand price competition,
while enhancing the procompetitive effects of interbrand
competition. Within the context of increased likelihood that
vertical minimum price agreements will be permitted, bricks-
and-clicks (mixed channel retailers) and pure play retailers
(e-tailers) may be constrained in mounting traditional
defenses against competitive forces, such as retaliatory price
cutting.
The Leegin decision could have important strategic
implications for on-line retailers, many of whom secure a
competitive advantage through a classic low cost leadership
strategy (Porter, 1980). With a vertical minimum RPM
agreement in place, e-tailers may be deterred from using their
low cost structure to under price brick-and-mortar traditional
competitors. This article explores the implications for on-line
strategies in this post-Leegin environment in which price
competition is restrained. In addition, this article will address
the feasibility for online retailers to pursue an integrated
strategy, combining both the low cost leadership and
differentiation strategies.
This article begins with a discussion of Porter’s model of
generic strategies as currently applied. Section III provides a
brief history and legal background of the Sherman Act, and
includes an explanation of the basis for prohibiting
anticompetitive behavior. This section also analyzes the
nature of vertical price maintenance agreements to ascertain
the anticompetitive and/or procompetitive effects that result
from the respective price maintenance agreements. Section IV
of the article focuses on the Leegin case, which shifted the
standard of review from the per se prohibition to the rule of
reason. Section V will explore the competitive implications of
the Leegin case, and how it alters the feasibility of Porter’s low
cost leadership strategy for e-retailers. We conclude with a
discussion of the current outlook for the sustainability of the
Leegin holding.
II. Porter’s generic strategies
Porter enumerated a series of generic strategies that a
business could implement in order to secure a competitive
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1061-0421.htm
Journal of Product & Brand Management
19/4 (2010) 306 –311
q Emerald Group Publishing Limited [ISSN 1061-0421]
[DOI 10.1108/10610421011059621]
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