Channel Policies and Legal Issues

Success Strategies in
Channel Management
Legal Issues
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 (Exclusive dealing)

Discriminatory pricing
Predatory pricing
Territorial restrictions and customer coverage restrictions
Price maintenance
Tying / full line forcing
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.

The supplier's objective in instituting territorial and other
kinds of so-called "vertical restraints" is to limit the extent of
intra-brand 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.
Airtight territory exists when absolute confinement is
combined with an exclusive distributorship.
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.

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.
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.
Pricing Policies
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.
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).
RPM inhibits competition between stores carrying the
same brand.
Setting minimum resale prices remains a legal activity
as long as it is not done as part of a concerted effort
among multiple parties.
Price Maintenance
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 (VMS).
Avoid known discounters: Establish screening and
performance criteria difficult for discounters to meet.
Price Discrimination
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.
It would be enforced on the grounds that this use of coercive
power is an unfair method of competition.
It may also illegal for buyers to coerce favours from suppliers
in the form of special promotional allowances and services.
Continue---
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.
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.
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."
Functional Discounts.
A functional discount is the use of reward power by the
manufacturer.
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.
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.
The related four policies are:

Exclusive dealing
Tying
Full-line forcing
Designated value offer policies
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.
A tying agreement in effect stops competing sellers from the
opportunity of selling the tied commodity or service to the
purchaser.
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.
Full-Line Forcing
A seller's power 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.
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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Channel Policies and Legal Issues

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Success Strategies in

Legal Constraints on Marketing Channel

Market coverage policies

Legal Constraints on Marketing Channel

Collusion (Exclusive dealing)

Market Coverage Policies

Market Coverage Policies

Market Coverage Policies

Slotting allowances could be illegal.

Promotional Allowances and Services

In order to entice channel members to advertise, display,

Product Line Policies

The related four policies are:

Designated Product Policies

Further, this effectively gives resellers reasonable profit-making

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