pricing-distribution.ppt - Discriminatory pricing by suchenfz

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									Chapter 4

 Pricing and Distribution Issues

Anti-trust – Protecting competition

 Prohibiting agreements or practices that restrict free
  trading and competition between business entities.
 Banning abusive behavior by a firm dominating a
  market, or anti-competitive practices that tend to
  lead to such a dominant position.
   predatory pricing, tying, price gouging, refusal to deal
 Supervising the mergers and acquisitions of large
 corporations, including some joint ventures.

Pricing Issues
 Categories of anti-trust law
   protecting fair competition, big vs. small (horizontal)
     Predatory, discriminatory pricing
   Protecting consumers from conspirers (vertical and
     Price fixing

 Per Se Violations
   Just prove it happened, no excuses
 Rule of reason (more demanding)
   Consider ‘nature and character’ of the agreement

  Pricing Issues
 Sherman Act – Anti competitive, Monopolies
       Section I:
         efforts to collude on price are anti-competitive (horizontal)
         resale price maintenance, vertical price fixing
       Section II:
         predatory pricing
                 Microsoft, predatory behavior though not pricing
 Clayton Act
       price discrimination between different purchasers if such discrimination substantially lessens competition or tends
        to create a monopoly in any line of commerce
       sales on the condition that
             the buyer or leaser not deal with the competitors of the seller or lesser "exclusive dealings",
             the buyer also purchase another different product (tying)
              mergers and acquisitions where the effect may substantially lessen competition any person from being a
              director of two or more competing corporations
 Robinson-Patman Act (B2B--amendment to Clayton Act)
       Price discrimination (rule of reason)
       ‘street money’ to salespeople
     Exempted associations

Price fixing agreements
 Horizontal
   Direct
   Indirect
     Oligopolies - parallel okay with no explicit agreement
 Among buyers
   distribution level

 Often the government demanded that certain subsidiaries be
  sold, so that the new company would not monopolize a particular
  geographical market. In 1999 a coalition of 19 states and the
  federal Justice Department sued Microsoft. A highly publicized
  trial found that Microsoft had strong-armed many companies in
  an attempt to prevent competition from the Netscape browser. In
  2000 the trial court ordered Microsoft split in two to punish it, and
  prevent it from future misbehavior. In his defense, CEO Bill
  Gates argued that Microsoft always worked on behalf of the
  consumer, and that splitting the company would diminish
  efficiency and slow the pace of software development.

Price Fixing - Recently
 U.S. and European regulators have launched an investigation
  into illegal price fixing among the largest names in the air cargo
  industry. Regulators believe that airfreight carriers may have
  conspired with each other to control pricing. More than a dozen
  airlines are believed to be part of the investigation, including:
  Lufthansa, Lan Chile, Air France, British Airlines, Japan Airlines,
  Korean Airlines, American Airlines, SAS, Asiana Air, Polar Air,
  Cathay Pacific, Atlas Air, and Cargolux. The U.S. Justice
  Department and the European Commission are conducting the
  antitrust investigation.
   Multi-country
   DOJ

Joint buying and selling
 May violate Sherman act
 Legal if:
  economies of scale – books, hardware, grocery
    purchasing
    warehousing
  Availability
    Minimum orders

Purchasing Group Guidelines:
 Market %
 Facilitate
   price fixing
   collusion

Exchange of price information
 Per Se if:
   effect on price
   no justification
   not unilateral
 Price signaling: tacit understanding develops
 Agreement on methods

Below cost pricing/predatory
 Varies by state
 Exemptions
 Predatory:
   form of monopolization
   hard to prove claim
   courts sensitive
   intent crucial

Predatory Pricing

 Predatory pricing (destroyer pricing)
      selling a product or service at a very low
  price, intending to
   drive competitors out of the market
   or create barriers to entry for potential new

   Competitor often eliminated before trial

Predatory Examples

 Walmart
  Pharmacy – birth control
 Amazon
  Free shipping in France – paid 1000/day
 Intel v. AMD
  1.6 Billion Euro

Discriminatory pricing
 Price discrimination is charging different
  customers (Channel!) different prices for the
  same product or service

Discriminatory Pricing
 Robinson-Patman Act
  competition lessened
  typically channel issue
  includes promotion
 Defenses
  meet competitor
  volume discounts (not excluded0

Discriminatory pricing

 Retail
   Different prices solely on volume
 Airlines - allowed
   End user
   Not a seat, a bundle of services
 Industrial - allowed
   Volume, long term commitment, non-peak

Robinson-Patman Act prohibits price
discrimination where the effect may be to
lessen competition.
 Discriminatory pricing cases usually deal with
  intermediaries in the distribution channel rather
  than the end consumer.
 Discrimination between competing customers in
  advertising and promotion is also prohibited under
  the Robinson-Patman Act. Ex: cosmetic firm

Defenses to charges of prices
 sellers can offer a discriminatory price in
  order to meet (NOT BEAT) a competitor's
  offered price to the same customer.
 Volume discounts are allowed, but only if the
  discounts are graded in such a way that they
  are available to all competing customers.

