Price Fixing?

Alan (California Radiant) Forbes

I was recently trying to source a boiler made by one of the larger boiler manufacturers. It wasn't a brand that I normally install, but because of the boiler room layout, this boiler would work better than any other.

This brand of boilers is sold locally by a supplier I normally don't do business with, but they were happy to make a sale except that they didn't have the particular model that I needed in stock at any of their branches in California, so I called out of state to a different supplier who had it in stock and for sizably less money, but before I went ahead with the purchase, the first supplier called to say that they received a shipment of the model I needed, but they were upset when I asked them to match the out of state dealer's price.

The next day, I received a phone call from the boiler manufacturer's local rep. who I've known for many years through other connections who said that he received a call from the local supplier and that he would make a special deal with them so that I could get the boiler at the reduced price, but only this once. He also said that he would call the out of state supplier and straighten them out because they are not supposed to sell boilers in California.

So, this boiler manufacturer has set up an exclusive deal with this multi-branch California supplier to sell their boilers. If you don't like their pricing, you can't buy one anywhere else. This struck me as odd because even though I don't normally shop around for boilers, there are times when availability is limited and it's nice to have an alternate source. But what this particular purchase has brought forward is that the dealer has price protections in place and he can charge whatever he wants because there's no competition.

This happened a few months ago, but it's continued to leave a bad taste in my mouth.

GGross

Wholesale salesperson here, have access to all purchasing info etc for our lines. I will try to be as vague as possible here as well

It is possible that there are regional pricing structures in effect and the manufacturer sells at a different price to distributors in different regions. The distributor is then obligated to make a good faith effort to only sell in their territory, forced air furnaces are huge with this structure, basically all of them. I have not ever seen a boiler manufacturer do this, but California is a long way from here, and I can't see a boiler company (almost all of whom are on the east coast) keeping the sames terms of sale and price with distributors who are so far away, and likely do a bit less business with them.

That being said, the more likely case here is that the rep is playing damage control for the distributor. I assume you have a pretty successful business here, and the distributor you don't do much business with would be eager to get some more from you. What seems more likely is that the distributor was pissed that another seller had a lower price, he whined at the rep, the rep called you and gave you some BS about honoring the price and working a deal with him. The rep is probably just paying the distributor out of pocket the difference to try to keep everyone happy.


So what can you do? Well personally I would buy it locally, especially if they have the parts. The fact they are willing to match an out of state distributor they likely don't compete with, who can't provide local support etc is astounding, and a great first impression that they are willing to work for you and want your business. I would give them the benefit of the doubt and let them show you if they can provide you with support to match their pricing.

I have seen this exact thing play out with varying differences here and there. All of my boiler lines have told me specifically that there are no regional pricing standards they conform to, my forced air line definitely does, other products definitely do.

mattmia2

Is it possible that this is the result of costs of doing business in california and the distributor is covering their costs? I can also see where it would be in the manufacturer's interest to not allow a distributor with a lot of capital to undercut another distributor at a loss and put the second distributor out of business.

EBEBRATT-Ed

This is done all the time. MFGs have their distributors and dealers and they have to protect their territory.

Let's say a MFG distributor is working with an engineer to spec his product for a large job. He does all the work to get the sale and is underbid by an out of state competitor...no good. Residential equipment may be sold differently

Zman

I believe that this is a clear violation of the Sherman/Clayton acts. https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/antitrust-laws

I'll need to double up on my blood pressure meds to talk about PE's who are hired to design a system who then turf their job to a manufacture rep who designs a system that can only be built using their product. The Rep then tags the project at the regional distributor so he gets a bonus. The customer paid the PE to design the project and later paid the rep to do the same design.

DJD775

They are enforcing corporate pricing and distribution policies set by a single manufacturer and agreed to by the distributor. This not taking place between manufacturers as that would be considered price fixing. As @EBEBRATT-Ed said this is to protect their territories. This is also common place in the boating industry. If by chance you are allowed to buy a boat 500 miles away for less be prepared to drive 500 miles for warranty service.

EBEBRATT-Ed

@Zman

My comments were more to the point of the engineer (and your right most of them do their best to get the MFG rep to do their work for them) Specs a boiler let's say but at least in a public bid they must allow an = Some might say an orange is + to an apple because they are both round.

If it's a private job, then it's up to the customer and or the engineer to decide what they want. Usually if they are "honest" you would think they would want competitive bids. Hard to prove but they can do whatever they want.

Bottom line is if you're in a certain area and the MFG and distribution is tied up tight as long as they are quoting all contractors the same # (again hard to prove) they are doing nothing wrong.


