Success Strategies in Channel
Management
Legal Issues
1
Legal Constraints
on Marketing
Channel Policies
Market Coverage
Policies
Pricing Policies
Discounts
Product Line
Policies
Promotional
Allowances and
Services
Product Policies
Exclusive Dealing
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Legal Constraints on Marketing Channel
Policies
The policies addressed below are as follows:
Market coverage policies
Customer coverage policies
Pricing policies
Product line policies
Selection and termination policies
Ownership policies
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Legal Constraints on Marketing Channel
Policies
There are a number of ways in which competition can be
threatened:
• Collusion:
• Discriminatory pricing.
• Predatory pricing
• Territorial restrictions and customer coverage restrictions
• Price maintenance.
• Tying
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Market Coverage Policies
From a legal perspective, channel intensity is linked to the concept of market
coverage, about which there is significant legal concern.
Selective and exclusive coverage policies have been called "territorial
restrictions" by anti-competitive enforcement agencies, because they are
used by suppliers to limit the number of resellers in a defined territory.
In reality, territorial assignments are rewards or spatial allocations given
by suppliers adopting selective or exclusive market coverage policies in
return for distributors' promises to cultivate the geography they have been
given.
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Market Coverage Policies
The supplier's objective in instituting territorial and other kinds of so-called "vertical
restraints" is to limit the extent of intra-brand competition. A critical issue that has
evolved in anti-competitive cases is whether such policies actually promote (or at
least do not substantially lessen) inter-brand competition.
In the language of anti-competitive enforcement, territorial restrictions range from
absolute confinement of reseller sales, which is intended to completely foreclose
or eliminate intra-brand competition, to lesser territorial restrictions, designed to
inhibit such competition.
Absolute confinement involves a promise by a channel member that it will not sell
outside its assigned territory. Often combined with such a promise is a pledge by
the supplier not to sell to anyone else in that territory, an arrangement known as an
exclusive distributorship. On the other hand, an airtight territory exists when
absolute confinement is combined with an exclusive distributorship. On the other
hand, an area of primary responsibility requires the channel member to use its best
efforts - or to attain a quantified performance level - to maintain effective
distribution of the supplier's goods in the territory specifically assigned to it.
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Market Coverage Policies
Profit pass-over arrangements require that a channel member who sells to a
customer located outside its assigned territory compensate the distributor in
whose territory the customer is located. Such compensation is ostensibly to
reimburse the distributor for its efforts to stimulate demand in its territory
and for the cost of providing services on which the channel member might
have capitalized.
Finally, a location clause specifies the site of a channel member's place of
business. Such clauses are used to "space" resellers in a given territory so
that each has a "natural" market comprising those customers who are
closest to the reseller's location. However, the reseller may sell to any
customer walking through its door. Furthermore, the customers located
closest to it may decide to purchase at more distant locations.
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Market Coverage Policies
In addition, suppliers might wish to
allocate different accounts to
different intermediaries.
This limits intra-brand competition;
the customer sees only one seller of
the firm's value offer, not multiples.
This policy can also facilitate
segmented pricing, charging higher
prices to segments of buyers with a
higher willingness to pay for the
firm's value offer.
Such policies have an economic as well
as a service rationale. As mentioned in
the context of market coverage policies,
permitting multiple channels to compete
for the same customer makes it possible
that one channel will bear the cost of
providing valued service outputs to the
customer, whereas another channel closes
the sale.
The free-riding channel does not bear
the costs of channel flows necessary to
provide the demanded service outputs,
but does get the sale and the profit from
the customer. In the long run, profits and
economic viability will suffer in the costbearing channel.
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Pricing Policies
Prices and price levels can be
influenced in many ways throughout
marketing channels. In fact, we have
just finished discussing two of them market coverage and customer
coverage. Because these policies are
both aimed at reducing or restraining
the amount of intra-brand
competition, the indirect effect of the
reduction is, in theory, supposed to be
an increase in the price of the brand
from its level in the absence of the
policies.
In other words, restrictions on intra-brand
competition are indirectly supposed to
result in higher prices and, thus, higher
gross margins. Obviously, price
competition induced by inter-brand
competitors can upset this arrangement.
Two policies that have a direct effect on
price - price maintenance and price
discrimination. We separate the
discussion of the two because they have
very different motivation,
implementation, and anti-competitive
concerns.
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Price Maintenance
Price maintenance in marketing channels is the specification by suppliers,
typically producers, of the prices below or above which other channel
members, typically wholesalers and retailers, may not resell their value
offers. Thus, the policy is frequently called resale price maintenance
(RPM).
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Price Maintenance
RPM inhibits competition between
stores carrying the same brand.
