Chapter 6

Legal and Ethical Behavior

Retailing, 6th Edition. Copyright ©2008 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

1. Explain how legislation constrains a retailer’s pricing policies.

2. Differentiate between legal and illegal promotional activities.

3. Explain the retailer’s responsibilities regarding the products sold.

4. Discuss the impact of governmental regulation on a retailer’s behavior with other supply chain members.

Learning Objectives

5. Describe how various state and local laws, in addition to federal regulations, must also be considered in developing retail policies.

6. Explain how a retailer’s code of ethics will influence its behavior.

Ethical and Legal Constraints Influencing Retailers

Exhibit 6.1

Primary U.S. Laws that Affect Retailing

Exhibit 6.2

Primary U.S. Laws that Affect Retailing

Exhibit 6.2

Examples of Laws Designed to Protect Consumers

Exhibit 6.3

Pricing Constraints

Horizontal Price Fixing Vertical Price Fixing Price Discrimination Deceptive Pricing Predatory Pricing

LO 1

Pricing Constraints

Horizontal Price Fixing:

Occurs when a group of competing retailers (or other channel members operating at a given level of distribution) establishes a fixed price at which to sell certain brands of products.

LO 1

Pricing Constraints

Exhibit 6.4 LO 1

Pricing Constraints

Vertical Price Fixing:

Occurs when a retailer collaborates with the manufacturer or wholesaler to resell an item at an agreed-on price.

LO 1

Pricing Constraints

Price Discrimination:

Occurs when two retailers buy an identical amount of “like grade and quality” merchandise from the same supplier but pay different prices.

LO 1

Price Discrimination

Cost justification defense.

Changing market defense.

Meeting competition in good faith defense.

LO 1

Pricing Constraints

Deceptive Pricing:

Occurs when a misleading price is used to lure customers into the store; usually there are hidden charges or the item advertised may be unavailable.

LO 1

Pricing Constraints

Predatory Pricing:

Exists when a retail chain charges different prices in different geographic areas to eliminate competition in selected geographic areas.

LO 1

Promotion Constraints

Deceitful Diversion of Patronage Deceptive Advertising Deceptive Sales Practices

LO 2

Promotion Constraints

Palming Off:

Occurs when a retailer represents that merchandise is made by a firm other than the true manufacturer.

LO 2

Promotional Constraints

Exhibit 6.5 LO 2

Deceptive Advertising

Deceptive Advertising:

Occurs when a retailer makes false or misleading advertising claims about the physical makeup of a product, the benefits to be gained by its use, or the appropriate uses for the product.

LO 2

Deceptive Advertising

Bait-and-Switch Advertising:

Advertising 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 Sales Practices

Failing to be honest or omitting key facts in either ad of the sales presentation.

Using deceptive credit contracts.

LO 2

Product Constraints

Product Safety Product Liability Warranties

LO 3

Product Constraints

Exhibit 6.6 LO 3

Product Constraints

Product Liability Laws:

Deal with the seller’s responsibility to market safe products. These laws invoke the “foreseeability” doctrine, which states that a seller of a product must attempt to foresee how a product may be misused and warn the consumer against hazards of misuse.

LO 3

Product Constraints

Expressed Warranties:

Are either written or verbalized agreements about the performance of a product and can cover all attributes of the merchandise or only one attribute.

LO 3

Product Constraints

Implied Warranty of Merchantability:

Is made by every retailer when the retailer sells goods and implies that the merchandise sold is fit for the ordinary purpose for which the such goods are typically used.

LO 3

Product Constraints

Implied Warranty of Fitness:

Is a warranty that implies that the merchandise is fit for a particular purpose and arises when the customer relies on the retailer to assist or make the selection of goods to serve a particular purpose.

LO 3

Supply Chain Constraints

Territorial Restrictions Dual Distribution Exclusive Dealing Tying Agreements

LO 4

Supply Chain Constraints

Territorial Restrictions:

Are attempts by the supplier, usually a manufacturer, to limit the geographic area in which a retailer may resell merchandise.

LO 4

Channel Constraints

Exhibit 6.7 LO 4

Supply Chain Constraints

Dual Distribution:

Occurs when a manufacturer sells to independent retailers and also through its own retail outlets.

LO 4

Dual Distribution

Ralph Lauren has a dual distribution strategy where it markets its Polo brand apparel through its own retail stores as well as through traditional department stores.

LO 4

Exclusive Dealing

One-Way Exclusive Dealing:

Occurs when the supplier agrees to give the retailer the exclusive right to merchandise the supplier’s product in a particular trade area.

LO 4

Exclusive Dealing

Two-Way Exclusive Dealing:Occurs when the supplier offers the retailer the exclusive distribution of a merchandise line or product in a particular trade if in return the retailer will agree to do something for the manufacturer such as heavily promote the supplier’s products or not handle competing brands.

LO 4

Tying Agreements

Tying Agreement:

Exists when a seller with a strong product or service requires a buyer (the retailer) to purchase a weak product or service as a condition for buying a strong product or service.

LO 4

Other Federal, State, and Local Laws

Zoning Laws Taxing Laws Franchise Laws Blue Laws Unfair Trade Laws Building Safety Regulations

LO 5

State, and Local Regulations Affecting Retailers

Exhibit 6.8 LO 5

Ethics in Retailing

Ethical Behavior in Buying Merchandise Ethical Behavior in Selling Merchandise Ethical Behavior in Retailer-Employee

Relationship

LO 6

Ethics in Retailing

Ethics:

Is a set of rules for human moral behavior.

LO 6

Ethics in Retailing

Explicit Code of Ethics:

Consists of a written policy that states what is ethical an unethical behavior.

LO 6

Ethics in Retailing

Implicit Code of Ethics:

Is an unwritten but well understood set of rules or standards of moral responsibility.

LO 6

Ethical Behavior in Buying Merchandise

Product Quality Sourcing Slotting Fees Bribery

LO 6

Ethical Behavior in Buying Merchandise

Slotting Fees (Slotting Allowances):

Are fees paid by a vendor for space or a slot on a retailer’s shelves, as well as having its UPC number given a slot in the retailer’s computer system.

LO 6

Ethical Behavior in Buying Merchandise

Markdown Money:

Is what retailers charge to suppliers when merchandise does not sell at what the supplier intended.

LO 6

Ethical Behavior in Selling Merchandise

Products Sold Selling Practices

LO 6

Ethical Behavior in Selling Merchandise

Home Depot’s no commission sales approach does not put the sales person at odds with the customer. However, given Home Depot’s self-service operation, paying a commission would be difficult.

LO 6

Ethical Behavior in the Retailer-Employee Relationship

Misuse of Company Assets Job Switching Employee Theft

LO 6

National Retail Federation Principles on Customer Data Privacy

Exhibit 6.9 LO 6

Additional Slides

Price Discrimination

Justifications Meet Competition in Good faith

Changing Market

Cost Justifications

LO 1

Promotional Constraints

Promotion Decisions

Deceptive sales practices

Deceitful diversion

of patronage

Deceptive advertising

LO 2

Product Constraints

ProductLiability

ProductWarranties

ProductSafety

ProductDecisions

LO 3