Law pricing presentation final 08152010

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  • In the Bizarre world of Anti Trust Pricing, any price a company charges for its good or services could be considered illegal. If your price is lower than your competitors’, you could be charged with being a “predator” for anti-competitive “predatory pricing.” If your price is “too high”, you could be charged with anti-competitive monopoly pricing, or “price gouging”. And if your price is the same as your competitors, you could be charged with collusion and anti-competitive price-fixing.
  • Our team investigated a broad area of unfair pricing practices. We were able to identify seven different areas of potentially illegal pricing. We have tried to illustrate the principles with cartoons, drama and references to court rulings Managers and the legal environment – Bagley & Savage Source - http://library.findlaw.com/1999/Jan/1/241454.html - Executive Summary Of The Antitrust Laws - By Richard M. Steuer of Mayer Brown LLP http://en.wikipedia.org/wiki/Competition_law
  • Http://iris.nyit.edu/~shartman/mba0101/trust.htm
  • Source - http://library.findlaw.com/1999/Jan/1/241454.html - Executive Summary Of The Antitrust Laws - By Richard M. Steuer of Mayer Brown LLP Managers and the legal environment – Bagley & Savage FTC Guide to the Antitrust Laws - http://www.ftc.gov/bc/antitrust/manufacturer_requirements.shtm The Sherman Act of 1890, which prohibits contracts, combinations, and conspiracies in restraint of trade, and monopolization, includes criminal penalties when enforced by the government. Violation can result in substantial fines and, for individual transgressors, prison terms. In addition, court orders restraining future violations are also available. These provisions are enforced primarily by the Antitrust Division of the Justice Department. The Clayton Act was first enacted in 1914 and significantly amended in 1936 by the Robinson-Patman Act and in 1950 by the Celler-Kefauver Antimerger Act. The Clayton Act, which deals with specific types of restraints including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates, carries only civil penalties and is enforced jointly by both the Antitrust Division and the Federal Trade Commission (FTC), but with the FTC in practice assuming almost total responsibility for the Robinson-Patman Act's strictures against anticompetitive price discrimination. The Federal Trade Commission Act, administered solely by that agency, is a catch-all enactment which has been construed to include all the prohibitions of the other antitrust laws and, in addition, may be utilized to fill what may appear to be loopholes in the more explicit regulatory statutes. Both the Antitrust Division and the FTC have broad investigatory powers to uncover antitrust violations. Yet, despite the breadth of this authority, they are subject to constitutional and statutory limitations. It is therefore essential, when contacted by an enforcement agency, to consult counsel at once. Over and above this awesome panoply of governmental enforcement, the Clayton Act arms a person who can establish that he or she has been injured by virtue of any antitrust violation with the substantial weapons of a private suit in the federal courts for treble the damages sustained plus reasonable attorneys' fees and a court order restraining future violations. In many instances, the specter of substantial liability for treble damages, not to mention the cost of defending such suits, is a far more significant deterrent to antitrust infraction than the threat of criminal sanctions. Source: FindLaw.com Executive Summary Of The Antitrust Laws
  • Information on all other national competition laws can be found at http://www.justice.gov/atr/contact/otheratr.htm OECD Guidelines on predatory pricing - http://www.oecd.org/dataoecd/7/54/2375661.pdf
  • Horizontal price fixing is an agreement between competitors or businesses at the same level of competition arranging to set a common price. It is the most direct way to reduce competition [1]. Includes: Setting prices (including maximum prices) Setting the terms of sale Setting quantity/quality of goods to be manufactured or made available for sale Rigging bids [2] In their Wisconsin Law Review Article, Robert Hande and Howard Marvel also categorize collusion as Type I and Type II collusion. Type I, or Classic, collusion involves parties colluding to directly raise prices. Type II collusion occurs when parties collude to disadvantage another rival, eventually enabling the colluding parties to raise prices. They also propose a Type III collusion, where competition is indirectly affected (for example by the parties agreeing to ban advertising and limit information to consumers or raise consumers’ search costs [3] Emerson, R. Business Law , pg. 518 Bagley, C. and Savage, D. Managers and the Legal Environment, 6 th Edition , pg. 650 Hande, Robert H. and Marvel, Howard P., “The Tree Types of Collusion: Fixing Prices, Rivals, and Rules,” Wisconsin Law Review , 2000:941, p. 941, 951, 964
  • Courts broadly define price fixing. Credit terms and discounts cannot be fixed since inextricably related to price [4] The reason why collusion is treated as a paramount offense is it could lead to monopoly-like outcomes, including monopoly profits shared by colluding parties [5] But it is permitted in some markets; where allowed, referred to as resale or retail price maintenance [6] 4. Emerson, pg. 518 5. Hande, R. and Marvel, H., p. 941 http://en.wikipedia.org/wiki/Price_fixingf For example, a manufacturer and distributor may agree that the distributor will sell the product at a specified price (resale price maintenance). In Leegan Creative Leather Products, Inc. v. PSKS, Inc. held that vertical price restraints are not per se unlawful, but must be judged under the rule of reason.
  • Table - Criminal penalties for price fixing 1890-1990 [7] 2 more examples: In the mid-1990’s - Archer Daniels Midland executives were caught on FBI surveillance tapes fixing the price of lysine, a feed additive, with competitors 2005 – Samsung pleads guilty in conspiring with other DRAM (dynamic random access memory) makers to fix prices of DRAM sold to computer and server manufacturers 7. Connor, J. “The Food and Agricultural Global Cartels of the 1990s: Overview and Update” 2002, pg. 22
  • In the EU, rare exceptions are made when they benefit consumers from technological innovation [10] Before 1995, less than 1% of firms accused of price fixing were foreign firms; after 1997, foreign firms account for over 50%. In 1999, nearly four fifths of fines for price fixing imposed by US Antitrust Division were against foreign firms ($900 million). [11] 10. Connor, pg. 3 11. Connor, pg. 20.
  • Businesspeople with advanced degrees, such as MBAs, should expect more severe penalties, such as longer prison sentences, as they "should know better.” [12] 12. Gift, Paul “Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals,” Graziadio Business Report , Pepperdine University: Graziadio School of Business and Management, 2009, Vol. 12, Issue 2
  • U.S. Justice Dept. views horizontal price-fixing as a “hard crime” punishable by prison sentences. In most cases, first time offenders serve a minimum sentence of 6-12 months [13] Liability for antitrust violations is joint and several, i.e. each conspirator could be liable for the losses caused by all of the violators [14] Table - Fines/Prison Sentences Imposed in U.S. DOJ Price Fixing Cases [15] 13, 14. Bagley, C. and Savage, D. pg. 650. 15. Connor, pg. 23
  • Eastman Kodak Co. v. ITS: The Downfall of the Chicago School - By Ronald S. Katz of Coudert Brothers LLP - http://library.findlaw.com/1992/Jul/1/128101.html
  • Refers to price fixing in the vertical direction or supply chain. Vertical pricing refers to price controls in the vertical direction. This can also be referred to as resale price maintenance. When a manufacturer sells directly to an end customer, the company clearly controls the customer price and this is not anti competitive. However, when the supply chain involves a distributor or retailer, the manufacturer can no longer control the actual retail price charged. Manufacturers can establish an MSRP or manufacturer’s suggested retail price. A manufacturer can establish an MSRP or manufacturers suggested retail price, but it would be anti-competitive and hence illegal for a manufacturer to dictate that retailers sell at this price. The fact that the suggested price is followed is not enough to show the presence of conspiracy. Maximum Retail Pricing however can be established by a manufacturer. In 1997 State Oil Co. v. Khan the Supreme Court unanimously overturned previous law in establishing manufacturers establishing price ceilings. The Supreme Court stated that from now on price ceilings will be subject to the "rule of reason" and should be lawful in the vast majority of cases. The Court was concerned monopolist dealers in exclusive territories would have complete control over pricing and that there might not be enough local competition to prevent price gouging.   By enforcing a maximum retail price, manufacturers can prevent dealers from charging more than list price for new or scarce products, like the latest iPhone. This will prevent long-term loss of brand goodwill by opportunistic dealers.   http://www.mayerbrown.com/publications/article.asp?id=786&nid=6 http://edition.cnn.com/US/9711/04/scotus.antitrust/index.html Minimum Retail Pricing RPM must be decided on a case by case basis. In 2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. the Supreme Court overturned previous ruling on minimum price fixing. The law now requires that courts use the “rule of reason” to decide on a case by case basis if manufacturers demanding minimum prices for their goods are violating federal antitrust laws.   This new law is untested and might conflict with prior contracts, franchise laws and even state law.   Establishment of a minimum retail price addresses problems a manufacturer faces when dealers take a free ride by offering heavily discounted prices yet do not offer aftermarket or marketing support for the brand.   Horizontal price fixing remains illegal and manufacturers must be careful to avoid minimum price requests from groups of dealers as this could lead to the manufacturer becoming embroiled in the dealer groups’ horizontal pricing conspiracy. http://www.fredlaw.com/articles/marketing/mark_0707_rjw.html "Rule of reason" determines illegality on a case-by-case basis, whereby "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” This rule not only examines circumstances, but also weighs likely harm as well as legitimate business justifications and consumer benefits, i.e. pro-competitive justifications. Thus, minimum RPM is not always legal or illegal, but each case will be analyzed on an individual basis, taking all relevant factors into consideration. It is worth noting that a significant amount of U.S. state law and legislation conforms to the new federal standard, but not all do.
