A recent article in the NYT, "The Fight Over Who Sets Prices at the Online Mall" by Brad Stone, discusses that battle between manufacturers, who want retailers to abide by price floors, and retailers, who want the freedom to set prices as low as they please:

Wary of the Internet’s tendency to relentlessly drive down prices, major brands and manufacturers — and now, book publishers — are striking back, deploying a variety of tactics and tools to control how their products are presented and priced online…

In many cases that freedom stems from a 2007 Supreme Court ruling in the case of Leegin Creative Leather Products v. PSKS. The ruling gave manufacturers considerably more leeway to dictate retail prices … For offline retailers like Wal-Mart Stores and Best Buy, that means not dropping below those prices in the circulars and ads in newspapers. But online retailers have a greater burden. Manufacturers consider the product pages on sites like eBay and Amazon.com to be ads, and they complain whenever e-commerce sites set prices below the minimum price. This leads the sites to replace prices with notes that say things like “To see our price, add this item to your cart”… As a result, those prices also did not show up on search sites like Google Product Search and PriceGrabber.com. The trend has arguably weakened one of the implicit promises of e-commerce: that quick searches and visits to comparison shopping sites will yield the best deals.

Most online retailers complain that the missing prices confuse consumers and give an advantage to big chains like Wal-Mart, which do not bear the same burden in their stores… “We think consumers are best served when the retail marketplace is open and transparent and retailers have an opportunity to offer the best prices and services, and are not controlled from above by manufacturers” ...

Manufacturers, of course, have a different view. They say the competitiveness of the Internet has unlocked a race to the bottom — with everyone from large corporations to garage-based sellers ravenously discounting products, and even selling them at a loss, in an effort to capture market share and attention from search engines and comparison shopping sites. They also worry that their largest retail partners may be unwilling to match the online price cuts and could stop carrying their products altogether…

Instead of selling e-books wholesale to retailers like Amazon.com, the publishers want to sell them directly, setting prices and having the retailer act as an agent, taking a fixed 30 percent commission.

The Retail Game

The dynamics of the battle between manufacturers, retailers, and consumers is a game: the players in the game are the manufacturers, retailers, and consumers, and each player’s payoff (profits) is affected by the actions taken by the other players.  Let’s consider the incentives faced by each player.