Section 8
Workbook

Australia

Europe

New Zealand

United States of America
Rule 1 – Restraints of Trade
Never have a communication (i.e. make/reach a contract, arrangement or understanding) with a:
purpose to boycott; or
purpose or having the effect or likely effect of:
 price-fixing, output restrictions or market allocatopn; or
 substantially lessening competition.
Rule 2 – Misuse of Market Power
Never use market power with the purpose (intention) of:
eliminating or damaging any competitor;
preventing the entry of any firm into any market; or
deterring or preventing any firm from engaging in competitive conduct in any market.
Rule 3 – Exclusive Dealing
Never supply on terms that:
oblige a buyer to deal with a particular supplier (third line forcing); or
have the purpose, effect or likely effect of substantially lessening competition (tie).
Rule 4 – Resale Price Maintenance
Never encourage a re-seller to:
sell;
offer to sell; or
advertise
above a particular price.
Words and concepts that are key to understanding the Rules
Never encourage a re-seller to:
competition;
market;
purpose;
effect;
likely effect;
inference; and
substantial.
Words and concepts – competition
The word means rivalry and it takes place in a market.
Words and concepts – market
A market defined by reference to a range of substitutable products, a geographic area and a level in the
channel to market (i.e. wholesale) within reasonable time frame (i.e. not spot).
Time
Geographic area in the context of rule 1
Geographic
Function
Geographic area in the context of rule 2
Product
+
Question 1. Beer is brewed at a local brewery. Between the brewery and the drinker marketing occurs at several
functional levels. Define the market at each functional level.
Question 2. Nearly all of the readers of the local paper live locally, some live in the environs, others in the region
and a few overseas. From the publisher’s perspective, what is the market area?
Question 3. The refrigerator in a nearby kiosk is stocked with:
 carbonated soft drinks;
 milk;
 energy drinks;
 mineral waters;
 fruit juices;
 flavored milks; and
 yoghurt.
Define the product market that includes carbonated soft drink.
Question 4. What are the markets for Guinness stout?
Question 5. In your shop you offer for sale exquisitely designed, magnificently crafted, and beautifully presented
amazingly expensive woman’s shoes? Define your market.
Question 6. In your record shop there is a section for “male vocal”. A potential customer enters your shop looking
for an Elvis Presley recording. Define the markets.
Question 7. You are breeding cattle for slaughter. Define your market.
Question 8. You sell Subaru car parts. Define your market.
Question 9. You have developed a range of wood architectural products. Your channel to market is direct to the
builder/end-user and internet based. Define your market.
Words and concepts – purpose and effect
Purpose is an intended consequence of an act or omission. It need not be the only intention but it must be
significant.
Effect is the result or consequence of an act or omission. Likely effect is just that, the likely effect of an act or
omission.
Words and concepts – inference
Purpose can be inferred from acts that are seen as steps needed to be taken to achieve the purpose. E.g. the
existence of a cartel can be inferred from acts in furtherance of the cartel where those acts can’t be justified
by another rational justification.
Question 8. A dog owner buys a can of dog food.
It can be inferred that the dog is to be fed canned dog food.
8
True
False
Question 9. Company A becomes aware that a potential competitor:
 is establishing in a neighbouring market; and
 will have capacity to enter company A’s market.
Company A puts out a media release in which it warns:
 volume is important to its profitability; and
 if it loses volume in its traditional market it will go after volume in the neighbouring market.
Company A’s purpose is to reach an understanding with the potential competitor that will see that potential
competitor stay out of company A’s traditional market.
9
True
False
Question 10. Company A sends its new price which is to take effect in 12 weeks to all customers. Two of its