  • Reference – Peperdine University – Grazadio School of Business - Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals – Dr Paul Gift – http://www.google.com/imgres?imgurl=http://gbr.pepperdine.edu/images/092/rpm1.jpg&imgrefurl=http://gbr.pepperdine.edu/092/rpm.html&usg=__IJJZxeUVUKOMnAP8cHAFEGcGG8o=&h=150&w=200&sz=5&hl=en&start=83&itbs=1&tbnid=XRuoPjURHprfrM:&tbnh=78&tbnw=104&prev=/images%3Fq%3Dantitrust%2Bpricing%26start%3D80%26hl%3Den%26sa%3DN%26gbv%3D2%26ndsp%3D20%26tbs%3Disch:1
  • United States v Colgate Co. - http://supreme.justia.com/us/250/300/case.html Leegin Creative Leather Products, Inc v PSKS, Inc - http://www.law.cornell.edu/supct/html/06-480.ZS.html 2009 Discount Pricing Consumer Protection Act - http://www.govtrack.us/congress/bill.xpd?bill=s111-148
  • Links regarding the UK’s net book agreement http://www.independent.co.uk/news/uk/collapse-of-net-book-agreement-within-months-collapse-1388530.html Note that a recent article in the UK’s Guardian newspaper mourns the Net Book Agreement claiming that the large booksellers now have too much control on what books sell, how they are presented and which writers should be bestsellers. http://www.guardian.co.uk/books/booksblog/2010/jun/17/net-book-agreement-publishing
  • Minimum Retail Pricing RPM must be decided on a case by case basis: In 2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. the supreme court overturned previous ruling on minimum price fixing. The law now requires that courts use the “rule of reason” to decide on a case by case basis if manufacturers demanding minimum prices for their goods are violating federal antitrust laws. This new law is untested and might conflict with prior contracts, franchise laws and even state law Establishment of a minimum retail price addresses problems a manufacturer faces when dealers take a free ride by offering heavily discounted prices yet do not offer aftermarket or marketing support for the brand Horizontal price fixing remains illegal and manufacturers must be careful to avoid minimum price requests from groups of dealers as this could lead to the manufacturer becoming embroiled in the dealer groups’ horizontal pricing conspiracy http://www.fredlaw.com/articles/marketing/mark_0707_rjw.html "Rule of reason" determines illegality on a case-by-case basis, whereby "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition”. This rule not only examines circumstances, but also weighs likely harm as well as legitimate business justifications and consumer benefits (i.e., procompetitive justifications). Thus, minimum RPM is not always legal or illegal, but each case will be analyzed on an individual basis, taking all relevant factors into consideration. It is worth noting that a significant amount of U.S. state law and legislation conforms to the new federal standard, but not all do.
  • The other definition of price gouging is the raising of prices above the market rate that would prevail in a competitive environment, by a monopoly.
  • Additionally, it is a violation of §501.204 of the Florida Unfair and Deceptive Trade Practices Act (FDUTPA) for a person, his or her agent, or employee, during a declared state of emergency, to rent or sell or offer to rent or sell at an unconscionable price within the state of emergency area, any essential commodity including, but not limited to, supplies, services, provisions, or equipment that is necessary for consumption or use as a result of a declared state of emergency. This prohibition remains in effect until the declaration of emergency expires or is terminated. The Price Gouging Statute covers only essential commodities. A “commodity” means any good, service, material, merchandise, supplies, equipment, resources, or other article of commerce, and includes, without limitation, food, water, ice, chemicals, petroleum products, and lumber necessary for consumption or use as a direct result of the emergency. The law also requires those selling goods and services to possess an occupational license. Examples of non-essential items luxury items are alcoholic beverages and cigarettes. The price gouging law does not define “unconscionable," "gross disparity," or "grossly exceeds.“ Price gougers are subject to hefty civil and criminal penalties. In addition to all other remedies FDUTPA provides, a court may impose a civil penalty of not more than $1,000 per violation, with the aggregate not to exceed $25,000 for any 24-hour period against the price gouging law violators. Additionally, it is a second degree misdemeanor for any person to offer goods and services for sale to the public during a state of emergency without an occupational license. The Department of Agriculture and Consumer Services, the office of the state attorney, or the Department of Legal Affairs may enforce Florida's price gouging law.
