MM4 – DISTRIBUTION MANAGEMENT

CHAPTER 1

MARKETING CHANNEL CONCEPTS

The Multi-Channel Challenge

Today’s customer expectation both in the business-to-consumer (B2C) and business-to-
business (B2B) levels, for high channel choice, flexibility, and an excellent buying
experience is less likely to be satisfied by one channel structure, thus a variety of different
channel is needed to satisfy these expanded customer expectations. Furthermore, these
multiple channels must be properly targeted to reach the appropriate market segments and
be properly coordinated to mesh smoothly and complement, rather than undermine each
other.

Key Challenges to be addressed

Finding the optimal multi-channel mix
Creating multi-channel synergies
Avoiding multi-channel conflicts
Gaining a sustainable competitive advantage via multi-channel strategy

The Marketing Channel Defined

The definition of “marketing channel” is based upon one’s perspective that of a consumer
versus that of a manufacturer.
From the perspective of a marketing manager, the marketing channel is viewed and
defined as: “the external contactual organization that management operates to achieve its
distribution objectives”.

Marketing Channels and Marketing Management Strategy

The marketing mix model portrays the marketing management process as a “strategic
blending” of the four controllable marketing variables (product, price, promotion, and
place). External uncontrollable elements include the economy, technology, government,
sociocultural patterns of buyer behavior and competition. The nonmarketing functions of
the firm constitute internal uncontrollable factors.
Marketing channel strategy fits under distribution (place) in the marketing mix. The
management must develop and operate their marketing channels in such a way as to
support and enhance the other strategic variables in the marketing mix in order to meet
the demands of the firm’s target markets.

Channel Strategy versus Logistics Management

Channel strategy and logistics management fits under the distribution variable of the
marketing mix. These two components together comprise the distribution variable of the
marketing mix. They are closely related, but channel strategy is a much broader and more
basic component than logistics management.

Channel strategy is concerned with the entire process of setting up and operating the
contactual organizations that are responsible for meeting the firm’s distribution
objectives.

Logistics management is more narrowly focused on providing product availability at the

appropriate place and time in the marketing channel.

Channel strategy must first be established before logistics management should be

considered. Logistic management is a subsidiary of channel management.
 Flows in Marketing Channels

1. Product flow
2. Negotiation flow
3. Ownership flow
4. Information flow
5. Promotion flow

1. Product flow is the actual physical movement of the product from the manufacturer
through all of the parties to the consumer.

2. Negotiation flow represents the interplay of the buying and selling functions
associated with the transfer of title or rights of ownership. Negotiation is a two-way
process involving mutual exchange between buyer and seller.

3. Ownership flow is the movement of the title of the product from one stage in the
process to another.

4. Information flow involves two directions from the manufacturer to the consumer and
from the consumer to the manufacturer. This flow includes transportation as information
deemed necessary for the actual delivery of the product is communicated to the
transportation agents.

5. Promotion flow refers to the flow of persuasive communication in the form of

advertising, personal selling, sales promotion and publicity. This flow adds the
advertising agency as an element of promotion.

Distribution through Intermediaries

Economic considerations are very important in determining what form intermediaries will
have in their appearance in marketing channels. Two important concepts are introduced:
specialization and division of labor and contactual efficiency. Specialization and Division
of Labor when applied to distribution, the concept is that of breaking down complex tasks
into smaller, less complex ones and allocating them to parties who are specialists at
performing them at greater efficiencies. Contactual Efficiency is from a channel
manager’s viewpoint, contactual efficiency is the level of negotiation effort between
sellers and buyers relative to achieving a distribution objective.

Channel Structure

Channel structure, in a managerial perspective, is defined as the group of channel

members to which a set of distribution tasks has been allocated. This definition suggests
that in developing channel structure, the channel manager is faced with allocation
decisions, how to allocate or structure the task of distribution to accomplish a firm’s
distribution objectives.

Typically, the most discussed dimension in the concept of channel structure is the length,
which is, the number of levels of intermediaries in the channel.

Multi-channel strategy simply means that the firm has chosen to reach its target consumer
through more than one channel. With the advent of E-commerce, many firms have opted
to use multi-channel strategies to reach their target market.
Ancillary Structure

While so far we have included in the channel management only those participants who
perform the negotiatory functions of channel management (buying, selling, transferring
title, distribution, etc.). There are others that are not members of the channel structure that
assist in the process. These other members are known as the ancillary structure.

