Edition Vitale, Giglierano and Pförtsch Chapter 4 The Legal and Political Environment

2 Business-Related Legislation: The Focus Is on Three Areas 1. Protect companies from each other 2. Protect consumers 3. Protect the interests of society

3 Enforcement Issues Some agencies are independent –Consumer Product Safety Commission, Federal Trade Commission are two examples of independent agencies. Some agencies are under the executive branch –Department of Health and Human Services, Department of Justice, Department of Agriculture are examples. Enforcement is often the choice of an agency or the Department of Justice.

4 Major Federal Acts that Affect Marketing Sherman Antitrust Act (1890) Clayton Act (1914) and the Federal Trade Commission Act (1914) Robinson-Patman Act (1936) Cellar-Kefauver Act (1950) C onsumer Goods Pricing Act (1975) Wheeler-Lea Act (1938)

5 Sherman Antitrust Act (1890) Prohibits monopolies or other acts in restraint of trade that affect interstate or foreign commerce. Allows for injunctions to stop such activities and for anyone injured by such activities to recover through treble damages in civil court. –Treble damages: three times the actual loss as a result of a violation of antitrust law. It provides for criminal penalties (substantial fines, and jail time up to three years)

6 Clayton Act (1914) A supplement to the Sherman Act. Corporate Officers and officials can be held responsible, but the Clayton Act is only applied to individuals and transactions engaged in interstate commerce. The Clayton Act does exempt labor and agricultural organizations from antitrust legislation.

7 Areas Limited by the Clayton Act (1914) Tying contracts –A requirement to purchase ancillary goods/services in order to get the offering desired. Exclusive Dealing –Occurs when a seller sells to only one buyer in a region and competition is lessened. Intercorporate stockholding –Occurs when one company controls the stock of another and exercises control to restrain trade. Interlocking directorates –Occurs when firms that compete with one another but have common members on their boards of directors.

8 Federal Trade Commission Act (1914) and the Wheeler Lea Act (1938) The FTC Act established the Federal Trade Commission to enforce previous federal acts. The Wheeler-Lea Act gives the FTC broader power: –To regulate unfair or deceptive practices whenever the public is deceived. The FTC tries to minimize violations by entering into consent decrees with potential violators. –Consent decree: a written agreement between a defendant and the prosecution to avoid undertaking an act that would violate law.

9 Robinson-Patman Act (1936) Often described as the price discrimination act. Makes it illegal to induce or receive a discriminatory price – it is particularly aimed at large firms engaged in interstate commerce. Requires proportionately equal terms be made to buyers in common market. –Proportionately equal terms: buyers in horizontal competition must receive substantially equal offers. Offers may be proportioned by the volume of business from each buyer. –Promotional allowance must be equally available to all customers.

10 Celler-Kefauver Act (1950) Often called the anti-merger act. Broadened powers under the Clayton Act to prevent mergers that may substantially reduce competition.

11 Celler-Kefauver Act (1950): An Example Question: Suppose Company A and Company B are PC manufacturers. Overall, they have 5% and 3% shares, respectively, in PC sales (and the market leader has 20%) However, Company A also manufactures a particular component and has a 30% market share, and Company B has a 25% market share for the same component. Combined, they would control over half the market for this component. What would the FTC likely do? Under the Celler-Kefauver Act, the FTC would likely order the merged company to sell off either A’s or B’s component business in order to approve the merger.

12 Consumer Goods Pricing Act (1975) Repealed the Miller-Tydings Act –Miller-Tydings had allowed fair trade pricing (allowing manufacturers to dictate the resale price of a product) CGPA prohibits price maintenance agreements among manufacturers and resellers

13 Uniform Commercial Code (UCC) A standard set of laws that govern contracts and associated case law. Most portions of the UCC have been adopted by 49 of 50 states (excluding Louisiana.) Consistency in the UCC between states helps with the administration and enforcement of contracts across state lines.

