Download The antitrust implications of relationship marketing

Journal of Business Research 57 (2004) 1211 – 1221
The antitrust implications of relationship marketing
Renée J. Fontenot a,*, Michael R. Hymanb,1
a
Department of Marketing, School of Business, The University of Texas of the Permian Basin, 4901 East University, MB 286, Odessa, TX 79762-0001, USA
b
Department of Marketing, College of Business Administration and Economics, New Mexico State University, Box 30001, Dept. 5280,
Las Cruces, NM 88003-8001, USA
Abstract
By definition, firms engaged in relationship marketing favor one another, which can be desirable because it promotes advantageous
strategic and competitive positioning. However, antitrust legislation mandates that firms avoid favored treatment of trading partners if it
adversely affects competition or excessively affects the free flow of goods and services to consumers—potentially an unintended
consequence of relationship marketing. Therefore, a firm’s commitment to the marketing concept may diminish if strengthening channel
relations reduce competition and possibly customer benefits. To anticipate future antitrust problems induced by relationship marketing, public
policy makers and scholars should scrutinize new-market-dominating mergers, business-to-business online exchanges, tying agreements, and
price discrimination.
D 2002 Elsevier Inc. All rights reserved.
Keywords: Antitrust; Relationship marketing; Business-to-business; Collaboration
1. Introduction
To enhance their competitiveness, firms increasingly
forge long-term relationships with strategic partners. Such
efforts are supported by a substantial marketing literature on
long-term relationships within buyer – seller channel alliances (Anderson and Narus, 1984; Boyle and Dwyer,
1995; Bucklin and Sengupta, 1993; Day, 2000; Dwyer et
al., 1987; Ganesan, 1994; Macneil, 1980; Mohr and Spekman, 1994; Morgan and Hunt, 1994; Varadarajan and
Rajaratnam, 1986; Wilson, 1995; Zaheer and Venkatraman,
1995). This literature focuses on the development, enhancement, and maintenance of enduring relationships among
exchange partners.
Exchange relationships built upon mutual dependence
can help firms to achieve their objectives (Buchanan, 1992;
James, 2000). Channel members that collaborate can be
more responsive and proactive in meeting their customers’
demands (Eqos Systems, 2000). Through favored treatment
of key partners, such relationships can conduce firms to
lower customers’ costs, increase product quality, and
*
Corresponding author. Tel.: +1-915-552-2170; fax: +1-915-552-2174.
E-mail addresses: fontenot _ [email protected] (R.J. Fontenot),
[email protected] (M.R. Hyman).
1
Tel.: +1-505-646-5238; fax: +1-505-646-1498.
0148-2963/$ – see front matter D 2002 Elsevier Inc. All rights reserved.
doi:10.1016/S0148-2963(02)00454-X
increase customers’ satisfaction, while reducing expenses,
achieving economies of scale, gaining access to markets
and/or technical information, and creating barriers to entry
(Dwyer et al., 1987; Gundlach and Murphy, 1993). Thus,
the extant research supports what seems intuitive to many
marketing scholars and practitioners—building relationships
with key channel members’ benefits collaborating firms.
Because a firm cannot build close relationships with all
its suppliers and customers, it will often try to collaborate
extensively with a few of them (MacDonald, 1995). Relationship marketing has been widely promoted, and empirically supported, as a means of promoting collaborative
business-to-business efforts (Morgan and Hunt, 1994;
Anderson and Narus, 1990; Kalwani and Naravandas,
1995; Gundlach et al., 1995; Mohr and Spekman, 1994).
Rarely, if ever, is such promotion of relationship marketing
tempered with a cautionary note regarding antitrust implications. If such relationships limit competition substantially
or discriminate among different classes of distributors, then
they may violate antitrust statutes—an unintended consequence. To explore relationship marketing from an antitrust perspective, the exposition proceeds as follows. First,
the three foundational US antitrust acts—the Sherman
Antitrust Act of 1890, the Clayton Act of 1914, and the
Robinson – Patman Act of 1936—and the basics of relationship marketing are discussed selectively. Second, potential
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conflicts between antitrust legislation and relationship marketing activities are illustrated. Finally, a few ways for firms
to avoid these conflicts are broached.
2. Brief overview of antitrust legislation
Through antitrust legislation, governments ensure interfirm competition without otherwise interfering with pricing
or output decisions. Specifically, the objectives of antitrust
legislation are twofold:
to ensure competition sufficient for low-priced yet highquality products; and
to ensure a level playing field for competitors (Klein,
1999).
Under US antitrust laws, illegal business practices must
have the potential to, or be proven to, affect competition
adversely, such as when competition is limited or impeded
by the joint actions of two or more firms, or when competitors act in a suspiciously uniform manner. Clearly, such
practices are limited to industries with high concentration
ratios (i.e., industries in which a handful of competitors
makes the lion’s share of sales).