These ancillary members provide services to the channel members after the basic channel
decisions have already been made. Some other companies use a number of non-
negotiatory tasks such as transportation, storage, insurance, financing and advertising that
must be performed by facilitating agencies (ancillary structure) for the marketing
channels to operate efficiently. It is advantageous for them to farm out these tasks rather
than to perform the task themselves.

Examples of ancillary members include: banks, insurance agents, storage agents,

contractors, repair shops, etc.

Channel management must also deal with these ancillary members who do not have as
great a stake in the channel as channel members but who are nevertheless key
components in ensuring that the product is available to the consumer.
CHAPTER 2

THE CHANNEL PARTICIPANTS

The three basic divisions of the marketing channel are: producers and manufacturers,
intermediaries and final users.

Channel participants are defined as participants that engage in negotiatory functions

linked together by the flows of negotiation or ownership. Producers and manufacturers
and intermediaries are further broken down into wholesale and retail intermediaries and
consumer and industrial users. Final users are defined as target markets and are excluded
from further discussions of channel members.

Producers and Manufacturers

Producers and manufacturers consist of firms that are involved in the extracting, growing,
or making of products. For the needs of the customers to be satisfied products must be
made available to customers when, where and how they want them.

Intermediaries

Intermediaries are independent businesses that assist producers and manufacturers in the
performance of negotiatory functions and other distribution tasks.

Wholesalers consist of businesses that are engaged in selling goods for resale or business
use to retail, industrial, commercial, institutional, professional, or agricultural firms, as
well as to other wholesalers.

Types and Kinds of Wholesalers Three major types of wholesalers as defined by the
Census of Wholesale Trade. These are:
1. Merchant wholesalers
2. Agents, brokers, and commission merchants
3. Manufacturer’s sales branches and offices

1. Merchant Wholesalers are firms engaged primarily in buying, taking title to, usually
storing, and physically handling products in relatively large quantities and then reselling
the products in smaller quantities to others. They go under many different names such as:
wholesaler, jobber, distributor, industrial distributor, supply house, assembler, importer,
exporter, and others.

2. Agents, brokers, and commission merchants are independent middlemen who do not
take title to the goods in which they deal, but who are actively engaged in the buying and
selling functions on behalf of others. They are usually compensated in the form of
commissions on sales or purchases. They also go under other names such as selling
agents and import and export agents.

3. Manufacturer’s sales branches and offices are owned and operated by manufacturers
but are physically separated from the manufacturing plants.

Distribution Tasks Performed by Merchant Wholesalers

Modern well-managed merchant wholesalers perform the following types of distribution
tasks for producers and manufacturers:

1. Providing market coverage

2. Making sales contacts
3. Holding inventory
4. Processing orders
5. Gathering market information
6. Offering customer support

1. Market coverage is performed because the market for products consists of many
customers spread across large geographical areas.

2. Making sales contact is a valuable service provided because the cost of maintaining
an outside sales force for many firms is prohibitively high.

3. Holding inventory is when the wholesaler takes title to and possession of the producer
and manufacturer’s product. This can help the producers and manufacturer’s financial
burden and help their production process.

4. Processing orders is very helpful to producers and manufacturers because many

customers purchase in small quantities. The wholesaler can “break down” a large order of
product into smaller more manageable pieces.

5. Gathering market information wholesalers are close to their customers through

frequent sales contacts. As such, they are in a good position to learn about a customer’s
product or service requirements. Such information then can aid producers and
manufacturers in their product planning, pricing, and the development of new products.

6. Customer support is the final distribution task performed for producers and
manufacturers on their behalf. Products may need to be assembled, set up or require
technical assistance. This allows the wholesaler to provide “value added services” to the
customer thus increasing the competitive advantage of one wholesaler over another. This
extra support plays a crucial role in making wholesalers vital members of the marketing
channel from the standpoint of both the producers and manufacturers and the customers
they serve.

In addition to the above services, merchant wholesalers are equally well suited to perform
the following distribution tasks for their customers:

1. Assuring product availability

2. Providing customer service
3. Extending credit and financial assistance
4. Offering assortment convenience
5. Breaking bulk
6. Helping customers with advice and technical support

1. Assuring product availability assuring that both the quantity and the variety
demanded by the customer is available to them when needed.

2. Providing customer service: Services such as delivery, repairs or warranty work saves
the customer time and effort.

3. Extending credit and financial assistance: Wholesalers provide this service in two
ways. First by extending “open” accounts to customers on products sold to them and
second by stocking the needed inventory for the customer, thus reducing the financial and
space expenses for the customer.

