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Announcements
4/10: Assigned reading: Case 17 (K&W, 5th ed.)
4/12: Debate # 3 Homework 6 (posted)
4/18: Review session (6pm-8pm, room # to follow) Practice exam due (will be posted on 4/17)
Group Work Form groups of 3-4 students
Suppose you work for LG. Your currently sell LG products (TV’s, cell phones, etc.) through retailers (Best Buy, Costco, etc.)
Your boss has asked you to advise him on the pros and cons of going to a “doing it yourself” retailing format (i.e. having “LG retail stores” operated by LG, Apple has done)
Write on a piece of 2 cons and 2 pros of this change (turn it in at the end of lecture for credit)
Pros - cons
Pros: Cost ineffective to use a retailer Cut the middleman More control More profits Quality Better incentives Avoiding free riding behavior
Cons: More sloppy then a retailer Loss of focus Starting from scratch √
Pros - cons
Pros: Better trained salesman / brand reputation More effective training Increased profit margin (eliminating
middleman) Differentiation strategy (Apple effect) Efficient shipping/inventory More effective advertising (economies of
scope)
Pros - cons
Cons: High operation costs (learning curve) LG is not as popular as Apple People who are in the retail business
might be more effective/knowledgeable about local market conditions (promotion)
Vertical Market Restrictions
5th area (and last) of Antitrust (we skipped price discrimination on purpose)
Previously discussed vertical issues: Vertical mergers
Now, different vertical issues: Placing restraints in relationships in a vertical
distribution channel
Vertical Market Restrictions
Potential anticompetitive effects: Exclusionary: can exclude competitors if effect is to
limit who can trade and where Collusion: price fixing or sharing markets concerns
arise Example: Large retailer (Walmart) forces Levi’s
(manufacturer) to push other retailers to a particular retail price (Toys R US case next Th)
Antitrust laws dealing with vertical restraints (VR):
Sherman Act, Section 1: General bans on trade restraints
Clayton Act, Section 3: Bans specific VR of trade
Vertical Market Restrictions
This area is becoming more important: Franchising is widely used (e.g. McDonald’s) Franchising practices are often considered VR
4 types of VR: Tying (aka bundling) Exclusive Dealing Exclusive Territories Resale price maintenance
All important in franchising
Tying
In order to get “A” you must buy “A+B” Product A is the “tying” product and B is the
“tied” product Example:
HP printer (tying product) and HP43 cartridge (tied product)
Kodak film (tying product) and processing (tied product)
Important: you must have market power in the sale of the tying product (otherwise you can’t force the consumer to buy the tied product)
Tying
Motives: Efficient: cheaper to market products together Goodwill: franchisor can maintain quality of store
(e.g. McDonald’s franchisees need to buy certain ingredients from franchisor)
More market power: seller extends market power from one market to another
Typically: Rule of reason Not relevant which law firms are judged under
(in recent years both laws have been used)
Tying
Northern Pacific Railway (1958) Spelled out rules of analysis that are used today Owned large territories to build railroad Over the years it sold or leased the land under the
condition that buyer or lessee ship all its products on the Northern Pacific RR
Question: Which are the tying and the tied products/services?
A. Tying: Land ; Tied: RR serviceB. Tying: RR service; Tied: Land
Tying
Northern Pacific Railway (1958) Supreme Court determined Burden of Proof:
1. Seller has sufficient economic power in market for the tying product to restrain free competition in the tied good
2. Seller has substantial commerce in the tied good3. Reasonableness of the tie in.
Ruling in this case: NPRR had sufficient economic power through its land holdings to affect RR competition (size of commerce was substantial).
Approach: Rule of reason
Tying: Burden of Proof
Sufficient Economic Power in tying market:
1. Large market share2. Patents, copyrights or trademarks3. High barriers to entry4. Uniqueness or special desirability for the tying good
Tying: Burden of Proof
Reasonableness: In some cases, firm can argue that without tie in,
business is unfeasible
Example: Jerrold Electronics (1960) Tied in equipment, layout and service for community
antenna systems (equivalent of cable systems today) Argued systems were delicate Court agreed tie in was ok
Tying: Burden of Proof
Reasonableness:
Chicken Delight (1971) Forcing franchisees to buy chicken, mixes and equipment Franchisor: to protect quality Q: what are the tied and tying products? Court:
Sufficient economic power in tying product market Substantial commerce in tied product market UNREASONABLE: same quality could have been achieved
under less restrictive means
Reasonableness can not always be claimed.
Exclusive Dealing
Seller forces buyer not to distribute products from seller’s competitors
Examples: fast food franchises, Apple store
Business motives: Distributors devote sole attention to 1 manufacturer
(avoids free riding by distributor/retailer) Manufacturer will invest more on distributor Better coordination and sales effort Economies of scale in shipping
Exclusive Dealing Why are antitrust laws concerned?
Exclusivity: other manufacturers looking for an outlet may not find one, as they are scarce
Clayton Act: Exclusive dealing is illegal when used “to
substantially lessen competition or create a monopoly”
Rule of reason approach.