customers are also competitors.
It can be inferred that its purpose in sending the price list was to influence the pricing decisions of its competitors.
10
True
False
Question 11. Company A prices below the prices of a new entrant. The new entrant:
 is unable to make a profit at the prevailing price levels; and
 eventually closes up shop.
It can be inferred that company A’s purpose when cutting its prices was to drive the new entrant out of the market.
11
True
False
Question 12. Company A prices below the prices of a new entrant. The new entrant:
 is unable to make a profit at the prevailing price levels; and
 eventually closes up shop.
A few weeks after the new entrant closes up shop Company A sets about recouping lost revenues by raising its
prices.
It can be inferred that company A’s purpose when cutting its prices was to drive the new entrant out of the market.
12
True
False
Question 13. Company A:
 has to channels to market for the goods it manufactures:
o 30% goes direct to end users: and
o 70% goes to end users through resellers.
 is experiencing a protracted strike at its factory;
 expects the strike will continue for at least a further month;
 holds two weeks stock inventory; and
 decides to withhold supplies to all resellers so that it can meet the requirements of its direct customers.
One reseller advises that it will go broke if supplies are withheld for more than two weeks. You advise that supply
will be resumed when the strike ends and not a day earlier.
It can’t be said that a purpose for withholding supply is to force a competitor out of business.
13
True
False
Words and concepts – substantial
Rules 1 and 3 – substantial lessening of competition = not trivial or ephemeral.
Mighty
Ephemeral
Rule 2 – substantial degree of market power = indifferent to competitors’ responses.
Question 14. Which of the indicia listed below indicate are used as a
measure of impacts on competition in the context of rules 1 and 3 and
degree of market power in the context of rule 2?
Market share relative to competitors
Market capitalization
Staying power
Fear of competitors
Indifference toward competitors
Barriers to entry
Vertical integration
Capacity to influence competitors (and others)
Rules 1 & 3
Rule 2
Mood of the court
Others (list)
Question 15. Company A operates the only recorded music shop at the aerodrome. It has a capability to import but
no present inclination to do so. Universal:
 is the sole supplier of Elvis Presley recordings and supplies them to the aerodrome music shop; and
 intimates to the aerodrome music shop that if it attempted to source any recordings by importing it would
cease supplying it with Elvis Presley recordings.
1 - Is the market power of company A substantial?
2 - Is the likely effect of company A’s action to substantially lessen competition?
15.1
Yes
15.2
Yes
15.3 If yes to 1 and/or 2, define the market(s)
No
No
Question 16. Company A:
 operates a number of grocery stores;
 has 20% of the market for bread;
 purchasers near to equal volumes of bread from three plant bakers; and
 advises one plant baker that it will no longer purchase bread from it.
1 - Is the market power of company A substantial?
2 - Is the likely effect of company A’s action to substantially lessen competition?
16.1
Yes
16.2
Yes
16.3 If yes to 1 and/or 2, define the market(s)
No
No
Words and concepts – lessening
The word lessening in the context of:
 competition extends to include preventing and hindering; and
 price fixing includes fixing, controlling or maintaining price.
Words and concepts – price
The word price includes the price for, or a discount, allowance, rebate or credit in relation to goods and / or
services.
Rule 1 – Restraints of Trade
Never:
 communicate with competitors with a:
o purpose to boycott
o purpose or where the likely effect is price “fixing”
 communicate with anyone with a purpose or where the likely effect is to substantially lessen
competition.
output
restriction
market
allocation
Contract
Arrangement
Understanding
purpose
effect
P or E
substantially
lessening
competition
price fixing
E
boycotting
Practice
rpm
Question 17. You are waiting for a plane. Happenstance has your competitor on the same flight. You strike up a
conversation. He:

congratulates you on winning a contract he bid for; and then

mentions he has been directed not to bid at less than list price.
17 – Breach?
Yes
No
Question 18. You are at home.
While flicking through the newspaper you read your competitor’s advertisement. It details the prices to apply in 10
days time.
18 – Breach?
Yes
No
Question 19. Your competitor publishes prices on its web site.
You visit the web site every day. Experience tells you that your best average profit margin is achieved by matching
your competitor’s prices. This you have done for the last two years.
19 – Breach?
Yes
No
Question 20. A direct report tells you:

he agreed with a competitor to work with Standards Australia/New Zealand to set a performance standard
for your product; and

his recent belief that the standard will exclude imported product from the market.
20 – Breach?
Yes
No
Question 21. Your competitor tells you that it:

is comfortable with its volume of business; and

will give a brutal lesson to any one who tries to win any of its customers.
21 – Breach?
Yes
No
Question 22. You send your price list to all account customers. One account customer is a competitor. You notice
that your customer / competitor follows your price to the cent.
22 – Breach?
Yes
No
Question 23. You see on your competitor’s web site its entire price. You decide to follow it exactly.
23 – Breach?
Yes
No
Rule 2 – Misuse of Market Power
Never use substantial market power with a purpose of elimination or damaging a competitor or competition.
Process
Prohibited consequence
barring a new entrant
Substantial
market power
used with a
purpose of
eliminating/damaging
a competitor
deterring competition
Question 24. You have 62% of the market. You tell your marketing people to win a further 1% of the market each
week. A sales person mutters: At that rate there will be no competitors in 38 weeks!
You compliment the sales person on the ability to add up.
24 – Breach?
Yes
No
Question 25. You:

are losing market share to a new entrant; and then

lower prices to below variable cost.
The new entrant withdraws temporarily from the market.
25 – Breach?
Yes
No
Question 26. You:

have 25% of the market for bread;

take 17% of the output of one baker;

learn the baker is supplying left-over bread at the end of the day to convenience stores at dirt cheap prices;
and

request supply at the dirt cheap prices
The baker refuses your request. You stop stocking the baker’s products.
26 – Breach?
Yes
No
Question 27. A manufacturer (potential competitor) in your industry announces that it is to enter your market.
You:

have spare capacity;

deep pockets; and

mount a preemptive strike starting with an announcement of your plan to launch in to the potential
competitor’s home market.
The potential competitor abandons its plan to enter your market.
27 – Breach?
Yes
No
Rule 3 – Exclusive Dealing
Never supply on terms that:
 oblige the buyer to deal with a particular supplier (third line forcing)
 have the purpose or likely effect of substantially lessening competition (ties)
purpose
Practices
effect
substantially
lessening
competition
rpm
Question 28. Many years ago you entered an exclusive dealing arrangement with a reseller in a country town.
Over time all of the reseller’s competitors have closed down.
28 – Breach?
Yes
No
Question 29. Many years ago you supplied beer ex-brewery gate. The delivery process is a shambles. You:

announce that hence forth beer will be sold on a delivered in to store basis;

do a deal with TNT to do deliveries; and

bill the publican for both the beer and TNT’s delivery charge.
29 – Breach?
Yes
No
Question 30. You:

lease refrigerators to take-out food shops on the condition that they only stock your drinks in the
refrigerator; and

take care to match the size of the refrigerator with the shop so as to ensure there is no space for any
competitor’s refrigerator.
Shop proprietors love the deal you offer. Those with refrigerators leased from you account for 70% of the market.
30 – Breach?
Yes
No
Question 31. You:

want every truck in the fleet to be painted in your colours; and

require those lorry owner drivers contracted to you to paint their lorries with Dulux Red 37.
In the isolated West Australia’s Carnavron there is only one shop that sells Dulux Red 37.
31 – Breach?
Yes
No
Question 32. You encourage engineers to specify products from your range of products. You make a computer
available that allows engineers to copy and paste the specifications for your products.
One product in the range you do not make available to resellers; it can only be purchased directly from you.
32 – Breach?
Yes
No
Rule 4 – Resale Price Maintenance
Never encourage resellers to sell or advertise products above a particular price.
purpose
Practices
effect
substantially
lessening
competition
rpm
Question 33. You:

visit a reseller;

