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Price discrimination, e-commerce marketplaces and cross selling

  • Writer: Mary Ariyo
    Mary Ariyo
  • Mar 18
  • 8 min read

The Chanel Boy bag is a classic. Its rectangular shape, quilted stitching on grained Calfskin, chain detailing and iconic Chanel logo which sits super imposed on a metal plaque screams luxury, exclusivity, status. A highly coveted bag, with a price tag to match it. A price tag justified on the quality of the materials used to create it, the artistry in its design, consumer demand and brand equity. Consumers accept the price tag, in part because it acts almost like a membership fee to an exclusive international members club. The price each consumer is willing and able to pay to get into that club is different, luxury fashion brands like all businesses want to charge consumers the most that they are willing to pay for these items. It has historically been difficult to do so on a personalised basis because businesses haven’t had the means or legally been allowed to do. The consolation prize has been the opportunity to set prices, discriminate based on geography. Luxury brands and other retailers have opted to set prices based on “the demographic, socioeconomic and even the psychographic characteristics of households and individuals with an area” (Bentio & Bentio, 2004). According to handbag-prices.com the Medium Chanel Boy bag retails at (US)$4,607 in Brazil, (US)$5,127 in the UK and (US)$5,567 in Canada, the varying price points in each market has allowed Chanel to decentralise pricing and optimise its performance in individual markets. In an increasingly global and connected market this only works because consumers have not been able to easily buy goods from other markets. The cost of flights, delivery and even prescriptions laid out by high-end brands have gotten in the way of consumers being able to get the best prices. That has been until now, when it appears the European Commission in collaboration with the UK government has decided to step into the role of fairly Godmother of sorts (to all involved) challenging the status quo with its updated VBER regulation.


What is VBER?

VBER stands for Vertical Agreements Block Exemption Regulation, it has been in place for the last 10 years and is due to be updated May 31st 2022. The regulation in part addresses vertical constraints on e-commerce - the restrictions put on e-commerce platforms, including resale marketplaces by brands. A clear-cut example of this would be a luxury goods manufacturer/brand like Bottega Veneta and an authorised e-retailer like Net-a-porter or Harrods. The regulation addresses efforts by brands to have more control over where, in what condition and at what prices they are sold at. To date there have been a succession of cases and pleas for changes to regulation involving luxury goods manufacturers, retailers and resellers. Whether it be The Tiffany & Co vs Ebay or Chanel vs TheRealReal there has been a battle over whether unauthorised marketplaces should be allowed to sell high-end goods. In a white paper put forward by LVMH to the European Commission in 2018, the conglomerate advocated for selective distribution networks – the right to restrict where, to whom and in turn at what price luxury good could be sold at in order ‘preserve the image and economic value of high – ended branded products’.


The new VBER offers extra protection for high end manufacturers allowing them to set constraints on the distributors which do not have to apply across the board (online and offline). This allows the manufacturers to prevent authorised distributors from selling goods on third party platforms likeAmazon. It also preventing manufactures from setting minimum advertised prices, only price recommendations. (It’s key to note that in US markets high end retailers can set minimum prices).


What does this look like?

Assume Reseller T buys a Chanel Medium sized Boy bag in Brazil for (US)$4,607 and wants to cash in, they will be able to use price comparison websites to determine what the going price for that item might be across authorised retailers in Europe using a platform like Lyst. However, they will not be able to sell it to consumers in the UK or EU on a platform like Amazon. They remain able to sell it on a platform like Vestiarie Collective or Stock X. The only way luxury goods manufacturers will be able to stop Reseller T from (1) knowing that the price, (2) being able to exploit any price variations and (3) prevent them from attempting to cross -sell is to limit the sale only offer direct-to-consumer services online, which brands like Chanel and Louis Vuitton already do. The new VBER regulation will allow luxury goods manufactures to more aggressively prevent unauthorised distributors that could be seen to their ‘brand image’ from selling their goods. For luxury goods manufacturers partnering with distributors is a great way of generating revenue, more distribution channels = more sales. When the desire to partner with distributors is also met by the desire to more actively manage their distribution networks and brand value (luxury prestige), it becomes significantly harder to set guidelines within the bounds of the law. This could potentially lead to tacit collusion between e-retailers and luxury goods manufacturers. Tacit collusion is a non- explicit agreement between competitors (luxury goods manufacturers often act as DTC retailers as well) regarding how to coordinate behaviour. Actions like agreeing to give exclusive access or pre-emptive access to certain products assuming the authorised distributors agrees to sell the it at a certain price or that the distributor imposes a secret ‘foreign payment fee’ on foreign customers from markets where the luxury goods manufacturer’s own price recommended price is higher becomes an increasingly likely possibility.


