Impact of Unilateral Price Policies
UNILATERAL PRICE POLICIES
Impact of Unilateral Price Policies
Some manufacturers have begun setting minimum prices for certain products. Find out what that means for you and your patients.
By S. Barry Eiden, OD, FAAO, & Jordan Kassalow, OD
Resale price maintenance (RPM), also known as retail price maintenance, is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices (RPM), at or above a price floor (minimum RPM), or at or below a price ceiling (maximum RPM). If a reseller refuses to maintain prices, either openly or covertly (such as selling on the grey market), the manufacturer may stop doing business with it. This was per se illegal until 2007, when the U.S. Supreme Court deemed it legal in certain situations (e.g., pro-consumer situations) (Leegin Creative Leather Products Inc. v. PSKS Inc., 2007) (See sidebar “Rules of Law Pertaining to RPM” below).
Before this change, companies had to use a Colgate policy (i.e., Unilateral Minimum Retail Price Policy), which is a one-way policy. Under a Colgate Policy, a manufacturer, without any agreement with the resellers, announces a minimum resale price and refuses to make further sales to any resellers that sell below the announced price. A unilateral policy is a form of RPM that enables a manufacturer to influence the lowest price at which its distributors and dealers resell its products without a formal contract regarding the resale price. The policy was first identified in United States v. Colgate & Co., 250 U.S. 300 (1919). The key is that the manufacturer is not setting a retail price, but is establishing, most commonly, a minimum retail price (MRP).
Under this changing landscape to favor consumers, Alcon was the first contact lens manufacturer to introduce a Unilateral Price Policy (UPP) (i.e., a Colgate policy) for its Dailies Total1 contact lens in 2013. This was followed in 2014 by Bausch + Lomb’s (B+L) introduction of a UPP for its Ultra contact lens and also by Johnson & Johnson Vision Care, Inc. (JJVCI) for its Acuvue Oasys, Acuvue 1-Day Moist, and Acuvue 1-Day TruEye contact lenses. Alcon extended its UPP to other new products in 2014 (Dailies AquaComfort Plus Toric, Dailies AquaComfort Plus Multifocal, and Air Optix Aqua Colors).
Changing Perceptions Fuel Contact Lens Price Competition
The first soft contact lens was developed and distributed to eyecare practitioners (ECPs) in the United States by B+L in 1971. From that point until the introduction of frequent replacement/disposable contact lenses in the late 1980s, contact lenses were fit and prescribed as individual lenses that were typically placed on the eye by ECPs and dispensed to patients most commonly without any patient knowledge of the name of the lens design, the lens parameters, or the manufacturer. Fees both on the wholesale level to the ECP and on the retail level to the patient allowed for profitability, incentive for innovation, and ECP dedication to contact lens practice.
As frequent replacement/disposable contact lenses grew to become the predominant modality of lens wear, patients became more aware of the contact lenses that they were wearing (design, parameters, and manufacturer). They began to perceive contact lenses as a commodity rather than as a medical device utilized by their ECP to address the unique vision and physiological requirements of their eyes. As such, over time, there was a drive to place extreme price pressure on the sale of contact lenses.
The introduction by Rep. Peter Stark (D-Calif.) and several colleagues of H.R. 2663 “Contact Lens Prescription Act of 2001” (Stark Act), which required ECPs to release a complete contact lens prescription to their patients following the fitting process, further opened the flood gates of price competition. (Note: at that time, this requirement was already in existence for spectacle prescriptions.) Alternative contact lens delivery options, such as online retailers and “big box” discount retailers, drove down contact lens price options for patients to levels that made it difficult for private ECPs to compete and remain profitable. A common impression developed in the eyecare field that fitting and prescribing contact lenses was no longer profitable for ECPs and that focusing on medical eyecare services and spectacle prescribing and sales was a preferable way to practice.
Discussions between ECPs and their contact lens representatives started revolving around “How much does a box of lenses cost?” and “How much are my competitors selling these lenses for?” versus conversations about lens technologies. The number of contact lens manufacturers began to dwindle due to consolidation, and there was a relative lack of innovation due to financial pressures on manufacturers to produce products at highly competitive prices.
Overall, the contact lens market over the past years has been relatively flat. Dissatisfied patients dropping out of contact lens wear have virtually equaled the number of new patients being fit into lenses in many major contact lens markets (Nichols, 2013). It is fair to question whether the relative lack of innovation in the contact lens field has been influenced by the loss of contact lens profitability.
