For more than a century, the Federal Trade Commission has been protecting the concerns of American consumers. The mission of the Federal Trade Commission or FTC is to protect consumers and competition by preventing the anticompetitive, deceptive, and unfair business practices through law enforcement, advocacy, education, and without unduly burdening business activity. The focus of FTC is to ensure that businesses do not form coalitions or adopt business practices that hurt competition, and consumers’ welfare and that consumers have access to accurate information that they need.
Anticompetitive behavior or behavior that is likely to reduce competition is of two types mainly – single-firm conduct (attempt at monopolization by a single firm), horizontal conduct (coalition or agreement between competing players targeted at growing their market power against remaining players).
The focus of this article is the anticompetitive behavior that results from the agreement between competitors. Collaboration between the competing players can often result in anticompetitive behavior and antitrust risks. There are antitrust laws in the United States that are enforced by the DOJ and the FTC mainly and that target to eliminate anti-competitive behavior and to ensure that the economy is seeing fair competition. While competitor collaborations are mostly procompetitive, there are several instances when firms collaborate to a degree that they stop playing independently. There are clear rules that prohibit even the most blatant non-competitive agreements. Such anti-competitive behavior includes price-fixing, bid-rigging, market division, customer allocation, group boycotts, and other types of anti-competitive behavior resulting from competitor collaborations.
It is a type of competitor agreement (can be a written agreement or just a verbal agreement between involved players or can be implied from their conduct) that raises prices, or reduces them or stabilizes prices or the competitive terms. In general, the antitrust laws require each player to set its own prices and other terms without agreeing with a competitor. When competing players try to decide prices and other terms through an agreement among them, it generally works against the consumers’ and the economy’s welfare. Customers want that the prices are set transparently on the basis of demand and supply and not on the basis of competitor agreement. Most often competitor collaboration on setting prices and restricting competition leads to higher prices than normal and losses for the consumers. So, price-fixing done through competitor agreement is among the leading concerns for the government antitrust enforcement.
Price fixing agreements among competitors are almost always illegal, whatever range they fix the prices in. Whether the involved players fix the prices at the minimum price range, at the maximum, or in the mid-range, it is almost always illegal for competing players to enter into a price-fixing agreement.
When price fixing is illegal?
Price fixing is illegal when two or more competitors enter into an agreement and take actions that can lead to higher, lower, or stabilized prices of a given product or services, without any legitimate justification. Generally, the players that forge such agreements do so in secret and such secret collaborations can be very hard to uncover. However, circumstantial evidence can help the investigating agencies uncover such secret dealings.
However, not all price changes or price similarities are illegal. It can also be a result of chance and often they are a result of normal market conditions. For example, prices charged for wheat or similar commodities are generally similar across all sellers. It is mainly because while the products are nearly identical, the prices charged by farmers also rise and fall together without any agreement among them. If the produce of wheat decreases due to a drought, then it growth in costs for all the farmers that are affected. Similarly, if consumer demand for wheat increases suddenly, it will cause the prices of wheat to rise uniformly across all farmers. Price fixing is related to not only prices but also to many other terms that affect the prices that consumers pay like shipping fees, warranties, discount programs, or the financing rates. A discussion of any of the following topics may give rise to antitrust scrutiny for price fixing. These topics include:
- – Present or future prices
- – Pricing policies
- – Promotions
- – Bids
- – Costs
- – Capacity
- – Terms or conditions of sale, including credit terms
- – Discounts
- – Identity of customers
- – Allocation of customers or sales areas
- – Production quotas
- – R&D plans
In case of price fixing, a defendant may argue that there was no such agreement but in case the government or a private party can prove that there was a plain price fixing then there cannot be any defense to it. Defendants cannot argue that the prices were reasonable to consumers or that necessary to avoid cut throat competition or stimulated competition in order to justify their behavior.