Antitrust legislation includes those acts designed ‘‘to
protect trade and commerce against unlawful restraints and
monopolies’’ (US Code, 2000). The major federal antitrust
acts in the US are the Sherman Antitrust Act of 1890, the
Clayton Act of 1914, the Robinson –Patman Act of 1936,
and the Federal Trade Commission (FTC) Act of 1914
(Antitrust Organization, 2000; Brobeck et al., 1999; Gleim,
2000; Mueller, 1996; Pitofsky, 2000). These acts, often in
combination, serve as the standard for establishing most
antitrust violations.
The Sherman Act, the first US Federal antitrust law
(Pitofsky, 2000), set the foundation for prohibiting antitrust
behaviors that restrain trade or commerce (Antitrust Organization, 1994; Klein, 1999). This sweeping act is the main
source of US antitrust law; subsequent acts only expanded
its scope (Antitrust Organization, 2000; Legal Information
Institute, 2000). The Clayton Act permitted US courts to
address anticompetitive behaviors at inception (Antitrust
Organization, 2000). The Robinson – Patman Act, which
amends Section 2 of the Clayton Act, prohibits price
discrimination between purchasers of goods of ‘‘like grade
and quality’’ (Brobeck et al., 1999). Violations of the Sherman Act can result in criminal felonies, whereas violations
of the Clayton, FTC, or Robinson – Patman Acts are civil
offenses that carry no criminal penalties (Klein, 1999).
Nonetheless, firms found guilty of antitrust violations in
the US Federal courts may be assessed treble damages
(Gleim, 2000; Mueller, 1996).
The Robinson– Patman Act, Clayton Act, and Sherman
Act circumscribe various activities that may, as a consequence, limit the competitiveness of firms. These acts
are complementary; likewise, the tests of illegality under
each act are complementary (US Code, 2000). Thus, firms
can be prosecuted simultaneously under multiple acts and
the charges need not be independent. (Readers who require
more background about these acts should see Appendix A.)
Other Western countries have antitrust governing rules
that encompass many of the same ideas as the US Antitrust
Acts. The Competition Act of Canada promotes and maintains fair competition so consumers can benefit from lower
prices, product choice, and quality services (Competition
Bureau, 2001). Article 82 of the European Economic
Community Treaty, similar to Section 2 of the Sherman
Act, prohibits abuse of a dominant market position within
the European Common Market (Berry, 2001). Australia’s
Trade Practices Act of 1974 is considered a comprehensive
antitrust regime based upon previous domestic experience
and, in part, on US antitrust laws (Berry, 2001). New
Zealand’s Commerce Act of 1986 is based on Australia’s
Trade Practices Act of 1974 (Berry, 2001). Therefore, the
topic of this paper has implications in a broad international
context.
3. Relationship marketing
Relationship marketing focuses on attracting, maintaining, and enhancing relationships between firms (Dwyer et
al., 1987). Under this framework, exchange partners singularly and jointly benefit from acting concordant with their
respective interests (Webster, 1992). Relational exchanges
and enduring sets of transactions are preferred to discrete
transactions and short duration interactions (Varadarajan
and Rajaratnam, 1986) because the former can enhance
firms’ competitiveness. Firms engaged in relationship marketing value and maintain relationships with their exchange
partners because of the superior outcomes derived from
purposeful cooperation (Gundlach and Murphy, 1993; Moorman et al., 1992).
Relationship marketing encourages firms to develop a
strategic competitive advantage (Aaker, 1998) by:
1. fostering intense, difficult-to-duplicate marketing relationships with key trading partners (Buchanan, 1992;
Day, 2000);
2. vertically integrating, even to the point of creating
exclusive dealing or sole-source relationships (Weitz and
Jap, 1995); and
3. collaborating with competitors (Hamel et al., 1989).
By focusing their efforts on several key trading partners,
firms can reduce transaction expenses (Anderson and Weitz,
1986; Kalwani and Naravandas, 1995), increase the quality
of goods, lower costs to customers, increase customer
satisfaction (Kalwani and Naravandas, 1995), access markets and/or technical information that leverages complementary strengths and achieves economies of scale (Wilson
R.J. Fontenot, M.R. Hyman / Journal of Business Research 57 (2004) 1211–1221
and Moller, 1992), absorb new knowledge, transform core
competencies, and change the bases of competition (Osland
and Yaprak, 1995). Relationship marketing seems strategically sound for many firms because these outcomes often
lead to sustainable competitive advantages (Aaker, 1998).
In addition to financial rewards, relationship marketing
assumes that exchange partners may experience personal,
noneconomic benefits and engage in social exchange (MacNeil, 1980). As a result, empirical studies on relationship
marketing also study the effect of noneconomic variables—
such as commitment, trust, communication, cooperation,
interdependence, and power—on firm performance, perceived effectiveness, and relationship outcome (Anderson
and Narus, 1990; Boyle and Dwyer, 1995; Bucklin and
Sengupta, 1993; Fontenot and Wilson, 1997; Ganesan,
1994; Mohr and Spekman, 1994; Morgan and Hunt, 1994;
Wilson, 1995).