4. Assortment convenience: By bringing together a variety of products from hundreds of

manufacturers, the customer need only place one order for many products.

5. Breaking bulk: Shipping costs dictate the shipment of many products by rail or
truckload quantities. Most customers order in single units; thus, the large loads must be
“broken” down into single unit sales. A wholesaler provides this service to its customers.

6. Helping customers with advice and technical support: Even the most
unsophisticated product may require setup or technical support. The wholesaler, being
closer to the customer than either the producer or manufacturer is better able to fulfill this
service. This also allows the wholesaler to differentiate its firm from others by these
“value-added” services.

Distribution Tasks Performed by Agent Wholesalers

These wholesalers do not take title to the products they sell and as a rule do not perform
as many distribution tasks as a typical merchant wholesaler. They do however perform a
variety of key functions.

Manufacturer’s agents (manufacturer’s representatives) specialize in performing the

market coverage and sales contact and distribution tasks for manufacturers.
Manufacturing agents generally represent several manufacturers at the same time and
operate in a wide range of product and service categories.

Selling agents are another type of agent wholesaler performing more distribution tasks
than manufacturing agents. Selling agents may perform many, if not most, of the other
distribution tasks such as: market coverage, sales contacts, order processing, marketing
information, product availability and customer services.

Brokers are the second major category of the nontitle-taking wholesalers, offer another
example of the wide deviation between definitions based on the performance of
distribution tasks presented in the marketing literature and performance in actual practice.
In the marketing literature, the broker is usually defined as a go-between or a party who
brings buyers and sellers together so that a transaction can be completed. It performs only
one distribution task – to provide market information.

Commission merchants are the third major category of agent wholesalers, who is of
significance mainly in agricultural markets. It performs a wide range of distribution tasks,
including physical holding inventory (though not taking title), providing market
coverage, sales contact, breaking bulk, credit and order processing.

Retail Intermediaries

Retailers consist of business firms engaged primarily in selling merchandise for personal
or household consumption and rendering services incidental to the sale of goods.

Kinds of Retailers
Alternative Bases for Classifying Retailers

By ownership of establishment
By kind of business (merchandise handled)
By size of establishment
By degree of vertical integration
By type of relationship with other business organization
By method of consumer contact
By type of location
By type of service rendered
By legal form of organization
By management organization or operational technique

Retailers’ Growing Power in Marketing Channels

The power and influence of retailers in marketing channels have been growing mainly
due to three major developments:
a) Increase in size and thus buying power
b) Application of advanced technologies
c) Use of modern marketing strategies

Since size translates into power, the largest retailers have the capacity to influence the
action(s) of other channel members, wholesalers and manufacturers. In many cases, the
giant retailers can literally dictate to the manufacturers (most manufacturers are
considerably smaller than the large retailers) the terms of sale they want and the product
offering they require. These large retailers are referred to as “power retailers” and
“category killers”.

Growing size and concentration of retailers is the most fundamental reason for greater
retailer power in marketing channels. But two other factors, advanced technology and
uses of modern marketing strategies are also important.

Modern retailers have become astute followers and ardent users of many new
technologies such as the Internet, scanners, sophisticated inventory management
software, shelf management software, forecasting, and consumer shopping trip studies.

Perhaps the most exciting technological development being embraced by retailers is their
growing use of the Internet to enhance the shopping experience. Conventional retailers
are integrating Internet-based E-commerce with their store and catalog operations. A new
term called threetailing has emerged to describe the convergence of in-store, catalog, and
online channels.

Turning now to retailers’ growing emphasis on marketing, a fundamental change has been
evolving in thinking by leading retailers about the application of marketing strategy in a
retail setting. In the past, retailers have been more supplier (vendor) driven than market
driven.

To sum up, retailers in the United States have become much larger, more concentrated,
more technologically adept, and more sophisticated marketers. As a result, they have
become far more powerful members of marketing channels and indeed have come to
dominate many of the marketing channels.

The implications of the retailer’s new position are potentially ominous. A producer or
manufacturer’s marketing strategies in the areas of product planning and development,
pricing, and promotion will be increasingly constrained and shaped by the considerable
demands of the powerful retailers.

Distribution Tasks Performed by Retailers

Retailers are especially suited to the following distribution tasks:

1. Offering manpower and physical facilities that enable producers/manufacturers and

wholesalers to have many points of contact with consumers close to their places of
residence.

2. Providing personal selling, advertising, and display to aid in selling supplier’s

products.