An agreement whose aim is to restrict production, sales or output also illegal like direct price fixing, since these practices have the potential to drive the prices of commodities higher. For example, an agreement among competing oil importers to restrict lubricant supply by refusing to import or sell them in Puerto Rico was challenged by the FTC. The agency alleged that it was a conspiracy and an unlawful horizontal agreement that was aimed at restricting output and was inherently anticompetitive as well as generated no cognizable efficiencies that could balance the anticompetitive impact of the agreement. These players were seeking to pressurize the legislature so that they would repeal an environmental deposit fees on lubricants. They had also warned of lubricant shortages as well as higher prices.
If Gasoline prices rise in an area at the same time and by the same amount, is it illegal?
A uniform price change that occurs in the same area at the same time can be a result of price fixing. However, there are also chances that the businesses could be responding to a change in the market conditions. For example, if the prices of crude oil have increased due to changed market conditions in the international oil market, it can cause the wholesale oil prices of gasoline to increase. Local gasoline stations increase the wholesale gasoline prices simultaneously to cover the increased costs. There are other market forces also that make the sellers adjust their prices quickly. For example, publicly posting current prices which is common with most gas stations, encourages the suppliers to adjust prices accordingly so as to avoid loss of sales. However, an antitrust violation may occur if all the gasoline station operators talked to each other about raising prices and entered into an agreement for a common pricing plan.
A company monitors the competitor’s ads and offers similar discounts and sales incentives for the customers, is it illegal?
Matching competitors’ prices is not illegal. There are several businesses in the US that claim to match the lowest prices in the market for the products they sell. That is not illegal. It’s a good business practice and occurs in highly competitive markets. Each business in the United States is free to set its own prices. It can also charge the same price as its competitors. However, if the decision is based on a common agreement of coordination between competing players, then it may be considered illegal.
Many times when bids are being awarded by means of solicitation, bidders may coordinate among themselves to rig the bidding process. This undermines the bidding process and is considered illegal. While bid-rigging may take several forms, one of the most common types of bid-rigging is when competitors agree in advance and coordinate among themselves that which player or firm is going to win the bid. For instance, there are ten players involved in the bidding process of which five form a secret coalition. They enter into an agreement that they will take turns to be the lower bidder, or sit out of a bidding round, or provide unacceptable bids to cover u their scheme to rig the bids. Apart from these actions, there are also other types of bid-rigging schemes or agreements like subcontracting a part of the main contract to the losing bidders or to form a joint venture to submit a single bid. For example, there are three school bus companies that enter into a joint venture to offer transportation services under a single contract with the school district. Instead of integrating their operations that would reduce costs, the companies formed the joint venture mainly to prevent the three players from offering competing bids.
Market Division or Customer Allocation:
Dividing geographical markets or allocating customer segments among players or, the involved parties in a relevant agreement is almost always illegal. Competitors may enter into plain agreements that divide sales territories or assign customers to the involved parties among them. Such agreements are illegal because they are essential anticompetitive or created so that the involved parties do not compete with each other.
For example, FTC discovered that two chemical companies FMC Corporation (based in the US) and Asahi Chemical Industry Co ltd. (based in Japan) entered into a conspiracy to divide the world market for microcrystalline cellulose (MCC) which is a binder used in making medicines (vitamin supplements or tablets). The two companies entered into an agreement for dividing markets. As a part of the agreement, FMC agreed not to sell the product to the customers in Japan or East Asia without the consent of Asahi whereas Asahi agreed not to sell the product in North America or Europe with the consent of FMC. As a result, FMC was restricted from acting as the US distributor for any competing manufacturer of microcrystalline cellulose including Asahi for ten years. Apart from that FMC was also prohibited from distributing in the US any other product that Asahi manufactured.
You want to sell your business and the buyer insists that you sign a non compete clause. Is it illegal or not?
A non compete clause is not always illegal or unethical. A limited non compete clause is commonly found included in business agreements whenever a deal to sell a business is formed. Generally, courts have considered such agreements legal if they are ancillary to the main transaction, reasonably necessary to protect the value of the assets on sales as well as limited in terms of the time and area being covered.
However, in some situations, a non compete clause may be illegal or anticompetitive. Several such antitrust concerns have been raised in the past. One such case that came to light was that of American Renal Associates and Fresenius Medical Care Holdings Inc in 2007.
