Pricing Strategy, Antitrust Law, and Distribution Channels

Introduction: Pricing Decisions and Legal Implications

The implications of pricing decisions are far-reaching for any enterprise seeking to grow its sales through alliances, indirect channel selling partnerships, and the expansion of direct sales forces with sales representative organizations. The legal implications of using price as the primary determining factor in expanding distribution networks also carry significant consequences for a firm's long-term legal strategy (Petty, 2002). In business models characterized by exceptionally high inventory turns, rapid new product introductions, and reliance on price as a primary differentiator alongside availability, these legal implications become amplified. A broad base of legal precedents and a series of laws define how and when price may be used as a differentiating element in managing sales and distribution expansion strategies.

The Sherman Antitrust Act has empowered the Antitrust Division of the U.S. Department of Justice to take action in 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 based on how intertwined a company's marketing plans and strategies are with its financial structures and plans. 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 with profitable, ethical goals.

The role of innovation is also examined, as courts have ruled that a company's capacity to generate new intellectual property and better serve customers can at times warrant a more monopolistic condition in an uncontested market arena (Petty, 2002). Microsoft and other high-technology companies have argued that their pricing and financial structures warrant higher royalty rates and greater costs from both consumers and enterprise customers. This rationale for higher—and at times predatory—pricing has been upheld in cases where technological gains provided the general public with greater access to knowledge, social mobility, or enhanced quality of life (Petty, 2002). Predatory pricing for a specific item or system used to augment a business's efficiency, however, did not meet this criterion. The Department of Justice fined Microsoft, and the European Union barred the company from forcing the bundling of Internet Explorer in every version of Windows. In defending these practices, Microsoft argued that the innate value of its intellectual property and innovation warranted the higher price, yet courts disagreed and ruled against the company. The Microsoft example illustrates how the legal implications of pricing strategies must be triangulated with a company's specific strategies, distribution network, and long-term expansion goals.

Commodity Markets, Collusion, and Antitrust Risk

The more commodity-driven a given business and its industry become, the more complex and opaque the legal decision-making process grows regarding when and how to use price as a leading differentiator. This is exemplified in the many cases of price fixing in the memory, microprocessor, and fast-moving electronics industries, where firms would be well advised to have attorneys review their product introduction plans and pricing strategies before launch. Collusion is common in many industries, as competing firms often cooperate to set and defend a price floor against a larger, better-capitalized competitor capable of absorbing losses for years. The most prevalent form of using price as a preemptive competitive strategy that frequently infringes on antitrust law 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 Dentsply Case: Monopolistic Pricing and Distribution Contracts

The use of such strategies appears most clearly in highly complex products to manufacture that nonetheless become undifferentiated and commodity-like within distribution networks. In 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 had become—providing unfair competitive advantages to preferred distributors, dealers, and dental treatment networks that could sell more of Dentsply's teeth composites than smaller, less-capitalized, and less-connected competitors. Dentsply International was found to be practicing a deliberate pricing and contract management strategy to gain monopolistic control over the distribution channel for replacement teeth.

The investigation found that Dentsply had specifically offered its dealers greater pricing support, including price protection on inventory of products being replaced with next-generation compositions, and had created contracts specifically designed to prevent 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 ranking of dealers based on contractual performance (Sacasas, 2006).

Also evident from a review of the contracts and legal strategies aimed at creating monopoly was the use of clauses and conditions that strongly discouraged Dentsply's dealer network from engaging with competing brands, including Hess Dental Laboratories. The legal foundations of the entire distribution network were predicated on creating a tightly held monopoly over synthetic teeth, supplies, and services. The intertwining of contract terms and pricing within 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 poor one that supported monopolistic behavior, it does demonstrate how a well-orchestrated strategy—incorporating legal precedent to support pricing, global expansion efforts, and the cultivation of a loyal distribution network—can be achieved.

Had Dentsply International lacked the level of coordinated effort across its contracts, pricing, distribution, product, and services strategies, it would likely have been found guilty, resulting in damages paid not only to Hess but to 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 to define monopolistic behavior. By citing the value of its unique intellectual property and innovative approach to creating new synthetic teeth, Dentsply International was also able to establish a monopolistic approach to using price as a deterrent to greater free-market competition. What further makes this case cautionary is how market leaders can and do use the argument that continued high levels of research and development (R&D) are critically important for the growth of new markets (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 R&D as a basis for higher prices. It does not, however, warrant the unethical behavior that Dentsply escaped liability for purely on the strength of its ability to execute a tightly integrated, well-orchestrated plan of locking competitors out from distributors and dealers who often represent multiple brands (Sacasas, 2006). This is ultimately a cautionary tale demonstrating the need for greater accountability and transparency in how pricing and contracts are used as monopolistic instruments, over and above their primary purpose of creating new market opportunities for growing companies.