7 - 1

Legal Issues in Marketing Channels*

©McGraw-Hill Companies, Inc. 2002

•Ch. 10 of Coughlan book** and my own materials

** Marketing Channels, Coughlan, Anderson, Stern, and El-Ansary (2006), Prentice Hall.

7 - 2

Major Topics for Legal Issues in Marketing Channels

Antitrust Laws in the U.S. Legal Rules in Antitrust Law

EnforcementChannel Structure-related Issues**

Market Coverage Rule: Distribution intensity issue

Customer Coverage Rule: Distribution level issue

Vertical Integration: Ownership/Function issue

©McGraw-Hill Companies, Inc. 2002

7 - 3

Major Topics for Legal Issues (Cont’d)

Channel Pricing-related Issues**(Resale) Price MaintenancePrice Discrimination

Product line-related Issues**Exclusive DealingTying Agreement

Channel Management-related IssuesSelection and Termination of a

middlemanEmerging Legal Issues in Marketing

Channels©McGraw-Hill Companies, Inc. 2002

7 - 4

Sherman Act

ClaytonAct

Robinson-Patman Act

Celler-Kefauver Act

Federal TradeCommission

ActRobinson-

Patman Act1936

Robinson-Patman Act

1936

Sherman Act1890

Sherman Act1890

Clayton Act1914

Clayton Act1914

FederalTrade

Commission1914

FederalTrade

Commission1914

Celler-Kefauver

1950

Celler-Kefauver

1950

©McGraw-Hill Companies, Inc. 2002

Antitrust Legislation in U.S.

* Background

7 - 5

Legislative Summary

Year Enacted Legislative Act Channel Practices Potentially Affected

1890 Sherman Act Resale price maintenance, illegal vertical integration and mergers, exclusive dealings, refusals to deal, resale restrictions

1914 Clayton Act Tying contracts, exclusive dealing arrangements, dual distribution

1914 Federal Trade Commission

Price discrimination, dual distribution

1936 Robinson – Patman

Price discrimination, promotional allowances

1930 Tariff Act(Amended)

Parallel import channels

1950 Celler – Kefauver

Horizontal mergers, vertical mergers

1975 Consumer GoodsPricing Law

Resale price maintenance

1985 Vertical RestraintsGuidelines

Exclusive dealing arrangements

©McGraw-Hill Companies, Inc. 2002

Exhibit 7.1

7 - 6

Legal Rules for Antitrust Law Enforcement

©McGraw-Hill Companies, Inc. 2002

• Per Se Illegal

•Modified Rule of Reason (“Quick Look”)

•Rule of Reason

•Per Se Legal

7 - 7

Measures of Industry Concentration

1. The share of the largest firm

2. The combined shares of the largest three firms

3. The number of firms with at least x percent of the market (e.g., 1 percent)

4. The share of the largest firm divided by the share of the next three largest competitors

5. Herfindahl-Hirschman Index (HHI):-The Sum of Squared Shares of the Firms in the Industry- Use- Thresholds: below 1000; 1,000 to 1,800; above 1,800

•Why Does Industry Concentration Matter for Antitrust Laws?

7 - 8

I. Channel Structure-Related Issues**1. Market Coverage Issue: Geography or Territory Distribution Intensity Issue

©McGraw-Hill Companies, Inc. 2002

a) Three Basic Coverage Policiesb) Factors to Consider:

(a) Customer Patronage Motives(b) Distribution Saturation(c) Desire for Control

"You can take 50 years to build a brand and you can ruin it in three years through careless distribution.“ex) Gucci and Bang & Olufsen

7 - 9

I. Channel Structure-Related Issues1. Market Coverage: Distribution Intensity Issue (cont’d)

©McGraw-Hill Companies, Inc. 2002

c) Antitrust Concern: Territorial Restriction

Ex) Continental TV vs. GTE Sylvania (1977)=> GTE Sylvania won the case When challenged, territorial restriction is under “rule of reason”• Interbrand Competition vs. Intrabrand Competition• Change: From “absolute confinement” to APR (Area of Primary Responsibility)

7 - 10

I. Channel Structure-Related Issues2. Customer Coverage Issue: Channel Level Issue

©McGraw-Hill Companies, Inc. 2002

a)Motive: Need to Prevent Gray Markets

b)Antitrust concern: resale restriction

Viewed similar to territorial restriction

Deemed rule of reason, but deemed illegal when substantially reducing interbrand competition

c) European view on gray markets

Ex) Supreme Court Case: Imported Textbook Sales in the U.S.