3. Interpreting consumer demand and relaying this information back through the channel.

4. Dividing large quantities into consumer-sized lots, thereby providing economies for
suppliers and convenience for consumers.

5. Offering storage, so that suppliers can have widely dispersed inventories of their
products at low cost and enabling consumers to have close access to the products of
producers/manufacturers and wholesalers.

6. Removing substantial risk from the producer/manufacturer by ordering and accepting

delivery in advance of the season.
CHAPTER 3

THE ENVIRONMENT OF MARKETING CHANNELS

The Environment

• Channel managers must take into account how the environment affects their non
member participants.

• Channel managers must analyze the impact of environment not only on their own firms
and ultimate target markets but also on all of the participants in the marketing channel.

Macro Environment

The five environments that affect the market operations:

1. Economic environment
2. Competitive environment
3. Sociocultural environment
4. Technological environment
5. Legal environment

THE ECONOMIC ENVIRONMENT

• The economy is the most obvious and persuasive category of environmental variable
because it affects every business and individual.

• In the channel management context, economic factors are critical determinants of

channel member behavior and performance.

a) Recession

• This occurs when there are two consecutive quarters of a decline in the Gross Domestic
Product (GDP), any period in which the GDP is stagnant or increasing very slowly is
often referred to as recessionary or at least as an economic slowdown. All members of the
marketing channel may feel the effects of recession in the form of substantial reductions
in sales volume and profitability.

b) Inflation

The reaction of channel members to inflation is often a determination of the reaction of

consumers or other final users. Unfortunately, these reactions are not easy to predict.

Consumer buying patterns during inflationary periods:

Going to the supermarket without bringing along extra money

Putting items back before checking out
Buying only the amount needed
Buying less meat
Stocking up on bargains
Buying lower quality brands
Buying unplanned items only if they are on special sale

From the perspective of the channel manager, such changes in consumer buying behavior
should be viewed in the context of how they might affect channel member behavior and
what the implications might be for channel strategy.

Reducing the inventory burden on channel members through streamlined product

offerings, faster order processing times and deliveries, higher inventory turnover strategy
or stronger promotional support may have to be incorporated into channel strategy in
times of high inflation rates.

c) Deflation

Deflation, static prices, or even a very low rate of price increase can create serious
channel management difficulties.

It becomes anything but easy to increase prices when inflation is low and virtually
impossible in times of falling prices.
Each channel member is highly sensitive to price increases during these times and
manufacturers may have a hard time passing on cost increases to other channel members.

d) Other economic issues

The budget deficit, the national debt, and the trade deficit are all of containing concern as
we move on to the coming decades of the 21st century. These phenomena are not bad in
and of themselves, but they can aggravate recession and inflation. The budget deficit and
the national debt make huge demands on capital and hence raise interest rates. High
interest rates can be a problem even when the inflation rate is moderate and the economy
is not in recession. It can affect all members of the marketing channel, even though
consumers may be slow to recognize the effects of high real interest rates, eventually they
catch on and their spending slows down. This, in turn, affects sales for retailers,
wholesalers and manufacturers.

THE COMPETITIVE ENVIRONMENT

a ) Types of Competition namely:

1.Horizontal competition
2.Intertype competition
3.Vertical competition
4.Channel system competition

Horizontal competition is defined as competition between firms of the same type.

Examples include automobile manufacturer versus another automobile manufacturer.
This is the most common form of competition and is generally referred to as simply
“competition”.

Intertype competition is competition between different types of firms at the same

channel level. Examples include off-price retailers versus department store retailers.

Vertical Competition refers to competition between channel members at different levels

in the channel such as retailer versus wholesaler or wholesaler versus manufacturer. This
vertical competition can escalate to vertical conflict as one channel member attempts to
directly impede another channel member’s attempt to achieve their objectives.

Channel system competition refers to complete channels competing with other complete
channels. In order for channels to compete as complete units, they must be organized as
cohesive organizations. Such channels have been referred to as vertical marketing
systems and are classified into three types:

Three types of vertical marketing systems:

Corporate
Contractual
Administered

In Corporate system competition, production and marketing facilities are owned by the
same company.
• Examples include Firestone Tire & Rubber Company and Sherwin-Williams Company

In Contractual channel competition, independent channel members producers or

manufacturers, wholesalers, and retailers are linked by contractual agreements.

Administered channel systems result from strong domination by one of the channel
members (usually a manufacturer) over others. This dominant position is a function of the
leverage that the dominant channel member can achieve based on a monopoly of supply,
special expertise, strong consumer acceptance of its products or other factors.