Consumer Benefits of RPM
In their comprehensive review of RPM, Tiko and Mather (2010) identified a number of ways that RPM will benefit consumers. First is the elimination of “free riding” by discount retailers. In essence, free riding occurs when full-service retailers first provide comprehensive services to consumers. Subsequently, consumers purchase the product at a much lower cost at discount retail establishments, because those establishments do not incur the expenses associated with providing comprehensive services to consumers. Without RPM, discount retailers will “free ride” on the full-service retailers, which might discourage full-service retailers from carrying a product; as a result, consumers will not get the product with the desired level of service (Tesler, 1960). In other words, without RPM, consumers would obtain all of their information and knowledge about a product that contributes to their purchase decision-making from full-service retailers but then buy the product on a “free ride” from a discount retailer.
Rules of Law Pertaining to RPM
From 1911 until 2007, minimum RPM agreements made between manufacturers and their retail resellers were deemed illegal under federal antitrust law. U.S. Supreme Court rulings pertaining to RPM during this time period were based on violations of the Sherman Antitrust Act, which regulates restraints of price competition. The court’s opinions during this time typically suggested that any controls of retail pricing were anti-competitive and, as such, illegal, except for the Colgate policies.
However, in 2007, a landmark case reviewed by the U.S. Supreme Court changed the landscape of opinion regarding RPM. In the case of Leegin Creative Leather Products Inc. v. PSKS Inc. (2007), the court ruled that bilateral RPMs are not illegal per se. They stated that each case should be evaluated based on “rule of reason.” The court felt that RPMs were not necessarily anti-competitive and often could ultimately benefit consumers. The Leegin decision has dramatically changed manufacturers’ control of how their products are priced and sold through their channels of distribution (Tiko and Mather, 2010).
One of the most important benefits of inhibiting free riding with RPM is that it would encourage inter-brand competition among manufacturers. This competition would stimulate the development of the best new products for consumers. Another pro-competitive outcome of RPM is that it enables new manufacturers to bring new products to market with the services necessary to introduce these new products. This again would encourage inter-brand competition. Often, manufacturers depend on retailers to provide key services related to their products, whether educational or otherwise; however, with vertical retail sales, manufacturers often are not in a position to provide these critical services to the consumers of their products. Often, it is only through the maintenance of adequate profit on product sales that manufacturers can expect retailers to be able to provide these services. RPM allows retailers to justify the time, effort, and cost of providing critical services for products. This, of course, will benefit consumers.
Without question, there are potential anti-competitive outcomes of RPM, such as organized efforts by retailers to form groups or “cartels” to inappropriately create a falsely elevated price point for a product that would be above the manufacturer’s MRP. This is more accurately known as a price fixing conspiracy and remains illegal because, unlike RPM, it has been deemed to have no positive impact for consumers. Additionally, a manufacturer who is inequitably dominant in the marketplace could use RPM to entice or require retailers to exclusively carry its product(s) or, alternatively, a dominant retailer can use RPM to agree to only carry a manufacturer’s products that have RPM. This would be anti-competitive and is why court rulings indicate that each instance of RPM must be evaluated on “rule of reason” that would protect consumers.
Retailer Benefits of RPM
To help incentivize retailers, minimum RPM arrangements offer larger discount-restricted markups to retailers; convey the types of services, effort, and brand image desired; monitor retail prices; and terminate retailers who do not comply. They serve as a “premium-termination” contract enforcement mechanism by restricting price at the retail level to enhance other forms of non-price competition. If a manufacturer was interested in using its market power to raise consumer prices, it could simply increase its wholesale prices to retailers. In the end, minimum RPM yields a larger markup for retailers as opposed to manufacturers. This is a common phenomenon in economics: a business practice that appears to harm competition actually has a legitimate, competitive justification when analyzed carefully (Gift, 2009).
As discussed, minimum RPM is a vertical price restriction imposed by an upstream manufacturer on downstream distributors, dealers, or retailers. Well-regarded companies such as Black & Decker, Cisco Systems, Samsung, Sony, and the Nine West Group have all employed minimum RPM strategies (Gift, 2009).
