Public Policy in Private
Markets
Debate 3
Vertical Restraints Wrap Up
Announcements
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Today:
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Debate # 3
Pick up HW 4
Turn in HW 6
Midterm # 2: 4/19
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Review sheet posted
Review session: 4/18; 6-8 pm, Holdsworth
203
Debate 3
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Group 1: Casey Conley, Kyle Ross, Steven
Hough, Nate Holt (FTC – prosecution)
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Group 2: Michael Fetterly, Steve D’Amario,
Atanas Gizdov (Toys R Us - defense)
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First video
Second Video
Room for defense (5 minutes, per group)
i>clicker questions throughout
Please put away your laptops
Controversy
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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?
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Do you think the exclusive dealing
agreements enforced by Toys R Us harmed
consumers?
A. YES
B. NO
Clarity of Presentation
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Which side presented the clearest case?
A. FTC (prosecution)
B. Toys R Us (defense)
Strength of Arguments
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Which side presented the strongest economic
arguments?
A. FTC
B. Toys R Us
Overall assessment of quality of
presentation
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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
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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?
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Do you think the exclusive dealing
agreements enforced by Toys R Us harmed
consumers?
1. YES
2. NO
Toys R US Case
Horizontal Coordination?
TRU as “Hub”
Toy Manufacturers
VR?
Exclusive Dealer of
New and Advertised
products
Toys R US
Buyer market power: if manufacturer does not
sell to Toys R US, profitability is compromised
Restricted Products
Warehouse Clubs
Exclusive Dealing: Burden of Proof
Seller’s (or buyer’s) market share:
1.
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Amount of foreclosure from exclusive dealing
(competitive effect)
TRU appeared to have substantial market share (?)
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Group’s 2 argument about relevant market was
excellent (recall Staples-Office Depot case)
Reasonableness?
2.
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Efficiency argument: preventing free riding by
warehouses.
Toys R Us: The reasonableness of VR
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Toys R Us
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Warehouse (wholesale) clubs:
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Spends a lot of $ in stocking many items, advertising,
showrooms, etc.
Provides a “special” one-stop shopping experience for toys
Limited assortment, low prices, popular items
Provides a “special” one-stop shopping experience for
everything.
The defense:
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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?
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VR allows more product variety
VR does not allow lower prices in popular items
VR allows for pre-sale services (show rooms, etc.)
 FTC
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Looked at the problem as anticompetitive from the
firm’s perspective (i.e. warehouse clubs)
Did it consider the consumer?
Vertical Restraints Wrap Up
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Restraint in contractual agreement between
upstream and downstream firm
Four types:
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Tying (Chicken Delight case)
Exclusive territories (soft drinks example, GTESylvania precedent)
Exclusive dealing (Toys R US)
Resale price maintenance
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Minimum price
Maximum price (Oil State v. Khan)
Law:
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Stop restrictive practices
Typically under rule of reason approach, except for
RPM (till recently)
Resale Price Maintenance
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Manufacturer specifies minimum or maximum
price that downstream unit can charge
Price fixing? Unlikely
Motives:
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(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)
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It is more efficient to not have intermediaries in the supply
chain