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  1. 1. Presented by: Amit Agarwal DP Bagria Mrinmoy Kanti Das Rahul Agarwal Ritesh Singh Yuganshu Pathak
  2. 2. Playmobil ---- at a glance Parent Company Geobra Brandstatter GmbH & Co. KG., Zirndorf, Germany PLAYMOBIL® subsidiaries: France Switzerland UK Austria Benelux Spain Italy USA Greece Canada Mexico Playmobil, whose parent company is Geobra Brandstatter GmbH & Co. KG., of Germany, is one of the leading specialty toy companies in the United States with annual sales of more than $18million
  4. 4. VIOLATIONS <ul><li>Over the past several years, Playmobil regularly published what it termed &quot;Suggested Retail Price Ranges&quot; for all of its products. </li></ul><ul><li>It also annually issued letters to all of its dealers setting forth a &quot;Retailer Discount Policy.&quot; </li></ul>
  5. 5. VIOLATIONS….. <ul><li>Playmobil did the following things, among others: </li></ul><ul><li>a. Established and communicated to dealers minimum resale prices for Playmobil products; </li></ul><ul><li>b. Threatened to terminate dealers for selling or advertising Playmobil products at prices below Playmobil's minimum resale prices; </li></ul><ul><li>c. Used threats of termination to secure dealers' adherence to Playmobil's minimum resale prices and to limit the duration of promotional sales by dealers; </li></ul><ul><li>d. Enforced adherence to minimum resale prices at the behest of dealers in order to stop &quot;price wars&quot; among them; and </li></ul><ul><li>e. Agreed with dealers on the retail prices for Playmobil products to be charged by the dealers. </li></ul>
  6. 6. Resale Price Maintenance <ul><li>Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). </li></ul>
  7. 7. Resale Price Maintenance <ul><li>Occurs when a manufacturer imposes lower limits on the prices retailers can charge. </li></ul><ul><li>Is often opposed because it appears to reduce competition at the retail level. </li></ul><ul><li>Yet, any market power the manufacturer has is at the wholesale level, manufacturers do not gain from restricting competition at the retail level. </li></ul><ul><li>The practice has a legitimate objective: </li></ul><ul><li>“ Preventing discount retailers from free-riding on the services provided by full-service retailers” </li></ul>
  8. 8. Market Characteristics Anticompetitive Minimum Resale Price Maintenance <ul><ul><ul><li>Higher prices </li></ul></ul></ul><ul><ul><ul><li>Imposer of restraint has market power </li></ul></ul></ul><ul><ul><ul><li>The industry is highly concentrated </li></ul></ul></ul><ul><ul><ul><li>The restraint is a widespread practice </li></ul></ul></ul><ul><ul><ul><li>The restraint is driven by retailers (as opposed to manufacturers) </li></ul></ul></ul><ul><ul><ul><li>The restraint facilitates cartel-like conduct </li></ul></ul></ul><ul><ul><ul><li>Sales of product subject to restraint would not benefit from increased services </li></ul></ul></ul><ul><ul><ul><li>Market is characterized by homogeneous product </li></ul></ul></ul>
  9. 9. Market Characteristics Pro-Competitive Minimum Resale Price Maintenance <ul><ul><ul><li>Lower prices </li></ul></ul></ul><ul><ul><ul><li>Increases consumer choice </li></ul></ul></ul><ul><ul><ul><li>Facilitates entry and/or innovation </li></ul></ul></ul><ul><ul><ul><li>Overcomes free rider problem/facilitates additional services </li></ul></ul></ul><ul><ul><ul><li>Provides prestige value </li></ul></ul></ul><ul><ul><ul><li>Facilitates demand and/or inventory stabilization </li></ul></ul></ul><ul><ul><ul><li>Increases sales of product subject to restraint </li></ul></ul></ul><ul><ul><ul><li>Market is characterized by highly differentiated products </li></ul></ul></ul><ul><ul><ul><li>Market is characterized by low barriers to entry </li></ul></ul></ul>
  10. 10. The Sherman Anti-trust Act (1890) <ul><li>The Sherman Antitrust Act was the first United States Government’s action to limit cartels and monopolies. It is the oldest of all U.S. Antitrust Laws. </li></ul><ul><li>The Sherman Act provides: &quot;Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal“. </li></ul><ul><li>The Act also provides: &quot;Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony </li></ul><ul><li>The Act was intended to prevent arrangements designed to, or which tend to, increase the cost of goods to the consumer . It was not specifically intended to prevent the dominance of an industry by a specific company </li></ul><ul><li>The law attempts to prevent the artificial raising of prices by restriction of trade or supply </li></ul>
  11. 11. Clayton Antitrust Act (1914) <ul><li>The Clayton Antitrust Act was enacted in the United States to remedy deficiencies in antitrust law created under the Sherman Antitrust Act. </li></ul><ul><li>The Clayton Act prohibits: </li></ul><ul><ul><li>Price discrimination between different purchasers if such discrimination substantially lessens competition or tends to create a monopoly in any line of commerce </li></ul></ul><ul><ul><li>Mergers and acquisitions where the effect may substantially lessen competition </li></ul></ul>
  12. 12. Per Se Rule <ul><li>In its 1911 Dr. Miles decision, the Supreme Court held that it was per se illegal price fixing for a manufacturer to dictate a product’s final price at retail. </li></ul><ul><li>Under the “per se rule,” inherently anticompetitive restraints on competition (such as price fixing) are conclusively deemed unlawful without any inquiry into their alleged reasonableness. State Oil Co. v. Khan ,522 U.S. 3 14-15 (1997). </li></ul>