Commitment and trust are the central variables in most
relationship marketing models (Fontenot and Wilson, 1997).
Generally considered a firm’s resolve to perform an activity
as promised, commitment derives from a firm’s ‘‘enduring
desire to maintain a valued relationship’’ (Moorman et al.,
1992, p. 316). Firms commit to one another only when the
relationship is considered important (Morgan and Hunt,
1994).
Trust in relationship marketing encourages firms to wave
formal contractual agreements. Trust is Firm A’s belief that
(1) Firm B will perform promised actions that yield positive
outcomes for Firm A, and (2) Firm B will not ordinarily take
unexpected actions that yield negative outcomes for Firm A
(Anderson and Narus, 1990; Doney and Cannon, 1997). In a
relationship, it reduces the risks of interdependency and is
related to uncertainty level, adequacy of information for
making decisions, predictability of decision consequences,
and decision confidence (Mayer et al., 1995; Morgan and
Hunt, 1994; Zaheer and Venkatraman, 1995).
Commitment and trust in marketing relationships encourage marketers to preserve relationship investments (Morgan
and Hunt, 1994). By deterring ex ante and ex post opportunism, and hence reducing transaction acts, trust and
commitment allow marketers to view high-risk actions as
prudent (Morgan and Hunt, 1994). Opportunistic behaviors
reduce the trust and commitment that make established
partnerships preferable to myopic, and temporarily more
profitable, alternatives.
With the benefits of commitment and trust come liabilities, e.g., when manufacturers negotiate tying contracts or
requirements agreements with their distributors (Gundlach
et al., 1995). Commitment is often manipulated by demanding high mutual investment, by involving relationshipspecific assets, or by other means of collateralizing significant economic resources (Sollner, 1999). Such commitments
may lead firms to protect those investments in ways that
unfairly limit competition.
Trusting firms favor relationship-specific investments
involving financial, physical, organizational, and informa-
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tional resources (Heide and John, 1988; Hunt and Morgan,
1995; Smith and Barclay, 1995). Assuming such investments and finite resources, trusting firms should reduce their
interactions with other firms and focus on furthering their
existing relationships and safeguarding their expenditures.
In doing so, their actions may unintentionally restrict trade
with competing firms, thereby posing antitrust threats.
Thus, the goal of relationship marketing is to form
mutually beneficial alliances that must restrict trade among
rivals by creating barriers to entry (Goldberg, 1979; Williamson, 1979). If such dealings are coercive, restrict
competition, or inhibit innovation, they may violate various
antitrust statutes even if they result from a committed
exchange relationship, a vertical integration, or collaboration with competitors. Consequently, stakeholders such as
employees, customers, communities, channel members,
competitors, and governments may be harmed.
4. Problematic antitrust behaviors
Colluding on prices (Sherman Act), entering into mergers
or other relationships that may lessen competition substantially (Clayton Act), or engaging in activities that unduly
restrain competition (Sherman Act), whether through relationship marketing activities or otherwise, is illegal. Some
outcomes propounded as benefits of relationship marketing,
such as creating barriers to entry, lowering costs, and
restraining trade among rivals, may violate antitrust strictures when large firms are involved.
If relationship marketing promotes efficiency, productivity, and effectiveness, then business practice may improve.
For small, independent, privately owned firms, relationship
marketing is a viable and valuable approach to long-term
success. Small firms in a relationship generally cannot pose
an antitrust threat because they cannot sufficiently restrict
competition (Brobeck et al., 1999). Although antitrust laws
apply equally to corporations, partnerships, sole proprietorships, individuals, trade associations, professionals, and
nonprofit organizations (Pitofsky, 2000), small firms rarely
have the resources or power to restrict trade or limit
competition substantially. In contrast, marketing relationships between large firms pose a more eminent antitrust
threat because they have such resources or power, especially
in oligopolistic industries (e.g., automobile manufacturers)
(Edgerton, 1957).
For example, the marketing relationship between Microsoft and Intel is so close that the term ‘Wintel’ was coined.
The term describes the combination of an Intel-made CPU
with a Microsoft Windows operating system (Webopedia,
2000). The so-called Wintel monopoly (Cooper, 1999)
created a de facto yet proprietary industry standard—PCs
running Microsoft operating systems optimized for Intel
microprocessors—by which both companies could stifle
software and hardware competition (Reinhardt, 1996).
Microsoft used Windows to overpower competing operating
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systems like DR-DOS (from Digital Research and later
Novell) (Spaulding, 2000), OS/2 (from IBM), and Pink
(from Taligent, a joint venture by IBM, Apple, and Hewlett
Packard) (Cotter and Potel, 1995). From the secure competitive position provided by a de facto standard operating
system, Microsoft could also overpower competing business
applications like Quattro Pro (versus Excel) or Wordstar and
WordPerfect (versus Word) (Liebowitz and Margolis, 1999).
