978-1285428710 Section 9 SECTION 9B

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SECTION 9B – ALL’S FAIR, OR IS IT?

READING 9.4 – ADAM SMITH: AN EXCERPT FROM THE THEORY OF MORAL

SENTIMENTS

Answers and Key Discussion Items

1. We judge others by our own feelings and experience. Those are things with which we are familiar

2. We make the determination of whether someone is wrong in their behavior by what we see and know;

3. While they may congratulate us on our success, you can be sure that not all of them are sincere. The

Note for the students that Smith is quite willing to acknowledge human nature with his discussions of

CASE 9.5 – SABOTAGING YOUR EMPLOYER’S INFORMATION LISTS BEFORE

YOU LEAVE TO WORK FOR A COMPETITOR

Answers and Key Discussion Items

1. The case was based on the breach of the duty of loyalty as well as appropriation of trade secrets –

the recruiting list was a trade secret – the employees should have been placed under a restrictive

2. Probably should have had restrictive covenants in their employment agreements and had greater

control on access to the data base with leads. In the case the court held that there was a breach of

CASE 9.6 – BAD-MOUTHING THE COMPETITION: WHERE’S THE LINE?

1, “You could go with them—they do good work, but they use illegal immigrants on their jobs.” The

students should discuss issues such as whether it is true, whether it is relevant to the sales – is this a

social responsibility issue?

“Be sure to get a time frame from them before you make a decision. Sometimes they can

“You need to be careful with X Company because I have heard that they are close to

spreading such information, if not true, would be per se slander or libel (if written).

“Check the registrar of contractors at the state level – they have had all kinds of

complaints +led against them.” This encourages customers to do their own background

“The Better Business Bureau has not given them a very good rating.” Instead, tell the

customer to check with the BBB.

“I can give you a list of people they’ve done work for and I have had to go in and clean

up the mess they have made.” Again, give the names of the companies and let the

“You can go with low price, but you get what you pay for.” This is opinion and a sales

2. Have the students go back through the statements and rework them so that they would

CASE 9.7 – ONLINE PRICING DIFFERENTIALS AND CUSTOMER QUESTIONS

Answers and Key Discussion Items

1. The argument could be made that the pricing differentials open up the possibility that following this

pricing could allow a competitor to move in and compete on the basis of lower prices in certain areas

2. The prices could be material to buyers – however, it is not as if the pricing is not transparent –

CASE 9.8 – BRIGHTON COLLECTIBLES: TERMINATING DISTRIBUTORS FOR

DISCOUNTING PRICES

The following is an excerpt from the court opinion that gives insight into how the courts have determined

the answer to the legal questions here.

In Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 31 S.Ct. 376, 55 L.Ed. 502 (1911), the

Court established the rule that it is per se illegal under § 1 of the Sherman Act, 15 U.S.C. § 1, for a

manufacturer to agree with its distributor to set the minimum price the distributor can charge for the

manufacturer’s goods. The question presented by the instant case is whether the Court should overrule the

per se rule and allow resale price maintenance agreements to be judged by the rule of reason, the usual

standard applied to determine if there is a violation of § 1. The Court has abandoned the rule of per se

illegality for other vertical restraints a manufacturer imposes on its distributors. Respected economic

analysts, furthermore, conclude that vertical price restraints can have procompetitive effects. We now hold

that Dr. Miles should be overruled and that vertical price restraints are to be judged by the rule of reason

Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several States.” The rule of reason is the accepted

standard for testing whether a practice restrains trade in violation of § 1. The rule of reason does not

govern all restraints. Some types “are deemed unlawful per se.” The per se rule, treating categories of

restraints as necessarily illegal, eliminates the need to study the reasonableness of an individual restraint

in light of the real market forces at work, and, it must be acknowledged, the per se rule can give clear

guidance for certain conduct. Restraints that are per se unlawful include horizontal agreements among

competitors to fix prices, or to divide markets.

. . . [T]he per se rule is appropriate only after courts have had considerable experience with the type of

restraint at issue, and only if courts can predict with confidence that it would be invalidated in all or almost

all instances under the rule of reason.

Dr. Miles treated vertical agreements a manufacturer makes with its distributors as analogous to a horizontal

combination among competing distributors. . . . [I]t is necessary to examine, in the first instance, the

economic effects of vertical agreements to fix minimum resale prices, and to determine whether the per se

rule is nonetheless appropriate.

Though each side of the debate can find sources to support its position, it suffices to say here that

economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price

maintenance.

The justifications for vertical price restraints are similar to those for other vertical restraints. Minimum

resale price maintenance can stimulate interbrand competition—the competition among manufacturers

selling different brands of the same type of product—by reducing intrabrand competition—the competition

among retailers selling the same brand. The promotion of interbrand competition is important because “the

primary purpose of the antitrust laws is to protect [this type of] competition.” A single manufacturer’s use of

vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to

invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against

rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that

they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in

between.