As these vertical marketing systems take a larger and larger share of the total distribution
system, the extent of channel system competition is expected to grow.

Not only do they have to think in terms of broad global perspective of competition, they
also need to worry about horizontal, vertical, and channel systems competition.

Competitive Structure and Channel Management

In designing the marketing channel, the channel manager needs to determine which kinds
of distributors and/or dealers can provide the most efficient and effective distribution of
the firm’s products.

A new term has emerged, called scrambled merchandising, to describe the selling of
products through nontraditional outlets and has drastically changed the competitive
landscape.

For example, the selling of automobile products in supermarkets or over the Internet is an
example of scrambled merchandising.

This changing competitive environment also means that producers and manufacturers
face a far more complex management task because they are dealing with more and
different types of channel members.

THE SOCIOCULTURAL ENVIRONMENT

Marketing channels are influenced by the sociocultural environment within which they
exist. Indeed, some channel analysts argue that this is a major force affecting channel
structure. In essence, then, the channel manager must be sensitive to the sociocultural
environment of the marketing channel when the channel extends into foreign cultures.

Other Sociocultural Forces

In recent years, several sociocultural phenomena have emerged that are not unique to any
particular country or region. Rather, these are forces that already have and will continue
to influence how marketing channels are designed and managed al over the world. The
most important sociocultural factors in terms of their relevance to marketing channels
are:

Globalization – a term that is most commonly used to describe the interconnectedness

and interdependence of countries around the world. It typically focuses on the vast and
complex trade flows among countries and the international supply chains that make huge
flows of products and services across national boundaries.
Consumer mobility and connectedness – people do a great deal of running around today,
whether for business or personal pursuits. Such mobility is increasingly taking place
across greater distances, perhaps equally obvious in the US and in other advanced
economies in the world. This ability to constantly be on the move while being able to stay
in constant contact has not been lost on consumers. Indeed, buying products and services
while literally running around has become a common expectation to consumers armed
with laptops and smartphones all over the world. This phenomenon, which in the recent
years has generally referred to as mobile commerce or simply m-commerce.
Social networking – this term refers to interaction in networks comprised of individuals
or organizations that are linked together based on some type of common interest, such as
friendships, beliefs, hobbies, professional pursuits, special knowledge and many others.
The Green Movement – this is a term that has often been used to refer to a focus on
preserving the environment and human health. Much of the attention has been focused on
possible adverse effects on human health and economic prosperity from such issues as
climate change, pollution, chemicals and hormones in the food chain, the profligate use
of resources and the number of other issues.

THE TECHNOLOGICAL ENVIRONMENT

Technology is the most continuously and rapidly changing aspect of the environment.
The channel manager has to sort out those developments that are relevant to his or her
own firm and then determine how these changes are likely to affect the channel
participants.

The Internet and Electronic Marketing Channels

The Internet provides a highly efficient means for gaining access to, organizing, and
sharing virtually unlimited amounts of information. Although the Internet was conceived
primarily as an information exchange mechanism, it has now become an established
“electronic marketing channel”.

Scanners, Computerized Inventory Management and Portable Computers

• Electronic scanners can be used to replenish inventory electronically without having to

rely on manually produced purchase orders.
• A computer generated order can list items falling below minimum inventory levels and
transmit the replenishment order directly to the producers and/or manufacturer.
• Computerized inventory systems based on data received from point-of-sale terminals
created a revolution in inventory management and control at the retail level and provided
timely and valuable information for making better merchandising decisions.
• Thus, the new technology is something of a mixed blessing for manufacturers. Quicker
response by retailers and wholesalers to fast-selling products can allow the manufacturer
more time to plan ahead to increase production. On the other hand, faster responses by
channel members to slow sellers can mean a sudden halt in orders.

Electronic Data Interchange

Electronic data interchange (EDI): Refers to the linking together of channel member
information systems to provide real-time responses to communications between channel
members.

• EDI technology enhances distribution efficiency resulting in substantial benefits to all

channel members and consumers through more accurate and timely production schedules,
order processing, and inventory carrying costs.
The Digital Revolution and Smartphones
The digital revolution is a term commonly used to describe the huge transformation that
has taken place over the past three decades from analog and mechanical technology to
digital technology. The most obvious and widespread manifestation of the digital
revolution has been reflected in the massive growth of personal computing, the Internet,
and cell phone usage.

RFID
This acronym stands for Radio Frequency Identification. This is a relatively new
technology that uses a device called an RFID tag attached to a person or object, that
enables that person or product to be identified and tracked using radio waves. The main
application is believed to be in the area of inventory tracking, management of the supply
chain and increasing the efficiency of the in-store buying process.

