Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Place and Development
of Channel Systems
Text © The McGraw−Hill
Companies, 2002322 Chapter 11
its troubled dealers, Acura increased its advertising, developed new models, and
worked with dealers to identify ways to earn more profit from service and used cars.^22Exclusive distribution is a vague area under U.S. antimonopoly laws. Courts cur-
rently focus on whether an exclusive distribution arrangement hurts competition.Horizontal arrangements among competitors are illegal
Horizontal arrangements—among competing retailers, wholesalers, or producers—
to limit sales by customer or territory have consistently been ruled illegal by the
U.S. Supreme Court. Courts consider such arrangements obvious collusion that
reduces competition and harms customers.Vertical arrangements may or may not be legal
The legality of vertical arrangements—between producers and middlemen—is
not as clear-cut. A 1977 Supreme Court decision (involving Sylvania and the dis-
tribution of TV sets) reversed an earlier ruling that it was always illegal to set up
vertical relationships limiting territories or customers. Now courts can weigh the
possible good effects against the possible restrictions on competition. They look at
competition between whole channels rather than just focusing on competition at
one level of distribution.
With a very small share of the overall market for television sets, Sylvania couldn’t
compete on price with bigger producers who sold through self-service stores. So Syl-
vania decided to target customers who saw TVs as a heterogeneous shopping
product. These people preferred stores that specialized in TVs, had a good selection
on hand, and provided advice before the purchase and repair service afterward. Such
retailers faced added costs to provide these services. They didn’t want customers to
inspect their TV sets, get information at their stores, and then be able to buy the
same sets somewhere else at a lower price. In other words, they didn’t want other
retailers to get a free ride on their investment in inventory and higher-paid sales
help. So Sylvania gave exclusive sales territories to dealers who cooperated with its
full-service strategy. Even though this approach tends to reduce competition at the
retail level, Sylvania argued that it needed such exclusive sales territories to com-
pete with other producers. The Supreme Court basically agreed.
The Sylvania decision does not mean that all vertical arrangements are legal.
Rather, it says that a firm has to be able to legally justify any exclusive arrangements.^23In spite of the 1977 Supreme Court ruling, firms should be extremely cautious
about entering into anyexclusive distribution arrangement. The antimonopoly rules
still apply. The courts can force a change in relationships that were expensive to
develop. And even worse, the courts can award triple damages if they rule that com-
petition has been hurt.
The same cautions apply to selective distribution. Here, however, less formal
arrangements are typical—and the possible impact on competition is more remote.
It is now more acceptable to carefully select channel members when building a
channel system. Refusing to sell to some middlemen, however, should be part of a
logical plan with long-term benefits to consumers.Channel Systems Can Be Complex
Is limiting market
exposure legal?
Caution is suggested
Trying to achieve the desired degree of market exposure can lead to complex
channels of distribution. Firms may need different channels to reach different seg-
ments of a broad product-market or to be sure they reach each segment. Sometimes
this results in competition between different channels.