Absent vertical price restraints, the retail services that enhance interbrand competition might be underprovided.

This is because discounting retailers can free ride on retailers who furnish services and then capture some of

the increased demand those services generate. Consumers might learn, for example, about the benefits of a

manufacturer’s product from a retailer that invests in fine showrooms, offers product demonstrations, or hires

and trains knowledgeable employees. Or consumers might decide to buy the product because they see it in a

retail establishment that has a reputation for selling high-quality merchandise. If the consumer can then buy

the product from a retailer that discounts because it has not spent capital providing services or developing a

quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a

level lower than consumers would otherwise prefer. Minimum resale price maintenance alleviates the problem

because it prevents the discounter from undercutting the service provider. With price competition decreased,

the manufacturer’s retailers compete among themselves over services.

Resale price maintenance, in addition, can increase interbrand competition by facilitating market entry for

new firms and brands. “[N]ew manufacturers and manufacturers entering new markets can use the

restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital

and labor that is often required in the distribution of products unknown to the consumer.”

Resale price maintenance can also increase interbrand competition by encouraging retailer services that

would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make

and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the

retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the

most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and

allowing it to use its own initiative and experience in providing valuable services While vertical agreements

setting minimum resale prices can have procompetitive justifications, they may have anticompetitive effects

in other circumstances. Vertical price restraints also “might be used to organize cartels at the retailer level.”

A group of retailers might collude to fix prices to consumers and then compel a manufacturer to aid the

unlawful arrangement with resale price maintenance. In that instance, the manufacturer does not establish

the practice to stimulate services or to promote its brand but to give inefficient retailers higher profits.

Retailers with better distribution systems and lower cost structures would be prevented from charging lower

prices by the agreement.

Resale price maintenance, furthermore, can be abused by a powerful manufacturer or retailer. A dominant

retailer, for example, might request resale price maintenance to forestall innovation in distribution that

decreases costs. A manufacturer might consider it has little choice but to accommodate the retailer’s

demands for vertical price restraints if the manufacturer believes it needs access to the retailer’s

distribution network.

Vertical agreements establishing minimum resale prices can have either procompetitive or anticompetitive

effects, depending upon the circumstances in which they are formed.

Respondent’s argument, furthermore, overlooks that, in general, the interests of manufacturers and

consumers are aligned with respect to retailer profit margins. The difference between the price a

manufacturer charges retailers and the price retailers charge consumers represents part of the

manufacturer’s cost of distribution, which, like any other cost, the manufacturer usually desires to minimize.

The retailers, not the manufacturer, gain from higher retail prices. The-manufacturer often loses; interbrand

competition reduces its competitiveness and market share because consumers will “substitute a different

brand of the same product.”

Resale price maintenance, it is true, does have economic dangers. If the rule of reason were to apply to

vertical price restraints, courts would have to be diligent in eliminating their anticompetitive uses from the

market.

Reversed.

Answers and Key Discussion Items

1. The issue of fairness enters into the ethical discussion of some discount retailers benefiting from

2. Yes, the court is concerned that if smaller stores cannot pick and choose their outlets that customer

service will go by the wayside – deep discounters do not provide staff for questions and customers

3. The customer may not realize the implications of the deep discount – this is an ethical issue that

CASE 9.9 – ELECTRONIC BOOKS AND THE AMAZON WAR

Answers and Key Discussion Items

1. The case has pitted Amazon against Apple and other device makers as well as book publishers. The

five publishers are attempting to use a rationalization for fixing prices – they believe that Amazon will

2. Amazon appears to be pricing below the market in an attempt to drive others out of the market. The

publishers recognize that it is working and the opposition is great. The irony in the case is that the

CASE 9.10 – MATTEL AND THE BRATZ DOLL

Discuss the following issues in the Mattel case:

1. Sloppy paperwork on what the employee had signed and what was contained in his exit interview

documentation – we have to be really careful to make sure all the provisions in all the employee’s

agreements are the same and can be carried through.

2. Don’t post things that are trade secrets – such as product development. You cannot protect it if you

don’t conceal it from general view.

3. Litigation is long, costly, and may not resolve the problem.

4. Competition is rugged – from the hiring of competitor’s employees to getting your employees to

infiltrate your private tradeshows.

5. Never bring a suit against a competitor unless you have clean hands – Mattel’s issues with trade

shows were brought into the suit for infringement.

6. Notice that Mattel’s copyright was not filed until 2003 – you have to file in order to bring suit for

infringement, although the copyright does exist without the actual filing.

Answers and Key Discussion Items

1. Yes, the litigation in this situation was self-destructive – the companies both lost the rights to a

See the list above for what Mattel should have done to protect itself more.