7 - 11

Parallel Import Channels

Producer(United States)

AuthorizedIntermediary

Consumers(United States)

Producer(France)

AuthorizedIntermediary

Consumers(European)

UnauthorizedIntermediary

Exhibit 7.2

©McGraw-Hill Companies, Inc. 2002

7 - 12

Channel Structure-Related Issues3. Ownership and function issue

©McGraw-Hill Companies, Inc. 2002

-Vertical Integration by Merger:Challengeable only for collusion

and setting up strong barriers to entry.

Ex) Merck + Medco

- Vertical Integration by internal expansion:

Limited only if attempt to create a monopoly

Ex) A-B + A-B Packaging

7 - 13

II. Channel Pricing-related Issues**

©McGraw-Hill Companies, Inc. 2002

1. (Resale) Price MaintenanceChange: Per se illegal Rule of Reason unless there is a specific price-fixing agreement: ex) Business Electronics vs. Sharp Electronics (1988)

* New Dealer: Office World Court ruled in favor of Sharp

“It is sometimes legitimate and competitively useful for manufacturers to curb price competition among their dealers”

7 - 14

II. Channel Pricing-related Issues

©McGraw-Hill Companies, Inc. 2002

Three Questions to Ask in Examining a Resale Price Maintenance Case

1.Conspiracy to fix prices?

2.Written agreement?

3.Use of Coercion?

7 - 15

II. Channel Pricing-related Issues

©McGraw-Hill Companies, Inc. 2002

Resale Price Maintenance between manufacturer and its resellers

•Minimum price fixing: Per Se Illegal Recent ruling: Rule of Reason (see WSJ article)

• Maximum price fixing: Rule of Reason

7 - 16

II. Channel Pricing-related Issues

©McGraw-Hill Companies, Inc. 2002

2. Price Discrimination Issue:Deemed legal unless customers are competing against each other

•Defenses to Price Discrimination Charges

1. Cost Difference Justification2. Functional Discount3. Meeting Competition Justification 4. Closeout or bankruptcy

Justification

•Predatory Pricing: Liggett & Myers vs. B&W case (1993) for value-priced cigarettes

7 - 17

III. Product line-related Issues**

©McGraw-Hill Companies, Inc. 2002

1. Exclusive Dealing:Deemed Illegal If It Substantially Lessens Competition in the Market.(a) Between a large supplier and a small dealer (b) Dollar volume involved(c) Substantial share of the market (10% and above)

Ex) Hagen Daaz vs. Ben & Jerry case

7 - 18

III. Product line-related Issues

©McGraw-Hill Companies, Inc. 2002

2. Tying Agreement: Franchise business

(a) Deemed worse than exclusive dealingPer Se Illegal

(b) Deemed legal only if two products are deemed inseparable.

(c) Full line forcing: Coercive Use of Economic Power Modified rule of reason

7 - 19

IV. Selection and Termination of Distributors

©McGraw-Hill Companies, Inc. 2002

a)Selection of Distributors

b) Refusal to sell: Colgate Doctrine* Colgate Doctrine (U.S. vs. Colgate 1919)

1. “Independent” or unilateral decision

2. No purpose to create monopoly

c) Termination: Unilateral, With Reason

7 - 20

Emerging Issues*Slotting allowances: Shelf space rental

fees paid by manufacturers to retailersCan lead to higher consumer prices.

Creates an entry barrier.Could be anticompetitive like RPM.Retailers can show favoritism

* Category Management: Meaning Israeli Guidelines on category management

• Control of organizing and managing a category: By retailer, not by a supplier

• Suppliers need a permit from government for doing category management©McGraw-Hill Companies, Inc. 2002