Are Corporate Predators On The Loose?
One spring day in 1979, Garith Helm was poking around a garage sale in Modesto, Calif., when he happened upon a used book titled Brew It Yourself. A professor of physics at Turlock State University, Helm bought the battered how-to guide for a dime and learned how to make traditional German Alt ale. Helm thought it was so superior to most mass-marketed beers that he began selling his St. Stan's brown and amber ales to local bars and pizza parlors.
When the boutique-beer craze arrived in the early 1990s, Helm was perfectly positioned to cash in. By early 1996, he had quit his job and was selling $300,000 worth of St. Stan's per month throughout California. But the same microbrewery revolution that was making Helm rich had prompted a counterattack by industry giant Anheuser-Busch Cos., which commands 44% of the domestic beer market. In March of 1996, Anheuser launched a campaign to discourage distributors from carrying the microbrews, Helm claims. Among other things, he says, Anheuser-Busch offered discounts and subsidized advertising and limited distributors' ability to bring rival brews to bars and retailers.
Within months, five of St. Stan's key distributors abandoned the company--costing it 45% in overall sales. "Ultimately, this could drive us out of business," says the 55-year-old Helm, who has been able to recover less than half of the lost distribution. Royce J. Estes, Anheuser-Busch's vice-president for corporate law, says the company's actions "are legitimate and legal."
Along with three other California microbreweries, Helm has filed an antitrust suit against Anheuser. The case, which has triggered a Justice Dept. investigation, charges Anheuser with illegally using its market power to keep the micros away from consumers. From a legal standpoint, this is essentially the same accusation being lobbed at Microsoft Corp. and Intel Corp. But while the Wintel antitrust wars are receiving virtually gavel-to-gavel coverage, far less attention has been devoted to Anheuser-Busch and the many other large companies accused of similar predatory practices. To people like Helm, though, the allegations against Microsoft and Intel are symptomatic of a broader problem: More and more, large companies are unfairly leveraging their dominance in an attempt to win 100% of their customers' business.
LAX TOO LONG. The alleged victims argue that the people in charge of policing anticompetitive conduct--namely, Justice, the Federal Trade Commission, state attorneys general, and the judiciary--have underestimated the danger of "exclusive dealing" arrangements for at least two decades. Well before Ronald Reagan eviscerated antitrust enforcement in the 1980s, the conventional wisdom among attorneys, economists, and law enforcers was that corporations should be free to strike any kind of "vertical" bargain with customers and distributors they wished. In fact, this orthodoxy is one of the main reasons that both the FTC and Justice were slow to take on Microsoft in the early 1990s, many experts believe.
Because of this long-standing permissiveness toward exclusive-dealing arrangements, a growing number of antitrust thinkers believes there has been an increase in the use of exclusivity payments, tying arrangements, and other potentially predatory tools aimed at driving competitors out of business. "During the entire Reagan years, I don't know if the federal-enforcement people wrote a single vertical nonmerger case," says FTC Chairman Robert Pitofsky. "So I think the business community came around to the view that it could take more of a chance in that area."
But under the leadership of Pitofsky and Justice's antitrust chief, Joel I. Klein, the feds are showing more interest in the issue of exclusive dealing. According to Pitofsky, both of the federal antitrust agencies have more vertical cases now than in the past 15 years. While the FTC and Justice won't specify which companies they are investigating, they are believed to be looking at Visa, MasterCard, United Airlines, Brunswick, and spice-maker McCormick, in addition to Microsoft, Intel, and Anheuser-Busch. Several private antitrust suits alleging various forms of exclusive dealing have also been filed recently. Pittsburgh-based LePage Inc., for example, is suing 3M for attempting to take over the private-label adhesive-tape market--a charge 3M denies (table, page 126).
But, as in the Microsoft case, there's a raging debate about whether exclusive-dealing arrangements really hurt consumers. The accused companies insist that the complaints are being brought by rivals who can't cut it in the marketplace. Many of the challenged practices, they add, actually benefit consumers. The rebate program at the center of the LePage-3M dispute, for example, helped lower the price that office-supply stores pay for adhesive tape, says 3M outside attorney Dan Sullivan. The price declined by 14% from 1993 to 1997--and much of that cost savings was passed on to consumers. "The reality is that when we give price concessions to our customers--whether it's a direct price reduction or a rebate or a discount--we are lowering prices," Sullivan says.