In the optical business, Maui Jim is probably the best known company that employs RPM. The logic for adopting this strategy is as follows: Maui Jim believes that motivating full-service ECPs to sell its products is ultimately advantageous for both its business and its customers. Maui Jim recognizes that these full-service ECPs provide well-trained sales personnel, well-staffed optical departments, product demonstrations, and other promotional services. Given the high cost of this customer service, these ECPs are unlikely to be able to compete on price with discount retailers who provide few or no services. Without RPM, Maui Jim recognizes the likelihood that the price difference between ECPs and discount retailers would be significant. Thus, consumers would be incented to obtain services at their ECP’s practice before buying their sunglasses from a discount retailer. Over the long run, this discourages full-service retailers from providing special services and, consequently, harms Maui Jim’s business via lost incremental sales and competitive disadvantage. Minimum RPM can prevent this type of consumer free riding by restricting the ability of discount retailers to undercut full-service retailers.
Minimum Retail Pricing and the Contact Lens Industry
The contact lens industry has a relatively unique relationship between the product and service elements involved in the provision of contact lens vision correction. For patients to obtain contact lenses, they need an ECP to examine their eyes and vision system to determine whether their refractive error and ocular health status make them a candidate for successful lens wear; ECPs are also responsible for evaluating the outcomes from this initial evaluation to choose which of the array of contact lens design options would be most appropriate for the patient in question. In addition, patients need appropriate professional aftercare to ensure proper vision and a proper eye health response to contact lenses.
Although professional fees are typically charged for these services, the average eyecare practice typically still generates more than 60% of its gross revenue from the sale of optical products (spectacles and contact lenses) (Management and Business Academy for Eye Care Professionals, 2011 Edition). With the introduction of frequent replacement contact lenses in the late 1980s, patients became progressively more aware of both the brand and the parameters of the lenses prescribed to them. This, in combination with the Stark Act and the growth of both Internet-based contact lens retailers and large discount mass merchandisers who would fill contact lens prescriptions at very low profit margins, began to result in more patients “taking” their contact lens prescriptions from their ECPs to fill at the lowest price available. In addition, large contact lens manufacturers often provided wholesale pricing for these large mass merchandisers at rates much lower than what private ECPs could obtain due to large-volume purchase discounting and cooperative marketing programs.
The ongoing commoditization of contact lens sales has created an environment in which many ECPs consider contact lenses not appropriately profitable in comparison to other aspects of their practice. This has a potential impact on both patients and on ECPs. If appropriate profit motivation is taken out of the equation, there is significant potential for inhibition of innovation. Unless contact lenses can provide appropriate financial benefit to both the ECPs who fit them and, ultimately, to the manufacturers who conduct the research and development that create new contact lens materials and designs, there will be little motivation for innovation in the field.
Beyond the economic impact on contact lens innovation, there is evidence that the purchase of contact lenses outside of the fitting ECP’s practice can increase the risk of medical complications associated with contact lens wear. Fogel and Zidile (2008) published results of a survey of contact lens wearers indicating that consumers who purchased their contact lenses either online or at a vendor other than their ECP were significantly less likely to follow FDA-recommended contact lens care and wearing behaviors. Additionally, a study by Stapleton et al (2008) found that those individuals who purchased their contact lenses over the Internet were approximately 4.8 times at greater risk for developing microbial keratitis compared to patients who purchased their lenses at their ECP’s office. Potential reasons may be that patients who purchased lenses on the Internet may not have had appropriate and regular professional eye care, or they may perform contact lens care behaviors that put them at higher risk for infection.
Until recently, there was no RPM within the contact lens industry. With careful review of the law, it appears that a number of contact lens companies have boldly moved into this arena to protect their brands. In 2013, coinciding with the introduction of its Dailies Total1 daily disposable lens, Alcon put in place what the company defined as a UPP. This price policy initially was exclusively applicable only to Dailies Total1 contact lenses and not to any other of the company’s existing contact lens products. However, as stated previously, in 2014, Alcon extended its UPP to other new products. Under the UPP in the United States, Alcon will not sell (or permit its authorized distributors to sell) these specific contact lens products to customers who resell or advertise these products for sale to patients at less than the MRP set by Alcon. The company’s policy indicates that Alcon customers are free to sell the product at a price higher than the MRP; however, if they sell the product at a price lower than the MRP, Alcon will terminate the supply of the product to that customer for a period of one year.
Alcon says it has adopted this policy to encourage retailers to provide patients with a high level of personalized service from ECPs who have a deep understanding of the advanced new technology associated with these products. The idea is that premium products can prosper only if ECPs invest the time to learn about their benefits and to educate their patients about them. The UPP was designed to incentivize ECPs to this. Alcon states that the policy will benefit patients and help ensure that the company can continue to innovate and bring state-of-the-art products to market in the future (Alcon Unilateral Price Policy Customer FAQ Document, June 1, 2013). These statements are in line with the spirit of the U.S. Supreme Court’s ruling in the Leegin case mentioned previously.