The proposed acquisition of assets from Fresenius AG by ARA would have made it the only operator of dialysis clinics in the Warwick/ Cranston Area of Rhode Island. The buying agreement included the sales of five Fresenius Clinics to ARA as well as a closure of three more clinics in the Rhode Island and Massachusetts area. After the FTC staff raised antitrust concerns, the two parties had to terminate the agreement.
As a result, FTC challenged the agreement to close the three clinics as a clear agreement to pay a competitor to exit the market. Apart from that, the FTC alleged a section 7 violation in the Warwick/ Cranston market for dialysis services. So, the commission also ordered the parties not to enter any agreement to close the dialysis clinics. The commission order also required ARA to notify the FTC in case it intended to acquire any dialysis centers in the Warwick/Cranston area over the next ten years.
If a company individually decides not to do business with another firm, it may not be illegal. However, if there is a group of competing businesses that together enter into an agreement to not engage in business with a distinct group of target customers or businesses, then such a boycott may be illegal. Competing companies can enter into such agreements to grab or exercise market power. For example, two or more competing companies can enter into an agreement for a group boycott that will be used to implement an illegal price-fixing scheme. In such a case, the competitors will fix the terms of doing business with others where the target would be to raise the prices in their own favor. The involved parties will do business with others on the basis of the terms and conditions set out in their joint agreement. While it will hurt the consumers and the other businesses in the market, the involved firms will benefit by charging higher prices. However, if it is a single firm that independently decides that it will not offer its goods or services at the prevailing services, then it is going to raise any antitrust concerns. Antitrust concerns will arise only when there are two or more companies involved in the agreement. If there are competing players involved in the agreement who together decide to not offer their products or services at prevailing prices in order to achieve higher prices for their products and services, it will definitely give rise to antitrust concerns.
In its history, the FTC has challenged several such actions and decisions in the healthcare industry. For example, healthcare providers like doctors forming an agreement to not deal with insurers or other buyers on terms except the ones laid out in the joint agreement among the group of doctors. Not just in the healthcare industry, but FTCX has also successfully challenged such agreements with other service providers including lawyers in the past. It challenged a group boycott by a group of Superior Court Trial Lawyers to stop providing legal services to indigent defendants in the District of Columbia until the district increased the fees paid to the lawyers in those cases. In this case, the decision of FTC was upheld by the Supreme Court.
Similar boycotts that are targeted at making the entry of new firms into a market are also illegal as well as those aimed to snatch market power away and create a disadvantage for an existing player. FTC has been successful at preventing several such boycotts in the past including one by a group of physicians that aimed to prevent a managed care organization from establishing a competing healthcare facility as well as one by retailers who wanted to force manufacturers to limit the volume of sales they achieved through a competing catalog vendor.
Boycotts that are aimed at cutting prices for the seller are also highly likely to raise antitrust concerns. Such boycotts can be achieved through the help of a common dealer or supplier. For example, in the Toys R US case in 1996, FTC took action against the company for using its dominant position in the toy industry to obtain agreements from the toy suppliers to not sell the same toys to the warehouse clubs that they sold to Toys R Us.
” In October 1998, the Commission issued its decision that Toys “R Us had orchestrated horizontal and vertical agreements with and among toy manufacturers to restrict the availability of popular toys to warehouse clubs, and ordered the company to stop pressuring manufacturers to limit supply or otherwise refuse to sell to discount club stores. Toys “R” Us appealed to the Seventh Circuit, and in August 2000, the appellate court upheld the Commission’s order.
In April 2014, on a petition from Toys “R” Us, the Commission modified its order to set aside certain provisions that restricted the company’s ability to enter into certain conditional supply relationships, finding that Toys “R” Us is no longer the largest toy retailer.”
Such group boycotts can be illegal in other conditions as well if they lack proper business justification and restrict competition. In 1995, FTC charged Santa Clary County Motor Dealers Association with using an illegal boycott to prevent a local newspaper from running articles that told consumers about how to use wholesale price information to negotiate for lower prices when buying cars from local car dealers. In this case, while FTC proved that there was no proper business justification behind the deal, it also affected price competition negatively.