  13. 13. Rule of Reason Analysis <ul><li>“ W hether minimum resale price maintenance is pro-competitive or anticompetitive. </li></ul><ul><li>For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers.” </li></ul><ul><li>Under the “rule of reason,” a court examines and balances competitive factors to determine whether a restraint on trade is “unreasonably restrictive of competitive conditions.” </li></ul><ul><li>“ Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice.” </li></ul><ul><li>Leegin , 127 S. Ct. at 2719-20. </li></ul>
  14. 14. Vertical Restraints are Generally Subject to Rule of Reason Analysis <ul><li>Ultimately, the question is </li></ul><ul><li>whether the anticompetitive effect of the vertical restraint in question substantially outweighs the procompetitive effect for which the restraint is reasonably necessary? </li></ul>
  15. 15. Vertical Restraints are Generally Subject to Rule of Reason Analysis <ul><li>Supreme Court cases confirm application of the Rule of Reason even for vertical price-based restraint claims. </li></ul><ul><li>State Oil Co. v. Khan, 552 U.S. 3 (1997) </li></ul><ul><ul><li>(holding that maximum resale price maintenance is subject to rule of reason analysis) (unanimous decision) (overruling Albrecht v. Herald Co. , 390 U.S. 145 (1968)). </li></ul></ul><ul><li>Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007) </li></ul><ul><ul><li>(holding that minimum resale price maintenance is subject to rule of reason analysis) (5-4 decision) (overruling Dr. Miles Medical Co. v. John D. Park & Sons Co . , 220 U.S. 373 (1911)). </li></ul></ul>
  16. 16. Free-riding amongst retailers <ul><li>Free-riding amongst retailers is possible, and that manufacturers may have legitimate reasons for wanting to control this type of behavior. </li></ul><ul><li>Free riding can occur when sales and service support for a product are efficiently done at the retail level, and when that effort cannot feasibly be sold separately from the product itself . In those circumstances, revenues from the sale of the product have to cover the sales and service effort. </li></ul><ul><li>Retailers that do not provide such sale and service effort find themselves in a lower cost position from retailers that do provide ancillary services. </li></ul><ul><li>In case of absence of vertical restrictions implemented by manufacturers, low-service retailers may undercut high-service retailers. </li></ul>
  17. 17. Colgate Doctrine <ul><li>In Colgate , the Supreme Court held that imposing Resale Price Maintenance (RPM) was lawful, provided that the seller did so unilaterally. While a manufacturer may not enter into an agreement with a reseller on price, “ he may announce in advance the circumstances under which he will refuse to sell ”. </li></ul><ul><li>The result, called the “ Colgate Doctrine,” meant that producers wishing to engage in RPM were required to announce the required retail price before an order was placed, and then terminate – without any discussion – any reseller who deviated. </li></ul><ul><li>Not every producer desired to reign in its sales force and risk potentially contentious relationships with customers by exercising the Colgate Doctrine, but the case provided a roadmap for firms dedicated to RPM </li></ul>
  18. 18. Economists’ defense of Playmobil <ul><li>First, they deny that it is aimed at reducing competition. To the extent that Playmobil has any market power, it can exert that power through the wholesale price, rather than through resale price maintenance. </li></ul><ul><li>Moreover, Playmobil has no incentive to discourage competition among its retailers. Because a cartel of retailers sells less than a group of competitive retailers, Playmobil would be worse off if its retailers were a cartel. </li></ul>Some economists defend resale price maintenance on two grounds: Price Quantity Demand Q Q +  Q  Q P P  P
  19. 19. Economists’ defense of Playmobil.. <ul><li>Second , economists believe that resale price maintenance has a legitimate goal. Playmobil may want its retailers to provide customers a pleasant showroom and a knowledgeable sales force. </li></ul><ul><li>Without resale price maintenance, some customers would take advantage of one store's service to learn about the special features of a product and then buy the item at a discount retailer that does not provide this service. </li></ul><ul><li>Thus discount retailers would free ride on the service provided by other retailers, leading to less service than is desirable. Resale price maintenance is one way for Playmobil to solve this free-rider problem </li></ul>
  20. 20. Outcome in Playmobil case <ul><li>Playmobil agreed to end its illegal price fixing efforts after the Department of Justice's Antitrust Division charged that the practices eliminated competition among retail stores. </li></ul><ul><li>For a period of five years, the decree would prohibit Playmobil from establishing a minimum advertised price policy that withholds advertising rebates from a dealer who advertises Playmobil products at a discount. The five year prohibition would permit Playmobil dealers to establish their pricing levels in a market free from the taint of Playmobil's illegal price coercion. </li></ul><ul><li>The settlement bars Playmobil from entering into retail price agreements with its dealers and from threatening to terminate dealers from discounting for 10 years. </li></ul>
  21. 21. Conclusion <ul><li>The example of Resale Price Maintenance illustrates an important principle: </li></ul><ul><li>Business practices that appear to reduce competition may in fact have legitimate purposes. This principle makes the application of the antitrust laws all the more difficult. </li></ul><ul><li>The economists, lawyers, and judges in charge of enforcing these laws must determine what kinds of behavior public policy should prohibit as impeding competition and reducing economic well-being. Often that job is not easy. </li></ul>