Co-Opetition - Adam M. Brandenburger [97]
MFCs are a practice that has come under quite intense antitrust scrutiny. In 1979 the Federal Trade Commission (FTC) challenged the use of MFCs by Ethyl Corporation and Du Pont in the sale of lead-based antiknock additives for gasoline. The charge was that the use of MFCs was a so-called facilitating practice, an activity that substantially lessened competition in violation of Section 5 of the Federal Trade Commission Act.22
In the first round of proceedings, the commission ruled against Ethyl and Du Pont. It was a controversial decision, with FTC Chairman James C. Miller III dissenting against his own commission’s ruling: “[These are] practices that buyers demand.… The challenged practices … arguably reduce buyers’ search costs and facilitate their ability to find the best price-value among refiners.… For these reasons … I dissent.”23
The case was brought to the New York federal court of appeals, which in 1984 overturned the original FTC decision.24 The basis of the appeals court ruling was that the use of MFCs had originated at a time when Ethyl was the only manufacturer of the antiknock additives. Since there was no competition at that time, the MFCs obviously had uses other than reducing competition between producers.
We saw these other uses earlier in this chapter. Because MFCs shift the balance of power from the buyer to the seller, they allowed Ethyl to be a tougher bargainer with its customers. That was true when Ethyl had a monopoly, and it remained true once there was competition in antiknock additives. And from the buyers’ perspective, MFCs are valuable because they guarantee that buyers won’t end up at a cost disadvantage relative to their rivals.
Even if there weren’t these other reasons to use an MFC, the FTC’s case would have been weak. On the one hand, if your customers have MFCs, you’re less likely to go after a rival’s customers with low prices. To that extent, competition may be reduced. On the other hand, though, if your customers have MFCs, a rival can more easily come after one of them with a low price. Because you can’t match selectively, you may not match at all. To that extent, competition may be increased. The net effect is ambiguous. As we write this book, the status of MFCs continues to be based on the favorable Ethyl-Du Pont ruling.
The use of an MCC is simply part of a contract between buyer and seller, one element of a multifaceted negotiation. While an MFC with one buyer can affect the price another buyer pays, an MCC with a buyer affects the price only that buyer pays. Think of an MCC as a financial option. With a stock option, investors pay dollars today for the right to buy something at a fixed price tomorrow. An MCC is an option that gives the seller the right to sell something tomorrow by matching the best price. This option, just like a stock option, has a direct value, and may be even more valuable if the existence of the option ends up raising tomorrow’s price. Of course, anticipating this effect, a buyer who agrees to an MCC can ask for a lower price today in return for providing the option.
One justification for using an MCC comes from the law itself. The Robinson-Patman Act prohibits companies from engaging in price discrimination. According to the law, companies are supposed to sell their products for the same price to all commercial customers.25 But there’s an important exception. An automatic defense against the charge of price discrimination is that you lowered price in response to a competitive bid: “[N]othing herein contained shall prevent a seller rebutting the prima facie case thus made by showing that his lower price … was made in good faith to meet an equally lower price of a competitor.… ”26 An MCC is a way of protecting yourself against the charge of price discrimination.
To our knowledge, there have been no antitrust challenges to take-or-pay contracts or rebate programs.