If your company is having difficulties with a particular supplier firm that does not fulfill its commitments in time and does not properly respond to queries (other competing companies have also stopped engaging in business with this supplier), should as a purchasing manager you ask your firm to stop dealing with this supplier?
No, it will not be illegal to stop doing business with such a supplier. First of all, businesses are free to unilaterally choose their business partners. If it is not due to an agreement among competing businesses to stop dealing with a particular supplier, the decision to not deal with the targeted supplier must not be a cause of concern for antitrust agencies.
Other Types of Agreements among Competitors:
The FTC uses a flexible rule of reason to evaluate other types of agreements among competitors that are not inherently harmful to consumers in order to determine the overall competitive impact of that particular agreement. The main focus of this analysis remains on the nature of the agreement and if it is reasonably necessary to achieve the pro-competitive benefits. Here are some examples of such dealings among competitors that are not included in the previous sections of this article but can give rise to antitrust concerns:
Agreements to restrict advertising:
In a free market system, truthful advertising helps consumers have access to the information they need to compare prices and quality of products offered by competing suppliers and sellers. In absence of truthful advertising consumers would find it difficult to determine which seller they should buy from or which supplier offers better quality products. This will also limit the choices in the hands of the consumers.
False or deceptive advertising is prohibited by the FTC Act. The FTC enforces this standard vigorously so that consumers can make the right choices in the market. So, if competitors enter into an agreement that limits the amount or content of advertising that is truthful and not deceptive may be illegal if there is evidence to prove that these restrictions lack necessary justification from a business point of view and can also have an anticompetitive effect.
In 2003, FTC challenged a professional code that a National Association of Arbitrators had adopted. Through this code, the association banned virtually all forms of advertisement and client solicitation. FTC through a consent agreement with that association to settle the charges got the policies that barred individual arbitrators from advertising truthful information removed. The national academy of arbitrators was prohibited from adopting policies that restricted its members from advertising truthful information about their services including prices and conditions of services, under terms of a consent order. The association was required to remove all the provisions that did not conform to the provisions included in the consent from all the important documents including its website and professional code.
Codes of Ethics:
Ethical codes adopted by the professional associations are mostly designed to benefit the public. These are self-regulatory activities designed to serve legitimate business purposes. In most cases, they can be expected to benefit consumers and strengthen competition. The antitrust laws do not prohibit professional associations from adopting such ethical codes that foster accountability and transparency on the part of the association. However, such ethical codes can be anticompetitive and illegal if they restrict competition among professionals or the ways in which the professionals can compete. For example, an association of traders adopts a mandatory code of ethics that prevents the member traders from competing on the basis of prices or restrict competing among the involved traders to only the terms set out in the code of ethics may put unreasonable and illegal restraint on competition
Example: An organization of store planners adopted a mandatory code of ethics which included the term that the planners could not offer free or discounted store design or planning services. The mandatory code of ethics adopted by the organization discouraged price competition among the planners that proved detrimental to the consumers of their services.
Exclusive Member Benefits:
Many times competing businesses form associations that offer some benefits and privileges which can improve efficiency and output while also reduce the costs for involved members. There are several such benefits and privileges which may include general industry promotion and high tech support and access to exclusive resources that may be inaccessible for the nonmembers. When associations withhold such privileges from would-be members offering competing products or services then these restrictions can harm competition and drive prices higher for the consumers. However, this problem occurs only in cases where the association has a significant market presence and access to the association sponsored benefits helps the association members gain a significant advantage that is not available to the nonmembers making it difficult for the nonmembers to compete with members.
Many times realtor ,board rules have restricted access to Multiple Listing Services (MLS) for the promotion of homes for sales. The MLS system combines the home listings of several brokers. In this way, it offers several benefits for both buyers and sellers. Access to the MLS was considered key to the marketing and promotion of homes for sales. However many times realtor board memberships excluded certain brokers. In the earlier antitrust cases, FTC invalidated many such realtor board rules.