tell it the average selling price of other resellers in the local area; and

explain that its margins are so low that you are concerned the reseller will have trouble when the inevitable
down turn comes.
33 – Breach?
Yes
No
Question 34. A reseller tells you:

that another is disrupting the market with low prices; and

if it continues it threatens to stop stocking your product.
You tell the discounting reseller of the threat and ask it to help you out by raising its prices by 10% for the next few
weeks
34 – Breach?
Yes
No
Question 35. You explain to a reseller that the advertising support is only paid in respect of advertising campaigns
that feature your suggested resellers’ selling price.
The reseller can sell at what ever price it likes but to get the advertising support it simply advertises at your
suggested resellers’ selling price.
35 – Breach?
Yes
No
Question 36. You:

notice that a reseller is selling your product as a loss leader; and

suspend supply of your product to the reseller.
36 – Breach?
Yes
No
Question 37.
You are in business in Gisborne.
Gisborne
 established in 1831
 sits on latitude 38.40 South and longitude 178.00 East
 population of 30,000 + 15,000 in environs
 is 275kms away is Rotorua, the nearest significant commercial centre
 is 530 kms from Auckland and 505 kms from Wellington
 infrequent rail access to the South
You set up in business in Gisborne almost 50 years ago. At the time you had:
 six competitors;
 a choice of three suppliers (A, B and C); and
 to ensure continuity of supply entered an exclusive dealing arrangement with B.
On the day you opened the door your ambition was to win all the business that was to be had. Your market share
has gown as follows:
120%
100%
80%
60%
Series1
40%
20%
0%
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Your competitors in the retail market (Black, Hay, Merino and Wak), not being able to make a profit, have passed
in to oblivion.
You learn that a former employee has been looking to raise funds needed to set up in competition with you. Your
need to defend your business sees you:
1 you make it clear to your banker that if the bank provides the funds you will take your banking business
elsewhere;
2 remind your supplier that delivering on the industry’s commitment to service every person in the country
requires each of the suppliers (A, B and C) to continue to focus on separate geographic areas of their
market;
3 issue a press release declaring an intention to always offer the lowest price in the market.
4 lobby the planning authority for a change planning regulations in a way that would make it almost
impossible for your former employee to get the necessary approvals; and
5 build up stocks with the intention of being able to meet all orders with absolutely no delay (knowing that it
would be costly for new entrant to build a matching inventory in order to match delivery times.
Question 38
You are in business in Gisborne.
Gisborne
 established in 1831
 sits on latitude 38.40 South and longitude 178.00 East
 population of 30,000 + 15,000 in environs
 is 275kms away is Rotorua, the nearest significant commercial centre
 is 530 kms from Auckland and 505 kms from Wellington
 infrequent rail access to the South
You set up in business in Gisborne almost 50 years ago and it has become your traditional market.
Your channel to market is both direct and through resellers (Black, Hay, Merino and Wak).
You learn that a former employee has been looking to raise funds needed to set up in competition with you. Your
need to defend your business causes you to consider taking each of the following initiatives:
1 offers each reseller a large bonus for maintaining volume (with you);
2 approach the former employee with an offer to appoint him as a reseller on condition he does not venture
in to your traditional market;
3 enter an exclusive dealing arrangement with one reseller for a term of 5 years. That reseller holds about
21% of the retail market. You then enter a similar agreement but for a term of 6 months. The second
reseller holds 20% of the market. You hold about 18% of that market;
4 offer 180 day trading terms to your resellers;
5 agree with your supplier that it remits to you 25% of revenue derived from any sales it makes to new
resellers in your market;
6 change your price structure to offer large discounts for bundled products (knowing that the former
employee would not have the resources to carry the range needed as a basis for bundling products).
7 meet with Black and Hay, advocate the importance of avoiding confusion in the market with respect to
selling prices and suggest that confusion can be avoided by adopting a common discount structure. You
take care to emphasize that resellers would remain free to set their respective list prices.
.