Ruling gives suppliers more pricing power

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The U.S. Supreme Court last month made it easier for travel suppliers to dictate the price at which their products are sold or resold to consumers. This may accelerate changes in travel distribution relationships.

In Leegin Creative Leather Products Inc. v. PSKS Inc., Leegin, a manufacturer of Brighton leather goods and accessories, agreed to set a retail price with its distributors. This type of price agreement is called "resale price maintenance." Until now, it has been illegal per se (lawyer-speak for it's always wrong, and I don't want to hear any excuses, justifications or explanations).

Now the Supreme Court says these pricing agreements are not always illegal, but only when they create bad results for consumers. The court says that resale price agreements sometimes help consumers by promoting services they want or encouraging new competitors.

For years, the travel industry has operated under an exception to the rule against resale price maintenance. Under the agency exception, airlines, cruise lines and tour operators may tell their "true agents" at what price to sell the supplier's product.

The problem: As travel sellers become larger, process transactions on their own merchant accounts and charge their own fees, they become less like the "true agents" covered by the agency exception.

While there haven't been any cases on this lately, the risk for travel sellers has been building. This risk has made many travel suppliers reluctant to control the prices at which their products are sold.

The Supreme Court's decision changes the landscape. Under the right circumstances (no "market power," no collusion with other suppliers, no agreement among sellers), travel suppliers can now establish minimum resale prices if they find that it would be beneficial to do so. 

Not everyone will find it beneficial. In practice, travel sellers that discount prices on cruise and tour products by using part of their commission usually offer less service for the lower price.

While cruise lines and tour operators often get complaints about the discounters, these suppliers may conclude that the array of prices and services offered in the present marketplace gives consumers a set of choices that, in sum, moves the most product.

But some cruise lines and tour operators will decide to require a higher level of service for consumers of their products and will enforce a resale price that is necessary to pay for that service. This may also create new pricing opportunities for the GDSs.

Mainly, the Supreme Court's new decision offers suppliers new opportunities for product differentiation. 

Some suppliers may opt for a high-price, high-service model, while others may opt for a low-price, low-service model.

The question for the travel industry: Which companies will have or develop brands (and marketing flash) strong enough to make the high-price, high-service product type a winner?

Malcolm "Chip" Brooks is a partner with the law firm Holland & Knight in Chicago. His specialties include litigation, antitrust, trade regulation and competition law.

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