safe harbor
Subscribe to safe harbor's Posts

Four FTC Commissioners Reject Wright’s Call for GUPPI Safe Harbor

Four members of the Federal Trade Commission (FTC) issued a statement on July 13, 2015, disputing claims by a fellow commissioner that the 2010 Horizontal Merger Guidelines include a “safe harbor” that is available in unilateral effects merger investigations. Commissioner Joshua Wright’s comments about the potential safe harbor arose in the context of the Commission’s investigation into Dollar Tree’s proposed acquisition of Family Dollar Stores, Inc. The FTC has accepted a proposed settlement to resolve the alleged anticompetitive effects of that transaction.

The dispute involves a Gross Upward Pricing Pressure Index (GUPPI) analysis. The GUPPI analysis permits the federal antitrust enforcement agencies to assess whether a merger involving differentiated products is likely to result in unilateral anticompetitive effects. Such effects can arise where the merged entity can profit from diverted sales. The GUPPI measures the value of diverted sales that would be gained by the second firm measured in proportion to the revenues that would be lost by the first firm.

The 2010 Horizontal Merger Guidelines anticipate the use of such an analysis in certain cases. Indeed, according to the guidelines, “[i]f the value of diverted sales is proportionately small, significant unilateral price effects are unlikely.” Commissioner Joshua Wright pointed to this language, and statements by one of the principal drafters of the 2010 Guidelines, to argue that the Department of Justice had already publicly announced a safe harbor where the GUPPI is less than five percent. Commissioner Wright argued that there was a strong legal, economic and policy case in favor of such a safe harbor, and urged the FTC to “adopt a GUPPI-based safe harbor in unilateral effects investigations where the data are available.”

Wright’s fellow commissioners firmly disagreed that any safe harbor has previously been identified, or that such a safe harbor is appropriate. In their statement, Chairman Ramirez and Commissioners Brill, Ohlhausen and McSweeney explained that the GUPPI analysis serves “as a useful initial screen to flag those markets where the transaction might likely harm competition and those where it might pose little or no risk to competition.” They emphasized that the GUPPI analysis is “only a starting point” in a merger investigation. The commissioners further claimed that Commissioner Wright’s remarks ignored “the reality that merger analysis is inherently fact-specific” and that “[t]the manner in which GUPPI analysis is used will vary depending on the factual circumstances, the available data, and the other evidence gathered during an investigation.” The commissioners concluded that “accumulated experience and economic learning” do not provide an adequate basis for recognizing a GUPPI safe harbor. The Commission will continue to “use GUPPIs flexibly and as merely one tool of analysis in the Commission’s assessment of unilateral anticompetitive effects.”

FTC and DOJ Host Conditional Pricing Programs Workshop

The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of “conditional pricing” programs.  Most panelists were academics, including economists and law school professors.  The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.

Conditional pricing programs.  Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company’s prices charged will vary depending upon the level of purchases the customer makes from the company’s competitors.   Examples include:

  • Bundled discounts: Supplier X, which sells dominant product A and competitive product B, grants a discount on product A (which the customers have to buy) so long as customers buy a certain percentage of their needs of product B from Supplier X, rather than from its competitors.
  • Loyalty / market share discounts: Supplier X, which has a dominant position in product A, grants discounts from its baseline pricing if customers purchase a high percentage (e.g., 90 percent) of Product A from Supplier X, rather than from its competitors.

Theories of harm.  The panelists discussed two basic categories of theories of competitive harm.

  • Exclusion of rival manufacturer.  When a smaller rival, perhaps a new entrant, tries to break in to a market, the dominant incumbent may impose a conditional pricing program that makes it hard for the new entrant to get a significant share of sales, which may deprive it of critical scale efficiencies and render it a marginal supplier, or perhaps even force an exit.
  • Coordination / collusion of customers / distributors.  A retailer can be viewed as providing retailing services in the sale of the manufacturer’s products.  The purchases and contracts different retailers receive from manufacturers can be thought of as inputs in the retailer’s provision of its services.  Some of the economists stated their view that customers who may desire to coordinate their behavior as sellers can use conditional pricing programs from their suppliers to ensure that the input costs are comparable, which can reduce competition among retailers.  For example, the conditional pricing program may ensure that no retailer switches over from the dominant supplier to the new entrant with a lower cost product.  Keeping the customers from switching to the new entrant may make it easier to achieve or maintain coordination.

Relevance of cost based tests.  The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful.  The issue is whether conditional pricing programs that result in a product being sold “above cost” should fit within a safe harbor. 

  • Legal background.  This discussion starts with the Supreme Court’s Brook Group case, which found that above cost pricing cannot create liability under a predatory pricing theory.  In cases involving bundled /multiproduct discounts, there has been a circuit split with the Third Circuit (LePage’s) allowing liability even if prices are above costs, and the Ninth Circuit (Peace Health) holding that above [...]

    Continue Reading