Concurrently, Intel surmounted microprocessor competitors like Advanced Micro Devices, Cyrix, and Motorola
(Savage, 1999). The Intel Inside advertising campaign was
meant to induce the same FUD (fear, uncertainty, and doubt)
about alternative suppliers that IBM induced in an earlier
generation of computer buyers (as per the long-lived maxim
‘‘No one was ever fired for buying IBM’’) (Shnier, 1996).
Thus, PC makers, fearful that building PCs with alternative
microprocessors or operating systems would incite Wintel to
punish them by restricting supply or raising prices (Sager et
al., 1996), often ignored such alternatives to the detriment of
consumers.
Once PCs not preloaded with a Windows 3.1, 95, or 98
operating system and compatible office software (e.g., Word,
Excel) became noncompetitive, Microsoft could dominate
price negotiations with PC makers. Large and loyal makers
were charged favorable prices. For example, Compaq and
Dell, with whom Microsoft has inveterate and profitable
relationships, paid less than IBM because IBM refused to
abandon OS/2 (France et al., 1999). By such actions, Microsoft deterred IBM from growing market share for OS/2
(France et al., 1999).
Microsoft used its quasi-monopoly in operating systems
(Shiver and Hiltzik, 2000) to dictate its relationships with
vendors (Jackson, 2000). For example, content providers
wanting a position on Window’s Active Desktop (i.e., a
shortcut icon linked to either an application or a URL) were
limited to 1-year agreements with Microsoft and forbidden
from entering into agreements with computer platform
competitors like Sun or Netscape (Harris, 1998). Thus,
Microsoft used subterfuge and barter to coerce vendors into
compliance (Jackson, 2000), resulting in consumer choice
reduction.
2000). Large firms that dominate a market as a result of
natural business success from growth, a superior product, or
business acumen are not automatically guilty of monopolization under Section 2 (US Code, 2000). However, if a
monopoly is willfully acquired through collaboration
between channel members, as might occur in relationship
marketing, then the firm with monopoly power has violated
Section 2. For example, consider the proposed merger
between Time Warner and America Online (AOL). Because
local cable companies have historically been monopolies
and Time Warner owns the cable television systems that
supply roughly 20% of US households (Hargreaves et al.,
2000), both the FTC and competing Internet service providers (ISPs) are concerned about equal access to these
newly opened high-speed Internet pipelines (Associated
Press, 2000). AOL’s 90 million subscribers make it the
dominant ISP; in contrast, Microsoft’s MSN.com service is
second with only 17 million subscribers (Carney and Yang,
2000). Although AOL has agreed to provide equal access to
all ISPs (Hargreaves et al., 2000), without a dissent degree,
these promises are nonbinding; thus, the FTC is resisting
approval of the merger until formal agreements are reached.
The FTC has blocked similar mergers that threatened to
create monopolistic power as defined by the Sherman and
Clayton acts. One concern about the AOL –Time Warner
merger is that the resulting firm will have a huge first mover
advantage over competing ISP and content providers (Hargreaves et al., 2000). First movers often set the industry
standard and use their initial financial returns to perpetuate
technological advances that foster long-term survival
(Aaker, 1998; Klepper and Simons, 2000). For the combined AOL – Time Warner, the cost advantage should snowball as it attracts new clients to its portals, which will
increase traffic, attract more clients, ad infinitum. Furthermore, the long-term competitiveness of many current competitors may depend upon their merging into four or five
firms of sufficient size, which would create an oligopoly
that could reduce consumer choice (Hargreaves et al.,
2000).
4.1. New-market-dominating mergers
The Internet has created a new domain for antitrust
activity. Among the FTC’s latest concerns are business-tobusiness online exchanges (Burt and Hicks, 2000). By
providing trading partners with real-time information about
product availability and prices (Glasner, 2000), these
exchanges can increase order speed and efficiency. The
exchange of information between competitors violates Section 1 of the Sherman Act per se if that information leads to
an understanding between competitors or parallel actions by
competitors such that trade is restricted or competition is
lessened (Brobeck et al., 1999).
Although online cooperatives can benefit from competing firms of all sizes, the antitrust implications are especially
pertinent to large firms. If the dominant firms in an industry
Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies that restrain trade or commerce
(US Code, 2000). Joint actions that unreasonably restrain
trade by purpose or effect are violations (Antitrust Organization, 1994). For example, Archer Daniel Midland violated Section 1 when it restricted trade by conspiring with
competitors to fix the prices and allocations of lysine and
citric acid (Castillo, 1996).
Section 2 of the Sherman Act prohibits monopolization,
attempts to monopolize, and conspiracies to monopolize
(US Code, 2000). Monopolization requires possession of
market power and some misuse of that power (US Code,
4.2. Business-to-business online exchanges
R.J. Fontenot, M.R. Hyman / Journal of Business Research 57 (2004) 1211–1221
form an online exchange, then antitrust concerns require that
exchange to benefit all possible participants (Glasner, 2000).
