1. Legal Issues in Marketing Channels*
Ch. 10 of Coughlan book** and my own materials
** Marketing Channels, Coughlan, Anderson,
Stern, and El-Ansary (2006), Prentice Hall.
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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 issue
Customer Coverage: Distribution level issue
Vertical Integration: Ownership/Function issue
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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 in Channels
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4. Antitrust Legislation in U.S.
Robinson-
Patman Act
1936
Sherman Act
1890
Clayton Act
1914
Federal
Trade
Commission
Celler-
Kefauver
1950
Sherman Act
Clayton
Act
Robinson-Patman Act
Celler-Kefauver Act
Federal Trade
Commission
Background: political motive and interpretation of laws change.
* Background
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5. Legislative Summary Year Enacted Legislative Act
Exhibit 7.1
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
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 Goods
Pricing Law
Resale price maintenance
1985
Vertical Restraints
Guidelines
Exclusive dealing arrangements
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6. Legal Rules for Antitrust Law Enforcement
Per Se Illegal
Modified Rule of Reason (“Quick Look”)
Rule of Reason
Per Se Legal
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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
Why Does Industry Concentration
Matter for Antitrust Laws?

8. a) Three Basic Coverage Policies b) Factors to Consider:
Channel Structure-Related Issues** 1. Market Coverage Issue: 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
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9. c) Antitrust Concern: Territorial Restriction
I. Channel Structure-Related Issues 1. Market Coverage: Distribution Intensity Issue (cont’d)
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)
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10. Motive: Need to Prevent Gray Markets
I. Channel Structure-Related Issues 2. Customer Coverage Issue: Channel Level Issue
Motive: Need to Prevent Gray Markets
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
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11. Parallel Import Channels
Producer
(United States)
Authorized
Intermediary
Consumers
(France)
(European)
Unauthorized
Exhibit 7.2
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12. Channel Structure-Related Issues 3. 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
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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
 “It is sometimes legitimate and competitively useful for manufacturers to curb price competition among their dealers”
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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?
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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
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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
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17. III. Product line-related Issues**
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
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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
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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, With Reason
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20. Emerging Issues * Category Management: Meaning
*Slotting allowances: Shelf space rental fees paid by manufacturers to retailers
Can 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 categorizing: By retailer, not a supplier
Suppliers need a permit from government for doing category management
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