Legal control over resale prices by
producers is possible under various
conditions:
If a producer deems service to be
essential, it can be required of all
retailers through dealership contracts,
rather than through minimum RPM.
Act unilaterally; statements and actions
should come only from the producer.
Avoid coercion; don't use annually
renewable contracts conditioned on
dealer adherence to producer's specified
resale price. Vertically integrate; form a
corporate vertical marketing system.
Avoid known discounters; establish
screening and performance criteria
difficult for discounters to meet.
Despite these arguments, setting
minimum resale prices remains a
legal activity as long as it is not done
as part of a concerted effort among
multiple parties.
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Price Discrimination by Buyers.
Price discrimination by a seller between two competing channel members can
be viewed as an attempt to exercise reward power relative to the channel
member receiving the lower price. However, forcing a discriminatory price
from an upstream seller in a channel may be viewed as coercion by the
buyer.
It is generally held to be unlawful for a person or organisation in commerce
knowingly to induce or receive a discrimination in price. To violate this
concept, buyers must be reasonably aware of the illegality of the prices
they have received. This section prevents large, powerful channel members
from compelling sellers to give them discriminatory lower prices. It would
be enforced on the grounds that this use of coercive power is an unfair
method of competition.
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Price Discrimination by Buyers
It may also illegal for buyers to coerce favours from suppliers in the form of
special pro-motional allowances and services. This stipulation raises the
possibility that slotting allowances could be illegal. Slotting allowances
are fixed payments made by a producer to a retailer for access to the
retailer's shelf space. They are used predominantly in grocery retailing, but
have also been observed in the software, music, pharmaceutical, and
bookselling industries.
Slotting allowances are not illegal in and of themselves. However, they
could be construed as illegal under certain conditions. Slotting allowances
could be challenged if competing retailers agreed on the amount of slotting
allowances or the allocation of shelf space to producers. The practice could
also be challenged if used as part of a conspiracy to monopolize trade or
if used to exclude certain producers from retail shelf space.
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Promotional Allowances and Services
In order to entice channel members to advertise, display, promote, or
demonstrate their wares, suppliers use all sorts of monetary inducements.
These rewards may be prohibited. Various regulations may prohibit a
seller from granting advertising allowances, offering other types of
promotional assistance, or providing services, display facilities, or
equipment to any buyer unless similar allowances and assistance are made
available to all purchasers
Because buyers differ in size of physical establishment and volume of sales,
allowances obviously cannot be made available to all customers on the
same absolute basis. Therefore, the law stipulates that the allowances be
made available to buyers on "proportionately equal terms."
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Certain stipulations may be applicable regarding
adherence:
Allowances may be made only for services actually rendered, and they must not substantially
exceed the cost of these services to the buyer or their value to the seller.
The seller must design a promotional program in such a way that all competing buyers can
realistically implement it.
The seller should take action designed to inform all competing customers of the existence and
essential features of the promotional program in ample time for them to take full advantage of
it.
If a program is not functionally available to (i.e., suitable for and usable by) some of the seller's
competing customers, the seller must make certain that suitable alternatives are offered to
such customers.
The seller should provide its customers with sufficient information to permit a clear understanding
of the exact terms of the offer, including all alternatives, and the conditions on which payment
will be made or services furnished.
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Functional Discounts.
In the discussion of channel flows previously, the Equity Principle was
introduced. That principle involves the use of reward power in granting
discounts to individual channel members based on the functions, or
marketing flows, they perform as they divide distribution labour.
A functional discount is a means of implementing the Equity Principle
directly. It provides for a set of list prices at which value offers are
transferred from the producer to a downstream channel member, plus a list
of discounts off list price to be offered in return for the performance of
certain channel flows or functions.
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Product Line Policies
For a wide variety of logical reasons, channel managers may wish to restrict
the breadth or depth of the value offer lines that their channel partners sell.
Here, we look at the rationale for four policies - exclusive dealing, tying, fullline forcing, and designated value offer policies - as well as the anticompetitive concerns surrounding them.
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Exclusive Dealing
Exclusive dealing is the requirement by a seller that its channel intermediaries sell or
lease only its value offers or brands, or at least no value offers or brands in direct
competition with the seller's value offers. If intermediaries do not comply, the seller
may invoke negative sanctions by refusing to deal with them. Such arrangements
clearly reduce the freedom of choice of the intermediaries (resellers).
Some of the managerial benefits of exclusive dealing follow:
Resellers become more dependent on the supplier, enabling it to secure exclusive
benefit of the reseller's energies.
Competitors are stopped from selling through valuable resellers.
With a long-term exclusive relationship, sales forecasting may he easier, permitting the
supplier to achieve more precise and efficient production and logistics.