The FTC is undecided about how to regulate these new
exchanges.
Online exchanges have come under FTC scrutiny because they require extensive sharing of information about
pricing, joint buying, and selling (Burt, 2000; Burt and
Hicks, 2000). One example of such an exchange is MyAircraft, which claims to be ‘‘uniquely positioned to provide
maximum value to companies in the aerospace industry’’
(MyAircraft, 2000). Launched in early 2000, MyAircraft is
an aircraft parts exchange cooperative among Honeywell
International, United Technologies, BF Goodrich, and i2
Technologies. This cooperative provides one-stop shopping
for aerospace products and services as well as supply
management expertise. In this latter regard, cooperative
members have access to previously unavailable information
about other aerospace firms—such as scheduling, projects,
pricing, buying, and sourcing—that could create an unfair
advantage. The FTC has yet to decide whether the combined
economic power of this cooperative poses an antitrust threat.
Another recently attempted collaborative effort among
competitors is Covisint, an online exchange through which
automakers can pool their efforts to buy materials, parts, and
services, thereby increasing their purchase leverage while
decreasing their costs (Fisher, 2000; Hicks, 2000a). Initially
conceived by General Motors, Ford, and Daimler Chrysler,
Covisint now includes Renault SA, Nissan, Toyota, Delphi
Automotive Systems, Dana, and others (Tellez, 2000). Experts predict that US automakers will spend roughly US$240
billion annually through Covisint (Ramirez, 2000). The
antitrust threat, relative to the Robinson –Patman Act, is that
cooperative members can charge other members less than
they can charge nonmembers for goods of like grade and
quality. Nonetheless, this proposed exchange should win
FTC approval if its founders can preclude coercive, lowprice agreements with suppliers (Volpe, 2000).
1215
ensure that stakeholders—in this case competitors and
customers—are unharmed.
The Clayton Act prohibits the sale of goods on the
‘‘condition, agreement, or understanding’’ that the lessee
or purchaser will not use or deal in the goods of a competitor if there is a substantial anticompetitive effect (US
Code, 2000). As under Section 1 of the Sherman Act, this
agreement need not be formal or expressed. Trust in relationship marketing implies that an agreement, written or
verbal, can be believed (Lindskold, 1978). Trust also
reflects the extent to which a firm safeguards the welfare
of a trading partner; limiting competition is one way to
safeguard this welfare (Aaker, 1998). Such acts of trust may
violate the Clayton Act to the extent that competition is
substantially restrained. For example, Telectron, a manufacturer of radio controls, accused Overhead Door, a competitor that acquired Advance Industries in 1971, of violating
Section 3 of the Clayton Act by coercing its distributors to
buy Advance controls rather than Telectron controls (Marcus, 1987). The US District Court of Minnesota, Fourth
Division, found Overhead Door guilty of using coercion
to tie the purchase of one of its products to the purchase
of another of its products (Marcus, 1987). The court ordered
Overhead Door to pay Telectron US$1,081,209.00 in
damages.
Generally, Section 3 violations of the Clayton Act are
difficult to prove because prosecutors must show that (1) the
defendant made a sale on the condition that the buyer will
not deal in the goods of the sellers’ competitors; (2) the
contract has the effect of substantially lessening competition
in the relevant market; and (3) the plaintiff was injured in its
business or property as a result of the defendant’s actions
(US Code, 2000). Although numerous Section 3 violations
have been claimed, the courts have substantiated few of
them because all three conditions are rarely shown. For
example, defendants often fail to show that competition was
substantially lessened in a given market (see Glasser, 1996;
Wanger, 1995).
4.3. Tying agreements
4.4. Price discrimination
Tying agreements represent a commitment that manufacturers frequently make to independent sales agents, distributors’ representatives, wholesales, retailers, and other
manufacturers. If refusing to sell to others significantly
lessens or even eliminates competition, then the commitment between the manufacturer and the sales agent or
representative violates the Clayton Act. Furthermore, this
type of contract hurts stakeholders such as customers
because it limits their choices.
In collaborative channel relationships, a firm can gain
control of one market by tying its product in that market to a
dominant product in another market and then selling the
joint product at a single price (Belloni, 1979). A successful
tying agreement might involve joint marketing and distribution by firms that offer complementary, yet nonsubstitutable, goods. Marketers engaged in tying programs should
Both the Clayton Act and the Robinson –Patman Act
prohibit activities between trading partners that reduce
competition. Price differentials may be justified, under the
Robinson – Patman Act, when differences in the cost of
manufacture, sale, or delivery result from differing methods
or quantities in which products are sold or delivered
(Brobeck et al., 1999; US Code, 2000).
