Slide 1Major Topics for Legal IssuesMajor Topics for Legal Issues (Cont’d)Antitrust Legislation in U.S.Legislative SummaryLegal Rules for Antitrust Law EnforcementMeasures of Industry ConcentrationChannel Structure-Related Issues** 1. Market Coverage Issue: Geography or Territory  Distribution Intensity IssueI. Channel Structure-Related Issues 1. Market Coverage: Distribution Intensity Issue (cont’d)I. Channel Structure-Related Issues 2. Customer Coverage Issue: Channel Level IssueParallel Import ChannelsChannel Structure-Related Issues 3. Ownership and function issueII. Channel Pricing-related Issues**II. Channel Pricing-related IssuesSlide 15Slide 16III. Product line-related Issues**III. Product line-related IssuesIV. Selection and Termination of DistributorsEmerging Issues7 - 1Legal 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 - 2Major 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©McGraw-Hill Companies, Inc. 20027 - 3Major 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©McGraw-Hill Companies, Inc. 20027 - 4Sherman ActClaytonActRobinson-Patman ActCeller-Kefauver ActFederal TradeCommissionActRobinson-Patman Act1936Robinson-Patman Act1936Sherman Act1890Sherman Act1890Clayton Act1914Clayton Act1914FederalTradeCommission1914FederalTradeCommission1914Celler-Kefauver1950Celler-Kefauver1950©McGraw-Hill Companies, Inc. 2002Antitrust Legislation in U.S.* Background7 - 5Legislative SummaryYear Enacted Legislative Act Channel Practices Potentially Affected1890 Sherman ActResale price maintenance, illegal vertical integration and mergers, exclusive dealings, refusals to deal, resale restrictions1914 Clayton ActTying contracts, exclusive dealing arrangements, dual distribution1914 Federal Trade CommissionPrice discrimination, dual distribution1936 Robinson – PatmanPrice discrimination, promotional allowances1930 Tariff Act(Amended)Parallel import channels1950 Celler – KefauverHorizontal mergers, vertical mergers1975 Consumer GoodsPricing LawResale price maintenance1985 Vertical RestraintsGuidelinesExclusive dealing arrangements©McGraw-Hill Companies, Inc. 2002Exhibit 7.17 - 6Legal Rules for Antitrust Law Enforcement©McGraw-Hill Companies, Inc. 2002• Per Se Illegal•Modified Rule of Reason (“Quick Look”)•Rule of Reason•Per Se Legal7 - 7Measures of Industry Concentration1. The share of the largest firm2. The combined shares of the largest three firms3. 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 competitors5. 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 - 8I. Channel Structure-Related Issues**1. Market Coverage Issue: Geography or Territory  Distribution Intensity Issue©McGraw-Hill Companies, Inc. 2002a) 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 & Olufsen7 - 9I. Channel Structure-Related Issues1. Market Coverage: Distribution Intensity Issue (cont’d)©McGraw-Hill Companies, Inc. 2002c) Antitrust Concern: Territorial RestrictionEx) 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 - 10I. Channel Structure-Related Issues2. Customer Coverage Issue: Channel Level Issue©McGraw-Hill Companies, Inc. 2002a)Motive: Need to Prevent Gray Marketsb)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 markets7 - 11Parallel Import ChannelsProducer(United States)AuthorizedIntermediaryConsumers(United States)Producer(France)AuthorizedIntermediaryConsumers(European)UnauthorizedIntermediaryExhibit 7.2©McGraw-Hill Companies, Inc. 20027 - 12Channel 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. Vertical Integration by internal expansion:Limited only if attempt to create a monopoly7 - 13II. 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 (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”7 - 14II. Channel Pricing-related Issues©McGraw-Hill Companies, Inc. 2002Three Questions to Ask in Examining a Resale Price Maintenance Case1.Conspiracy to fix prices?2.Written agreement?3.Use of Coercion?7 - 15II. Channel Pricing-related Issues©McGraw-Hill Companies, Inc. 2002Resale 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 Reason7 - 16II. Channel Pricing-related Issues©McGraw-Hill Companies, Inc. 20022. Price Discrimination Issue:Deemed legal unless customers are competing against each other•Defenses to Price Discrimination Charges1. Cost Difference Justification2. Functional Discount3. Meeting Competition Justification 4. Closeout or bankruptcy Justification•Predatory Pricing: Liggett & Myers