Having actual lived (and suffered) under this rule as a smaller manufacturer operating on a national level for decades. It has a real and, in some cases, severe financial impact on my life.
This rule caused us lots of harm and prevented the growth of our small, self-funded entreprenuerial business. As a manufacturer, having local resellers is a less expensive alternative to hiring our own sales force. The distribution channel is essentially a way to outsource sales, which if you are a small start-up is often a key enabler to getting your business off the ground. Resellers are crucial to us because they call on customers, demonstrate our products, answer questions, do local support and even run local ads. That's why they are worth the ~30% margin I build in to our business model to pay them. Dealers also assume credit cost/risk and aggregate a bunch of onesy/twosy orders into volume purchases that our small company can handle. To me that 30% is a necessary cost of making and selling my product just as much as parts and assembly. If the dealer didn't make that investment on my behalf, then I would have to raise that much more money and pay to do that work myself. That's the beauty of a distribution channel. I don't have to fund that pre-sales and distribution expense upfront out of my pocket. My reseller partners essentially go into business with me, do the work and get paid for their work by adding that cost downstream of me. It's a wonderful enabling option for me as an entreprenuer - except it doesn't work because of this law. It makes it so that I can't ensure that my reseller will actually be repaid for their investment and work to build our mutual business.
The problem is that as soon as my product starts to get any momentum, an internet or mail-order 'box house' buys a little inventory from a distributor and marks the product up only 15%. Prospects still learn about the product from the local sales calls, ads or shows our 'real' dealers invest their money to do, and prospects still phone the 'real' dealers for pre-sales questions and demos but then many of the prospects buy from the box house because it's cheaper. But it's only cheaper because those box houses 'cheat' by not doing the market development and support work that we need them to do (and built into the margin to pay for). In that case I'd rather lower my product's selling price and split the difference directly with the consumer. The problem is that then I don't have anyone doing local demos, sales, support etc. Some products need those things to succeed and those products (like mine) are harmed by this law.
When I design, cost-estimate and raise capital to build a product, I always have a projected ASP (Average Selling Price). This is what we think a typical consumer will typically pay for the product. We use this to figure out if the product will be a good competitive alternative in the market and if enough customers will actually buy the product. We balance the bill of materials, advertising, cost of sales and customer acquisition costs. In our ASP there is an average expected reseller margin which is there to pay the resellers to do the work we need them to do to make the product successful. Those box houses are essentially 'leeching' the value of the pre-sales work and investment I asked my 'real' reseller partners to make. It sucks that I make this product by my own hand and the "sweat of my brow" so to speak, but then this law limits how I bring my product to the marketplace, how I implement my distribution partnerships, and how I grow my business.
In my view the law is a government intrusion into my right to enter into certain kinds of mutually agreed contracts with my distribution partners. It also quite literally limits what products I can consider creating and offering to consumers. I have to stay away from products that I feel need a lot of face-to-face explanation, demonstration and support to succeed. There's no way I can justify raising the capital from my investors to fund local sales offices and this law makes it very risky for local resellers to go into partnership with me, front that investment on my behalf, provide that service and have any expectation of being fairly compensated for doing so.
Apparently my only alternative is to shift my business, capital structure, staffing and core competency to sell direct to consumers. Only then am I actually free to set the price an end-user pays for the product I make. But what if I don't want to operate on Dell's model? What if that model doesn't fit my products, market and customers? While it appears that I am free to outsource my manufacturing to the most efficient method, if I dare outsource my distribution to what I think is a more efficient method then I get a bunch of government meddling in my freedom of contract with my "sales outsourcing" providers. Yes, I can decide not to sell to certain dealers, *but* it's illegal for me to use the markup a dealer adds to the final customer price as one of the criteria for choosing my distribution relationships.
This seems so incredibly unfair that when my lawyer first told me this many years ago, I got a second opinion from another lawyer because I couldn't believe that my freedom as an inventor/businessperson was so limited in this country. The result is that the resellers that are actually helping me build my business by investing their capital to our mutual benefit by funding local sales, support and product knowledge (such as flying their staff to my training seminars)- they start to lose money and then drop our products. Then demand falls because no one is investing locally in generating demand and then of course the 'box houses' drop the product because no wants it (not that they carried much inventory to start with - many of them don't carry any product - they only order when you do). The final result is that we, the entreprenuerial company, are harmed or grow more slowly. To me it appears that the government is keeping me from doing what I think is best for my company and customers. Whether it's the best way (or not) should be for the market to decide. I'll lose my house if I screw up either way. Since I'm putting everything on the line as an entreprenuer, it seems only fair that I be set free to succeed or fail without artificial distribution/pricing limitations on how I bring my products to consumers.
Manufacturers can have a legitimate need to set selling prices by contract so that they can ensure a margin that gives an adequate ROI for valuable services provided by their distribution partners. Of course I want that margin to be as low as possible because I want to sell more. In fact, I'm always working to squeeze every penny possible out of the total cost a final consumer pays for my product - from parts, and assembly to advertising and reseller margins (because it helps me be more successful). At the same time, each of those costs in the final dollars you pay is paying for something that I designed into my product, including the pre-sales and dealer support that I chose to build into my product and its price. In my business it's the same kind of design choice (and trade-off) I make as the choosing the price/performance of any other component. How well I make those trade-offs is my business (and often the key to my success). That's why I want the freedom to evaluate the market need and then set adequate reseller margins to fund the local sales, support, advertising and demo costs that I've chosen to make part of the product I'm creating.
My last point is that resellers being free to set any price works the other way too. When I bought my car it was selling way over MSRP because it had gotten great reviews. The manufacturer (Acura) didn't have enough to meet demand in the first year so the dealers were jacking up the price an extra $5,000. I actually complained to Acura and they said they hated it but they couldn't "fix" the price. It was bad for Acura because they didn't make any more money from the increased demand, the dealer kept the windfall (even though it was Acura's work and investment that created the extra value) and Acura also got a PR black-eye as well as having to live with an inaccurate price perception in the market.