Offering different promotions or pricing schedules to
indirectly competing customers, such as stores in different
geographical regions or customers with vastly different
assortments (e.g., a hardware store versus a supermarket),
does not violate the Robinson – Patman Act, nor does
varying prices or promotions across customers to match
competitors in a given market or to accommodate regionspecific market factors (Person, 1999). Violations of the
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Robinson –Patman Act require a nonuniform offer to all
customers in the same markets and arise when cost savings
are arbitrarily passed along without clear indications of
intercustomer differences (US Code, 2000).
In a price discrimination challenge under the Robinson –
Patman Act, Taylor Publishing accused Jostens, the market
leader in scholastic yearbooks, of sham pricing (Brown,
1999). Specifically, Taylor Publishing accused Jostens of
winning yearbook accounts by first offering customers a
low-cost, bare bones product and then—having won their
trust and commitment—convincing the client to upgrade
their order with additional, high-profit-margin features.
Jostens’ allegedly trained their sales representatives in this
sales tactic. Students—the ultimate customers and one
stakeholder group—suffered from this misuse of a marketing relationship.
In the largest Robinson – Patman Act settlement, Penguin
Books was found guilty of granting special pricing considerations to large chain bookstores (e.g., Barnes and Noble)
but not to independent booksellers (Madison, 1997). Large
publishers (e.g., Viking and Random House) had previously
been found guilty of price discrimination and ordered to
change their anticompetitive practices. Penguin Books
wanted to maintain its special relationships with large chain
bookstores because the publisher is expanding 16 times
faster than book retailers are in general (Madison, 1997). No
longer able to favor these chains as it had previously,
Penguin Books replaced its old unacceptable practices with
a new practice—instead of giving direct discounts to these
large chains, it simply asked for a partial payment of
roughly 80% on invoices. This new practice hurt the small
and independent booksellers that could not compete on price
against the larger chains.
Committing a national seller to specific local distributors
may discourage the seller from selling or distributing its
products to other local distributors. For example, manufacturers often rely on exclusive distributors or protected sales
territories. These types of agreements, or tying contracts,
violate antitrust if they deny competitors free access to the
tied product market.
5. Discussion
Although relationship marketing is touted as a strategically advantageous practice, some limitations pertain. Firms
must be cautious because relationship marketing may
encourage antitrust actions. The risks are less for small,
privately owned firms and may be more acceptable to their
stakeholders, but for large or publicly held firms, relationship marketing may lessen competitive activities to an
illegal degree. Given that antitrust violators can incur
substantial penalties, the interests of stakeholders may
mitigate the attractiveness and viability of relationship
marketing for such firms. Table 1 summarizes the three
foundational US antitrust laws, the relationship marketing
activities that may prove problematic, and general signs that
suggest antitrust violations.
Firms risk civil and/or criminal prosecution when they
engage in price fixing or in relationship marketing activities
that restrict rivals’ activities. Antitrust litigation is costly and
can divert resources otherwise available to improve firms’
competitive positions; firms may incur ponderous expenses
until litigation is resolved even if later found innocent.
Additionally, the adverse publicity concomitant with antitrust suits may reduce firms’ customer loyalty or tarnish their
reputations, which in turn hurts stakeholders by reducing
shareholder equity, employee earnings (via layoff, suspensions, and salary cuts), and revenue to host communities.
Firms that develop an intense marketing relationship
should consider their joint actions’ potential to encourage
or restrict competition (Glasner, 2000). These firms should
conduct an antitrust audit to review problematic areas such
as intercustomer variation in pricing, policies for selecting
trading partners, policies for excluding a class of buyers or
sellers, and deteriorating competitive conditions to preclude
questionable activities and accompanying FTC scrutiny
(Brobeck et al., 1999). Such self—but not do-it-yourself—
regulation could be performed by an outside organization,
such as Ernst and Young or Arthur Andersen LLP, which
would first define standards and then conduct an independent review (Hicks, 2000b).
Beyond the use of an external agency to perform an
antitrust audit, the outcome is contingent upon the thoroughness and accuracy of the information provided. An audit can
reveal unsuspected antitrust threats and clarify potential
antitrust behaviors. The initial step of an audit would define
the potential antitrust violations relevant to the focal organization. In the information-gathering stage, the company
would clearly define the market(s) in which they compete as
well as the number and relative market share of competitors.
Sales contracts, selling relationships, and selling formats are
articulated in detail along with all pricing schedules (written
or verbalized). These elements are the starting point for an
antitrust audit.
The second step examines the various areas to which the
company might be at risk of an antitrust violation. Identifying
potential violations of the Sherman, Clayton, and Robinson–
Patman Acts begin differently. Potential Sherman Act violation identification begins with examining the degree to which
the company monopolizes any market within which they
compete, or the degree to which the company’s relationships
with trading partners unreasonably or unnecessarily restrains
trade. Potential Clayton Act violation identification begins by
examining the conditions or the degree of pressure, if any, the
company places on trading partners regarding the products
they sell and buy. Potential Robinson– Patman Act violation
identification begins with examining the pricing policies of
the company. A small firm in a highly competitive market
would clearly not represent a monopoly threat and would be
able to summarily sidestep continuing the audit process as it
pertains to Sherman Act violations.