  • On August 14, 2004, Attorney General Christ announced the creation of the Attorney General's Hurricane Task Force, which mobilized criminal and civil investigators statewide to investigate price gouging complaints. Based on their investigations, the attorney general filed numerous civil complaints against several individuals and businesses. Such as, 1.Days Inn Airport, West Palm Beach (State of Florida v. Janus Hotels and Resorts, Inc., Complaint, available at myfloridalegal.com/daysinncomplaint.pdf; myfloridalegal.com/JanusAVC.pdf) A billboard in close proximity to the Days Inn Airport advertised rooms for less than $50 per night. After Hurricane Charley, the hotel charged more than double that amount to three consumers. Two were forced to pay $109 per night, while the hotel charged $119 for the third. The hotel told the consumers that it had "only two rooms left," thereby creating a sense of urgency to pay the inflated price. The hotel settled the lawsuit for $70,000 with $10,000 of the settlement for consumer restitution and the remainder went to the costs of the investigation and to the Florida Hurricane Relief Fund. 2. Payless Inn & Suites, Ocala (State of Florida v. Ocala Inn Management, Inc., Complaint, available at myfloridalegal.com/paylesscomplaint.pdf) A 77-year old woman, with her husband and disabled daughter, fled their Tampa home because it was in a designated evacuation zone. The family checked into the Payless Inn after seeing a highway billboard advertising a 50 percent discount for senior citizens. The next day, the hotel charged the family $160.49 for a one-night stay. Later that day, the family found a booklet advertising rates for only $29.99 a night, with a $10-per-person charge for additional guests. Two days later, the inn quoted a rate of $59.99 over the phone. The hotel told another consumer that only two rooms were available at a rate of $129.90. The hotel told the consumer that the high price stemmed from the room being a suite. In fact, the room was not a suite, but a regular room. Soon after, the consumer called the hotel to learn that a regular room was $79 a night. 3. Baymont Inns & Suites, Naples (State of Florida v. Baymont Inns Hospitality, LLC, Complaint, available at myfloridalegal.com/baymontcomplaint.pdf) The Baymont Inns & Suites charged three consumers more at check-out than the price quoted to them when they made their reservations. The first consumer received a quote of $53.99 per night. During check-out three days later, the hotel charged her 33 percent more, $71.99 for the first two days, and $89.10 for the third day, or 65 percent above the quote. After she protested, the hotel reduced the rate for the third day charges to $71.99, but refused to honor the $53.00 quote for the first two days. The hotel charged a second consumer $93.60 after receiving a 10 percent AAA discount. The hotel, however, quoted a rate between $49 and $64 per night. A third consumer reserved a room for herself, a friend, and a dog at a quoted rate of $55 per night. The hotel tried to charge her $99 per night, but upon her objection, the hotel reduced the rate to $79 per night, still 44 percent higher than the originally quoted price. 4. ABC Restoration, Inc. d/b/a Dr. Dry (State of Florida v. ABC Restoration, Inc., Complaint, available at myfloridalegal.com/DrDryComplaint.pdf) Dr. Dry sent an employee on August 16, 2004, to assess water damage at a consumer's home. Dr. Dry's employee quoted a price of $6,500 to $7,500 to repair the couple's porch ceiling and upstairs screens and to remove the carpet from a room adjacent to the porch. The business removed the carpet, left it on the front lawn, moved furniture from an upstairs room to the porch, and then demanded $12,000 to complete the remaining work. Dr. Dry also provided a quote of $5,000 to remove furniture and wet carpeting from another home. The consumer in that home authorized Dr. Dry to charge her credit card $5,000 upon completion of the work. The workers placed 10 large fans and three dehumidifiers in the woman's home and made large holes in her ceilings to allow for drainage. Dr. Dry then demanded an additional $6,500 to complete the work. Later, the woman discovered that Dr. Dry had charged her credit card even though Dr. Dry never completed the agreed-upon work. The business then refused to give her a refund. Also, on August 17, Dr. Dry removed 24 square yards of wet carpet from a Ft. Myers home. The removal took one hour to complete, for which Dr. Dry charged a fee of $22 per square yard. The standard industry price for the service should have been $3 to $8 per square yard. 5. Sun State Trees & Property Maintenance, Inc. (State of Florida v. Sun State Trees & Property Maintenance, Inc., Complaint, available at myfloridalegal.com/sunstatecomplaint.pdf) Two Winter Park neighbors obtained an estimate from Sun State, after three trees in one man's yard fell onto another house, damaging the roof. Sun State provided an estimate of $30,000 for tree removal services and gave invoices for $15,000 to each of the neighbors. Sun State removed one tree on August 15, 2004, two days after Hurricane Charley hit Florida, and arranged to return the next day to remove the remaining trees. The next day, the neighbors complained about the high cost of the tree removal service, and Sun State offered to complete the job for a total cost of $11,000. The average price in Central Florida for the removal of three trees during the 30-day period preceding the declaration of a state of emergency was approximately $3,359.14. 6. John Charles Mikell and John Tate Mikell (State of Florida v. John Charles Mikell et al., Complaint, available at myfloridalegal. com/MikellComplaint.pdf) A man and his son traveled to Santa Rosa County and sold generators from a pickup truck and horse trailer parked on a roadside. They sold 22 generators for $650 each. The investigators determined that the manufacturer's suggested retail price for that model generator was $299.99, meaning the price offered for the generators was more than double the retail price.
  • Laws against price gouging In the United States, laws against price gouging have been held constitutional as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution. Proponents of laws against price gouging assert that it can create an unrealistic psychological demand that can drive a non-replenishable item into extinction. Opposition to laws against price gouging Some support the ability to raise prices under such circumstances, asserting that government prohibition of the practice is a violation of individual rights or that the ability to raise prices has beneficial effects or both. Libertarians are among those who think firms should be allowed to charge what they want regardless of the circumstances. Free market economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. For example, after a storm has felled numerous trees in a locality, a rise in the price of chain saws will discourage their purchase by people with only a minor need for them, making them more available for those with the strongest need. Problems during the 1870 Siege of Paris, which critics attribute to price restrictions, are often held up as another example. Free market economists, in effect, reject the term "price gouging," and argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency. Moral arguments Both proponents and opponents of laws outlawing price gouging make moral arguments. Proponents of the laws state that when some people are priced out of a market in an emergency, they can be severely hurt (and in the case of food and water price gouging, could even lose their lives). Thus those with limited financial resources are at a disadvantage relative to those who are wealthier. Further, proponents of the laws assert that it is simply unfair for a supplier of goods to receive an unearned windfall at the expense of other people. Opponents of the laws state that, when an emergency combined with anti-gouging laws causes important goods to disappear from the shelves on a first-come first-served basis, the people who need them most may not get them; but with price rises, people whose need for the goods is not strong will refrain from buying them, making them available for the people with the strongest need. In this view, people who most need the goods but don't get them, because of shortages due to non-market-clearing prices, could be severely hurt (or again, in the case of food and water shortages, could even lose their lives).
  • Cartels Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products. The most famous, or infamous, example is the Organization of the Petroleum Exporting Countries (OPEC). Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members’ profits by reducing competition. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. Contrariwise, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the competition policy in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper. Monopoly Monopolies are characterized by a lack of economic competition for the good or service they provide and a lack of viable substitute goods.
  • The protection of international competition is governed by international competition agreements. In 1945, during the negotiations preceding the adoption of the General Agreement on Tariffs and Trade (GATT) in 1947, limited international competition obligations were proposed within the Charter for an International Trade Organization. These obligations were not included in GATT, but in 1994, with the conclusion of the Uruguay Round of GATT Multilateral Negotiations, the World Trade Organization (WTO) was created. The Agreement Establishing the WTO included a range of limited provisions on various cross-border competition issues on a sector specific basis.
  • Violations of the Sherman Act involving agreements between competitors are usually punishable as criminal felonies.
  • Copyright, patents and trademarks are examples of government-granted monopolies.