How they handle "online" sales I am not sure

JakeCK

"protect their territory" sounds like something a cartel kingpin would say. 

DJD775

JakeCK said:

"protect their territory" sounds like something a cartel kingpin would say. 

I hope the HVAC manufacturer handles violations differently than a cartel

MaxMercy

mattmia2 said:

Is it possible that this is the result of costs of doing business in california and the distributor is covering their costs?

Agree, location is a big factor. I can't speak for California but of course we all hear about the high costs associated with regulations. I'm in CT and let me tell you *everything* here is expensive from taxes, fuel costs, electricity, insurance, etc. My wife is retiring this month and I'd love to pack up and move south. Fortunately, we live well but we could live like kings on our pensions out of CT. Unfortunately, our two sons are anchored here and we won't leave them or our grandkids.

I didn't mean to digress that much but if it costs more to run a business in CA as I suspect it does, then the distributor in CA may have been making less on that boiler at his full price than the out of state distributor makes at his lower price.

DanHolohan

When I worked for the rep we had an arrangement with the other reps, which the factory oversaw. If a large contractor in, say, Chicago, won a bid to do a major hotel in NYC, the contractor would buy the B&G pumps from the Chicago rep, who then had them shipped to the jobsite in NYC. The Chicago rep would have to pay us an out-of-territory commission because we would be taking on any in-warranty service. That commission sometimes got added to the price charged to the contractor, and sometimes it didn't get added.

EBEBRATT-Ed

@DanHolohan

When I was the rep for a large burner MFG the "commission" was split 2 ways if the job was out of territory. Job location1/2, rep who got the order 1/2.

The contractor paid the same price either way. If a rep was quoting a job out of his territory, he split with the local rep. If the local rep got the order, he kept the whole thing

DanHolohan

Thanks, @EBEBRATT-Ed. We also kicked a small commission to the wholesaler for those big jobs. The wholesaler did absolutely nothing for that but it kept us in their good graces when it came to selling them the shelf-goods. The supply chain is pretty interesting.

mattmia2

DanHolohan said:

Thanks, @EBEBRATT-Ed. We also kicked a small commission to the wholesaler for those big jobs. The wholesaler did absolutely nothing for that but it kept us in their good graces when it came to selling them the shelf-goods. The supply chain is pretty interesting.

I think somewhere in this is the reason that the supply houses that have been bought by big chains don't have the part you need in stock.

GGross

mattmia2 said:

DanHolohan said:

Thanks, @EBEBRATT-Ed. We also kicked a small commission to the wholesaler for those big jobs. The wholesaler did absolutely nothing for that but it kept us in their good graces when it came to selling them the shelf-goods. The supply chain is pretty interesting.

I think somewhere in this is the reason that the supply houses that have been bought by big chains don't have the part you need in stock.

Yup, we won't stock anything B&G because the rep sells commercial jobs direct, which is a direct competition with us, other products are the same way. Why would a wholesaler provide support for manufacturers who are in competition with them? No thank you, we will push for products that allow everyone to be more profitable

DanHolohan

Exactly. 

Jamie Hall

A comment, if I may, from the standpoint of an engineer who once had the opportunity to write specs. for various jobs -- some private, some for public agencies -- and, of course, who was responsible for the project when it was complete (I haven't been sued yet...).

First, let me say that I never allowed a manufacturer's rep. to design anything I stamped. I often made extensive use of their knowledge of the products in question, and of the literature -- but the design was mine. This may differ with other engineers; I wouldn't know.

Second, the part of the design which involves the specifications is a little different for private jobs vs. public works. For private jobs, it is quite permissible to specify that such and such an item -- let's say a pump -- is to be manufacturer X model Y, or equal, and let the bidder prove to you that what they are proposing is, in fact, equal. Sometimes it is. Sometimes it isn't. On a public works project, however, that is not permitted. On those, it is perfectly alright to write the specification in such a way that it is unlikely that some other unit will be used, but you can't say so (among other things, you can't require patented or copyright features). This can make specification writing a fine art -- and scrutiny of the resulting bids an even finer art, sometimes requiring a pretty deep dive into the item being offered.

Things get even more interesting when the detailing is left to some other firm. While I used to let a steel fabricator, for instance, propose detailing, if my stamp went on it I double checked everything that was done -- and this should not be a cursory check, but almost as thorough as one were doing the design from scratch, one's self. Again, other engineers may have different practices.

EBEBRATT-Ed

Engineers usually write specs around a certain brand say X but will accept Y & Z as equals if the intention is to get competitive bids.

