Chapter 4
The Legal and Political Environment
1
Business-Related Legislation:
The Focus Is on Three Areas
1. Protect companies from each other
2. Protect consumers
3. Protect the interests of society
2
Enforcement Issues
• Some agencies are independent
– Consumer Product Safety Commission,
Federal Trade Commission are two examples
of independent agencies.
• Some agencies are under the executive
branch
– Department of Health and Human Services,
Department of Justice, Department of
Agriculture are examples.
• Enforcement is often the choice of an agency
or the Department of Justice.
3
Major Federal Acts that Affect
Marketing
1980
Consumer Goods Pricing Act (1975)
1960
Cellar-Kefauver Act (1950)
1940
1920
Wheeler-Lea Act (1938)
Robinson-Patman Act (1936)
Clayton Act (1914) and
the Federal Trade Commission Act (1914)
1900
4
Sherman Antitrust Act (1890)
• Prohibits monopolies or other acts in restraint of
trade that affect interstate or foreign commerce.
• Allows for injunctions to stop such activities and
for anyone injured by such activities to recover
through treble damages in civil court.
– Treble damages: three times the actual loss as a
result of a violation of antitrust law.
• It provides for criminal penalties (substantial
fines, and jail time up to three years)
5
Clayton Act (1914)
• A supplement to the Sherman Act.
• Corporate Officers and officials can be held
responsible, but the Clayton Act is only applied
to individuals and transactions engaged in
interstate commerce.
• The Clayton Act does exempt labor and
agricultural organizations from antitrust
legislation.
6
Areas Limited by the Clayton
Act (1914)
• Tying contracts
– A requirement to purchase ancillary
goods/services in order to get the offering desired.
• Exclusive Dealing
– Occurs when a seller sells to only one buyer in a
region and competition is lessened.
• Intercorporate stockholding
– Occurs when one company controls the stock of
another and exercises control to restrain trade.
• Interlocking directorates
– Occurs when firms that compete with one another
but have common members on their boards of
directors.
7
Federal Trade Commission Act
(1914) and the Wheeler Lea Act
(1938)
• The FTC Act established the Federal Trade
Commission to enforce previous federal acts.
• The Wheeler-Lea Act gives the FTC broader
power:
– To regulate unfair or deceptive practices
whenever the public is deceived.
• The FTC tries to minimize violations by
entering into consent decrees with potential
violators.
– Consent decree: a written agreement between
a defendant and the prosecution to avoid
undertaking an act that would violate law.
8
Robinson-Patman Act (1936)
• Often described as the price discrimination act.
• Makes it illegal to induce or receive a
discriminatory price – it is particularly aimed at
large firms engaged in interstate commerce.
• Requires proportionately equal terms be made
to buyers in common market.
– Proportionately equal terms: buyers in horizontal
competition must receive substantially equal
offers. Offers may be proportioned by the volume
of business from each buyer.
– Promotional allowance must be equally available
to all customers.
9
Celler-Kefauver Act (1950)
• Often called the anti-merger act.
• Broadened powers under the Clayton Act
to prevent mergers that may substantially
reduce competition.
10
Celler-Kefauver Act (1950): An
Example
• Question: Suppose Company A and Company B are
PC manufacturers. Overall, they have 5% and 3%
shares, respectively, in PC sales (and the market
leader has 20%)
• However, Company A also manufactures a particular
component and has a 30% market share, and
Company B has a 25% market share for the same
component. Combined, they would control over half
the market for this component.
• What would the FTC likely do?
Under the Celler-Kefauver Act, the FTC would likely order
the merged company to sell off either A’s or B’s component
business in order to approve the merger.
11
Consumer Goods Pricing Act
(1975)
• Repealed the Miller-Tydings Act
– Miller-Tydings had allowed fair trade pricing
(allowing manufacturers to dictate the resale
price of a product)
• CGPA prohibits price maintenance
agreements among manufacturers and
resellers
12
Uniform Commercial Code (UCC)
• A standard set of laws that govern contracts and
associated case law.
• Most portions of the UCC have been adopted by
49 of 50 states (excluding Louisiana.)
• Consistency in the UCC between states helps
with the administration and enforcement of
contracts across state lines.
13
Intercorporate
Stockholding
Business
Legislation
Issues
Interlocking
Directorates
Price
Maintenance
Price
Discrimination
Resale
Restrictions
Refusal to Deal
14
Intercorporate
Stockholding
Occurs when a company owns
another company in the same
market in an attempt to control
the company so that competition
is reduced.
