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COPYRIGHT 2005 Sloan Management Review
Antitrust laws can give managers a sobering dose of reality--even managers who believe they are obeying the laws. These days, most business-people know better than to sit down with competitors to fix prices or divide markets, and most are alert to the perils of pricing below cost until competitors fail. However, when considering core marketing issues such as distribution policy, line extensions or joint marketing agreements, or even when trying to enhance the company's "good citizen" image, they may not realize the growing likelihood of violating antitrust laws. They are especially likely to do so when their brands hold dominant market shares.
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The issue is particularly sensitive in the United States, where longtime federal statutes such as the Sherman Antitrust Act are being interpreted with economic rigor. But it applies outside the United States as well; for instance, the European Union's directives are taking a harder line with antitrust interpretations. For the purposes of this article, we will refer only to U.S. situations.
While marketing practices received increased antitrust scrutiny beginning in the late 1990s, (1) a series of events in the early 2000s has reinvigorated the legal thinking regarding marketing concerns and antitrust. There is little debate that the new emphasis is due to significant changes in business practices concerning promotion, sales and distribution. The retail sector's category management is one example: There has been a shift from each supplier having its own retailer relationship for management and stocking of its products to a practice in which the retailer may entrust one supplier with operation of an entire category of merchandise. What has spurred business interest is a series of challenges to the changed practices leading to verdicts with substantial damages awarded, most notably the Conwood case (discussed below) and its billion-dollar verdict. (2) Federal antitrust enforcement officials, in particular the U.S. Federal Trade Commission, have begun to scrutinize retail practices such as category management and slotting allowances. (3) Academics have also renewed their interest in the topic, in large part spurred by the cases mentioned above. (4) In sum, as the marketing world has changed, antitrust lawyers, scholars, enforcement officials and especially competitors affected by these changes have scrambled to understand how the new practices affect competition.
The lesson here is that the degree to which a company dominates a market may dictate the degree to which the practices in which it engages are illegal. We have chosen to underscore that principle by offering five concrete examples of marketing practices that have given rise to antitrust liability, the threat of liability or litigation resulting in settlement. The examples we have selected are usually the pivotal cases in their fields. Our goal is to bring the risks to life and suggest implications for managers' decisions. As a crucial first step, it is helpful to understand how antitrust enforcement agencies and the courts undertake analysis to decide whether particular conduct violates antitrust laws.
The Role of Dominance in Antitrust Analysis
The actions of dominant companies may spur antitrust concern based on their intent or on the effects of those actions in eliminating competitors, expanding the companies' dominance in particular markets or expanding their dominance to other markets. They may also spur such concern if they injure the interests of consumers by raising prices, limiting choices or reducing innovation. It is reasonable to ask whether such actions would be illegal regardless of company dominance (certainly, they might be), but antitrust enforcement agencies will employ a specific two-step analytical process to examine the conduct of dominant companies. First, the concentration of the relevant market will be considered. If the market is determined to be unconcentrated, then, with a few obvious exceptions, (5) the analysis will stop.
Obviously, a crucial step in the analysis is the determination of the relevant market in terms of both its geographic and product boundaries. Herein lies a danger for managers. They may believe they need not worry because they can point to a wide range of competitors, but antitrust analysis may define the market more narrowly. (See "Differing Perspectives of 'Relevant Markets'.") From an antitrust analyst's viewpoint, the primary purpose of defining markets is to determine whether the conduct in question harms or will harm competition. The lesser the degree of market concentration, (6) the greater the effect the conduct must have in order to injure markets. (7) The more concentrated the market, the more likely the injury to competition--even when the acts seem innocuous to managers.
When an antitrust enforcement agency decides that a market is concentrated, it will continue its analysis to determine the extent to which the concentration is a problem. First, its method of calculating market shares (8) recognizes the importance of differences in the relative size of the market's participants--if a market has one dominant leader, for example, smaller competitors may merely follow the behavior of that leader. (9) The crucial point is that market shares are the beginning of most antitrust analyses, and while dominance need not indicate an antitrust problem, lack of dominance in many instances is likely to preclude it.
Once dominance has been determined, antitrust analysis focuses on how a company might exercise market power. A current example is the Procter & Gamble Co.'s proposed acquisition of the Gillette Co. (10) (At press time, the acquisition was partway through the Federal Trade Commission's review process.) P & G's stated rationale for the acquisition is to increase its bargaining power with giant retailers such as Wal-Mart Stores Inc.--to become as essential to the retailers as the retailers now are to them. However, it may be determined that the combined corporation has dominance in some health and beauty aids categories and that such dominance might be enhanced by the combined companies' role as category captain, among other things. P & G's situation is by no means unique. As a vendor gains power, it may use its leverage not only against retailers but also against its smaller competitors, for example, by elevating the costs to retailers of doing business with the smaller vendors. The effects of such exclusionary conduct might include increased prices to consumers, fewer choices and reduced innovation. The purpose of the antitrust laws, and the role of the enforcement agencies, is to prevent and restrain practices that, in some cases, may lead to such consequences.
In general, the responses of federal and state antitrust agencies and private plaintiffs have lagged the marketing initiatives of the business world. But the message of the discussion presented here is that they are rapidly closing the gap,...
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