Public Policy in Private Markets Debate 3 Vertical Restraints Wrap Up

Announcements Today:  Debate # 3  Pick up HW 4  Turn in HW 6 Midterm # 2: 4/19  Review sheet posted  Review session: 4/18; 6-8 pm, Holdsworth 203

Debate 3 Group 1: Casey Conley, Kyle Ross, Steven Hough, Nate Holt (FTC – prosecution)  First video Group 2: Michael Fetterly, Steve D’Amario, Atanas Gizdov (Toys R Us - defense)  Second Video Room for defense (5 minutes, per group) i>clicker questions throughout Please put away your laptops

Controversy What was the most controversial issue in this case? A.The business motives (i.e. reasonableness for exclusive dealing) B.Product Market definition C.Collusion of manufacturers D.Competition from internet sellers E.Inability of manufacturers to sell in other outlets (Costco, Wal-Mart)

Anticompetitive vertical restraint? Do you think the exclusive dealing agreements enforced by Toys R Us harmed consumers? A.YES B.NO

Clarity of Presentation Which side presented the clearest case? A.FTC (prosecution) B.Toys R Us (defense)

Strength of Arguments Which side presented the strongest economic arguments? A.FTC B.Toys R Us

Overall assessment of quality of presentation On a scale from 1 – 10 (1 poor, 10 outstanding), what would be your rating of the FTC’s side?

Overall assessment of quality of presentation On a scale from 1-10 (1 poor, 10 outstanding), what would be your rating of the defense side (Toys R Us)?

Anticompetitive vertical restraint? Do you think the exclusive dealing agreements enforced by Toys R Us harmed consumers? 1.YES 2.NO

Toys R US Case Toy Manufacturers Toys R US Warehouse Clubs Exclusive Dealer of New and Advertised products Buyer market power: if manufacturer does not sell to Toys R US, profitability is compromised Restricted Products Horizontal Coordination? TRU as “Hub” VR?

Exclusive Dealing: Burden of Proof 1. Seller’s (or buyer’s) market share: Amount of foreclosure from exclusive dealing (competitive effect) TRU appeared to have substantial market share (?) Group’s 2 argument about relevant market was excellent (recall Staples-Office Depot case) 2. Reasonableness? Efficiency argument: preventing free riding by warehouses.

Toys R Us: The reasonableness of VR  Toys R Us  Spends a lot of $ in stocking many items, advertising, showrooms, etc.  Provides a “special” one-stop shopping experience for toys  Warehouse (wholesale) clubs:  Limited assortment, low prices, popular items  Provides a “special” one-stop shopping experience for everything.  The defense:  Without VR, the Toys R Us experience is not viable (free riding from warehouse clubs)  Today: internet sales would make Toys R Us defense stronger

The deeper question  Are consumers better off with the VR?  VR allows more product variety  VR does not allow lower prices in popular items  VR allows for pre-sale services (show rooms, etc.)  FTC  Looked at the problem as anticompetitive from the firm’s perspective (i.e. warehouse clubs)  Did it consider the consumer?

Vertical Restraints Wrap Up Restraint in contractual agreement between upstream and downstream firm Four types:  Tying (Chicken Delight case)  Exclusive territories (soft drinks example, GTE- Sylvania precedent)  Exclusive dealing (Toys R US)  Resale price maintenance Minimum price Maximum price (Oil State v. Khan) Law:  Stop restrictive practices  Typically under rule of reason approach, except for RPM (till recently)

Resale Price Maintenance Manufacturer specifies minimum or maximum price that downstream unit can charge Price fixing? Unlikely Motives:  (minimum) High prices can maintain quality image: “you get what you pay for”  (minimum) Avoid free riding behavior by retailers that do not offer pre-sale services (e.g. a showroom)  (maximum) Reduction of double marginalization problem (very important)  It is more efficient to not have intermediaries in the supply chain