 Some pricing strategies that might be called
 discriminatory pricing are legal.

 Different customers paying different fees
  based on demographic differences
   Ex: age, gender (ladies night, dry cleaning),
    occupation, financial aid
 Different models of the same product costing
  more, even though it may not have cost more
  to make.

More legal pricing strategies
 Different locations priced differently based on
  consumer preference.
   Ex: Theater seats
 Prices varying by season
   Ex: Casinos in Las Vegas, Airfares, Hotels

 Unit Pricing
 Instituted for consumer benefit
 Unit pricing laws are enforced in many states

 Cost of unit pricing to the retailer, labor
  intensive to label ALL products with unit
 Low income/less educated consumers have

Misleading Pricing
 Sales pricing:
   High-low pricing
   May Company
 Consumers relying on reference prices
 Most enforcement conducted by state
 Manufacturer's suggested retail price?

FTC's Guidelines
 An advertiser may claim a savings from its
  own former price if it can demonstrate that its
  former price is a bona fide or genuine price;
  that is, a price from which a reduction
  represents a genuine savings to the
  customer.... .

State law:
 Massachusetts law states that sale prices are
  only legitimate if the retailer has sold at least
  30 % of the sale-priced item at the regular
  price OR the regular price must be in effect
  for at least 15 days initially, and then, over an
  180 day period, it must be offered at the
  regular price at least 55 % of the time.

When do think it is ethical to increase
 Ex: Gasoline prices increasing when there
  are oil shortages or during the summer when
  many people go on vacation?
 Airline prices during peak travel seasons
  such as Thanksgiving and Christmas?

Sandoz Corporation's Clozaril
  Cost for one year = $8,944
  Most potential users are lower income and
   on state/federal medical programs
  Could help over 500,000 people in the US
   to lead normal lives.
  Won't sell without including expensive
   blood testing program in the USA.... costs
   $172 per week. Sell in Europe for as low
   as $20 per week.

The Paper Industry
  Costs of being accused of price-fixing are
   very high:
    lawyers' fees
    court costs
    government fines
    poor morale among employees
    damaged public image
    civil suits
    prison terms

Clayton Act
 Allows injured parties to bring civil suits
  against antitrust violators and provides for
  successful plaintiffs to receive judgments of
  three times the damages proven to have
  suffered from illegal agreements

• "We've tried hard to stress that collusion is illegal.  We
  point out that anticompetitive practices hurt the company's
  ethical standards, public image, internal morale, and
  earnings. Yet we wind up in trouble continually. When we
  try to find out why employees got involved, they have the
  gall to say that they 'were only looking out for the best
  interests of the company.' they seem to think that the
  company message is for everyone else but them. You
  begin to wonder about the intelligence of these people.
  Either they don't listen or they're just plain stupid."

In 1977, the paper industry
 price-fixing
   consumer paper, fine paper and stationary,
    multiwall bags, shopping bags, labels, corrugated
    containers, and folding cartons.
 By early 1978, over 100 law suits had been
  filed against the industry.

What happened?
 15 were sentenced to brief prison terms of 5 to 60
  days and were fined as much as $35,000.
 17 were fined between $500 and $30,000 and
  placed on probation
 15 were fined between $100 and $2,500 with no
  jail sentences
 all 22 companies were fined $50,000 which was
  the maximum at that time for a misdemeanor
 45 civil lawsuits filed by customers who were
  seeking damages.

The Industry
 450 companies that make folding cartons.
  No one company has a market share of over
  10 %. Usually, this is not the type of
  company that tends to collude on prices. Yet
  the 22 companies that were convicted
  represented 70% of the $1.5 billion in annual
  sales for the industry.

So why did this happen?
 Market mature and overcrowded.
 Market consisted of large powerful customers.
 Alternative packaging, such as plastic containers
  were being used.
 The industry had not modernized its plants.
 The large paper companies did not place priority on
  the folding-box industry.
 Survival of the industry was at stake.