In 2014, B+L became the next contact lens manufacturer to introduce a UPP when the company brought its new Ultra monthly disposable contact lens to the marketplace. B+L’s Ultra contact lens UPP states: “Bausch + Lomb is not making and will not make an agreement with any of its customers regarding the price at which such customer sells or advertises Bausch + Lomb Ultra® contact lenses. Rather, each customer is free to advertise or charge whatever price it wants, but should understand that Bausch + Lomb will cease to supply, and will prohibit its authorized distributors from supplying, Bausch + Lomb Ultra® contact lenses to any customer that resells or advertises Bausch + Lomb Ultra® contact lenses to the end consumer (e.g., patient) for sale at less than the MRP.” As to why the company adopted its pricing policy, B+L further states: “Bausch + Lomb Ultra® contact lenses are a significant advancement in contact lens technology. The full benefits of this advancement can only be realized through a deep understanding of the technology by eye care professionals (“ECP’s”) [sic], the provision of a high level of service by ECP’s based on that knowledge, education of consumers regarding the product and a continuing high level of customer service by Bausch + Lomb. The UPP is intended to (a) encourage ECP’s to invest the time to learn about the product and educate consumers, (b) support Bausch + Lomb Ultra® contact lenses as a premium offering and to enable Bausch + Lomb to continue to provide excellent customer service.”
Most recently, JJVCI applied a UPP to its existing Acuvue Oasys, 1-Day Acuvue Moist, and 1-Day Acuvue TruEye contact lens designs. JJVCI is the first company to apply a UPP to products that had previously been on the market and sold without a UPP. The company included the UPP as part of its “Enterprise Strategy,” which also included a new lens pricing program to the company’s resellers, new lens packaging, and the discontinuation of lens rebate programs. In a letter to eyecare professionals on June 24, 2014, Laura Angelini, president of Johnson & Johnson Vision Care – North America stated: “We believe the multifaceted nature of this new pricing strategy and the variety of elements that comprise the program will allow you to refocus the critical doctor/patient conversation on eye health and product performance, rather than cost. Also, by removing the complexity of rebates and building these savings into our new pricing, we believe we will be able to reach more patients with instant savings, while providing a simpler approach for everyone.”
Retail price management is considered today to be an acceptable business practice and within legal bounds if the “rules of reason” exist that benefit consumers and promote the development and growth of the industry. Recently, for the first time, UPPs have been put in place by contact lens manufacturers—most often, but not exclusively, in association with new, premium products. The goal of such a policy is to encourage ECPs to become fully educated about the products and to provide optimal professional services when prescribing these lenses. By making sure that profit margins and competitive positions are maintained through the establishment of the MRP, manufacturers expect that ECPs will fit and prescribe such lenses primarily based on their clinical benefits and attributes. Ultimately, this is in the best interest of patients.
Although in theory the establishment of MRP policies in the contact lens industry should allow the goals of manufacturers to be realized, it is entirely dependent on the behavior of the resellers (i.e., ECPs). If ECPs appropriately conceptualize the benefits of UPPs and MRPs, and if they believe in the technological benefits of the products, they will support the products by prescribing and selling them. This would ultimately reinforce the commitment of the manufacturers to these policies and encourage them to utilize them with future products. If this comes to fruition, we can expect to see a true revolution in the way that business is conducted in the contact lens industry from this time forward. CLS
For references, please visit www.clspectrum.com/references and click on document #226.
Dr. Eiden is president and medical director of North Suburban Vision Consultants, president and medical director of the National Keratoconus Institute, and co-founder of EyeVis Eye and Vision Research Institute. He is an adjunct faculty member at The University of Illinois Medical Center as well as at the Indiana and Illinois Colleges of Optometry and Pennsylvania College of Optometry at Salus University. He is also a consultant or advisor to CooperVision, Alcon, B+L, Visionary Optics, Alden Optical, Oculus, Oasis Medical, Paragon Vision Sciences, and SpecialEyes.
Dr. Kassalow is a managing partner at Farkas, Kassalow, Resnick & Associates. Their practice, located in Manhattan and Roslyn, NY, specializes in advanced contact lens care. Dr. Kassalow is also the founder and co-chairman of VisionSpring, a social enterprise that in 2014 will deliver more than 500,000 eyeglasses to low income people throughout the developing world. He is a consultant or advisor to Alcon.
Contact Lens Spectrum, Volume: 29 , Issue: September 2014, page(s): 36-40