CHAPTER SIX LEGAL AND ETHICAL BEHAVIOR 1. Primary US Laws Affecting Retailing and Protecting Consumers a. Federal Trade Commission Act of 1914 i. Establishes the FTC, which is a body of specialists with broad powers to investigate and to issue cease-and-desist orders ii. Enforces the Sherman Act of 1890 and the Clayton Act of 1914, which ban monopolies and restraints of fair trade, as well as prohibit specific practices that lessen competition and tend to create a monopoly in any line of commerce b. Equal Opportunity Act of 1975 i. Prohibits discrimination in credit transactions because of gender, marital status, race, national origin, religion, age or receipt of public assistance c. Child Safety Act of 1966 i. Prevents the marketing and selling of harmful toys and dangerous products 2. Pricing Constraints a. Horizontal price fixing i. A group of competing retailers (or other channel members operating at a given level of distribution) establishes a fixed price at which to sell certain brands of products 1. Example: a. All hotels agree to set same price per room during busy weekend, such as homecoming b. Price fixing by retailers is a violation of the Sherman Antitrust Act c. It is also illegal for retailers to reach agreements with one another regarding the use of double coupons, rebates, or other means of reducing price competition in the marketplace b. Vertical Price fixing i. A retailer collaborates with the manufacturer or wholesaler to resell an item at an agreed-on price; also called resale price maintenance or fair trade c. Price discriination i. Two retailers buy an identical amount of “like grade and quality” merchandise from the same supplier but pay different prices 1. Justification for some types of price discrimination a. Cost justification defense - accounted for differences in cost to i. The seller in the manufacturer, sale, or delivery arising from differences in the method or quantities b. Changing market conditions defense i. Danger of imminent deterioration of perishable goods or on the obsolescence of season goodsc. Meeting competition in good faith defense d. Deceptive Pricing i. A misleading price is used to lure customers into the store and then hidden charged are added; or the item advertised may be unavailable e. Predatory pricing i. A retail chain charges different prices in different geographic areas to eliminate competition in selected geographic areas 3. Promotion Constraints a. Promotion decisions are constrained by i. Federal Trade Commission Act ii. Wheeler-Lea Amendment of the FTC Act, which prohibits unfair and deceptive acts and practices regardless of whether competition is injured 4. Deceptive Pricing a. Occurs when misleading prices are used to lure customers into the store and then hidden charges are added; or the item advertised may be unavailable b. The Wheeler-Lea Amendment Act of the FTC Act made illegal all “unfair of deceptive acts in commerce” c. Customer is treated unfairly and the competitor is being potentially harmed 5. Deceptive Diversion of Patronage a. Publish or verbalize falsehoods about a competitor so as to divert their patrons b. Palming off i. A retailer represents that merchandise is made by a firm other than the true manufacturer c. False or misleading advertising claims about the: i. Physical makeup, benefits, or the appropriate uses for the product 6. Deceptive Advertising a. Requirements to challenge any claim contained in advertising i. The FTC must prove that the challenged claim is contained in the advertisement ii. The claim must be deceptive iii. The deceptive claim must be material b. Bait-and-switch advertising i. Advertising or promoting a product at: 1. An unrealistically low price to serve as bait and then trying to switch the customer to a higher-priced product 2. Scope of the FTC ban is broad and also includes forbidden practices as: a. Refusing to demonstrate, show, or sell offered product b. Disparaging the advertising product c. Failing to have sufficient quantities d. Refusal to take orders that can be delivered in reasonable timee. Use of a sales plan or compensation for sales employee designed to discourage them from selling the advertised product 7. Deceptive Sales Practices a. Illegal practices i. Failing to be honest or motting key facts in either an ad or a sales presentation ii. Using deceptive credit contracts 1. Credit card act (2009) a. Protection against arbitrary rate increases b. Not penalizing cardholders who pay c. Protecting cardholders from misleading terms d. Protection of vulnerable consumers from fee-heavy subprime credit cards 8. Product Constraints a. Product safety i. Consumer product safety act 1. Retailers have specific responsibilities to monitor the safety of consumer products ii. Consumer product safety improvements act (2008) 1. Applies to all members of the supply chain b. Product liability laws i. Deal with the seller’s responsibility to market safe products ii. Foreseeability doctrine 1. A seller must attempt to foresee how a product may be misused and warn the consumer against the same c. Warranties i. Expressed warranties: written or verbalized agreements: 1. About the performance of a product 2. That can cover all attributes of the merchandise or only one attribute ii. Implied warranty of merchantability 1. Made by every retailer when the retailer sells good 2. Implies that the merchandise sold is fit for the ordinary purpose for which such goods are typically used iii. Implied warranty of fitness 1. Implies that the merchandise is fit for a particular purpose 2. Arises when the customer relies on the retailer to assist or make the selection of goods to serve a particular purpose 3. Customer relies on the retailer for expertise to provide the product that will safely perform 4. Example: auto repair 9. Supply Chain Constraints a. Territorial restrictionsi. Limit the geographic area in which a retailer may resell its merchandise ii. Lessen competition between retailers iii. Violation of Sherman Antitrust Act b. Dual Distribution i. A manufacturer sells to independent retailers and also through its own retail outlets ii. Adversely affects