In the more recent cases, FTC has challenged many MLS policies that permit access to all brokers but at a more subtle level disfavor specific brokerage arrangements that can offer the consumers a lower cost alternative when compared to the more traditional, full-service listing agreement. For example, many brokers offer a limited-service model like listing the home on the local MLS for a fee while leaving the rest aspects of the sale to the seller. The FTC has challenged the rules of several MLS organizations excluding these brokers from home sale websites. While these rules restricted the ways in which the sellers could do business, they also denied home sellers the benefit of having different types of listings.
In most cases, the activities of Trade Associations do not pose an antitrust risk. Their activities are generally either pro-competitive or competitively neutral. For example, a trade association may set industry standards that might protect the interests of the consumers or allow components from different manufacturers to operate together. Moreover, the association may represent its members before the government and the legislature and provide valuable information that enables informed decision making on the part of the government. So, when the trade associations carry out their activities with adequate safeguards in place, the antitrust risks are reduced.
However, forming a trade association does not make joint activities carried out by competitors immune to antitrust scrutiny. If competitor agreements that violate the law are carried out through the trade associations, they will still be considered illegal. For example, if competitors use trade associations to control the prices or to suggest prices to the member parties, then it will be illegal and lead to antitrust investigation and action. Even if the competing players are a part of some trade association, it is illegal for them to use mechanisms like information sharing, or standardized contracts, operating hours, accounting, safety codes, or transportation methods as a disguised means to fix prices.
The exchange of price or other sensitive business data among competitors whether in a trade association, professional association, or any other business group is an area of concern for antitrust agencies. Any similar type of exchange of data or statistical reporting including data on current prices or information identifying data from individual competitors can grow antitrust concerns if it encouraged more uniform prices than would otherwise exist. Antitrust concerns are less likely to arise if exchanged information is related to costs or any other form of data other than prices and historical data, rather than current or future data. Similarly, if the data being exchanged is managed by a third party, the chances of antitrust concerns arising due to the exchange are low.
The FTC and DOJ have developed guidelines for the healthcare industry. These guidelines are known as the Statements of Antitrust Enforcement Policy in Healthcare and are meant for the healthcare providers sharing price and cost data. However, the principles included in these guidelines are also broadly applicable to other industries. Apart from that, the DOJ has issued many business review letters that are related to proposed information exchanges by various trade associations.
Antitrust laws and dealings in the supply chain:
This was a list of dealings between businesses that can raise anti-competitive concerns. Apart from it, there are also various types of dealings in the supply chain that can raise antitrust concerns. The antitrust laws also affect manufacturer dealer and supplier-manufacturer relationships (vertical relationships). Law sees most such vertical relationships or arrangements as beneficial overall because apart from reducing costs, they also improve the efficiency of distribution for businesses. However, in some cases, these relationships can give rise to antitrust concerns if they reduce competition among firms at the same level as among retailers or among wholesalers or if they prevent the entry of new firms in the market. Such concerns arise mainly in the market where the number of sellers is low or the markets dominated by a single seller. In such markets, the restraints imposed by the manufacturers or suppliers can make it difficult for new entrants or firms with innovative products to find outlets and reach the consumers.
Manufacturer Imposed Requirements:
Reasonable restrictions on dealers related to prices, territory, or customers are legal. Requirements that manufacturers impose can increase Interbrand competition while also reduce intrabrand competition among the dealers. For example, manufacturer dealer agreements related to ceiling prices can prevent dealers from charging noncompetitive prices. Similar agreements related to setting floor prices or limiting territories can encourage dealers to offer their customers the level of service that the manufacture wants when customers buy its products. However, these restrictions can also reduce competition, and therefore their anticompetitive effects need to be weighed against the offsetting benefits. Till, some 13 years ago, courts did not treat the minimum resale price agreements the same as the maximum resale price agreements. However, in 2007, the US SUpreme court determined that all the manufacturer-imposed vertical price programs required to be evaluated using a rule of reason approach. According to the supreme court, if there are no vertical price restrictions, the level of retail services that enhance Interbrand might remain low. This is because the retailers who offer discounts might get the chance to free ride on retailers that offer services and then capture some of the demand generated by those services. However, this change was made in the federal standards and some state antitrust laws, as well as international authorities, view the minimum price rules as intrinsically illegal.
