Retail Pricing, Intensity of Distribution, and the Law

June 8, 2006

Project Discussion (5)

• Identify the single-most important anti-trust aspect concerning market concentration and conduct in your selected category. State differently, if you were a “channel manager,” what aspects of the laws concerning relationship between suppliers and retailers would be given the most attention.

Project Discussion (6)

• What are the state laws affecting the structure of distribution in your retail channel?

Topics

• Coverage and trade support• Retail pricing models and volume• Resale price maintenance• Price discrimination• Tying relationships/full-line forcing• Exclusive territories/franchise agreements• Refusals to deal• Termination• Franchise agreements

Retailers vs. Suppliers…

• State required unit pricing on items

• Legalization of maximum resale price maintenance

• Illegality of minimum resale price maintenance

Intensive Distribution and Pulling Strategy

• All brands in convenience products are stocked by all major retail competitors.

• Brands must be stocked because of the “pulling strategies” directed at consumers.

• Since demand is strong and products are intensively distributed:1. Margins are low—marginal costs are major

component of price, and2. Demand is more price elastic for the retailer

Intensive Distribution and Pushing Strategy

• Only the dominant brands in convenience products are stocked by all major competitors.

• 3rd and 4th ranked brands are inconsistently stocked, used to differentiate assortments.

• Since the firm’s brands are weak and margins are low in the category:1. Product is stocked because of trade

promotion or2. Because it’s not found at all competitors

Selective Distribution

• Retailers know that consumers shop extensively in the category.

• Retailers do not want to be “shopped” on identical items, want their assortments differentiated.

• Permits them to maintain a planned price markup on their products, local oligopoly.

• Retailers require a certain degree of “push” to maintain adequate distribution.

Exclusive Distribution

• Suppliers position brand with advertising to maintain “prestige objectives.”

• Distribution remains exclusive, retailers are rewarded with monopoly positions within markets, the ultimate in intermediary promotion.

• Retail markups are determined by profit maximizing markups, retailers determine the most profitable price.

Resale Price Maintenance

• When an express agreement exists that fixes the price at which a distributor resells, the parties necessarily have "a conscious commitment to a common scheme designed to achieve an unlawful objective."

Maximum vs. Minimum RPM

• Prior to the Supreme Court’s State Oil v. Kahn all forms of resale price maintenance were illegal

• Since the Kahn decision, maximum resale price maintenance is legal. (suppliers forcing retailers price at a competitive level).

• Minimum resale price remains illegal (suppliers forcing retailers price above a competitive level, i.e., prices cannot go below a certain minimum).

How can suppliers affect prices in resale market, and in effect, achieve maximum resale price maintenance?

• Advertising a low price

• Pre-marking products

• Increasing distribution intensity

• Vertical competition

• Facilitate unit price comparisons

Robinson-Patman Act• Permits discriminations which "make only due

allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities" sold or delivered to the purchasers

• in good faith to meet the equally low price of a competitor

• prohibits the granting of promotional materials and allowances (such as for cooperative advertisements) to competing customers except upon proportionally equal terms

…cost of manufacture, sale or delivery…

• Delivery intermediaries– Actual, “outside” cost– Assigned, allocated, or “activity-based” cost

• Promotional intermediaries– “Synthetic brokerage”– Manufacturers’ representatives

• Use of sub-contracting in manufacturing, formulation and packaging

Tying Arrangements

• Tying is "an agreement by one party to sell one product – the tying product -- only on the condition that the buyer also purchase a second product -- the tied product' -- or at least agree not to buy that product from another supplier."

• Tying product has market power

• Tied product is interchangeable

Exclusive dealings

• The principal vice of exclusives is that, if they tie up a significant portion of the market, the seller's competitors will be foreclosed from market access and competitively disadvantaged.

Exclusive Dealings: Harley Davidson

• HD has asked for a ruling granting them to require dealers purchase replacement parts exclusively from HD.

• Significant portion of the market debate• Elimination of competition from after-market

fabricators and re-builders.• Exclusive dealings on a product line can be

viewed as the tied product in franchise agreements.

Refusal to Deal

• “a seller should not agree with some of its customers that it will not sell to another (for example, a “price cutter”). If such an agreement can be shown, the refusal to deal is likely to be the subject of litigation and, if there is evidence of an agreement with the compliant customers as to the prices or price levels they charge, a rule of per se illegality can be applied.

Prohibited

• Organized boycott of suppliers by retailers

• Organized boycott of retailer by suppliers

• Collusion of supplier and retailer to exclude retailer or supplier

Conwood vs. U.S. Tobacco• “Conwood involved the $1.7 billion U.S. moist snuff market,

in which United States Tobacco Co. (USTC) had a 77% market share and Conwood had 13%. Despite a decreasing market share, USTC imposed price increases of approximately 8% to 10% each year from 1979 to 1998. In fact, USTC was the most profitable publicly traded company in the United States in 1999.

• “Conwood sued USTC, claiming that various promotional practices resulted in unlawful monopolization. After a four-week trial, the Paducah, Ky., jury deliberated for four hours and returned a verdict in favor of Conwood for $350 million. The federal district court trebled the award to $1.05 billion.

• “The case focused on USTC's role as a retail category manager. A retailer chooses manufacturers to help manage a given retail product category by providing information about shelf space position and in-store marketing.”

• August 19, 2002 edition of The National Law Journal

Implications of Conwood on Category Management

• Suppliers in the roles of “Category Captain, Category Analysts, Category Validator

• Not every supplier “playing a role”• Suppose you were a supplier that suddenly

loses shelf-space or “disappeared” from the category? What evidence would be brought to court to show that collusion occurred to reduce competition?

Territorial and customer restrictions

Rule of Reason: The issue is whether the anticompetitive effect of the restraint on intrabrand competition (among dealers selling the same brand) is outweighed by the procompetitive effect on interbrand competition (among different brands) generated by strengthening the seller's ability to compete.

State Franchise Laws• Exclusive territories, protection against encroachment

• Protection against vertical competition:– “In September 1999, 32 states had laws restricting manufacturers

from competing with their dealers. Since then, 12 states have passed such rules, including some that toughened regulations already on their books”

• Protection against inter-type competition:– “those laws mandate that only franchised dealers can sell a new

vehicle -- and only franchised dealers can get the cars at true wholesale cost

• Protection for smaller market dealerships– “franchise laws in most states bar car makers from giving price

breaks to certain dealers -- high-volume operations, for instance -- and not to others.

Supreme Court and Wine

• GRANHOLM, ET AL. V. MICHIGAN BEER AND WINE WHOLESALERS ASS’N, ET AL.

• state laws violate the Commerce Clause if they mandate “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” state laws violate the Commerce Clause if they mandate “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.”