Restraint Of Trade

FTC Probes Music-Instrument Industry

As reported by the WSJ today, the FTC is probing whether instrument and audio gear makers have hampered competition by forcing retailers to charge minimum advertised prices (MAP).

Fender Musical Instruments Corp., Yamaha Corp., Gibson Musical Instruments Corp, the Tascam unit of TEAC Corp, as well as retailer Guitar Center Inc. have all received subpoenas.  The industry does about $7.5 billion annually.

After the Supreme Court's 2007 Leegin decision, agreements to charge MAPs are no longer per se illegal.  It is an open question what will need to be proven to show illegality, and any action by the FTC will be watched with great interest.

What is clear is that the Leegin decision has led manufacturers in numerous industries to go to war against internet discount retailers, with the effect of boosting prices to consumers in the short run at least.  As discussed previously (see September 16, 2008 post below), MAP agreements appear to be driving up prices in the flooring industry.

Today's WSJ article also sugggests this is happening in the furniture industry.  Retailer Design Furnishings Inc alleges that manufacturer Tropitone Furniture cut off its supplies after its web site advertised and sold Tropitone products below the MAP.  The WSJ obtained a Tropitone distributor list that shows Tropitone set the MAP for a patio set at $5,884 on the internet and $4,464 in stores.  

The purpose, it seems, is to drive internet retailers out of business.  

This supports my thesis - that, whether or not Leegin was really the result of a maturation of economic thinking, it is having a concrete impact on contemporary business models.  Consideration of its wisdom cannot be divorced from consideration of the desirability of that impact.

Kohl asks dominant wireless phone companies to "justify" text messaging rates

On Tuesday, Senator Herb Kohl (D-WI) sent a letter to the CEOs of Verizon Wireless, AT&T, Sprint, and T-Mobile asking them to explain their recent lockstep price increase in the rates for sending text messages.

As Kohl - Chairman of the Antitrust Subcommittee - points out, in 2005 sending text messages cost about 10 cents.  Last Fall, Sprint announced a 100% increase to 20 cents, and all 3 of Sprint's main competitors have now announced the same increase. 

This increase made a splash on the tech-blogosphere, where some calculated that it amounts to charging $13,000 for sending 10mb of data.  See Techinnoventure ;  Richard Koman at ZDNet Government ; CrunchGear; GThing.

Kohl points out that "it appears that each of [the] companies has changed the price of text messaging at nearly the same time, with identical price increases.  This conduct is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace."  He notes that the level of industry consolidation has increased in recent years.

His request is quite interesting:

Therefore, I specifically ask each of your companies to explain why text messaging rates have dramatically increased in recent years.  Please explain the cost, technical, or any other factors that justify a 100% increase in the cost of text messaging from 2005 to 2008.  Please also provide data on the utilization of text messaging during this time period.  Please provide a comparison of prices charged for text messaging as compared to other services offered by your companies....  Finally, please state whether your text messaging pricing structure differs in any significant respect from the pricing of your three main competitors.  Please provide this information not later than Monday, October 6, 2008.

This request places the companies in a tight spot.  It is, we can speculate, very unlikely that the costs of these 4 companies similarly increased in a way that justified an identical 100% increase.  So this raises the question whether the companies will dare say they increased their prices to 20 cents because their competitors were enacting similar increases.  Will they say, in other words, that they were engaged in price-matching behavior?

Such behavior might not be illegal, if for example it was not accompanied by any improper signalling or communications, but it is also not a competitive way of setting prices and Senator Kohl will not be happy to hear it.  But how else can it be explained?

At first blush, it may seem odd that companies would be asked to "justify" a price increase on the basis of "cost, technical, or other factors."  Some companies are able to increase prices without regard to cost.  But this typically only occurs when those companies have market power.  Kohl seems interested in exposing that these companies have market power which they are using to impose inflated prices on consumers. 

Italian offices of Cargill and Bunge raided

Speaking of dawn raids (see post below), the European Commission raided the Italian offices of Cargill Inc and Bunge Ltd, in an apparent investigation of possible cartel activity affecting grain and cereal markets. 

As reported by Reuters and the WSJ.

It appears Cargill and Bunge may have run afoul of Mister Prezzi (i.e., Mister Prices) - new Italian regulatory czar Antonio Lirosi.

Cargill and Bunge have been reaping incredible earnings, even in these tough ecomonic times.  As the WSJ reports, Bunge's net income for 1Q 2008 was up nearly 2,000%.

Why Italy?  As reported by cafebabel, frozen incomes and an inflation rate above the European average are pushing purchasing power to the breaking point.  The rising price of Pasta -- a staple good -- is hitting particularly hard.

Stay tuned for more information on the EC's investigation.