Sunday, November 23, 2003

Market power, market share, and measuring concentration Can a company that has only 20% of a given market use its buying power to retrain trade and raise price? It all depends on how you count, according to 1998 Federal Trade Commission (FTC) ruling against toy retailer Toys-R-Us (TRU). There are other ways of framing the numbers and the specific realities of each market require different approaches. The commission found that the chain had managed to "persuade"10 of the biggest toy manufacturers to jointly boycott low-priced warehouse clubs, a big threat to Toys-R-Us's profits. The inducement to join the boycott was a threat -- TRU could choose not stock or push those manufacturers' products, either not all or less prominently. The other inducement would be that TRU would guarantee that the other competitors would not break the boycott. As both the FTC and a subsequent court decision held, this was a classic cartel, one where one set of stories were denied products for their shelves in return for prominent shelf space on a bigger retailer. In the court case, the federal court resurrected some "hoary" older laws as precedents for the ruling against TRU, according to an article, "Short leap from Toys-R-Us to Heinz-Beechnut" by Robert Skitol from the American Antitrust Institute ("FTC:WATCH No. 550," 9/11/2000) In the end it was a case of "powerful buyers bending suppliers to their will in ways that suppressed downstream competition." But how can a company that is not a monopoly be an antitrust violator? One of TRU's principal defenses was that it lacked sufficient market power to support finding an antitrust violation since its share of toy sales nationally was "only" 20%. The Commission found that (a) while TRU's share of national toy sales and of national toy purchases at wholesale was 20%, its share of sales within major metropolitan areas ranged between 35 and 49%; and (b) it buys about 30% of the largest toy companies' total output. These shares, however, were also found to understate significantly TRU's actual market power: "While not a monopolist or a monopsonist, TRU enjoys a dominant position" on both the buying and selling side. The FTC ruled that, for the toy makers, "no other retailer could make up for lost sales should [TRU] decide to terminate." It also ruled that TRU had other, more subtle forms of retaliation, including giving some vendors far better shelf space (nearer the front of the stores, at the "cap" of an aisle) than others. Ultimately, TRU had enough market power to bend ten big companies to its will, even though they certainly would have no reason to boycott the discount stores. The market power of oligopolies can add efficiencies to the market, but it can also work to take them away. As Skitol points out, buying power can either enhance efficiency and ultimately lower consumer prices or, alternatively, facilitate collusive and exclusionary practices that suppress both upstream and downstream competition generally. Two important insights from the Toys-R-Us decision are that (a) even buying power falling short of economists' technical definitions of "monopsony" can threaten serious anticompetitive effects and (b) buyer power can be particularly anticompetitive under market conditions where it partners with and facilitates the exercise of seller market power, suppressing competition at both levels of the distribution chain. Oligopolies then can have power over the market even when they don't own 40% or 50% of the overall market and even when they don't conspire with their immediate rivals. Part of it is how you slice and dice any market; in this case TRU is far more dominant than it might at first seem. Applying the Herfindahl index or other oligopoly measures is not a purely objective act; it's all based on how you define the market. The point is that antitrust decisions cannot be based on simple percentages. It is also the case, as we've argued, that there are more ways for oligopolies to succeed than by simply raising consumer prices. In this case, TRU maintained prices, keeping competition at bay. 5:23:48 PM

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