I used to bid jobs with commercial oil and gas burners where x wasn't the same a s Y or Z.

On one job I remember we were bidding against our most hated competition. On the first bid he was low but I got the bids thrown out on a technicality. So the City rebid the job and the second time we were the low bidder. (of course the prices kept getting lower). My competition then got the bids thrown out again,

So the third time around i decided forget it and didn't bid.

He of course dropped his #.

But I decided to let the City have his crappy equipment and lousy install. And he didn't make any money on it anyhow

So in my mind I had the last laugh.

Don't think he ever talked to me after that LOL

It was fun though.

We used to bid jobs against each other all the time for about 15 years. He probably got more than I did.

I remember 1 $5000,00 job we were $5,00 dollars apart We won that one.

The other one we won I was $268794,00 and he was 270000.00

Dummy. You NEVER bid an even #

Paul Pollets

I used to buy my boilers in Canada when the dollar was worth 30% more than the Canadian dollar. It was easy to broker the boilers over the border, then have them shipped to Seattle. It wound up being 25%-30% less expensive than getting the boilers from a Seattle wholesaler. The president of the company called me to ask that I make purchases in Seattle only, the reason being the local sales rep was denied a commission for the Canadian purchases.

HomerJSmith

It was interesting reading the comments on this post. I'll put my 2 cents worth in which is worth 2 cents.

There is a problem with driving a car down the road by just looking in the rear view mirror, I think you'd agree. Most of the comments are about how things were in the past, looking in the rear view mirror and not forward looking. I can understand this. The past is safe (tomorrow is going to be like today) and the future is scary. This is Cognitive Dissonance ( Normalcy bias, a form of cognitive dissonance, which is the refusal to plan for, or react to, a disaster which has never happened before).

What is the disaster I see? We are in the "Greater Recession" aka the greatest world wide depression ever told. This is an era where the near past is no guide for the future.

I suffer from a Cassandra Curse which has plagued me all my life. Never the less, I will go out on a limb even tho it seem fruitless. I predict, as we fall into the Deeper Depression, the following:

1. As the liquidity dries up, (No, not water, but the amount of money value available, a sign of a failing economy). People will repair their heating appliances and not buy new ones unless absolutely necessary.
2. People will attempt to repair their equipment themselves with the help of You Tube and sites like Heating Help.com .
3. Contractors will be in fierce competition with each other for business and profits will be marginal at best. Portal to Portal charges will go bye, bye. Non contractors will be added competition in a tight market (your former employees that did your work and that you had to let go to keep your expenses as low as possible).
4. Manufacturers that are carrying debt will discount their products because of lack of demand and the need for money to service those debts. Those companies in a stronger economic position will have to meet those discounted prices to remain competitive. Many companies will go out of business which would restrict the availability of repair parts for their units. Those repair parts will command a premium price for a time. Contractors that have an inventory of repair parts will have business over those who don't and have to go to a wholesaler and be told that the part is unavailable or there is a long wait time.
5. The eventual elimination of licensing laws and a trade union, a guild like structure that is more responsive to competence than current licensing laws.

These are a few of the events that I see coming, believe it or not. There are others, but why spoil your day.

Keep an eye on liquidity. Our economy runs on liquidity and when that dries up, the wheels come off the bus.

Sorry!

SlamDunk

DanHolohan said:

When I worked for the rep we had an arrangement with the other reps, which the factory oversaw. If a large contractor in, say, Chicago, won a bid to do a major hotel in NYC, the contractor would buy the B&G pumps from the Chicago rep, who then had them shipped to the jobsite in NYC. The Chicago rep would have to pay us an out-of-territory commission because we would be taking on any in-warranty service. That commission sometimes got added to the price charged to the contractor, and sometimes it didn't get added.

That set up is unforgiving.

After a national construction company built our facility and turned the keys over to us, a couple territory reps (different products) refused to support said componants ( mostly electronic hvac controllers and bms system) because the construction company bought them in another territory, shipped them to our location and shafted the local reps.

We didnt understand what you just explained. We just wanted support when parts started failing and we needed replacements. We paid our bills on time!

After a lot of grief, they charged us an arm and a leg for the few replacements we needed. It was a big deal.
They got their commisions in the end, when we doubled the size of our facility four years later. My company paid the price but it left us with a bitter taste and no forgiveness!

Those componants and the BMS became obsolete and we are removing them right now, ourselves; we sourced our parts from their competitors-local reps, national products. We are spending a few mil. We would have stuck with the original guys if their attitudes were better towards us.