The DNA Code - a Secret Pricing Formula between Manufacturers (or Publishers) and the Major Retail Chains

Initial Publication: 02/23/02; Last Update: 02/24/02 10:02

How have the nation's manufacturers, publishers major retail chains been able to keep their low per-unit cost to buy goods a secret from competing small retail stores? The answer is by having their cost (or the seller's price) a secret, dependent on about 50 to 100 different factors.

Most surprisingly, the selling price to a major chain retailer is so secret that the manufacturers and superstore chains do not know the per-unit price at which they are selling and buying goods between themselves. The secrecy is inherent in having about 50 to 100 different elements make up the price, so that one cannot determine the price without an exhaustive search into the value or cost of each of the elements making up the price.

In reality, the price is made up by a complicated code, similar to the DNA Code ascertained to exist for humans and other living things. The similarity is so strong, that I have named the secret pricing code a "DNA Code", with the elements requiring definition.

In my auto-parts RPA litigation Auto-Parts Litigation Website, the DNA Code (still being developed) consists of about 50-100 elements, which can be seen at Tentative DNA Code for Auto-Parts Aftermarket.

Virtually none of these elements is part of the manufacturer's price list from which smaller competitors select, order and purchase their inventories. They believe, mistakenly, that the invoiced price is the same for all, and that there are no lower prices available. This is true, generally, for competitors other than the large retail chains. Small companies buy at the list price, and for them their invoice generally tells the whole story. You can tell from the invoice sent to the small company the price it pays per unit.

This is not true, however, as to the per-unit prices being paid by large retail chains. You start with the invoiced price (which will generally be a little lower than the per-unit price for the smaller stores), and then you must calculate the DNA Code, and deduct the calculated amount from the chain-store's invoices, to calculate the real per-unit price applicable to such chain.

Several important consequences arise from existence of this DNA Code:

First, neither the manufacturers nor the major retail chain knows the actual per-unit price at which goods are being bought and sold between each other.

Secondly, any RPA (statutory) defense of "Cost Justication" and "Meeting Competition" cannot be established by a manufacturer or major retail chain because they cannot prove the prices being charged to or by themselves or their competitors.

Thirdly, Section 2(c) of the RPA in some federal Circuits might be construed to permit a 2(c) claim directly by reason of the subterfuge involved in pricing, in addition to the indirect result of a Section 2(c) claim by reason of elimination of the defenses of cost justification and meeting competition, as discussed above.

Section 2(c) was enacted, it can be argued, to encourage prices to be revealed, instead of using hidden pricing schemes (which are not indicated on the invoice). By hiding the actual price through the DNA Code, the defenses are lost anyway, and the result is a Section 2(c) claim which permits no statutory defenses.

How did the DNA Code come about?

This is easy to answer, I think. You look to the persons who have the money, and see what they would do. The major chain-store retailers, who are able to rake in the public's money, make demands upon manufacturers and publishers to lower their prices indirectly through a series of givebacks. The form of these givebacks has been a continual creative exercise by the major chain retailers, who device new ways to have money shoveled to them by the manufacturers and publishers.

You can be quite certain that the manufacturers and retailers do not lay awake at nights dreaming up new ways to send their money to the major chain stores. But the major chain stores, starting with Wal-Mart, have vast organizations set up to demand every penny they can extract from the hapless manufacturers and publishers, who try to offset this economic juggernaut (the persons who control the pursestrings) by merging, and then merging again, and again, until the manufacturers have merged themselves into several big conglomerates, only to find that this is not enough. Being a manufacturing or publishing conglomerate does not create sales.

The sales are generated by the major retail stores which bestow their purchase-order gifts on those compliant manufacturers and publishers who agree to sell to the chains at invoice less DNA Code prices, while continuing to sell to the chains' smaller competitors at much higher, but profitable prices. After all, the publishers and manufacturers have to make a profit somewhere, and certainly are not making any profits on their sales to the major retail chains.

Why, then, do the manufacturers and publishers continue to sell to the major retail chains. The answer is, in part, that they do not. Many manufacturers and publishers have gone out of business and therefore have stopped selling to the chains and other customers. For those manufacturers and publishers still selling to the major chains, the thinking seems to be that if they don't sell to the major chains, a competitor will, and that could be disastrous for the manufacturers and publishers who believe that this could create an awsome competitor to them.

In the long run, the manufacturers and competitors are seeking a solution to the problem which is, it seems, that either the price-discrimination practices stop, and revert to a level playing field for all purchasers, or the smaller retail competitors such as Kmart, Target, Venture and Toys-R-Us will go out of business (after wiping out most independent retailers), and the manufacturers and publishers will also be wiped out, by having the surviving chains transfer most of their purchases to foreign manufacturers (and possibly some foreign publishers).

Somebody has to step in to stop this destruction of America's business.

There is no reason why any one retailer should announce that it is going to withdraw from the game. It would only go out of business sooner.

There seems to be four possible end games: (i) the Justice Department, FTC and state agencies step in to stop the price discrimination (in spite of the media claiming that there should be little or no regulation of business); (ii) private RPA suits should be brought to impose massive monetary penalties on the RPA violators, to encourage them to stop violating the RPA; (iii) industries should get together through industry-wide lawsuits and agree to enjoin the unlawful practices; and (iv) do nothing and watch most of America and its institutions change to third-world status, with the owners of the major businesses selecting other countries to develop and then destroy.

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Copyright © 2002 by Carl E. Person