Chapter 6

Legal and Ethical

Behavior

Learning Objectives
Explain how legislation constrains a
retailers pricing policies
Differentiate between legal and illegal
promotional activities
Explain the retailers responsibilities
regarding the products sold
Discuss the impact of government
regulation on a retailers behavior
with other supply chain members

Learning Objectives
Describe how various state and local
laws, in addition to federal
regulations, must be considered in
developing retail policies
Explain how a retailers code of ethics
will influence its behavior

Exhibit 6.1- Ethical and Legal

Constraints Influencing
Retailers

LO 1

Exhibit 6.2- Primary U.S. Laws that

Affect Retailing

LO 1

Exhibit 6.3 - Examples of Laws

Designed to Protect Consumers

LO 1

Exhibit 6.4- Pricing

Constraints

LO 1

Pricing Constraints
Horizontal
price fixing

A group of competing retailers (or other channel

members operating at a given level of distribution)
establish a fixed price at which to sell certain brands of
products

Vertical
price fixing

A retailer collaborates with the manufacturer or

wholesaler to resell an item at an agreed-on price; also
called resale price maintenance or fair trade

Price
Two retailers buy an identical amount of like grade and
discriminati quality merchandise from the same supplier but pay
on
different prices
Deceptive
pricing

A misleading price is used to lure customers into the

store and
then hidden charges are added; or the item advertised
may be
unavailable

Predatory
pricing

A retail chain charges different prices in different

geographic areas to eliminate competition in selected

LO 1

Pricing Constraints
Justification for some types of price
discrimination
Cost justification defense - Accounted for
differences in cost to:
The seller in the manufacture, sale, or delivery
arising from differences in the method or
quantities

Changing market conditions defense

Danger of imminent deterioration of perishable
goods or on the obsolescence of seasonal goods

Meeting competition in good faith defense

LO 1

Promotion Constraints
Promotion decisions are constrained
by the:
Federal Trade Commission Act
Wheeler-Lea Amendment of the FTC Act

LO 2

Exhibit 6.6 - Promotional

Constraints

LO 2

Deceitful Diversion of
Patronage
Publish or verbalize falsehoods about a
competitor so as to divert their patrons
Palming off
A retailer represents that merchandise is
made by a firm other than the true
manufacturer

False or misleading advertising claims

about the:
Physical makeup, benefits, or the
appropriate uses for the product
LO 2

Deceptive Advertising
Requirements to challenge any claim
contained in advertising:
The FTC must prove that the challenged
claim is contained in the advertisement
The claim must be deceptive
The deceptive claim must be material

LO 2

Deceptive Advertising
Bait-and-switch advertising
Advertising or promoting a product at:
An unrealistically low price to serve as
bait and then trying to switch the
customer to a higher-priced product

LO 2

Deceptive Advertising
Forbidden practices
Refusing to show, demonstrate, or sell the product
offered
Disparaging, by word or deed, the advertised
product
Failing to have sufficient quantities of the advertised
product at all outlets listed in the advertisement
Refusal to take orders for the advertised
merchandise to be delivered within a reasonable
period of time
Design sales plan or compensation such that to
discourage salesman from selling advertised
product
LO 2

Deceptive Sales Practices

Illegal practices
Failing to be honest or omitting key facts
in either an ad or a sales presentation
Using deceptive credit contracts
Credit Card Act (2009)

Protection against arbitrary rate increases

Not penalizing cardholders who pay
Protecting cardholders from misleading terms
Protection of vulnerable consumers from fee-heavy subprime
credit cards

LO 2

Exhibit 6.7- Product

Constraints

LO 3

Product Constraints
Product safety
Consumer Product Safety Act
Retailers have specific responsibilities to
monitor the safety of consumer products

Consumer Product Safety Improvements

Act (2008)
Applies to all members of the supply chain

LO 3

Product Constraints
Product liability laws
Deal with the sellers responsibility to
market safe products
Foreseeability doctrine
A seller must attempt to foresee how a
product may be misused and warn the
consumer against the same

LO 3

Product Constraints
Warranties
Expressed warranties: Written or
verbalized agreements:
About the performance of a product
That can cover all attributes of the merchandise
or only one attribute

Implied warranty of merchantability

Made by every retailer when the retailer sells
goods
Implies that the merchandise sold is fit for the
ordinary purpose for which such goods are
typically used
LO 3

Product Constraints
Implied warranty of fitness
Implies that the merchandise is fit for a
particular purpose
Arises when the customer relies on the
retailer to assist or make the selection of
goods to serve a particular purpose

LO 3

Exhibit 6.8 - Supply-Chain

Constraints

LO 4

Supply-Chain Constraints
Territorial restrictions
Limit the geographic area in which a
retailer may resell its merchandise
Lessen competition between retailers
Violation of Sherman Antitrust Act

Dual distribution
A manufacturer sells to independent
retailers and also through its own retail
outlets
Adversely affects the manufacturer-retailer
relationships
LO 4

Exclusive Dealing
One-way exclusive dealing
arrangement
Retailer has exclusive right to merchandise the
suppliers product in a particular trade area

Two-way exclusive dealing agreement

Supplier offers the retailer:
Exclusive distribution of a merchandise line/product
in a particular trade area

Retailer agrees to return the manufacturers

favor

LO 4

Supply-Chain Constraints
Tying agreement
Seller with a strong product or service
requires a buyer (the retailer) to:
Purchase a weak product or service as a
condition for buying the strong product or
service.

Not viewed as a violation

Viewed as illegal if a substantial
share of commerce is affected
LO 4

Other Federal, State, and

Local Laws
Federal laws retailers must be aware
of:
Trade agreements regulating import and
export
Laws that deal with minimum wages and
hiring practices

State and municipalities regulations

regarding retail activities
LO 5

Exhibit 6.9 - State and Local

Regulations Affecting Retailers

LO 5

Ethics in Retailing
Ethics: Set of rules for human moral
behavior
Explicit code of ethics: Written
policy that states what is ethical and
unethical behavior
Implicit code of ethics: Unwritten
but well understood standards of
moral responsibility
LO 6

Ethics in Retailing
Retail decision that involve ethical
considerations:
Buying merchandise
Selling merchandise
Retailer-employee relationships

LO 6

Ethical Behavior in Buying

Merchandise
Product quality
Testing products to check if they:
Adhere to stricter ethical and environmental
standards that go beyond existing
government regulations

Sourcing
Retailers inspect suppliers to make sure
they are not buying :
Illegal merchandise
From unsavory characters
LO 6

Ethical Behavior in Buying

Merchandise
Sustainability
Requiring suppliers to engage in
sustainable business practices

Slotting fees (slotting

allowances)
Fees paid by a vendor for:
Space or a slot on a retailers shelves
Having its UPC number given a slot in the
retailers computer system
LO 6

Ethical Behavior in Buying

Merchandise
Bribery
Offering an inducement to the retailer
for purchasing vendors products
Markdown money
Retailers charge suppliers when
merchandise does not sell at what the
vendor intended

LO 6

Ethical Behavior in Selling

Merchandise
Products sold
Should a retailer sell any product as long
as it is not illegal?

Selling practices
Can a salesperson, while not saying
anything false, be allowed to conceal
certain facts from a customer?

LO 6

Ethical Behavior in the

Retailer-Employee
Relations
hip
Misuse of company assets

Job switching

Employees switching jobs should respect

previous employers right to retain
confidentiality

Employee theft

LO 6