Success Strategies in Channel Management

Legal Issues

Legal Constraints on Marketing Channel Policies

Market Coverage Policies

Pricing Policies
Discounts

Product Policies

Product Line Policies Promotional Allowances and Services

Exclusive Dealing

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

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

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.

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.

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. 8

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.

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. If a producer deems service to be essential, it can be required of all retailers through dealership contracts, rather than through minimum RPM. 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.
Legal control over resale prices by producers is possible under various conditions: 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.

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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. 22

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 (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. (4) the tying arrangement affects a substantial amount of commerce in the market for the tied value offer; and

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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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