7 - 1 Legal Issues in Marketing Channels* ©McGraw-Hill Companies, Inc Ch. 10 of Coughlan book** and my own materials

7 - 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

7 - 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

7 - 4 Sherman Act Clayton Act Robinson-Patman Act Celler-Kefauver Act Federal Trade Commission Act Robinson- Patman Act 1936 Sherman Act 1890 Clayton Act 1914 Federal Trade Commission 1914 Celler- Kefauver 1950 ©McGraw-Hill Companies, Inc Antitrust Legislation in U.S. * Background

7 - 5 Legislative Summary Year EnactedLegislative ActChannel Practices Potentially Affected 1890Sherman Act Resale price maintenance, illegal vertical integration and mergers, exclusive dealings, refusals to deal, resale restrictions 1914Clayton Act Tying contracts, exclusive dealing arrangements, dual distribution 1914Federal Trade Commission Price discrimination, dual distribution 1936Robinson – Patman Price discrimination, promotional allowances 1930Tariff Act (Amended) Parallel import channels 1950Celler – Kefauver Horizontal mergers, vertical mergers 1975Consumer Goods Pricing Law Resale price maintenance 1985Vertical Restraints Guidelines Exclusive dealing arrangements ©McGraw-Hill Companies, Inc Exhibit 7.1

7 - 6 Legal Rules for Antitrust Law Enforcement ©McGraw-Hill Companies, Inc 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

7 - 8 I.Channel Structure-Related Issues** 1. Market Coverage: Geography or Territory  Distribution Intensity Issue ©McGraw-Hill Companies, Inc 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

7 - 9 I. Channel Structure-Related Issues 1. Market Coverage: Distribution Intensity Issue (cont’d) ©McGraw-Hill Companies, Inc 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)

I. Channel Structure-Related Issues 2. Customer Coverage: Channel Level Issue ©McGraw-Hill Companies, Inc a)Motive: Need to Prevent Gray Markets b)Antitrust concern: resale restriction  Viewed similar to territorial restriction  Rule of reason, but deemed illegal when substantially reducing interbrand competition c) European view

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

Channel Structure-Related Issues 3. Ownership and function issue ©McGraw-Hill Companies, Inc 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

II.Channel Pricing-related Issues* ©McGraw-Hill Companies, Inc (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”

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

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

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

III. Product line-related Issues* ©McGraw-Hill Companies, Inc 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

III. Product line-related Issues ©McGraw-Hill Companies, Inc 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

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

Emerging Issues * Slotting allowances : S helf 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 ©McGraw-Hill Companies, Inc. 2002