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Legal Issues in Marketing Channels*

Legal Issues in Marketing Channels*. Ch. 10 of Coughlan book** and my own materials. ©McGraw-Hill Companies, Inc. 2002. Major Topics for Legal Issues. Antitrust Laws in the U.S. Legal Rules in Antitrust Law Enforcement Channel Structure-related Issues**

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Legal Issues in Marketing Channels*

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  1. Legal Issues in Marketing Channels* • Ch. 10 of Coughlan book** and my own materials ©McGraw-Hill Companies, Inc. 2002

  2. Major Topics for Legal Issues • Antitrust Laws in the U.S. • Legal Rules in Antitrust Law Enforcement • Channel Structure-related Issues** • Market Coverage: Distribution intensity • Customer Coverage: Distribution level • Vertical Integration: Ownership issue ©McGraw-Hill Companies, Inc. 2002

  3. Major Topics for Legal Issues (Cont’d) • Channel Pricing-related Issues** • (Resale) Price Maintenance • Price Discrimination • Product line-related Issues** • Exclusive Dealing • Tying Agreement • Channel Management-related Issues • Selection and Termination of a middleman • Emerging Legal Issues ©McGraw-Hill Companies, Inc. 2002

  4. Sherman Act 1890 Clayton Act 1914 Sherman Act Clayton Act Federal Trade Commission 1914 Robinson- Patman Act 1936 Federal Trade Commission Act Celler- Kefauver 1950 Robinson-Patman Act Celler-Kefauver Act Antitrust Legislation in U.S. * Background ©McGraw-Hill Companies, Inc. 2002

  5. Year Enacted Legislative Act Channel Practices Potentially Affected Resale price maintenance, illegal vertical integration and mergers, exclusive dealings, refusals to deal, resale restrictions 1890 Sherman Act Tying contracts, exclusive dealing arrangements, dual distribution 1914 Clayton Act Price discrimination, dual distribution 1914 Federal Trade Commission Parallel import channels 1930 Tariff Act (Amended) Price discrimination, promotional allowances 1936 Robinson – Patman Horizontal mergers, vertical mergers 1950 Celler – Kefauver Resale price maintenance 1975 Consumer Goods Pricing Law Exclusive dealing arrangements 1985 Vertical Restraints Guidelines Legislative Summary Exhibit 7.1 ©McGraw-Hill Companies, Inc. 2002

  6. Legal Rules for Antitrust Law Enforcement • Per Se Illegal • Modified Rule of Reason (“Quick Look”) • Rule of Reason • Per Se Legal ©McGraw-Hill Companies, Inc. 2002

  7. Measures of Industry Concentration • The share of the largest firm • The combined shares of the largest three firms • The number of firms with at least x percent of the market (e.g., 1 percent) • The share of the largest firm divided by the share of the next three largest competitors • 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

  8. Channel Structure-Related Issues**1. Market Coverage: Geography or Territory  Distribution Intensity Issue a)Three Basic Coverage Policies b) 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 ©McGraw-Hill Companies, Inc. 2002

  9. I. Channel Structure-Related Issues1. Market Coverage: Distribution Intensity Issue (cont’d) • c) Antitrust Concerns: 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) ©McGraw-Hill Companies, Inc. 2002

  10. I. Channel Structure-Related Issues2. Customer Coverage: Channel Level Issue • Motive: Need to Prevent Gray Markets • Antitrust concern: resale restriction • Viewed similar to territorial restriction • Rule of reason, but deemed illegal when substantially reducing interbrand competition • c) European view ©McGraw-Hill Companies, Inc. 2002

  11. Producer (United States) Producer (France) Authorized Intermediary Unauthorized Intermediary Authorized Intermediary Consumers (United States) Consumers (European) Parallel Import Channels Exhibit 7.2 ©McGraw-Hill Companies, Inc. 2002

  12. Channel Structure-Related Issues3. Ownership and function issue Vertical Integration by Merger: Challengeable only for collusion and setting up strong barriers to entry. Vertical Integration by internal expansion: Limited only if attempt to create a monopoly ©McGraw-Hill Companies, Inc. 2002

  13. II.Channel Pricing-related Issues* 1.(Resale) Price Maintenance Change: Per se illegal  Rule of Reason unless there is a Specific Price-fixing Agreement: ex) Business Electronics vs. Sharp (1988) * New Dealer: Office World  Ruled in favor of Sharp Electronics  “It is sometimes legitimate and competitively useful for manufacturers to curb price competition among their dealers” ©McGraw-Hill Companies, Inc. 2002

  14. II.Channel Pricing-related Issues • Three Questions to Ask in Examining a Resale Price Maintenance Case • Conspiracy to fix prices? • Written agreement? • Use of Coercion? ©McGraw-Hill Companies, Inc. 2002

  15. II.Channel Pricing-related Issues • 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 ©McGraw-Hill Companies, Inc. 2002

  16. II.Channel Pricing-related Issues • 2. Price Discrimination Issue: • Deemed legal unless customers are competing against each other • Defenses to Price Discrimination Charges • Cost Difference Justification • Functional Discount • Meeting Competition Justification • Closeout or bankruptcy Justification • Predatory Pricing: Liggett & Myers vs. B&W case (1993) for value-priced cigarettes ©McGraw-Hill Companies, Inc. 2002

  17. III. Product line-related Issues* 1. Exclusive Dealing: Illegal If It Substantially Lessens Competition in the Market. (a) large supplier and small dealer (b) Dollar Volume involved (c) Substantial share of the market (10% and above) Ex) Hagen Daaz vs. Ben & Jerry case ©McGraw-Hill Companies, Inc. 2002

  18. III. Product line-related Issues • 2. Tying Agreement: Franchise business • (a) Deemed worse than exclusive dealing • Per Se Illegal • (b) Deemed legal only if two products are inseparable. • (c) Full line forcing: Coercive Use of economic Power  Modified rule of reason ©McGraw-Hill Companies, Inc. 2002

  19. IV. Selection and Termination of Distributors • 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, Reason ©McGraw-Hill Companies, Inc. 2002

  20. *Slotting allowances: Shelf space rental fees paid by manufacturers to retailers. Can lead to higher consumer prices. Creates entry barrier. Could be anticompetitive like RPM. Retailers can show favoritism * Israeli Guidelines on category management Control of organizing and categorizing: By a retailer, not a supplier Suppliers need a permit from government for category management Emerging Issues ©McGraw-Hill Companies, Inc. 2002

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