  • American Bar Association – Predatory Pricing – Google Books http://books.google.co.uk/books?id=K7OLLYMRdv4C&printsec=frontcover&dq=predatory+pricing&source=bl&ots=ZgXMAk3JnL&sig=E_P7aBB9XbYbM7NmQJ88lT6DquA&hl=en&ei=sPMXTPaHOMWblgfD6OXSCw&sa=X&oi=book_result&ct=result&resnum=6&ved=0CDMQ6AEwBQ#v=onepage&q&f=false Judge Easterbrook Quote - Stopping Above-Cost Predatory Pricing - Yale Law Journal - http://www.yalelawjournal.org/the-yale-law-journal/content-pages/stopping-above%11cost-predatory-pricing/
  • Predatory Pricing lecture by Kerry Tan - http://web.econ.ohio-state.edu/~tan/E367/lecture3_predatorypricing.pdf
  • Predatory Pricing lecture by Kerry Tan - http://web.econ.ohio-state.edu/~tan/E367/lecture3_predatorypricing.pdf Managers and the legal environment – Bagley & Savage 1970 Matsushita Electronic Industrial Co. v. Zenith Radio Corp. http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?friend=nytimes&court=US&vol=475&invol=574&pageno=588 Brooke Group v. Brown & Williamson Tobacco http://www.law.cornell.edu/supct/html/92-466.ZS.html
  • The Herbert Dow story from The politically incorrect guide to American history   By Thomas E. Woods And http://www.thefreemanonline.org/featured/herbert-dow-and-predatory-pricing/# Wal-Mart Germany Story – NY Times 2000 Edmund L Andrews
  • Predatory Pricing lecture by Kerry Tan - http://web.econ.ohio-state.edu/~tan/E367/lecture3_predatorypricing.pdf
  • Price Discrimination in Anti-Trust pricing is defined as the illegal charging of different prices to different purchasers of goods that are of “like grade and quality”, when the price differences are not justified by cost differences. Note that the purchasers must be of the same distribution level. The Robinson-Patman (RP) Act was established in 1936. Historically, it was referred as the "anti-chain store act“. RP Act was intended to prohibit monopolization by curbing the power of large retail chains, thus enabling smaller independent retailers to compete with the retail chains. However, as seen in the next slide, the RP Act contains many elements, making it very difficult to prove illegal price discrimination. References Bagley, C.E. and Savage, D.W. (2010) Price Discrimination: The Robinson-Patman Act. In: Managers and the Legal Environment: Strategies for the 21 st Century, 6e, pages 665-667. Emerson, R.W. (2009) Robinson-Patman Act. In: Barrons’ Business Law, 5e, pages 525-526. Steuer, R.M. (1999) http://library.findlaw.com/1999/Jan/1/241454.html SPG Insights (2006) http://www.imakenews.com/strategicpricing/e_article000649775.cfm?x=b11,0,w Dukes, A.J. (2003) http://findarticles.com/p/articles/mi_qa4026/is_200307/ai_n9292644/
  • Illegal price discrimination occurs if the different prices charged result in substantial injury to: (1) buyers' competition (injury in the secondary line) - buyers must compete geographically, and on the same functional level. If both purchasers are ultimate consumers and do not compete in resale of the product, no violation can be found. (2) sellers' competition (injury in the primary line) – lower discriminatory (predatory) price damages the seller’s competitors by making them lose business. This is essentially the same as the Predatory pricing section (Section 5) discussed previously. Assuming that the supplier sells in interstate commerce, each of the following five elements must be present in order to prove illegal price discrimination under the RP Act. Discrimination - This standard is met simply by charging different prices to different customers. Sales to Two or More Purchasers - The different prices must be charged on reasonably contemporaneous sales to two or more purchasers - a rule that permits price fluctuations. In other words, it is inappropriate under the statute to compare two widely separated sales in a highly volatile market. Yet if prices typically change annually or semiannually, a sale made in January may be compared with one made in March. In addition, offering different prices is not enough. Actual sales or agreements to sell at different prices must exist. Goods – RP Act applies to the sale of goods only; services, such as telecommunications, banking, and transportation, are not covered. Like Grade and Quality - The goods involved must be physically or essentially the same. Brand preferences are irrelevant, but functional variations can differentiate products. Reasonable Probability of Competitive Injury - The law generally focuses on injury at one of two levels: “primary line” or “secondary line”. The primary line injury had been discussed in the Predatory Pricing section. Far more common is “secondary line” injury, where a supplier’s disfavored reseller or end-user customer may sue the supplier for price discrimination. However, the law is clear that only competing customers must be treated alike. To the extent that customers do not compete due to their locations or the markets they serve, different prices are appropriate under the RP Act. Defenses to Price Discrimination Even if all five price-discrimination elements are present, there are three defenses that may be used to avoid what otherwise is unlawful discrimination. Cost Justification - This defense permits a price disparity if it is based on legitimate cost differences. Meeting Competition - Under this defense, discrimination is permissible if it is based on a good-faith belief that a discriminatory price is necessary to meet the price of a competitive supplier to the favored customer or to maintain a traditional price disparity. Changing Conditions - Special prices may be provided to sell perishable, seasonal, obsolete, or distressed merchandise, even though the full price had been charged up to the point of offering the special prices. References Bagley, C.E. and Savage, D.W. (2010) Price Discrimination: The Robinson-Patman Act. In: Managers and the Legal Environment: Strategies for the 21 st Century, 6e, pages 665-667. Emerson, R.W. (2009) Robinson-Patman Act. In: Barrons’ Business Law, 5e, pages 525-526. Steuer, R.M. (1999) http://library.findlaw.com/1999/Jan/1/241454.html SPG Insights (2006) http://www.imakenews.com/strategicpricing/e_article000649775.cfm?x=b11,0,w Dukes, A.J. (2003) http://findarticles.com/p/articles/mi_qa4026/is_200307/ai_n9292644/
  • U.S. law had focused on prohibiting price discrimination as a means to preserve market competition by maintaining the viability of numerous sellers. While price discrimination has been unlawful since 1914, the RP Act amended existing legislation in 1936, so this entire area is commonly referred to by the name of the amendment. In the early twentieth century, a chain store could bargain with suppliers for cheaper prices because it bought large quantities of goods. Because the traditional local retailers, so-called mom-and-pop shops, were not entitled to these bargain prices, chain stores' discounts were generally viewed as unfair. The RP Act was a result of this public outcry against the chain store. The act prohibits sellers from charging different prices to different buyers for identical products when the effect might be injurious to competition. The act was intended to eradicate the competitive advantage of the chain store. But since 1936, the economic benefit of the RP Act has been debated. On the one hand, RP Act is one way to ensure that competitors will be protected from those whose only advantage is size. Thus, RP is seen as preserving market competition. On the other hand, many anti-trust economists disagree with this reasoning and argue that the act rewards less-efficient competitors, imposes higher prices and lower sales, and provides less economic benefit overall. Since passage of RP Act, many cases involving alleged violations of the act have been examined by the courts. Courts have generally ruled in favor of the defendant. Examples In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. , 509 U.S. 209, 220 (1993), the U.S. Supreme Court held that the RP Act does not "ban all price differences charged to different purchasers of commodities of like grade and quality". Instead, the Act proscribes "price discrimination only to the extent that it threatens to injure competition”. Therefore, the plaintiff must prove that the defendant’s practice of price discrimination has caused injury to his/her business. On January 10, 2006, the U.S. Supreme Court issued its decision in Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc . Reeder-Simco GMC, Inc. (Reeder), an authorized dealer of heavy-duty trucks manufactured by Volvo Trucks North America, Inc. (Volvo), generally sold those trucks through a competitive bidding process, whereby the retail customer describes its specific product requirements and invites bids from dealers. Once a Volvo dealer receives the customer’s specifications, it requests a discount or "concession" from Volvo off the normal wholesale prices. Volvo decides on a case-by-case whether to offer a concession. The dealer then uses its Volvo discount in preparing its bid; it purchases trucks from Volvo only if and when the retail customer accepts its bid. Retail customers normally solicited bids from only one Volvo dealer. In the atypical cases in which a retail customer solicited bids from more than one Volvo dealer (so-called "head-to-head" situations), it was Volvo’s stated policy to offer the same price concession to each dealer. In 1997 after Volvo had announced plans to streamline its dealer network, Reeder learned that Volvo had given another dealer a price concession greater than the discounts Reeder typically received. Suspecting it would not be retained as a Volvo dealer, Reeder filed suit against Volvo, claiming