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Table 1
Summary of key antitrust legislation
Act
Summary
Example of problematic
relationship marketing behaviors
US Department of Justice:
warning signs of problematic actions
Sherman
Antitrust
Act
Section 1
Main provision prohibits any joint
actions that restrain trade.
Prohibits joint actions by
two or more companies
that unreasonably or
unnecessarily restrain trade.
Relationship marketing depends on mutual
trust between trading partners, which allows
waiving of formal contractual negotiations.
Under this section, an agreement need not be
formal or expressed; it may be inferred from
any dealing between buyer and seller.
. Bidders seem to win
bids on a fixed rotation.
. Unusual and unexplainable
large dollar difference between the
winning bid and all other bids.
Section 2
Prohibits any act of
monopolization or attempted
monopolization of any market.
To streamline channel functions and to reduce
costs associated with duplicate relations, firms
in partnering relationships cultivate one or
several key trading partners. In other words,
firms restrictively align themselves with immediate
channel members, which excludes competitors.
Because these trading partners account for a major
portion of sales or profits, the risk of losing those
partners is high, which keeps firms loyal.
Thus, close and mutually dependent relationships
with channel members act as a barrier to entry.
. Competitors submit
identical bids.
. Same company—repeatedly the
low bidder—awarded contracts
for a certain service or in
a particular area.
. Fewer competitors than normal
submit bids on a project.
Clayton
Act
Section 3
Enacted in 1914 to clarify and
strengthen the Sherman Antitrust Act.
Prohibits the sale of a company’s
products on the condition that the
customer not deal in competitive products,
where the effect is to substantially lessen
competition or tends to create a monopoly.
One trading partner may pressure (or require)
another trading partner to purchase most or all
of a needed product component from it
(i.e., a ‘‘requirements’’ contract). Cherry picking is
avoided by having the sale of some items contingent
upon the sale of other items (i.e., a ‘‘tying agreement’’).
. Buyers are excluded from freely
choosing a vendor because of
exclusive agreements between
competitors and distributors.
Robinson –
Patman
Act
A 1936 amendment to the Clayton Act,
primarily motivated by concern over
chain stores.
Prohibits price discrimination between
purchasers of goods of like grade and
quality.
To further a lucrative, long-term relationship between
a major wholesaler and a chain store, the wholesaler
may offer price incentives to the chain store that are
unavailable to small, independent retailers.
. Any evidence that two sellers of
similar products agreed to price
their products a certain way.
. The same bidder bids substantially
higher on some bids than on others,
yet with no cost reason to explain
the difference.
. Large price changes involving
more than one seller of similar
products, particularly if price
changes of equal amount and occur
at the same time.
The third step in an antitrust audit involves an analysis of
the information gathered in light of the potential violations.
From the analysis, a strategic summary and action plan can be
developed. As with any audit, the company officers should be
briefed and individuals should be assigned the responsibility
for following through on the action plan. The final step sets
up a system for feedback and checking progress.
Traben and Partners (2001), a management consulting
firm, recommends that businesses conduct an audit when
there is a significant change or anticipated change in an
organization. Such times include when an organization plans
reorganization, the management changes, a company experiences difficulty achieving its goals, and a firm enters a new
market. Such audits can serve as an early warning to the
company before changes that might lead to violations.
Another way to avoid antitrust violations is to involve the
FTC during the early planning stages of any activity that
might cause a firm to dominate a market or to gain
monopoly power. In general, the FTC is unconcerned about
partnerships among firms with less than 20% market share
(Hicks, 2000a) because their potential to impact the market
is minimal. Partnerships that exceed a 20% share can take
several proactive steps to avoid antitrust violations. For
example, in forming online cooperative exchanges, channel
members can:
1. hire an antitrust attorney,
2. hire outside executives to head the new entity;
3. develop policies and guidelines that limit competitors’
access to product and pricing information;
1218
R.J. Fontenot, M.R. Hyman / Journal of Business Research 57 (2004) 1211–1221
4. train employees on how to secure competitive information properly;
5. open the exchange to all buyers and sellers in the market;
and
6. cultivate a procompetitive image (Glasner, 2000; Hicks,
2000a).
Enforcement of antitrust legislation in the US presents
several conundrums for businesses engaging in relationship
marketing. Though the acts have been amended through the
years, many situations facing business today could not have
been predicted when the acts were written. This means that, in
some situations, ascertaining if a company is violating antitrust laws because of its novel situation may be difficult.
Antitrust laws have not been consistently enforced or even
interpreted similarly across different situation through time
because of US economic and political environments.
Several caveats are present as a result of recent political
changes and technological advances. For example, the FTC is
broadening its focus significantly to include more global
antitrust issues because of the 1993 enactment of the North
American Free Trade Agreement (NAFTA) among the US,
Canada, and Mexico (Swindle, 1998). In addition, the FTC is
uncertain on how to judge issues of antitrust, specifically
mergers and collaborations, among high-tech firms. Rapid
technological advancements make it very difficult to predict
whether these mergers are likely to cause anticompetitive
effects as rapid change and growth reduce the possibility that
the collaboration could exercise market power (Swindle,
1999). These are among the challenges businesses will
continue to encounter in the future.