 Undifferentiated products
   Margins had been running at about 3 to 6 % of
 Business Culture

Business Culture
 Divisions isolated from the rest of the
  company's culture.
   Example: one box-making company was running
    a house of prostitution as a service for its
    customers. The parent company knew nothing
    about this.
 Personnel Practices
   performance based on profits and volume of

 Pricing Decisions
   job order nature of the business, prices were
    negotiated constantly. Often prices were set
    by junior managers and salespeople.
   lots of people involved in pricing: clerks, plant
    mangers, cost estimators, and sales people.
 Trade Associations
   Opportunity: the folding-box industry had
    many trade association meetings.

 Corporate Legal Staff
   The legal staff for many of these companies
    tended to react to legal problems rather than
    anticipate them.
   the legal staff was far removed from the
    individuals who were actually making the pricing

Managing Company culture
 Upper management must serve as a role
 Training of managers and salespersons as
  to the proper way to do business might be
 Restricting who can legitimately take part
  in pricing decisions.
 Have a set of rules for making pricing

Managing Company culture
 Have codes of ethics that are specific!!
   Don't just say that our company supports life,
    liberty and the pursuit of happiness. Address
    issues such as price-fixing specifically.
 Make company audits to see if the ethics
  code is being followed. Audit pricing
  decisions...investigate those that seem out of

 Finally, company's need to instill a sense
  of industry pride in its employees.
 Attitudes such as "if we're not smart
  enough to make reasonable profits without
  resorting to any form of price-fixing, we'll
  simply get out of the business."
 Distinction between earned, clean, good
  profits....versus rigged, dirty, bad profits


 Manufacturer-->Wholesaler-->Distributor--

As with pricing,

 many of the laws involving distribution fall in
  the category of ANTITRUST.

Legal constraints on a marketers
distribution decisions fall in 3 areas:
product mix requirements or restriction
territory, location, or customer restrictions
pricing restrictions

 Exist when a seller, having a service or product that
  buyers want, refuses to sell it unless a second
  product or service is also purchased. Stifles
 Extended to include franchisor trademarks as
  possible tying products. Because the only source of
  the trademark is the franchisor
   EX: if a fast-food franchisor
   Ex: IBM making customers use their punch cards on their
    tabulating machines.

Exclusive Dealing

 Requirement by a seller that its customers
  sell only its products, or at least no products
  in direct competition with the seller's
 Not illegal per se. Instead they are measured
  under a "rule of reason" as the effects that
  the exclusive deals have on competitor.

Requirements contract.

 buyer agrees to purchase all or part of his
  requirements of a product from one seller,
  usually for a specified period of time. These
  agreements clearly reduce the freedom of
  choice of the buyer. This also has the effect
  of closing out competition.

Exclusive dealing or requirements
 Not illegal per se. Instead they are measured
  under a "rule of reason" as the effects that
  the exclusive deals have on competitor.

Per Se and Rule of Reason

 illegal per se, illegal no matter what the
  consequences of that act are.
 Actions are judged illegal under the rule of
  reason if the consequences of the actions
  have adverse effects on others.
   brand of sewing patterns
   Standard oil franchisees having to buy Standard
    Oil's other products such as tires and motor oil.

 Agreements about from where and to whom
  the distributor can sell.
 Several forms
  Location from which a retailer can sell
  Segment customers and assign segments to
   specific distributors
  Restrict the territories which distributors can solicit
   or accept business.

Rationale for Restrictions

 Marketer hopes to improve the environment
  where the distributor can better engage in
  interbrand (between different brands)
 Shielded from "intrabrand" competition
  ....competition within the same brand.
  Ex: Estee Lauder, Lancôme, etc have limited
   number of retailers who distribute them.


 Prior to 1977, both horizontal and vertical territorial
  restrictions were illegal per se.
 Court found that the test of illegality for vertical
  territorial restriction was to balance the restriction
  negative effects on intrabrand (same brand)
  competition with their positive effect on interbrand
  (different brands) competition.
 Restrictions are allowed if the net result is that more
  overall competition is in the market. Thus the law
  changed from having vertical territory illegal per se,
  to being based on rule of reason.

Chapter 4

   Distribution Issues


 Direct mail such as catalogs and flyers,
  telemarketing, home shopping channels,
  Infomercials, computer shopping systems,
 Over half the total adult population shop by
  direct sources.

Ethical Issue

 Privacy, confidentiality, and intrusion.
 Ease and low cost of information technology
  today. Customer data bases make it easier
  for direct marketers to target consumers.
 Information is passed (lists are rented)
  between organizations.