Volvo’s pricing practices constituted unlawful price discrimination under section 2(a) of the RPA. Following a jury trial, Reeder was awarded $4 million in damages on its RPA claim. In a 2-1 decision, the U.S. Court of Appeals for the Eighth Circuit affirmed the jury’s verdict. The Supreme Court granted certiorari on March 7, 2005 and the case was argued on October 31, 2005. On January 10, 2006, in a 7-2 decision (Justice Stevens, joined by Justice Thomas, dissenting), the Supreme Court reversed the Eighth Circuit because the Court held that Reeder’s evidence failed to establish the competitive injury required under the RP Act. With this case, the Court once again emphasized that it is the plaintiff’s burden to meet the RP Act’s "competitive injury" requirement. Because of the 2006 ruling of the U.S. Supreme Court, the Third Circuit Court reversed price discrimination judgment in Feesers v. Michael Foods and Sodexho earlier this year. In June 2009, a federal judge in Pennsylvania issued a rare plaintiff's judgment in a RP Act. The court found that local Harrisburg food distributor Feesers had proved its claim that Michael Foods, the largest producer of liquid eggs in the United States, had discriminated against it in the pricing of egg and potato products sold to both Feesers and the multi-national food service management firm, Sodexo. The Third Circuit Court did not contest that Feesers had shown that—on average and over time—Michael Foods sold egg products to Sodexo at lower prices. However, the appellate court focused on the statute's requirement of competitive injury from price discrimination, and in particular on the requirement that two purchasers of products from a single manufacturer be in competition with each other for "the same dollar." The Third Circuit found that food service management firms, such as Sodexo, and food distributors, such as Feesers, are not competing purchasers because they do not compete in the same bid markets. Therefore, Feesers cannot satisfy the competitive injury requirement of price discrimination of the RP Act. References SPG Insights (2006) http://www.imakenews.com/strategicpricing/e_article000649775.cfm?x=b11,0,w Dukes, A.J. (2003) http://findarticles.com/p/articles/mi_qa4026/is_200307/ai_n9292644/http://www.law.cornell.edu/supct/html/92-466.ZS.html (1993) http://www.law.cornell.edu/supct/html/92-466.ZS.html McDermott Newsletters (2006) http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/6851e0cb-31b3-4c31-b06c-4bede6eeb8a4.cfm Duncan, R.A. and Williams, M.K. (2010) http://www.faegre.com/showarticle.aspx?Show=10778
  • EU Perspective Under EU law, for example, article 82 prohibits companies with a dominant position from applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing the trading parties at a competitive disadvantage. Accordingly, not just any price discrimination is actionable under article 82; the price discrimination must be imposed by a company with a dominant position. Note that “dominant market power” is not a requirement under U. S. law. There are few EU cases dealing with pure price discrimination, without some other form of competitive abuse. One such case involves EU airlines. In December 2003, the European Commission launched a probe into claims that E.U. airlines have engaged in illegal price discrimination to charge different fares for the same flight according to the national residence of the passenger buying the ticket. Initial evidence had suggested that a fare booked on an airline Web site varied by as much as 300 percent, depending on which country the booker entered as their place of residence. One example was a Frankfurt-Berlin flight, which cost €88 if booked in Germany but €268 if booked in Belgium. The Commission cracked down on airline Web site price discrimination by writing to 18 leading E.U.-based airlines. All but two, Alitialia and Olympic Airways, responded that while they may have indulged in discriminatory practices in the past, they had now desisted. Tests by the Commission verified these claims. A statement from the Commission said: "In rare cases some restrictions may still exist for certain paper-based tickets, but all electronic tickets are now available throughout the E.U. without discrimination, except, in some cases, for differences in handling fees. As a result, price levels are now similar for all E.U. residents.” References Miller, W.T. and Shaw, K.N. (2010) http://www.globalcompetitionreview.com/reviews/20/sections/71/chapters/787/eu-us-comparison-pricing/ Business Travel News (2004) http://www.allbusiness.com/transportation-communications/transportation-services/4136942-1.html
  • Managers need to make sure that similar pricing is used when selling goods to different customers of the same geographical area and functional level. For example, if a company has a volume discount program, it could end up discriminating in price among the different purchasers depending on the purchasers’ volumes. But if the company has made the discount program reasonably available to all purchasers, even if some purchasers currently lack sufficient sales to qualify for higher volume discounts, the company is not liable. Managers need to be aware that, despite it is very difficult to prove illegal price discrimination, lagging or resentful rivals may use the RP Act as a misguided and wasteful way to battle a leading competitor. References Dukes, A.J. (2003) http://findarticles.com/p/articles/mi_qa4026/is_200307/ai_n9292644/
  • It’s important to understand the differences between BUNDLING and TYING of products. Bundling is a marketing decision, a packaging strategy. It is a legal commercial practice where a company offers several products or services together in a combined offering. Typically, this strategy is used to configure margin-rich solutions, to offer desired complimentary products or services in a convenient and affordable way, and to further differentiate from competition who may only offer a partial or incomplete solution. Tying is an often illegal use of market power to limit consumer choice or competitive forces by making the sale of product or service conditional upon the sale of another product or service. Oftentimes the tied products or services are unrelated or not desired by the purchaser. This practice has historically been seen as an unfair, unethical, or anti-competitive use of economic power.
  • Tying of products can be broken down into two different categories. Horizontal tying deals with the conditional sale of unrelated goods. Vertical tying is the conditional sale of related goods. While vertical tying could be defended as characterized as bundling, Horizontal tying is much harder to defend or justify. The key concept with tying is that of economic power. If a conditional sale is made possible because of the seller’s dominant market position or market influence, it could be seen as anticompetitive. This is particularly true when the tied item is not desired by consumers or is of a sub-standard or poor quality relative to competitive products. Typically, there are four conditions that must be met in order to establish unlawful tying. Just because a situation meets these four criteria does not mean that the practice is unlawful. However, these four conditions must be met (at a minimum) if unlawful tying is to be argued.
  • Most states have laws against Tying of products. There are key provisions within the Sherman AntiTrust Act and the Clayton Act that relate to tying of products. Other significant legislation and policy that extends or further clarifies the notion of Tying. The Bank Holding Company Act Amendments clarify the practice of bundling and tying within the financial services industry. The Magnuson-Moss Warranty Act clarifies a seller’s rights and responsibilities as it relates to service and warranties primarily for consumer goods. Perhaps the most notable court case related to bundling and tying of products is the United States v. Microsoft. The controversy over Internet Explorer and Windows Media Player is a highly visible and well known consideration of market power and the impact on competition and consumer choice. Some recent court cases has suggested that the presence or exercise of market power is not necessarily anti-competitive or illegal. Jefferson Parish Hospital District v. Hyde and Illinois Tools Works v Independent Ink are two rulings that have raised the burden of proof for demonstrating that a company’s exercise of market power is bad for consumers or illegally restricts competition.
  • In the European Union, there are also laws against unlawful tying of products. Tying in European law is summarized as unconnected supplementary obligations. As in the United States, the intent behind this legislation is to promote competition and to ensure market power is not used to unduly restrict consumer choice. In the EU, Microsoft had to pay a E497 million Euro fine for anti-competitive practices related to Windows Media Player.
  • The discussion of Tying has key implications for commercial managers making decisions about packaging or bundling multiple products or services into an integrated offering. Package solutions should be designed to differentiate but not limit competition, to increase not limit consumer choice. While “loss-leaders” are an acceptable marketing strategy, managers should be careful anytime there are broad discrepancies in margin-realization between packaged or bundled products. In generally, packaged solutions should involve closely related products and services. The packaging of unrelated products and services can be more easily characterized as Horizontal Tying.