Price of Medium Sized Chanel Boy handbags across a variety of markets and the cost of flight to each location from London UK

Country

Price (US$)

Cheapest Flight from London

Brazil

$4,607

$965.56

South Korea

$4,676

$613.32

Hong Kong

$4,695

$524.91

Russia

$4,772

$59.40

France

$4,877

$70.45

Germany

$4,877

$84.26

Italy

$4,877

$13.81

Spain

$4,877

$27.63

Belgium

$4,877

$98.08

Netherlands

$4,877

$60.78

Japan

$4,942

$1146.52

Denmark

$4,942

$41.44

United Kingdom

$5,127

n/a

Singapore

$5,201

$638.18

Australia

$5,267

$1131.33

Sweden

$5,326

$42.82

United States

$5,341

$356.39

Canada

$5,567

$352.24


Sources: handbag-prices.com/chanel/boy/, Google flights and Morningstar for Currency via Google (data pulled in late 2021/early 2022)


In the 2010, 74% of retailers in the EU did not sell products to customers in other EU countries. When Mystery shoppers attempted to buy from other countries only 61% of their efforts were successful. The refusal to sell ‘re-routes’ consumers to shop on e-retailers or in stores located in their own home market. The act of discriminating against foreign consumers (at least within EU & UK) has maintained the sanctity of geographic or third-degree price discrimination as it is formally called. Alongside rerouting and the earlier mentioned ‘foreign payment fee’ the imposition of heavy delivery costs can also be used to put consumers off exploiting retailers who cross-sell. The extent of the effectiveness of heavy delivery fee with luxury goods is somewhat questionable, assuming a consumer is comfortable parting with $4,877 is an additional fee of $50-$90 likely to stop them?

The only way it becomes truly affective will be if the prices of delivery exceeds the difference between the price of the item in the crossing selling market and the home market. A difference like that would be relatively easy for regulators to pick up on and would suggest luxury goods regulators were ‘setting minimum prices’ which VBER prohibits.


Dual Pricing

Going forward VBER update will allow for different wholesale prices depending on whether the product is being sold online or in physical store within the same market. Something that previously hasn’t been allowed. This change is seen as a response to the struggling performance of physical stores, especially in the wake of COVID-19. Offering a lower in store price encourages consumers to visit, engage in the luxury experience and strengthens/maintains the brand image of luxury manufacturers who often sell in their own stores or through concessions which they have full creative direction over. When high prices apply across the board consumers are likely to seek out a bargain, choosing to look online for a potentially lower priced alternative. In a market where luxury goods manufactures are not allowed to a minimum price for distributors the expensive physical store loses business. Physical stores are undeniably more inefficient than online retailers and marketplaces, the allowance of dual pricing gives luxury goods manufacturers who are essentially upstream monopolists (who operate concession and DTC stores) and advantage in the downstream oligopolistic market against other resellers/distributors. This is known as ‘productive efficiency’ as coined by Yoshida (2000). This advantage for physical stores creates more intense competition in the downstream (sales to consumer) market, which ultimately benefits consumers. By excluding distributors like Amazon who often put very little effort into marketing or courting consumers, the luxury goods manufacturers address the concerns about distributors who ‘free riding’ as explained by LVMH in their white paper to European Commission.


In the face of this great competition luxury goods manufacturers who are upstream monopolists (sole producers of their authentic goods) as well as downstream oligopolists (when they sell to consumers not only through DTC but also selected distributors) it is important for them to introduce some sort of strategy that will generate demand and bring in success for their physical stores.


A potential phy-gital payment solution


  • A loyalty card/account like offering in which consumers are rewarded for using in store and online with early access to collections, brand events and workshops etc in exchange for personal data on their shopping habits with the business or manufacturer.

  • This would introduce the opportunity for a personalised pricing model in stores in which businesses are able to estimate their consumer’s maximum willingness to pay and charge them accordingly. Having the capabilities to offer such a model would draw the luxury goods industry towards ‘perfect price discrimination’ which is often very difficult to achieve.

  • Luxury goods manufacturer’s being able to utilise their monopolistic advantage to convince consumers to use their loyalty card in-stores (especially) opens the possibility to personalised pricing in addition to the geographic price discrimination.

  • We have seen widespread success in the implementation of such schemes in the grocery and food market (for Tesco Clubcard and Starbucks Rewards), though they have not been used to directly offer consumers personalised pricing.

  • The more information the luxury goods manufacturer has on their consumer the easier it becomes for them to profile that consumer like a ‘group’ or market, which it already does through geographic and third-degree price discrimination. The likelihood for this strategy to be successful is strengthened by the market/upstream monopoly power of these manufacturers and the new ability to restrict consumers from reselling items on undesirable reseller platforms.


As popularly documented the luxury goods industry has not always been the best at developing its own in-house technology solutions, a potentially great partner for such a product could be Klarna, the BNPL service provider, which offers a system that aids consumers when they pay. The development of a joint loyalty product in which Klarna would potentially adapt its checkout and wishlist offerings to also be usable in store luxury brands could collect personal data and offer consumers at the point of the checkout/till a custom price. Marketing the partnership in a similar style to the AMEX x British Airways card, could go someway in convincing users.


The legality


According to EU consumer protect law the offering of personalised pricing is considered an ‘unfair commercial practice’, to be permitted traders are required to be transparent about it and clearly inform consumers about how the prices are calculated. In most industries having to disclose such information could potentially discourage consumers from buying items, however, given the relationship between status and luxury goods, pairing the personalised pricing with early access, or exclusivity has the potential to make it acceptable. The applications of varying degrees of personalised pricing takes place online using social media data and profiling techniques, the acceptance of it seems quite common and when consumers feel hard done by these pricing strategies they tend to opt for anonymity, assuming the right to anonymity remains I believe that the phy-gital payment solution could be viable.



 
 
 

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