if a manufacturer acting on its own, adopts a policy regarding a desired level of prices, then legally the manufacturer is free to deal only with the retailers agreeing to that policy. The manufacturer is legally also allowed to stop dealing with the retailers not agreeing to its resale price policy. It means the manufacturer is free to implement a dealer policy on a nonnegotiable or take it or leave it basis. Moreover, customer or territory restrictions on dealers that is how or where a dealer may sell a product are also generally legal. Such agreements can have procompetitive benefits. They can result in better sales and service efforts on the part of each dealer in his assigned area and thus help churn competition with the other brands.
However, there are also certain instances where manufacturer imposed requirements may give rise to antitrust concerns. In case a manufacturer enters into an agreement with competing manufacturers for imposing price or non price restraints upstream or downstream in the supply chain dealing with suppliers or dealers), it can give rise to antitrust concerns. Similarly, if dealers or suppliers act together in a manner to induce a manufacturer to implement similar restraints then it would also give rise to antitrust concerns. The thing that marks the distinction between agreements that will give rise to antitrust concerns and the ones that will not. If it is a unilateral decision to impose the restraint, then it is legal but if the decision arises from a collective agreement among competitors then it will be unlawful.
In a 1998 case, an association of 25 dealers agreed to settle charges with the FTC that they entered into a collective agreement that they would boycott Chrysler if the automaker continued to allocate vehicles on the basis of total sales. The dealers wanted that Chrysler allocated vehicles on the basis of sales made to customers in each individual dealer’s territory. In its investigation, the FTC found that the actions of the association were unreasonable and were mainly meant to stop a dealer that sold at low no-haggle prices and via online channels to customers across the country.
In many cases, it becomes difficult for FTC to determine if restraint is vertical or horizontal due to manufacturers in the market operating at various different levels or supplying important inputs to their competitors. However, whether the restraint is vertical or horizontal, it is the impact that really matters. The question before FTC while investigating such cases is if the restraint unduly reduces competition at any level among the competitors. If it is a vertical restraint, then it is an outcome of an agreement among competitors. Moreover, if the agreement between competitors is labeled as horizontal but the agency finds it to be having a horizontal anticompetitive impact. For example, the FTC has stopped exclusive distribution agreements operating as market allocation schemes between competitors in global markets. In such a situation, the competitors designate each other as the exclusive distributor for their products in specific geographic regions to avoid competition. However, it is still an agreement between competitors to not compete in the specified geographic areas or simply a market allocation scheme.
Do sellers need to charge the MSRP specified by the manufacturer?
MSRP means manufacturer suggested retail price. The keyword here is suggested. A dealer can use the manufacturer’s suggestion or discard it with regards to setting prices. It means he can follow the MSRP or charge a different price as long as it is the dealer’s own decision and not a product of collective agreement. It also depends on the manufacturer whether it wants to sell its products to any dealer or only the dealers willing to sell at the MSRP.
Dealers complain to a manufacturer about the prices other dealers are charging for his products. What should the manufacturer tell them?
At each level of the supply chain, the competitors should set their prices independently. It means just as manufacturers cannot agree on wholesale prices, the dealers cannot agree on retail prices. However, if a manufacturer likes, it can listen to what its dealers have to say and respond accordingly on its own.
Many times a manufacturer removing a discounting dealer from his network has given rise to antitrust issues. There is also evidence in many cases to show that the manufacturer received complaints from dealers before it removed the discounting dealer. However, this evidence is not always sufficient to show or prove a violation since a manufacturer is entitled to keep its dealers satisfied with their affiliation. A legal issue may arise if the action has happened as a result of a collective agreement between competing dealers who agreed to threaten a boycott or to pressure the manufacturer together.
If the company I want to carry products of already has a franchised dealer in the area, is not it a restriction on competition?
Basically, it is not a restriction on competition. A manufacturer is free to decide the number of manufacturers and specifically who its distributors will be according to the antitrust laws in the United States. From a competition point of view, every manufacturer wants that his dealer network is able to produce the best results. In order to successfully compete with the other manufacturers, it may decide to use only franchised dealers with exclusive territories. Otherwise, it can use different dealers that can help it target different customer segments. However, there are both pros and cons of being a franchised dealer.