GLOBAL CHECK? What's more, big companies argue that global trade is making it harder than ever to accumulate monopoly power--which is the only circumstance in which such exclusive-dealing schemes are generally considered dangerous. With low inflation, robust growth, and seemingly widespread innovation, it's hard to argue that widespread predatory acts are hurting the economy, many economists say.
Even so, a growing number of antitrust scholars believes that in discrete parts of the economy, significant monopoly power still exists. This concern has heightened because "more mergers are reaching toward monopoly power" and "conventional wisdom has developed that if you can't be first or second in a market, then it's not worth being in the market at all," Pitofsky says. The FTC and Justice are worried that companies with monopoly power in certain sectors will charge unfair prices, curtail consumer choice, and potentially even dampen innovation.
While there is a wide variety of exclusive-dealing arrangements a company with market power can deploy, two types are of most concern right now: tying arrangements and exclusivity incentives (table). Tying happens when the seller conditions the sale of a particularly hot product upon the buyer's agreement to purchase a second product that is in less demand. Microsoft, for example, is charged with requiring computer makers to buy its Internet browser to get its Windows operating system. The company denies the charges.
BUNDLE BATTLE. But tying arrangements can also come in more subtle forms. LePage's chief operating officer, Gary L. Dean, claims that 3M is tying the sale of its self-stick note pads to sales of its less popular cellophane tape using a device known as bundled rebates. Under this arrangement, buyers are given a steep discount for Post-it notes--the 3M brand that holds a dominant share of that market--if they bundle the buy with the company's other products. 3M responds that the bundled rebates cover too many products to be construed as coercive.
While tying arrangements win customers by exploiting the demand for a hot product, exclusivity payments win them over with money. In essence, customers are given cash or discounts to encourage them to shun competitors. For example, Denver-based Frontier Airlines Inc. is accusing United Airlines Inc. of giving Denver-based corporate clients discounts that hinge on not using other carriers. United denies it is breaking the law.
Exclusivity deals can come in dozens of varieties. Take "slotting fees," one of the most controversial practices. Many small companies in the food-and-beverage industry complain that large manufacturers such as PepsiCo's Frito Lay Div. and spicemaker McCormick are using these payments to purchase exclusive space on store shelves. Similarly, in a suit against Brunswick, a coalition of boat builders contends that the company has been driving competitors out of the business with so-called market-share discounts. Under these schemes, the size of the discount a boat builder receives is pegged to the percentage of engines it buys from Brunswick. The company, which recently ended the rebates, declined to comment.
While the antitrust community was slow to note the power of exclusive-dealing arrangements, large companies understood their effectiveness at least five years ago, says Frederick R. Warren-Boulton, who served as chief economist in the antitrust division of the Justice Dept. under Reagan and is now a Washington-based consultant. "The reality is that doing these things has been enormously beneficial for the firms involved," he says. In some circumstances, they "can be very effective at imposing very high costs on entrants but no cost at all on the dominant firm."
Still, everybody agrees that it's hard to figure out when exclusive-dealing arrangements are harmful. Manufacturers say that each one of these controversial practices can also help consumers. Both 3M and Microsoft note that customers frequently ask manufacturers to tie together seemingly unrelated products because it's more convenient. Similarly, slotting fees help to ensure that valuable store space is auctioned off to the product in highest demand, says Gene Grabowski, spokesperson for Grocery Manufacturers of America, a trade association representing large foodmakers.
DELICATE CALL. To determine if a particular exclusive-dealing arrangement is anticompetitive, law enforcers and judges comb through reams of market data to analyze the potential benefits of a company's practices. Even if the actions are deemed predatory, antitrust regulators are reluctant to ban specific marketing practices, fearing that "you can wind up with too much rigidity in the economy," says Columbia University School of Law antitrust professor Harvey J. Goldschmid.
That's why both judges and state and federal antitrust agencies have been slow to crack down on exclusive dealing--too slow, in the eyes of many critics. In spite of the number of ongoing investigations into exclusive dealing, Georgetown University Law Center antitrust expert Steven C. Salop insists there still have not been enough penalties handed out "to put the fear of antitrust enforcement in the hearts" of corporate executives. Judges have the power to shackle companies with consent decrees that limit sales practices and fine them for competitors' injuries--even levying triple damages.
But with a record number of lawsuits and inquiries homing in on the problem of exclusive dealing, more consent decrees and penalties could be in the offing. If Microsoft, Anheuser-Busch, and a few other corporate giants get stung, there's little doubt that Corporate America will start paying closer attention to the long-neglected corner of antitrust law.