Business Law A Legal Analysis of Pricing Strategy Effects on Distribution Channels and Networks

The implications of pricing decisions have far-reaching implications for any enterprise seeking to grow their sales through alliances, indirect channel selling partnerships and the expansion of their direct sales forces with sales representative organizations. The legal implications of using price as the primary, determining factor in expanding distribution networks has significant implications for a firm's legal strategy over the long-term as well (Petty, 2002). In business models characterized by exceptionally high inventory turns, rapid new product introductions, and the reliance on price as a primary differentiator along with availability, the legal implications become amplified due to the broad base of legal precedents and series of laws that define how and when price can be used as a differentiating element in managing sales and distribution expansion strategies. The intent of this analysis is to evaluate how pricing as a finance function is often integrated into the broader strategic marketing and distribution strategies of an organization. The Sherman Antitrust Act has empowered the Antitrust Division of the U.S. Department of Justice to take action on cases where the financial structures of sellers or market making companies, seek to gain unfair competitive advantage or exclusionary status of one seller or distribution partner over another (Scheffman, 2002). As a result, the Department of Justice will often evaluate cases on how intertwined the marketing plans and strategies are with the financial structures and plans of the company. The intent of this analysis is to evaluate how pricing can be used effectively, and how finance can be more focused on a coordinating role of compliance and competitiveness, keeping market, product and distribution strategies synchronized to profitable, ethical goals. The role of innovation is also examined as courts have ruled that the capacity of a company to generate new intellectual property and better service customers can at times warrant a more monopolistic condition in an uncontested market arena (Petty, 2002). Microsoft and other high technology companies have argued their pricing and financial structures warrant higher royalty rates and greater costs from customers, both consumers and enterprises. This factor in rationalizing higher and at times predatory pricing has been upheld in technology gains that provided the general public greater access to knowledge, social mobility or enhanced their lives (Petty, 2002). Predatory pricing for a specific item or systems used for augmenting a businesses' efficiency however did not meet this criterion and the Department of Justice fined Microsoft in addition to the European Union barring them from forcing the bundle of Microsoft Explorer in every version of Windows. In defending these operations Microsoft explained that the innate value of their intellectual property or innovation warranted the higher price, yet all courts disagreed and charged them. The Microsoft example shows how the legal implications of pricing strategies need to be triangulated with the specific strategies of a company, distribution network and long-term expansion goals.

A Legal Analysis of Pricing Strategy Effects on Distribution Channels and Networks

The more commodity-driven a given business is and the industry it operates in becomes, the more complex and opaque the legal decision-making process of when and how to use price as the leading differentiator or not. This is exemplified in the many cases of price fixing in the memory, microprocessor and fast-moving electronic industry, where firms would be well advised to have attorneys review their product introduction plans and pricing strategies before introducing them. Collusion is common in many industries as competitive firms will often cooperate with one another to set and defend a price floor from a larger, most well capitalized competitor capable of taking on losses for years. The most prevalent form of using price as a pre-emptive competitive strategy that often infringes on antitrust is the use of pricing agreements and exclusive deals on specific product lines to create a tiered or layered distribution network, which is in direct violation of the Sherman Antitrust Act (Sacasas, 2006).

The use of these strategies are seen in highly complex products to produce, yet which become undifferentiated and commodity-like in distribution networks. In the case of Howard Hess Dental Laboratories v. Dentsply International Inc., (Sacasas, 2006) the case revealed how pervasive the practice of using pricing agreements and segmented distribution agreements to provide unfair competitive advantages to preferred distributors, dealers and dental treatment networks who could sell more of the teeth composites than the smaller, less capitalized and connected competitors. Dentsply International was found to be practicing a deliberate pricing and contract management strategy to gain monopolistic control for the distribution channel...

The case investigation found that Dentsply had specifically offered its dealers more pricing support including price protection on inventory of products being replaced with next-generation compositions, and specifically created contracts to keep dealers from signing with any other supplier, including Hess Dental (Sacasas, 2006). It was also found that Dentsply International was providing preferential training to dealers who participated in the contracts' many requirements and there was a clear delineation of dealer ranking by contractual performance (Sacasas, 2006).
What also was evident from a review of the contracts and series of legal strategies aimed at creating monopoly by Dentsply International was the use of clauses and conditions that strongly discouraged their dealer network from engaging with competitive brands including Hess Dental Laboratories. The legal foundations the entire distribution network was based on were predicated on creating a tightly-held monopoly of synthetic teeth, supplies and services. The intertwining of the contract and pricing in the context of the distribution network expansion strategy gave Dentsply International an effective defense against Hess. While many in the healthcare industry considered the outcome of this case an exceptionally bad one that supported monopolistic behavior, it does show how a well-orchestrated strategy that includes legal precedent to support pricing, global expansion efforts and the practice of creating a loyal distribution network can be achieved. Had Dentsply International lacked the level of coordinated efforts across its contracts, pricing, distribution, product and services strategies, they would have been found guilty and it would have led to damages being pad not just to Hess but every other market participant. Legal theorists and scholars in the area of business law in healthcare point to Howard Hess Dental Laboratories v. Dentsply International Inc.(Sacasas, 2006) as a cautionary tale of what can happen when pricing and legal strategies are used for defining monopolistic behavior. In citing the value of their unique intellectual property and innovative approach to creating new synthetic teeth, Dentsply International also was able to define a monopolistic approach to using price as a deterrent to greater free market competition. What also makes this case cautionary is how market leaders can and do use the argument of continued high level of research & development (R&D) being critically important for the growth of new markets

(Petty, 2002).

Howard Hess Dental Laboratories v. Dentsply International Inc. (Sacasas, 2006) has also been used throughout other industries as well to protect unfair pricing and promotional strategies, yet has not as successful as the original ruling. The role of monopolistic behavior in creating market advantage is precisely what the Sherman Antitrust Act was passed to prevent (Scheffman, 2002). The defense of using innovation and the need for continual improvement of products for the customer's good has been successfully used to counter the Act (Petty, 2002) to the Supreme Court (Sacasas, 2006).

The precedence this creates for attorneys in high velocity, rapidly changing businesses is clear. There needs to be greater oversight of the contract creation and management, in addition to the defining of pricing strategies congruent with the level of innovation and research and development (R&D) applied to a given product generation or entirely new invention (Petty, 2002) for it to be defensible within the context of monopolistic pricing. Second, the role of attorneys need to be more as strategists and less as risk mitigators alone. As the Howard Hess Dental Laboratories v. Dentsply International Inc. illustrates the role of corporate and specifically trade law in the successful definition of monopolistic behavior, it also shows where the potential incongruities are and why distribution strategies need far greater oversight and governance if they are to truly deliver on the value of innovations the pricing strategies claim to protect (Petty, 2002).

Conclusion

The case of Howard Hess Dental Laboratories v. Dentsply International Inc., illustrates how a well-defined distribution strategy that includes the attorney as strategist can defend the use of intellectual property and high levels of research & development (R&D) as a defensible strategy for higher prices. It does not however warrant the unethical behavior that Dentsply got away with purely based on their ability to execute such a tightly integrated, well-orchestrated plan of locking out competitors from distributors and dealers who often represent multiple brands (Sacasas, 2006). This is a cautionary tale showing the need for greater accountability and transparency in the area of how pricing and contracts are used as a monopolistic strategy over and above their primary purpose of creating new market opportunities for growing companies.

Bibliography

Petty, R.D. (2002). Limiting product…