How do marketers get this
 redeemed coupons that have space for name and
 product warranties that are sent back to the
 information from orders
 Caller ID....where your name and telephone number
  may automatically appear when you call a company
  for information.
 From organizations, universities

Recorded Sales Calls

 7 million Americans received automated
  telephone sales calls a day at one time. Now
  however, recorded sales calls are illegal
 In some states, it is also illegal to randomly or
  sequentially dial numbers....if you are called
  and not addressed by your name
 Do Not Call List

Ethical Issue

 Exclusion. Because marketers can target those
  groups whose purchasing behavior and income
  match their products, other groups may be excluded
  from receiving important product information or
  purchase incentives.

   Citibank's POS Information. Unintentional result of this may
    be to further widen the gap between lower and upper
    income groups in the US.


 Slotting allowances. Manufacturer pays fees
  to the retailer for allocating warehouse space
  or shelf space to its products.
 As retailers have gained power slotting
  allowances have risen.

Slotting Allowances

 Is this a legitimate cost of business?
 purchasing, stocking, labeling, and similar
 Or ransoms that manufacturers must pay to
  an increasingly power retail trades.
 Are these deals passed on to consumers in
  the form of lower prices?

Slotting Allowances

 Does this practice discourages the
  introduction of new, innovative
  products....especially those from smaller
  manufacturers who may not be able to afford
  the slotting allowances.
 Does this work to constrain consumers'
 Does this mean that smaller firms cannot
Slotting Allowances

 Additional costs to the manufacturers are
  ultimately passed down to the consumer?
 One study estimated that the manufacturer
  and distributor costs increased by about 2.5
  % because of slotting allowances in 1988.
 In 1990, the FTC studied slotting allowances
  to see if they should be illegal. NOPE! Again
  2000 NO!


 Selling of products through channels of
  distribution that are not authorized by the
  trademark holder.
 Occur either within a market or across

Within a market:

 A manufacturer's authorized distribution-
  channel members sell the trademarked
  goods to unauthorized intermediaries who, in
  turn, distribute the goods to customers within
  the same market area.

Across markets

 Goods are imported to other countries. When
  goods intended for one country are diverted
  into an unauthorized distribution network,
  which then imports the goods to another
  country...this is called parallel importing.

  unofficial, unauthorized, or unintended

Gray marketing

 Different from the selling of counterfeit
  products (Black Market). Real thing but being
  sold through unauthorized channels.
   IBM personal computers, Seiko watches,
    Olympus cameras
   Wine, pianos, pharmaceuticals (Nevada has law)

Size of Grey Market?

 Difficult to estimate because of the illegal
  nature of the activity
  $10 and $15 billion dollars worth of goods
  flow annually through gray market channels
  in the US alone.

Difficulties with Gray Marketing

 High priced, high image good, the presence
  of gray marketed items may force the
  manufacturer to lower prices...hurt the
  prestige of a product.

Difficulties with Gray Marketing

 After-sale service is a prime source of
  revenues and profits. The after sale service
  may be more profitable than the initial sell of
  the product.
 Gray markets tend to separate the product
  from the service because gray markets do
  not provide services. Thus the buyer will have
  to try to find service wherever he/she
  can...this may not be with the original

Difficulties with Gray Marketing

 Upsets pricing policies in the channel and
  can conflict with prices on direct sales,
  perhaps eroding them as well.
 If prices and margins erode, the
  manufacturers usually finds it harder to
  maintain dealer support and point-of-sales
  Cosmetics, automobiles, appliances, etc.

Difficulties with Gray Marketing Gray
 can create consumer dissatisfaction. The
  product being sold is the real thing, so when
  the consumer has problems with it, they
  return it to the manufacturer.

Black (Counterfeit) Products
 Designer Clothing
 Software
 Pharmaceuticals
    Deadly substitutions, typically online sources
 Watches
 Cars and motorcycles
    BMW, Ferrari
 Counterfeit when patent or trademark infringement.
 Knockoff, bootleg, pirate imitates a well-known brand
  but typically inferior quality, no attempt to deceive the
  buyer, or infringe upon brand names, patents,
  trademarks or copyrights.

Illegal in most Developed Countries

 Penalty for seller
 Italy penalty for buyer
 Common practice
   Manufacturing
     China ($15m), Taiwan ($6m), Malaysia ($4m), Hong
      Kong ($3.6m), Singapore ($3m) and Korea ($2m)
   Retail
     Asia, Eastern Europe

 Estimates 9% of world economy, $400b


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