Cloud Computing
Cloud computing is an Internet-based technology that enables both large and small
organizations and businesses to utilize highly sophisticated computer applications without
having to have their own hardware, software, office computing space and staff.

THE LEGAL ENVIRONMENT

The legal environment refers to the set of laws that impact marketing channels. The legal
structure resulting from these laws is not a static code, but rather it is a continually
evolving structure affected by changing values, norms, politics and precedents established
through court cases.

What should be kept in our minds as we proceed through the discussion of legal issues is
the potential for conflict that exists between the objectives of an individual firm’s channel
management strategies and the interests of society.

Dual Distribution refers to the practice whereby a producer or manufacturer uses

two or more different channel structures for distributing the same product to his
target market. The selling of the same or similar products under different brand
names for distribution through two or more channels is also a form of dual
distribution.

• Dual distribution, which in recent years is increasingly being referred to as multi-

channel distribution, is not illegal per se under federal antitrust laws.

Antitrust controversies have emerged when a firm distributes through its own vertically
integrated channel in competition with independent channel members at the wholesale or
retail levels. Such distribution practices are common in the marketing of petroleum
products, tires, shoes, paints, and drugs.

Exclusive Dealing occurs when a supplier requires its channel members to sell only its
products or at least to refrain from selling products from directly competitive suppliers.

• With an exclusive dealing arrangement, the supplier gains a substantial degree of market
protection from competitive products in the market areas covered by its channel
members.

• Exclusive dealing arrangements are in violation of the antitrust provisions of the

Clayton Act if their effect is to substantially lessen competition or foster monopolies.

• The substantiality test is based upon three conditions:

a. Whether the exclusive arrangement excludes competitive products from a

substantial share of the market
b. Whether the dollar amount involved is substantial
c. Whether the dispute is between large suppliers and a smaller distributor or deal
where the supplier’s disparate economic power can be inherently coercive.

Full-Line Forcing occurs when a supplier requires channel members to carry a

broad group of its products (the full line) in order to sell any particular products
in the supplier’s line. • It does represent, up to a point, a legitimate effort by the
manufacturer to see that a broad range of its products is carried by channel
members and to discourage “cherry picking” by channel members of only the
“hottest” items in the manufacturer’s product line.

Price Discrimination refers to the practice whereby a supplier, either directly or

indirectly, sells at different prices to the same class of channel members to the extent that
such price differentials tend to lessen competition. Accurate generalizations about
whether specific channel pricing policies and practices constitute discrimination are
difficult to make.

Price Maintenance refers to a supplier’s attempt to control the prices charged by its
channel members for the supplier’s products.

• Thus, the supplier dictates the prices charged by channel members to the consumer.

Refusal to Deal Refusal to deal: Suppliers may select whomever they want as
channel members and refuse to deal with whomever they want. Thus, there
are no legal barriers to sellers using their own criteria and judgment in the
selection of channel members.

• Refusal to deal cannot be used to coercively cut off channel members who will not
conform to policies stipulated by the seller that may be illegal or in restraint of trade.

Resale Restriction refer to a manufacturer’s attempt to stipulate to whom channel

members may resell the manufacturer’s products and in what specific
geographical market areas (or territories) they may be sold.

• Such restrictions can be very advantageous to both the manufacturer and the channel
members. The capacity to stipulate to whom products may be resold enables the
manufacturer to retain and reserve certain house accounts (customers to whom the
manufacturer sells directly) by prohibiting channel members from selling to these
customers.

• From the channel members’ standpoint, the territorial restrictions minimize intrabrand
competition (competition between distributors selling the same branded product of a
particular manufacturer) because each channel member is in effect given a “protected”
geographical market area in which to sell.

• The Supreme Court has ruled that restrictions can have “redeeming virtues” by
promoting intrabrand competition. The court also ruled that such resale restrictions are
not necessarily anti-competitive if competition is viewed in a broader perspective.
• The legality of resale restrictions is still up in the air.

Tying Agreements whereby a supplier sells a product to a channel member on condition

that the channel member also purchase another product, or at least agrees not to purchase
that product from any other supplier.

Vertical Integration occurs when a firm owns and operates organizations at other
levels of the distribution channel (for example, a manufacturer owning and
operating its own wholesaling facilities and retail stores). Vertical integration can
occur as a result of growth and evolution of the firm. The firm desires to gain
scales of economies and a high degree of control over its products.