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.
©McGraw-Hill Companies, Inc. 2002
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Major Topics for
Legal Issues in Marketing Channels
Antitrust Laws in the U.S.
Legal Rules in Antitrust Law
Enforcement
Channel Structure-related Issues**
Market Coverage Rule: Distribution intensity
issue
Customer Coverage Rule: Distribution level
issue
Vertical Integration: Ownership/Function issue
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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 Marketing
Channels
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Antitrust Legislation in U.S.
Sherman ActAct
Sherman
1890
1890
Sherman Act
Clayton Act
Clayton
Act
1914
1914
Clayton
Act
Federal
Federal
Trade
Trade
Commission
Commission
1914
1914
Federal Trade
Commission
Act
Robinson-Patman Act
Celler-Kefauver Act
* Background
©McGraw-Hill Companies, Inc.
2002
RobinsonRobinsonPatman Act
Patman
Act
1936
1936
CellerCellerKefauver
Kefauver
1950
1950
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Legislative Summary
Exhibit 7.1
Year Enacted Legislative Act
1890
Sherman Act
1914
Clayton Act
1914
Federal Trade
Commission
Tariff Act
(Amended)
Robinson –
Patman
Celler –
Kefauver
Consumer Goods
Pricing Law
Vertical Restraints
Guidelines
1930
1936
1950
1975
1985
©McGraw-Hill Companies, Inc. 2002
Channel Practices Potentially Affected
Resale price maintenance, illegal vertical
integration and mergers, exclusive dealings,
refusals to deal, resale restrictions
Tying contracts, exclusive dealing arrangements,
dual distribution
Price discrimination, dual distribution
Parallel import channels
Price discrimination, promotional allowances
Horizontal mergers, vertical mergers
Resale price maintenance
Exclusive dealing arrangements
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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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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?
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I.
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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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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©McGraw-Hill Companies, Inc. 2002
I. Channel Structure-Related Issues
2. Customer Coverage Issue:
Channel Level Issue
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
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Ex) Supreme Court Case: Imported Textbook Sales in the 7U.S.
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Parallel Import Channels
Producer
(United States)
Authorized
Intermediary
Consumers
(United States)
Producer
(France)
Unauthorized
Intermediary
Authorized
Intermediary
Consumers
(European)
Exhibit 7.2
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Channel Structure-Related Issues
3. Ownership and function issue
-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
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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 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”
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II. Channel Pricing-related Issues
Three Questions to Ask in Examining a Resale
Price Maintenance Case
1. Conspiracy to fix prices?
2. Written agreement?
3. Use of Coercion?
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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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II. Channel Pricing-related Issues
2. Price Discrimination Issue:
Deemed legal unless customers are competing
against each other
•Defenses to Price Discrimination Charges
1. Cost Difference Justification
2. Functional Discount
3. Meeting Competition Justification
4. Closeout or bankruptcy Justification
•Predatory Pricing: Liggett & Myers vs. B&W
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©McGraw-Hill
Companies,
Inc. value-priced
2002
case
(1993)
for
cigarettes
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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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
deemed inseparable.
(c) Full line forcing: Coercive Use of
Economic Power  Modified rule of reason
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IV. Selection and Termination of
Distributors
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
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Emerging Issues
*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 managing a
category: By retailer, not by a supplier
• Suppliers need a permit from government
for doing category management
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