  • Law pricing presentation final 08152010

    1. 1. Fixed Business Law Groupwork EMBA11 – Group 2 Stanelle, Tari, Estep, Nguyen, Mildren
    2. 2. <ul><ul><li>Any price charged could be illegal </li></ul></ul><ul><ul><li>Lower than your competitors could be predatory </li></ul></ul><ul><ul><li>Higher than your competitors could be gouging </li></ul></ul><ul><ul><li>Same as your competitors could be price-fixing </li></ul></ul>
    3. 3. <ul><li>Horizontal Price Fixing </li></ul><ul><li>Vertical Pricing Fixing </li></ul><ul><li>Price Gouging </li></ul><ul><li>Antitrust Cartels and Monopoly </li></ul><ul><li>Predatory Pricing </li></ul><ul><li>Price Discrimination </li></ul><ul><li>Tying of Products </li></ul>
    4. 4. <ul><ul><li>Created in reaction to a public outcry over trusts </li></ul></ul><ul><ul><li>(late 19th century corporate monopolies that dominated U.S. manufacturing and mining) </li></ul></ul><ul><ul><li>Trusts took their name from the device of business incorporation called trusteeship </li></ul></ul><ul><ul><li>(this consolidated control of industries by transferring stock in exchange for trust certificates) </li></ul></ul><ul><ul><li>Rapid industrialization in the late 1800’s increased market competition and rivals sought greater security and profits in cartels (mutual agreements to fix prices and control output) </li></ul></ul><ul><ul><li>Creation of trusts brought entire industries under the control of a few powerful people </li></ul></ul><ul><ul><li>(e.g. Oil and steel lay in the hands of the corporate giants John D. Rockefeller and J. P. Morgan) </li></ul></ul><ul><ul><li>By the 1880’s, abuses by the trusts brought demands for reform </li></ul></ul>
    5. 5. <ul><li>The 1890 Sherman Act </li></ul><ul><ul><li>Prohibits contracts, combinations, and conspiracies in restraint of trade and monopolization </li></ul></ul><ul><ul><li>Includes criminal penalties when enforced by the government </li></ul></ul><ul><ul><li>Violation can result in substantial fines and, for individual transgressors, prison terms </li></ul></ul><ul><ul><li>In addition, court orders restraining future violations are also available </li></ul></ul><ul><ul><li>Enforced primarily by the Antitrust Division of the Justice Department </li></ul></ul><ul><li>The 1914 Clayton Act </li></ul><ul><ul><li>Amended in 1936 by the Robinson-Patman Act and in 1950 by the Celler-Kefauver Antimerger Act </li></ul></ul><ul><ul><li>Deals with exclusive dealing arrangements, tie-in sales, price discrimination, M&A, interlocking directorates </li></ul></ul><ul><ul><li>Carries only civil penalties </li></ul></ul><ul><ul><li>Jointly enforced by the Antitrust Division and the Federal Trade Commission (FTC) </li></ul></ul><ul><ul><li>FTC in practice has responsibility for anticompetitive price discrimination </li></ul></ul><ul><ul><li>Establishes triple damages in private suits </li></ul></ul><ul><li>The 1914 Federal Trade Commission Act </li></ul><ul><ul><li>Established a new government agency with broad authority to regulate unfair and deceptive business practices </li></ul></ul><ul><ul><li>The agency can issue a cease and desist order telling firms that certain practices must be stopped </li></ul></ul><ul><ul><li>Less cumbersome than court processes (strict rules of evidence and juries) </li></ul></ul><ul><ul><li>Firms can still appeal an FTC order to a court </li></ul></ul><ul><ul><li>Somewhat a catch all enactment that gives even broader powers than the Sherman Act </li></ul></ul>
    6. 6. <ul><li>Not all countries have Antitrust Laws </li></ul><ul><li>(Complete list can be found at www.justice.gov) </li></ul><ul><li>International guidelines established by </li></ul><ul><ul><li>OECD </li></ul></ul><ul><ul><li>World Trade Organization </li></ul></ul><ul><ul><li>International Competition Network </li></ul></ul><ul><li>European Union </li></ul><ul><ul><li>Covers - Cartels, Monopolies, Mergers, State Aid </li></ul></ul><ul><ul><li>Enforced by Directorate-General for Competition – but managed by national agencies </li></ul></ul><ul><ul><ul><li>UK, Office of Fair Trading and Competition Commission </li></ul></ul></ul><ul><ul><ul><li>France, Conceal de la Concurrence </li></ul></ul></ul>Map Illustrating Global existence of Antitrust laws – Source Anti trust blog
    7. 7. <ul><li>Horizontal price fixing is an agreement between competitors or businesses at the same level of competition arranging to set a common price. It is the most direct way to reduce competition. Includes: </li></ul><ul><ul><li>Setting prices (including maximum prices) </li></ul></ul><ul><ul><li>Setting the terms of sale </li></ul></ul><ul><ul><li>Setting quantity/quality of goods to be manufactured or made available for sale </li></ul></ul><ul><ul><li>Rigging bids </li></ul></ul><ul><li>Price fixing can be prosecuted as a criminal offense under Section 1 of the Sherman Antitrust Act </li></ul>
    8. 8. <ul><li>Can be viewed as a per se violation of Sherman Act – regardless of impact or efficiency of the act </li></ul><ul><li>The reason why collusion is treated as a paramount offense is it could lead to monopoly-like outcomes, including monopoly profits shared by colluding parties </li></ul><ul><li>Courts broadly define price fixing. Credit terms and discounts cannot be fixed since inextricably related to price </li></ul><ul><li>But it is permitted in some markets; where allowed, referred to as resale or retail price maintenance </li></ul>
    9. 9. <ul><li>Criminal penalties for price fixing 1890-1990 </li></ul><ul><li>2007 – British Airways and Korean Air Lines fined over $1 Billion for fixing fuel surcharges from 2004-2006 </li></ul><ul><li>2008 – LG, Chungwa Picture Tubes, and Sharp plead guilty and agree to pay $585 Million in criminal fines for colluding to fix prices of LCD panels </li></ul>
    10. 10. <ul><li>The EU has stipulations similar to the US against horizontal price fixing and collusion </li></ul><ul><li>In the EU, rare exceptions are made when they benefit consumers from technological innovation </li></ul><ul><li>International price fixing by private entities can be prosecuted under the antitrust laws of many countries </li></ul><ul><li>Before 1995, less than 1% of firms accused of price fixing were foreign firms; after 1997, foreign firms account for over 50% </li></ul>
    11. 11. <ul><li>In addition to formal agreements, the law also covers activities that have price fixing effects, i.e. merely discussing pricing plans with competitors (conscious parallelism) </li></ul><ul><li>Competitors must be careful about even giving the appearance of collusion. Be prepared to show facts supporting the exercise of an individual business judgment in making a pricing decision </li></ul><ul><li>Businesspeople with advanced degrees, such as MBAs, should expect more severe penalties, such as longer prison sentences, as they &quot;should know better” </li></ul><ul><li>In addition to fines, civil actions (especially class actions) can have serious financial consequences. Litigation for price fixing is not uncommon </li></ul>
    12. 12. <ul><li>U.S. Justice Dept. views collusion as a “hard crime” punishable by prison sentences </li></ul><ul><li>Liability for antitrust violations is joint and several, i.e. each conspirator could be liable for the losses caused by all of the violators </li></ul><ul><li>Fines/Prison Sentences Imposed in U.S. DOJ Price Fixing Cases </li></ul>
