Friday, January 27, 2017

Minimum Prices Have Consumer Benefits: Contact Lens Case Study

By Ryan Radia of CEI.
"Today, the Competitive Enterprise Institute published a study that I co-authored with Tom Haynes, who chairs CEI’s board of directors, about price regulation in the contact lens market. We look at how this industry has evolved in recent years, and how the rise of discount stores and online retailers has affected people who buy, sell, and make contacts. In particular, our study discusses policies adopted by several major contact lens manufacturers to distribute only to retailers who sell the manufacturers’ contacts at or above a specified price. Although these policies have been met with skepticism by some lawmakers—and one state, Utah, has passed a law to ban this pricing practice—we argue that allowing manufacturers the option to set a price floor for their own contacts actually benefits consumers and improves competition in the contact lens marketplace.

Behind the push for laws restricting contacts manufacturers from influencing the retail prices of their contact lenses are discount and online retailers such as Costco and 1-800 CONTACTS. These high-volume retailers specialize in offering lower prices than competing retailers with higher costs, so they oppose efforts by manufacturers to prevent them from undercutting their competitors’ prices. But contacts aren’t a typical consumer good that one can simply grab off the shelf (or place in an online cart). Instead, contacts require a prescription individually tailored to each patient’s needs from an eye care professional (such an optometrist). Literally tens of millions of variations of contact lenses are manufactured today, with myriad combinations of prescriptions, brand names, and sizes.
Eye care professionals operate independently from contact lens manufacturers, but these professionals play a crucial role in ensuring consumers get the contacts that work best for them. Thus, people who wear contacts and the companies that make them have a shared interest in a well-functioning eye care industry. Because optometrists and other eye care professionals not only prescribe contacts but also sell them, many consumers opt to buy their contacts from the same person who prescribes them. Other consumers prefer to take their prescription to a discount store or online retailer, and they are free to do so.

Many eye care professionals offer eye examinations at a modest cost—or, sometimes, for free—hoping to recoup the cost of this loss-leader service by selling contact lenses. Similar business models are common in many markets, such as the cell phone industry, in which smartphones are often “sold” at a fraction of their actual cost to customers who commit to a multi-year service plan, and the video game console industry, in which consoles are often sold slightly below cost while game publishers must share a portion of their proceeds with the console manufacturer.

By maintaining a price floor for contact lenses, manufacturers can preserve the ability of eye care professionals to generate reasonable returns on their retailing operations, offsetting the costs of their professional services. To be sure, not all major contacts manufacturers currently have a minimum pricing policy, and there is no reason to believe that pricing uniformity is necessarily optimal in the contacts industry. But allowing competing manufacturers to decide for themselves how to attempt to shape the process by which their contacts are sold at retail is the best way to promote innovation and ultimately serve consumers.

Read the full paper, Resale Pricing in the Contact Lens Industry: A Case Study of Regulation Undermining Pro-Consumer Resale Pricing Strategies, here."

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