Pancakes & Syrup
Facts
Maple Corporation is a manufacturer of breakfast products. Maple sells its products to wholesale distributors and directly to large retail chains. Maple's Real Maple brand table syrup is very popular due to its high content of real maple syrup. To boost sales of its pancake batter mix, Maple Corporation conditions the sale of its table syrup on the buyer's agreement to buy Maple's pancake mix. To get its customers to cooperate with this arrangement, Maple gives an extra 5% trade discount for each syrup/mix transaction. The pancake batter mix is not as popular as the syrup, causing retailers to experience oversupplies of mix. To induce customers to buy the oversupply, retailers are having to offer deep discounts on the mix.
Legal Reasoning:
What type of arrangement is this? What law applies? What are the elements of the law? Is the Maple Corporation arrangement legal in your opinion? Why?
This is an example of a Tying Arrangement – an agreement between a buyer and a seller under which the buyer of a specific product or service is obligated to purchase additional products or services from the seller.
The antitrust law applies in this situation, due to the fact that the law restricts business practices that are considered to be monopolistic or which restrain interstate commerce. This law consists of two acts – the Sherman Act, and the Clayton Act.
The Sherman Act declares illegal every contract, combination or conspiracy in restraint of trade or commerce between states or foreign countries. Restraint of trade is defined as “any activity which tends to limit trade, sales and transportation in interstate commerce or has a substantial impact on interstate commerce. Such restraint tends to restrict production, affect prices, or otherwise control the market to the detriment of purchasers or consumers of goods and services.”
The Clayton Act declares that instances of price discrimination, exclusionary practices, mergers and interlocking directorates are illegal if they substantially lessen competition or tend to create monopoly power.
Antitrust concerns are raised by tying arrangements because sellers create them in order to maintain or enhance the their pre-existing market power and/or damage competition in the market for the same product. I do not believe that the Maple Corporation arrangement is legal. I think that this arrangement violates the Sherman Act in that it is restricting the trade in the pancake mix market. The buyer may prefer another manufacturer’s pancake mix, but because the Maple Corporation is conditioning the purchase of their maple syrup with their pancake mix the buyer may not be able to afford another manufacturer’s pancake mix as well. By forcing buyers to purchase their pancake mix in addition to their syrup (which is very popular in comparison to their pancake mix) the Maple Corporation is limiting the market for other pancake mix suppliers.
In my opinion, I would also say that the Maple Corporation’s arrangement violates the Clayton Act as well. The competition in the breakfast market is highly favors the Maple Corporation’s products. If customers want their syrup, buyers must supply the syrup. The buyers may not necessarily want to purchase the Maple Corporation’s pancake mix, but must do so in order to please customers with their maple syrup. These buyers are then having to significantly discount the pancake mix in order to get it off of their shelves. By providing a discount when both products are purchased, the corporation is not only selling both of their products to more buyers, but is also influencing customers to buy both products from the buyers as well. The entire breakfast market is being manipulated by the Maple Corporation’s arrangement, and it seems to me as if they are attempting to monopolize the breakfast industry.
Ethical Reasoning:
How does this agreement benefit Maple Corporation? Does it fairly protect Maple's interests?
This agreement benefits Maple Corporation because they are only selling their popular maple syrup in condition with their pancake mix. The high demand for their maple syrup may cause buyers to overlook the fact that they are being manipulated into buying their pancake mix as well, which isn’t necessarily the favorable brand of pancake mix. Regardless, the Maple Corporation is selling their products in order to maximize their profits, due to the fact that both of their breakfast products are now in high demand. This agreement protects Maple’s interests in that the agreement was made solely for Maple’s benefit.
Is this agreement fair to buyers of Maple's products?
I do not believe that this agreement is fair to the buyers of Maple’s products. Buyers want to sell popular products, Maple’s syrup being one of them. However Maple’s pancake mix is not nearly as popular and requires significant discounting in order for it to sell. The buyers are then losing money because they cannot purchase the syrup without the pancake mix, causing for a huge oversupply in the pancake mix that consumers do not want to purchase. The Maple Corporation is forcing buyers to purchase pancake mix that few want to buy, which is not fair at all to the buyers of their products.
Is this agreement fair to consumers in general?
The customers are not being forced to purchase the pancake mix, however if they do choose to purchase it they receive a discounted rate. I think this is fair for general consumers, but at the buyer level of consumption it is still unfair.
Considering the fairness to each of the parties involved, is it ethical for Maple to continue with this arrangement? If not, what is the solution?
If Maple were to continue with the tying arrangement, and sell their pancake mix to buyers at a discounted price I believe that this arrangement could be ethical. This way, buyers will not be losing money by having to buy the pancake mix at full retail price just to turn around and sell it at significantly discounted rates in order to account for the oversupply.