14 Business Legislation Issues Intercorporate Stockholding Interlocking Directorates Price Maintenance Refusal to Deal Resale Restrictions Price Discrimination

15 Intercorporate Stockholding Intercorporate Stockholding Occurs when a company owns another company in the same market in an attempt to control the company so that competition is reduced. It is not illegal necessarily for one company to own more than one company in the same market. However, it is illegal to use that ownership to reduce competition and choice.

16 Interlocking Directorates Interlocking Directorates Occurs when a company has members of its board of directors serve on the board of directors of another company. Companies that compete in the same market cannot have common directors such that actions would lessen competition in their markets. A key is how you define a “market.”

17 Price Maintenance Price Maintenance Occurs when a manufacturer attempts to dictate the resale price of an item – this is generally illegal. A supplier is allowed some influence on price when the supplier contributes to the value of the offering (e.g., providing financing for inventory.) This helps protect full-service retailers from free rider retailers  Free ride retailers provide fewer services and a reduced selling price.  Without this protection, consumers would likely go to full service retailers for product information, but purchase from free ride retailers

18 Refusal to Deal Occurs when a company refuses to restock or supply associated services to a dealer that has not followed suggested pricing guidelines. Refusal to deal is generally illegal. Courts have recognized the right of a seller to sell or not sell to whomever it wants to, so long as the reason for the decision is not to fix prices or restrain trade.

19 Resale Restrictions Resale Restrictions Occurs when a company maintains house accounts (customers that are within the reseller’s market but are served directly by the supplier), or limits resellers to certain territories. The courts have not come down on clearly on either side of this issue.

20 Price Discrimination Price Discrimination Occurs when a supplier sells the same product to the “same class” of buyers at different prices such that it reduces competition. Selling products at different prices to customers that are not in competition with one another is not considered discriminatory.

21 Pacific Drives

22 Pacific Drives

23 Spartan Computers Enters the Market

24 Major tenets of price discrimination regulation Offerings sold for different uses, to separate markets, at different times, that are not identical, to government agencies, or at prices that meet a competitive threat are generally not a violation of price regulations. Offerings created through supplier-customer collaboration, through partnering, or through customization for a customers’ particular needs are not identical.

25 Substantiality Test Business regulation is not characterized by precision, since enforcement is discretionary. Violation are subject to a substantiality test – it has three considerations: –The size of the organizations involved (is a large business coercing behavior from a small business?) –The volume of business involved (is the volume of business large compared to the total market?) –Market preemption (preventing access to markets)

26 Intellectual Property: Patent Patent –Protection granted by the federal government to inventors of original products, processes, or compositions of matter. –Functional patents last 20 years. –Design patents last 14 years.

27 Intellectual Property: Copyright Copyright –Protection for the original works of authors, musicians, and photographers. –Protects the expression of an idea, not the underlying idea itself. –Copyrights are granted to individuals for their lifetimes plus fifty years. –Copyrights automatically apply to all work created since 1989.

28 Intellectual Property: Trade Secret Trade Secret –A process, technique, or competitive advantage whose owner has chosen not to seek legal protection to avoid disclosure. –It cannot be something that is common knowledge, and the owner must have taken reasonable efforts to keep the trade secret a secret. –Owners are not able to license, sell, or trade them with the same degree of legal protection as patents or copyrights

29 Pacific Model units/month $38 per unit Desktop Computer Market Pacific Model units/month $38 per unit NBM Computers PaloAlto Computers PACIFIC DRIVES Pacific Drives supplies the same product to two customers who compete in the same market.

30 United Memories aggressive price at NBM Computers Pacific Model units/month $38 per unit Desktop Computer Market Pacific Model units/month $38 per unit NBM Computers PaloAlto Computer PACIFIC DRIVESUNITED MEMORIES UniMem Model units/month $32 per unit

31 Spartan Computers Enters the Market Desktop Computer Market UNITED MEMORIES UniMem units/mo. $32 per unit Pacific units/mo. $38/unit NBM Computers PaloAlto Computer PACIFIC DRIVES Pacific units/mo. $38/unit Spartan Computers Pacific Model units/mo. $55 per unit