    13. 13. <ul><li>Vertical Price Fixing refers to the manipulation and control of pricing in the supply or distribution chain </li></ul><ul><li>Unless a manufacturer sells its product directly through its own retail outlet, it has very little control of the end customer pricing </li></ul><ul><li>Manufacturer’s desire to control end customer pricing </li></ul><ul><ul><li>To protect their brand image </li></ul></ul><ul><ul><li>To avoid consumer “free riding” from full service retailers and buying at discount retailers. e.g. test driving a car at Gainesville Ford and then buying from a discount online dealer in Texas </li></ul></ul><ul><ul><li>To avoid price gouging on new highly sought after products, e.g. new iPhone </li></ul></ul>
    14. 14. <ul><li>Also referred to as Resale Price Maintenance </li></ul><ul><li>A manufacturer cannot legally dictate the end customer price charged by a retailer </li></ul><ul><li>Manufacturers can however establish </li></ul><ul><ul><li>A Manufacturers Suggested Retail Price (MSRP) </li></ul></ul><ul><ul><li>A Maximum Retail </li></ul></ul><ul><ul><li>A Minimum Retail Price (RPM) </li></ul></ul>
    15. 15. <ul><li>Some argue that Resale Price Maintenance has less to do with Price fixing and more to do with management of retailer incentives </li></ul><ul><li>A Minimum Price maintenance allows alignment of interests of retailers and manufacturers </li></ul><ul><li>Restricting price at the retail level enhances other forms of non-price competition – brand identity, service </li></ul><ul><li>The fact that a retailer is following the MSRP is not enough to show price fixing; the plaintiff must show actual agreement of the pricing </li></ul>
    16. 16. <ul><li>1911 Supreme Court determines minimum retail pricing is illegal under the 1890 Sherman Act </li></ul><ul><li>1919 United States v. Colgate Co. established the right of a company to go beyond announcing its MSRP and refusal to deal with wholesalers and retailers who do not conform to such prices </li></ul><ul><li>2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. Supreme Court overturned previous ruling on minimum price fixing. The law now requires that courts use the “rule of reason” to decide on a case by case basis if manufacturers demanding minimum prices for their goods are violating federal antitrust laws </li></ul><ul><li>Attempts were made by legislators to reverse the Leegin decision with the 2009 Discount Pricing Consumer Protection Act (now thought to be abandoned) </li></ul>
    17. 17. <ul><li>The EU, Canada and Australia have very similar rules to the US </li></ul><ul><li>An example of long term vertical price fixing comes from a “cozy” arrangement in the UK </li></ul><ul><li>Starting January 1 st 1900 the main UK book publishers refused to sell to booksellers that discounted their MSPR </li></ul><ul><li>This process continued until 1962 when it was evaluated by the restrictive practices court. The court determined it was to the benefit of the industry that important, but low volume works were subsidized by best sellers </li></ul><ul><li>This practice continue until the early nineties, when the practice was finally challenged by large retailers - Dillons and Waterstones </li></ul>
    18. 18. <ul><li>Law from the 2007 Leegin Creative Leather Products, Inc. v. PSKS, Inc. case is new and untested </li></ul><ul><li>Concerns that it might conflict with prior contracts, franchise laws and even state law </li></ul><ul><li>Horizontal price fixing remains illegal and manufacturers must be careful to avoid minimum price requests from groups of dealers as this could lead to the manufacturer becoming embroiled in the dealer groups’ horizontal pricing conspiracy </li></ul>
    19. 19. <ul><li>In 2004, Hurricanes Charley, Frances, Jeanne, and Ivan devastated Florida </li></ul><ul><li>In the midst of the recovery, price gouging profiteers preyed upon hurricane victims </li></ul><ul><li>Over 6,000 reports of price gouging were confirmed by the Attorney General’s Office during the declared state of emergency covering these hurricanes </li></ul><ul><li>Fortunately, Florida's price gouging law protected these consumers </li></ul>
    20. 20. <ul><li>Typically defined as a sharp increase in the price of basic necessities over a short period of time either immediately prior to or following a natural disaster, to a level that is higher than is considered reasonable or fair </li></ul>
    21. 21. <ul><li>Florida Statute 501.160 states that during a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities, dwelling units, or self-storage </li></ul>facilities for an amount that grossly exceeds the average price for that commodity during the 30 days before the declaration of the state of emergency, unless the seller can justify the price by showing increases in its prices or market trends
    22. 22. <ul><li>Following the Hurricane Andrew disaster in Florida and Louisiana, there were widespread reports of price gouging at many retailers, by contractors and other individuals </li></ul><ul><li>Bob Crawford, Florida’s Commissioner of Agriculture and Consumer Services said of Hurricane Faye: </li></ul><ul><ul><li>“ We had quite a bit of price gouging during Hurricane Andrew, but it seems to be more rampant this time.” </li></ul></ul><ul><ul><li>“ Bottled water will be $0.75 one day, and then the next day it will be $3 or $4.” </li></ul></ul><ul><ul><li>“ We’ve had complaints of plywood marked up 200 to 300 percent.” </li></ul></ul>
    23. 23. <ul><li>Most countries outside the US have little protection of consumers for price-gouging, regardless of the cause </li></ul><ul><li>To date, 31 states have enacted Anti Price-Gouging legislation </li></ul><ul><li>In general 12 of the remaining 19 states have either taken enforcement action without Anti Price-Gouging laws or considered an Anti Price-Gouging bill that ultimately failed </li></ul>
    24. 24. <ul><li>Price gouging, at its worst, prevents those without the ability to pay from obtaining the most basic of needs, including food, water, shelter and medicine </li></ul><ul><li>This leaves the question, how much should prices be able to increase to compensate merchants for additional costs and risks, before gouging occurs </li></ul><ul><li>No clear answer exists to this question, with many states implementing 10% to 25% limits for price increases during states of emergency </li></ul>
    25. 25. <ul><li>A cartel is an agreement among competing firms. It is an organization of producers or manufacturers that agree to fix prices, marketing, and production </li></ul><ul><li>A monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to </li></ul>determine significantly the terms on which other individuals shall have access to it
    26. 26. <ul><li>Competition law, known in the United States as antitrust law, are laws that promote or maintain market competition by regulating anti-competition conduct </li></ul><ul><li>Issues associated with cartels and monopolies: </li></ul><ul><ul><li>Limiting Supply </li></ul></ul><ul><ul><li>Predatory Pricing </li></ul></ul><ul><ul><li>Price Discrimination </li></ul></ul><ul><ul><li>Refusal to Deal & Exclusive Dealing </li></ul></ul><ul><ul><li>Tying & Product Bundling </li></ul></ul>
    27. 27. <ul><li>Laws governing competition can be traced back over 2,000 years to the Roman empire and medieval times </li></ul><ul><li>In the US the Sherman Antitrust Act outlawed all contracts, combinations and </li></ul>conspiracies that unreasonably restrain interstate and foreign trade. This includes cartel violations, such as price fixing, bid rigging and customer allocation.