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Exclusive Dealing
Resellers may obtain more stable prices and may gain more regular and frequent
deliveries of the supplier's value offers.
Transactions between resellers and the supplier may be fewer in number and larger in
volume.
Resellers and the supplier may be able to reduce administrative costs. Both may be
able to secure specialized assets and long-term financing from each other.
Resellers generally receive added promotional and other support as well as avoid the
added inventory costs that go with carrying multiple brands.
Requirements contracts are variants of exclusive dealing.
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Exclusive Dealing
Exclusive dealing lessens inter-brand
competition directly, because competing
brands available from other suppliers are
excluded from outlets.
To be illegal, such arrangements must
have a tendency to work a substantial, not
merely remote, lessening of competition
in the relevant competitive market.
"Substantiality" may be determined by
taking into account the following factors:
•The relative strength of the parties
involved
•The proportionate volume of commerce
involved in relation to the total volume of
commerce in the relevant market area
•The probable immediate and future
effects that preemption of that share of
the market might have on effective
competition within it
•The duration of the contracts
•The likelihood of collusion in the
industry and the degree to which other
firms in the market also employ exclusive
dealing
•The height of entry barriers
•The nature of the distribution system and
distribution alternatives remaining
available after exclusive dealing is taken
into account
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Tying
Tying exists when a seller of a value offer that buyers want (the "tying value
offer -product") refuses to sell it unless a second ("tied") value offer (goods
and services) is also purchased, or at least is not purchased from anyone
other than the seller. Thus, a producer of motion picture projectors (the
tying value offer) might insist that only its film (the tied value offer) be
used with the projectors, or a producer of shoe machinery (the tying
product or value offer) might insist that lessees of the machinery purchase
service contracts (tied service) from it for the proper maintenance of the
machinery.
Many of the business reasons for using tying policies are similar to those for
using exclusive dealing.
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Reasons for tying, beyond those that apply from
the discussion of exclusive dealing, are:
•
Transferring the market demand already established for the tying value offer (e.g.,
can closing machines) to the tied value offer (e.g., cans).
•
Using the tied value offer (paper) to meter usage of the tying value offer (copying
machines).
•
Using a low-margin tying value offer (razors) to sell a high-margin tied value offer
(blades).
•
Achieving cost savings via package sales. For example, the costs of supplying and
servicing channel members might be lower, the greater the number of value offers
included in the "package."
•
Assuring the successful operation of the tying value offer (an automobile) by
obliging dealers to purchase tied value offers (repair parts) from the supplier.
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Tying
A tying agreement in effect stops competing sellers from the opportunity of
selling the tied commodity or service to the purchaser. Indeed, like
exclusive dealing policies, the critical issue in the condemnation of tying is
the foreclosing of inter-brand competition from a marketplace. But tying
contracts are viewed much more negatively by the courts than are exclusive
dealing arrangements or requirements contracts.
However, certain types of tying contracts are legal. There have been rulings
that if two value offers are made to be used jointly and one will not
function properly without the other, a tying agreement is within the law.
(Shoes are sold in pairs, and automobiles are sold with tires.) In other cases,
if a company's goodwill depends on proper operation of equipment, a
service contract may be tied to the sale or lease of the machine.
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Full-Line Forcing
One special form of value offer policy is called full-line forcing. Here a
seller's leverage with a value offer is used to force a buyer to purchase its
whole line of goods. This policy is illegal if competitive sellers are
unreasonably prevented from market access.
Therefore, the presumption against tying arrangements is not quite as strong as
the per se rule against horizontal price-fixing conspiracies.
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Horizontal Price-fixing Conspiracies.
The issues on which courts are most
likely to focus are whether -
(4) the tying arrangement affects a
substantial amount of commerce in the
market for the tied value offer; and
(1) there are two distinct value offers;
(2) the seller has required the buyer to
purchase the tied value offer in order to
obtain the tying value offer;
(3) the seller has sufficient market power
to force a tie-in;
(5) whether the tie is necessary to fulfil a
legitimate business purpose.
However, these structural per se criteria
are not likely to be satisfied for sellers
with relatively small market shares,
especially when the tying value offer is
unpatented.
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Designated Product Policies
A producer may want to sell some portion of its product line only through a
limited number of resellers, whereas its other resellers may sell a different
subset of the company's value offers.
Such a policy can help preserve the producer's exclusive brand name and
prevent its erosion through overly broad distribution through outlets with
an insufficiently high-quality image or service provision capabilities.
Further, this effectively gives resellers reasonable profit-making opportunities.
If the reseller has at least some value offers for which there is little or no
competition, it can confidently invest in customer service and promotional
activities, secure in the knowledge that its efforts will not fall victim to free
riding by other resellers.
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