(solution) EVALUATING EXCLUSIVE CONTRACTS Pirna Oil Company, a manufacturer of a variety of petroleum…

(solution) EVALUATING EXCLUSIVE CONTRACTS Pirna Oil Company, a manufacturer of a variety of petroleum…

EVALUATING EXCLUSIVE CONTRACTS Pirna Oil Company, a manufacturer of a variety of petroleum products, denied Federal Trade Commission charges that its contracts with its independent retail service stations require exclusive dealing or that these contracts threaten to lessen competition. The Commission had charged Pirna Oil Company with requiring its dealers to refrain from handling competing products in violation of Sec. 3 of the Clayton Act, which prohibits such arrangements where the effect may be substantially to lessen competition or to create a monopoly. The Commission cited several types of contracts that Pirna had used that required dealers to buy all products from the Pirna organization. Denying this contract is unlawful, the president of the Pirna Oil Company maintained that it was necessary to assure proper quality and standardization of products on which the prestige of the Pirna name rests and to develop and compete for public acceptance. The president contended that this type of contract was necessary if his company was to meet the competition of larger oil companies. The president also maintained that Pirna actually developed a “new area of competition,” bringing other sellers into the market and promoting competition with established products. The president further emphasized that in the market Pirna's annual sales and net worth are inconsequential when compared with the sales volume or net worth of any of the larger companies with which Pirna competed. He stressed that, although its current contract calls for the dealers to buy their products from Pirna, there are no provisions for cancellation of the agreement if a dealer fails to comply with this requirement; rather, he may, at the option of the Pirna Oil Company, be reduced from an exclusive to a nonexclusive basis. The president maintained that the contract was required to protect the Pirna's trade name and good will and the public interest. By this requirement, the public is assured that the products purchased at a Pirna Station will always be of high quality and guaranteed by the company. It was the president's opinion that, because of the myriad of types of products a station might handle, it was costly, uneconomical, and impracticable for a retail service station to handle more than one brand. QUESTIONS 1.       When may a manufacturer use exclusive contracts with its dealers? 2. Does the size of a company have any effect on whether or not it may use exclusive contracts? 3. Evaluate the points that the president of Pirna gave as to why the company should be allowed to continue to use exclusive contracts? Are these economically sound? 4. Should Pirna be allowed to continue to use exclusive contracts with its retail stations?