It will require you to comply with the requirements and guidelines set forth by the manufacturer related to product sales, operating hours, operating standards, and similar more. These are not restrictions on competition but instead reasonable limits that ensure that you run your business according to the manufacturer’s and its customers’ expectations. In exchange, you will be dealing in a brand that consumers associate with quality and a certain level of customer service.
For example, a beer brand requires its dealers to store the beer at a certain temperature. Not storing at that temperature will spoil the flavor and instead of blaming the dealer and its storage methods, the customers will blame it on the manufacturer. This can lead to a loss of sales at all the outlets of the manufacturer brand.
Example: I cannot participate in my supplier’s cooperative advertising program if I advertise a price below the supplier’s minimum advertised price. Think that’s unfair.
Manufacturers are allowed considerable leeway while setting the terms of advertising that they help to pay for. These promotional programs are mainly a part of the manufacturer’s strategy to compete against other manufacturers more effectively. The situations where these programs can have an unreasonable effect on price levels are limited.
However, there have been such cases where the FTC has found such practices to be anticompetitive and illegal. In 2000, FTC charged five music distributors who wanted their retailers to advertise their music CDs at or above the MAP (Minimum Advertised Price). In exchange, the distribution companies offered the retailers substantial sums for advertising on various channels like Television, radio, and newspaper as well as for in-store advertising within the retailer’s own stores. At that time, these five distributor companies held an approximately 85% market share in the United States.
These distributors included Time-Warner Inc., Bertlesmann, Universal Music and Video Distribution Corporation and UMG Recordings, Inc., EMI Music Distribution, and Sony Music Entertainment. FTC found that these practices constituted an antitrust violation in two respects. On the one hand, they facilitated collusion among the distributors, and individually these practices constituted an unreasonable vertical restraint under the rule of reason. These restraints were unreasonable, preventing the retailers from telling the consumers about the deals and discounts on records and CDs.
Exclusive Dealing or Requirement Contracts:
Exclusive dealings or contracts are common across the industry. Manufacturers and dealers form such contracts across various industry sectors and generally, these contracts are legal. Suppose, there is an exclusive dealing contract between a manufacturer and a distributor, it prevents the distributor from selling the products of a different manufacturer. A requirement contract also prevents the manufacturer from buying raw material from a different supplier. The investigating agencies judge such agreements under the rule of reason standard to check if the procompetitive benefits offset the anticompetitive effects.
Exclusive dealing contracts are generally beneficial because they encourage marketing support for the manufacturer’s brand. A dealer into an exclusive contract with a manufacturer can become an expert in his products and thus start specializing in the promotion of the manufacturer’s brands. It may also include special services that cost money. For example, The dealer may offer exclusively designed stores, trained professionals, special working hours as well as an inventory of products on hand or faster warranty service. However, in several instances, the cost of offering these services may be difficult to recover. For example, if the customer leaves without buying anything from the dealer or retailer, the cost of operations cannot be passed on to the customer in the form of a higher retail price.
For example, there is a retailer offering valuable service along with the product and charges a higher price. There is another retailer who does not offer valuable services or high-cost amenities like a discount warehouse or online store with the product and charges a lower price. The consumer may take a free ride on the first retailer and then buy the same product from the second retailer who charges a lower price. In this way, the full-service retailer may continue to lose sales and if he loses enough sales he may stop offering the services. In case, the services were genuinely valuable and useful, (if they together resulted in higher sales than the product alone) then it would mean a loss for the manufacturer as well as the consumer. So, antitrust laws generally nonprice vertical agreements like exclusive dealing contracts that are designed to encourage the provision of special or extra services by the retailers.
However, there are also chances that an influential manufacturer with market power can use these types of vertical arrangements for preventing smaller competitors from succeeding in the market. For example, a smaller competitor may need retailers and wholesalers to expand its presence in a market. However, an existing firm with a large market share may use its exclusive deals and contracts with dealers and retailers in the local market to make it difficult for a new firm to make sufficient sales possible.