5.1. Directions for future research
Future research programs should include in-depth case
studies about the types of firms and relationship marketing
activities that lead to antitrust violations. One primary
source for firms and activities is current FTC or US
Department of Justice cases. Another timely research program could focus on antitrust and e-commerce. When
antitrust laws were first penned, the Internet did not exist.
Clearly, the new concerns posed by e-commerce could
instigate the FTC to revise current antitrust legislation.
Acknowledgements
The authors thank Dr. Jerry Hampton for suggesting this
issue.
Appendix A. US antitrust acts
A.1. Sherman Antitrust Act
The Sherman Act provides criminal sanctions and civil
penalties against parties involved in antitrust activities.
Section 1 prohibits every contract, combination, or conspiracy, among parties—competitors, distributors, retailers, and/
or customers—that unreasonably or unnecessarily restrains
trade (US Code, 2000). Unacceptable working agreements
need not be written contracts; mere understandings, which
may be inferred from similar actions by competitors (horizontal agreements) or between manufacturers, distributors,
and retailers (vertical agreements), are sufficient (Anonymous, 1919). Because agreements may be inferred from
parallel actions undertaken after innocent communications
between agents, firms should avoid even the appearance of
understandings with other firms (Bue, 1972). In contrast,
working together is legal unless it unfairly restricts trade
(Anonymous, 1925); similarly, if two firms act likewise as a
result of market conditions, such actions are legal (Brobeck
et al., 1999).
Firms that individually or jointly try to monopolize
markets violate Section 2 of the Sherman Act. Generally,
a greater than 50% market share, the possession of
market power, or some misuse of market power is
necessary before a question of monopolization arises
(Boyle, 1980). Most Section 2 violations result from
misuses or abuses of economic power fostered by large
size, financial resources, or patent position (Van Graafeiland et al., 1980). An unfortunate consequence of
increased market share and the resulting power is the
potential for abuse in even ordinary business practices
(Brobeck et al., 1999). Section 2 violations are joint
actions that effect or are meant to affect an unreasonable
restraint of trade (US Code, 2000). For example, monopolization is ruled when firms embrace opportunities that
preclude other firms from embracing the same opportunities.
A.2. Clayton Act
The Clayton Act prohibits practices not expressly covered by the general language of the Sherman Act. Unlike the
Sherman Act, it restricts practices that the courts deemed
beyond the realm of Sherman Act but nonetheless may
lessen competition substantially among goods (but not
services) sellers (US Code, 2000). The Clayton Act was
crafted to protect public interests; it does not restrict a firm’s
freedom to act in its best interest if such actions follow from
efforts to secure fair opportunities for honest gains (Denman
et al., 1939).
Section 3 prohibits any lease, sale, or contract for sale
of goods on the condition, agreement, or understanding
that the lessee or purchaser will not use or deal in the
goods of a competitor that would significantly diminish
competition (Becker, 2000; US Code, 2000; Warren et al.,
1962). Section 3 also pertains to less obvious situations,
such as requirements contracts (Brobeck et al., 1999).
Under such contracts, sales are predicated on buying all
or most of a firm’s requirement from a seller or buying
another product from a seller (i.e., tying agreement). As
R.J. Fontenot, M.R. Hyman / Journal of Business Research 57 (2004) 1211–1221
with Section 1 of the Sherman Act, agreements need not
be formal or expressed; they may be inferred from any
dealings between buyers and sellers, especially when
buyers are coerced to comply with sellers’ conditions
(Brobeck et al., 1999).
A.3. Robinson –Patman Act
The Robinson– Patman Act, an amendment to Section 2
of the Clayton Act, prohibits firms engaged in interstate
commerce from charging different prices for goods of like
grade and quality when such pricing would lessen competition or create a monopoly (US Code, 2000). Specifically, it prohibits discrimination that may lessen
competition substantially (Warren et al., 1968), encourage
a monopoly, or injure, destroy, or prevent competition with
persons who grant or knowingly benefit from price discrimination (Clark, 1959). Sometimes called the Anti Chain
Store Act (Brobeck et al., 1999), it was intended to protect
independent retailers from chain store competitors (Coxe,
1949).
Under this act, manufacturers or goods sellers should
preclude special pricing or services to a subset of distributors (Goldberg, 1963). All distributors should be equally
able to obtain promotional services, provisions for markdown allowances and returns, or other marketing services
(US Code, 2000). Equal but different pricing is permitted if
the price differentials are reflected in cost differences
yielded by differing production methods or order-sizerelated scale economies (Clark, 1959). In sum, Robinson –Patman Act violations are actions caused by inconsistent interfirm pricing.
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