It is not illegal necessarily for
one company to own more than
one company in the same
market.
However, it is illegal to use that
ownership to reduce competition
and choice.
15
Interlocking
Directorates
Occurs when a company has
members of its board of directors
serve on the board of directors of
another company.
Companies that compete in the
same market cannot have
common directors such that
actions would lessen competition
in their markets.
A key is how you define a
“market.”
16
Price
Maintenance
Occurs when a manufacturer
attempts to dictate the resale price
of an item – this is generally illegal.
A supplier is allowed some
influence on price when the supplier
contributes to the value of the
offering (e.g., providing financing for
inventory.)
This helps protect full-service
retailers from free rider retailers
Free ride retailers provide fewer
services and a reduced selling
price.
Without this protection,
consumers would likely go to full
service retailers for product
information, but purchase from 17
free ride retailers
Occurs when a company
refuses to restock or supply
associated services to a dealer
that has not followed suggested
pricing guidelines.
Refusal to deal is generally
illegal.
Courts have recognized the
right of a seller to sell or not sell
to whomever it wants to, so long
as the reason for the decision is
not to fix prices or restrain trade.
Refusal to Deal
18
Occurs when a company
maintains
house accounts (customers
that are within the reseller’s
market but are served directly
by the supplier), or
limits resellers to certain
territories.
The courts have not come
down on clearly on either side of
this issue.
Resale
Restrictions
19
Occurs when a supplier sells
the same product to the “same
class” of buyers at different
prices such that it reduces
competition.
Selling products at different
prices to customers that are not
in competition with one another
is not considered discriminatory.
Price
Discrimination
20
Pacific Drives
21
Pacific Drives
22
Spartan Computers Enters the Market
23
Major tenets of price
discrimination regulation
Offerings sold
for different uses,
to separate markets,
at different times,
that are not identical,
to government agencies, or
at prices that meet a competitive threat
are generally not a violation of price regulations.
Offerings created through supplier-customer collaboration,
through partnering, or through customization for a
customers’ particular needs are not identical.
24
Substantiality Test
• Business regulation is not characterized by
precision, since enforcement is discretionary.
• Violation are subject to a substantiality test –
it has three considerations:
– The size of the organizations involved (is a
large business coercing behavior from a small
business?)
– The volume of business involved (is the
volume of business large compared to the total
market?)
– Market preemption (preventing access to
markets)
25
Intellectual Property: Patent
• Patent
– Protection granted by the federal
government to inventors of original
products, processes, or
compositions of matter.
– Functional patents last 20 years.
– Design patents last 14 years.
26
Intellectual Property: Copyright
• Copyright
– Protection for the original works of
authors, musicians, and
photographers.
– Protects the expression of an idea, not
the underlying idea itself.
– Copyrights are granted to individuals
for their lifetimes plus fifty years.
– Copyrights automatically apply to all
work created since 1989.
27
Intellectual Property: Trade
Secret
• Trade Secret
– A process, technique, or competitive
advantage whose owner has chosen
not to seek legal protection to avoid
disclosure.
– It cannot be something that is
common knowledge, and the owner
must have taken reasonable efforts to
keep the trade secret a secret.
– Owners are not able to license, sell, or
trade them with the same degree of
legal protection as patents or
copyrights
28
Pacific Drives supplies the same
product to two customers who
compete in the same market.
PACIFIC DRIVES
Pacific Model 1000
5000 units/month
$38 per unit
NBM
Computers
Desktop Computer Market
Pacific Model 1000
5000 units/month
$38 per unit
PaloAlto
Computers
29
United Memories aggressive
price at NBM Computers
UNITED MEMORIES
UniMem Model 300
5000 units/month
$32 per unit
PACIFIC DRIVES
Pacific Model 1000
5000 units/month
$38 per unit
NBM
Computers
Pacific Model 1000
5000 units/month
$38 per unit
PaloAlto
Computer
Desktop Computer Market
30
Spartan Computers Enters the
Market
UNITED MEMORIES
UniMem 300
5000 units/mo.
$32 per unit
PACIFIC DRIVES
Pacific1000
5000
units/mo.
$38/unit
Pacific1000
5000
units/mo.
$38/unit
NBM
Computers
PaloAlto
Computer
Pacific Model 1000
500 units/mo.
$55 per unit
Spartan
Computers
Desktop Computer Market
31