    28. 28. <ul><li>The EU’s competition law explicitly forbids cartels and related practices in its article 81 of the Treaty of Rome. Since The Treaty of Lisbon came into effect, the 81 EG is replaced by 101 AEUV. </li></ul><ul><li>In the public cartel, a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions </li></ul><ul><li>A government-granted monopoly (also called a “de jure monopoly”) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to the sole provider of a good or serve </li></ul>
    29. 29. <ul><li>It has been suggested that for a cartel or monopoly to be formed, government assistance, whether overt or covert, is required </li></ul><ul><li>Increased competition from free trade puts significant pressure on cartels and monopolies </li></ul>
    30. 30. <ul><li>“ Predatory prices are an investment in a future monopoly, a sacrifice of today’s profits for tomorrow’s. The investment must be recouped. If a monopoly price later is impossible, then the sequence is unprofitable and we may infer that the low price now is not predatory.” – Judge Easterbrook </li></ul><ul><li>Pricing below cost to injure rival firms and thus induce their exit: </li></ul><ul><ul><li>Predator sets price very low (below marginal cost) </li></ul></ul><ul><ul><li>Rival firms cannot compete and exits the market </li></ul></ul><ul><ul><li>Predator firm becomes a monopolist and increases price to monopoly price </li></ul></ul><ul><li>Cases involving allegations of unfair, predatory pricing have been tried in the US courts system as: </li></ul><ul><ul><li>Monopolization cases under the Sherman Act </li></ul></ul><ul><ul><li>Price discrimination cases under the Clayton Act </li></ul></ul>
    31. 31. <ul><li>Many economists believe predatory pricing is unsustainable long term </li></ul><ul><li>The question becomes - When is a low price “predatory” and when is it “competitive” </li></ul><ul><li>In Brooke Group v. Brown & Williamson Tobacco , Supreme Court defined two fundamental prerequisites that plaintiffs must satisfy in predatory pricing cases: </li></ul><ul><li>1. Prices were set below some &quot;appropriate measure&quot; of its costs (The Court failed to state explicitly what the measure would be) </li></ul><ul><li>2. Reasonable expectation that predator would subsequently be able to recoup its investment in those below-cost prices </li></ul>
    32. 32. <ul><li>The Court has repeatedly shown its skepticism about cases of predatory pricing </li></ul><ul><ul><li>Predatory pricing schemes are rarely tried </li></ul></ul><ul><ul><li>Even when tried, they are even more rarely successful </li></ul></ul><ul><li>1970 Matsushita Electronic Industrial Co. v. Zenith Radio Corp. </li></ul><ul><ul><li>Zenith claimed that the seven firms were pricing their TVs and other electronic appliances below cost in the US market </li></ul></ul><ul><ul><li>The Supreme Court said that the plaintiff’s arguments did not make sense economically with respect to the industry’s market structure </li></ul></ul><ul><ul><li>Firms did not possess significant market power </li></ul></ul><ul><ul><li>Unlikely for predators to recoup losses from predation </li></ul></ul><ul><ul><li>No evidence of conspiracy </li></ul></ul><ul><li>Brooke Group v. Brown & Williamson Tobacco </li></ul><ul><ul><li>Plaintiff accused Brown & Williamson of charging below-cost prices in the market for generic (low-priced) cigarettes </li></ul></ul><ul><ul><li>In the case the Supreme Court established two fundamental prerequisites for predatory pricing cases </li></ul></ul>
    33. 33. <ul><li>A case often presented by detractors of the predatory pricing laws is the case of Dow Chemicals </li></ul><ul><ul><li>1904 Herbert Dow invented a cheaper way of producing Bromine </li></ul></ul><ul><ul><li>He started exporting and competing against the German Brominkartel </li></ul></ul><ul><ul><li>The Germans retaliated by discounting their products tin the US </li></ul></ul><ul><ul><li>Dow outsmarted his competitors by buying much of the discounted Bromine and sold it back to the Germans at a discounted price </li></ul></ul><ul><ul><li>In 2000 Germany's federal cartel office found Wal-Mart guilty of predatory pricing practices </li></ul></ul><ul><ul><li>It had sold household staples like milk, flour and butter below its wholesale costs </li></ul></ul><ul><ul><li>Recouping of investment was not considered </li></ul></ul><ul><ul><li>Regulators acted to prevent Wal-Mart and other big chains from using ''unfair'' tactics to devastate smaller stores </li></ul></ul>
    34. 34. <ul><li>Predation is a very costly way in which to enhance market power </li></ul><ul><li>If firms are pricing below cost, the cost of predation can be </li></ul><ul><ul><li>Severe for the predator </li></ul></ul><ul><ul><li>Profits for predator would be higher under normal competition versus under possible predation </li></ul></ul><ul><li>There are three other reasons why firms would still proceed with predation: </li></ul><ul><ul><li>Low-cost signaling </li></ul></ul><ul><ul><li>Build a reputation </li></ul></ul><ul><ul><li>Stunt growing markets </li></ul></ul>
    35. 35. <ul><li>Price Discrimination in Anti-Trust pricing is defined as the illegal charging of different prices to different purchasers of goods or services that are of “like grade and quality”, when the price differences are not justified by cost differences </li></ul><ul><li>The Robinson-Patman Act, established in 1936, was intended to curb monopolization and preserve competition </li></ul>
    36. 36. <ul><li>Price discrimination occurs if the different prices charged result in substantial injury to: </li></ul><ul><ul><li>Buyers' competition (injury in the secondary line) - The buyers must compete geographically and on the same functional level. If both purchasers are ultimate consumers and do not compete in resale of the product, no violation can be found </li></ul></ul><ul><ul><li>Sellers' competition (injury in the primary line) – The lower discriminatory (predatory) price damages the seller’s competitors by making them lose business </li></ul></ul>
    37. 37. <ul><li>Section 2 of the Clayton Act </li></ul><ul><li>The Robinson-Patman Act </li></ul><ul><li>Interesting Cases: </li></ul><ul><li>Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. </li></ul><ul><li>Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc. </li></ul><ul><li>Feesers v. Michael Foods and Sodexho </li></ul><ul><li>Recent Supreme Court rulings emphasis: </li></ul><ul><li>To satisfy the competitive injury requirement, plaintiff must prove that the different purchasers are competing in the same bid markets, and that the defendant’s illegal price discrimination has injured the plaintiff’s ability to compete </li></ul>
    38. 38. <ul><li>Article 82 of EU law focuses on combating illegal price discrimination </li></ul><ul><li>Unlike the US, Article 82 requires that the party engaging in price discrimination has some form of dominant market power </li></ul>
    39. 39. <ul><li>Managers need to be aware: </li></ul><ul><li>Similar pricing should be used when goods of “like grade and quality” are sold to different customers of the same geographical area and functional level </li></ul><ul><li>Lagging or resentful rivals may use the RP Act as a misguided and wasteful way to battle a leading competitor </li></ul>
    40. 40. <ul><li>Bundling is a legal marketing strategy where a company offers several products for sale as one combined product </li></ul><ul><li>Occasionally, bundling can represent an unfair use of market power and be used to limit consumer choice </li></ul><ul><li>Tying is making the sale of one good conditional on the customer purchasing a second (perhaps unrelated) good </li></ul><ul><li>Industry examples: Software suites, Cable/Internet services, Fast Food (value meals ), Printers & Ink, Razors & Razorblades </li></ul>
    41. 41. <ul><li>Horizontal Tying – conditional sale of unrelated goods </li></ul><ul><li>Vertical Tying – conditional sale of related goods </li></ul><ul><li>Economic Power – seller’s degree of market influence </li></ul><ul><li>Four conditions to establish unlawful tying: </li></ul><ul><ul><li>Two separate products/services involved </li></ul></ul><ul><ul><li>Purchase of good A is conditional upon the additional purchase of good B </li></ul></ul><ul><ul><li>Seller has sufficient market or economic power </li></ul></ul><ul><ul><li>Affects a substantial amount of interstate commerce in the product category </li></ul></ul>
    42. 42. <ul><li>Most states have laws against tying </li></ul><ul><li>Sherman AntiTrust Act </li></ul><ul><li>Clayton Act </li></ul><ul><li>Bank Holding Company Act Amendments of 1970 </li></ul><ul><li>Magnuson-Moss Warranty Act </li></ul><ul><li>Interesting Cases: </li></ul><ul><li>Jefferson Parish Hospital District v. Hyde , 466 U.S. </li></ul><ul><li>Illinois Tool Works v. Independent Ink </li></ul><ul><li>United States v. Microsoft </li></ul>
    43. 43. <ul><li>Article 102 of the Treaty on the Functioning of the European Union </li></ul><ul><li>Section 2(d) addresses Tying </li></ul><ul><li>No “unconnected supplementary obligations” </li></ul><ul><li>Microsoft’s Windows Media Player - €497 million fine </li></ul>
    44. 44. <ul><li>Use caution when constructing bundled packages of goods and services </li></ul><ul><li>Be particularly careful if a package includes unrelated products </li></ul><ul><li>Watch out for broad discrepancies between product margin realization </li></ul><ul><li>Loss leaders are acceptable under certain circumstances </li></ul><ul><li>Generally, package solutions should not exploit market power to limit competition or consumer choice </li></ul>

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