For example, in a rather recent case, FTC found that McWane Inc., a supplier of ductile iron pipe fittings used in municipal water systems around the US had maintained its monopoly in the market illegally by requiring the distributors to buy domestic fittings exclusively from it and not from any of its competitor trying to enter and find a firm footing in the US market. There were two more players involved in the case but in the end, FTC found that only McWane was guilty of antitrust violations. In its decision, FTC prohibited McWane from demanding exclusivity from its customers. McWane’s policy was anticompetitive and it restricted another new entrant from achieving sufficient sales and competing effectively in the United States market. On the supply side also exclusive contracts can be anticompetitive and can force new entrants to seek raw materials from higher-priced resources since low-cost sources will be tied up in exclusive contracts with the existing players with market power.
FTC had charged Mylan, the US’s second-largest generic drug maker in a similar case in 1998 with an attempt to monopolization, and restraint of trade. FTC charged in this case that Mylan had attempted to monopolize the market and violated antitrust laws by acquiring exclusive licenses to a critical ingredient used in the lorazepam and clorazepate tablets (antianxiety drugs). This allowed Mylan to dramatically increase the prices of the two tablets.
In some situations, competing manufacturers can use exclusive dealings to restrict competition between them. For example, two leading manufactures of pumps for fire trucks were found guilty of exclusive provisions in sales contracts by FTC. Each of these two companies sold the pumps on the condition that the company would buy additional products from its existing supplier only. It was like collusion for customer allocation between the two companies. the two companies had their own customers and they did not compete for each other’s customers since their existing customers continued to purchase from them only.
A small manufacturer of high-quality flat panel display monitors wants to sell his products to a big-box retailer who is into an exclusive contract with another large manufacturer of the same products. Isn’t the exclusive dealing contract illegal?
Exclusive distribution arrangements like the one mentioned here are usually legal in the United States. The reason is that selling products like high-quality flat panel display monitors usually requires high-level knowledge and skills as well as warranty services. Moreover, it is the manufacturer who invests in providing the required training to the sales staff as well as into the product’s attributes and operations. Therefore, a reasonable level of commitment may be necessary on the retailer’s part. The retailer in exchange for all the related services and other privileges will commit to selling only the manufacturer’s products. Generally, this level of service proves beneficial for the customers of high-quality electronics products. Antitrust laws will generally not interfere with such exclusive commitments since commitments bar new entrants from entering the market and achieving sufficient sales. So, if there are sufficient sales outlets (excluding the big box retailer into an exclusive dealing contract with another manufacturer) from where your consumers can buy your products there is no reason for the law to interfere with the arrangement.
Refusal to Supply:
Generally, businesses have every right to choose their partners. A seller is free to choose who it wants to deal with. A firm can refuse to deal with another firm or person as long as it is the firm’s own decision and not a product of anticompetitive dealing among firms or the part of any other predatory or exclusionary strategy that is aimed at achieving or maintaining a monopoly position in the market. The US Supreme Court had laid out this principle several years ago. One of the core principles of the Sherman ACT is to preserve the right to freedom of trade. If the firm does not aim to create or maintain a monopoly, the Sherman act does not restrict any trader or dealer from choosing his own business partners. It is the long-recognized right of a trader or manufacturer engaged in an entirely private business to get to choose whom he wants to deal with.
This is a fundamental rule of federal antitrust law that separates legal independent decision making from illegal joint or monopolistic activity.
I am the owner of a small clothing store and my manufacturer cut me off because I sell below the suggested retail price. I think it is because my competitors complained against me. Is it legal?
In general it is legal for a manufacturer to have a policy that dealers should sell a product above a certain minimum price. Manufacturers can also terminate the dealers that do not honour the policy. The manufacturers may choose to adopt this kind of policy since it encourages dealers to provide full customer service. Apart from that it also prevents the other dealers that do not provide full service from poaching away customers or taking free rides on the services offered by the other dealers. However, if the manufacturer cuts you off because it has an agreement with your competitors so that it can maintain the price they agreed at then it is illegal.