Introduction and Executive Summary ........................................................................................1
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Table of Contents
Introduction and Executive Summary ........................................................................................1
Chapter 1
Overview of the Contact Lens Industry
Introduction .........................................................................................................................5
Consumer Sales ...................................................................................................................6
Contact Lens Manufacturers ...............................................................................................7
Distribution Channels .........................................................................................................8
Managed Vision Care ....................................................................................................... 12
Conclusion ........................................................................................................................13
Chapter 2
Manufacturer-Distributor Relationships: Exclusive Dealing, Private Label
Lenses, and Limited Distribution Lenses
Introduction .......................................................................................................................14
Types of Arrangements Between Manufacturers and Sellers ...........................................14
Potential Consumer Harm from Private Labeling and Limited Distribution ....................16
Competing Outlets Sell Private Label
and Limited Distribution Lenses ...........................................................................19
Competition for Profits from Lock-In ...................................................................21
Informed Consumers .............................................................................................21
Reputation .............................................................................................................23
Prices for Private Label and Limited Distribution Lenses ....................................24
Biomedics55 and Private Label Equivalents ............................................24
-i-
Proclear Compatibles, Acuvue2, and Acuvue Advance ...........................26
Effect on Manufacturer and Retail Competition ...................................................28
Efficiencies from Limited Distribution .................................................................29
Distribution Restrictions to Promote Interbrand Competition ..................30
Efficiencies from Limited Distribution
and Private Label Lenses ..........................................................................32
Conclusion ........................................................................................................................33
Chapter 3
Prices and Availability in Online and Offline Retail Channels
Introduction .......................................................................................................................34
Online Sales of Contact Lenses ........................................................................................34
FTC Study .........................................................................................................................36
Availability ............................................................................................................37
Prices .....................................................................................................................40
Conclusion ........................................................................................................................43
Chapter 4
Impact of the Eyeglass Rule on Competition
Introduction .......................................................................................................................45
The Eyeglass Rule .............................................................................................................45
Impact of the Rule on Competition ...................................................................................47
Other Effects of the Rule ..................................................................................................49
Conclusion ........................................................................................................................50
-ii-
Chapter 5
State Barriers to Competition
Introduction .......................................................................................................................51
State Licensing Requirements ...........................................................................................51
Effect on Competition ...........................................................................................52
Effect on Quality of Service Provided ..................................................................53
State Restrictions on Advertising ......................................................................................56
Other State Barriers ...........................................................................................................59
Conclusion ........................................................................................................................59
Conclusion ...................................................................................................................................60
Appendix
Private Label Lenses .........................................................................................................61
Price Regressions ..............................................................................................................63
-iii-
Introduction and Executive Summary
On December 6, 2003, Congress passed the Fairness to Contact Lens Consumers Act
(“FCLCA” or the “Act”), which became effective on February 4, 2004.1 Congress enacted the
FCLCA to enhance competition in the market for contact lenses by providing consumers with a
greater ability to fill their contact lens prescriptions from sellers other than their prescribing eye
care practitioner (“ECP”).2
The Act, along with the Federal Trade Commission’s (“FTC” or “Commission”)
implementing regulations, impose on prescribers and sellers several requirements intended to
enhance prescription portability. Among other things, ECPs must release a contact lens
prescription to a patient and may not tie the prescription release to the purchase of lenses from
the ECP.3 Sellers may dispense contact lenses only in accordance with a contact lens
prescription that the patient or ECP presents directly to the seller, or that has been verified by the
ECP.4 In addition to these provisions, the Act also requires the FTC to “undertake a study to
examine the strength of competition in the sale of prescription contact lenses.”5
1
P.L. 108-164, 1117 Stat. 2024.
2
In this report, ECP refers to both independent ECPs and those who are affiliated
with optical chains and retailers. See Chapter 1, Section III, infra for a discussion of the various
distribution channels.
3
15 U.S.C. § 7601; 16 C.F.R. § 315.3.
4
15 U.S.C § 7603(a); 16 C.F.R. § 315.5(a). In addition, the FTC regulations
require ECPs who prescribe private label lenses to include on the prescription the name of the
manufacturer, the trade name of the private label brand, and, if applicable, the trade name of an
equivalent brand name. 16 C.F.R. § 315.2(e)(8). Sellers may fill prescriptions for private label
lenses with the same lens that is sold under a different name. 15 U.S.C. § 7603(f); 16 C.F.R.
§ 315.5(e).
5
15 U.S.C. § 7609(a). Congress directs the Commission to address the following
specific issues: “1) The incidence of exclusive relationships between prescribers or sellers and
contact lens manufacturers and the impact of such relationships on competition; 2) The
difference between online and offline sellers of contact lenses, including price, access and
availability; 3) The incidence, if any, of contact lens prescriptions that specify brand name or
custom labeled contact lenses, the reasons for the incidence, and the effect on consumers and
competition; 4) The impact of the FTC eyeglasses rule on competition, the nature of enforcement
of the rule, and how such enforcement has impacted competition; and 5) Any other issues that
1
The FTC has over three decades of experience in the optical goods market and has issued
regulations for the industry. The FTC promulgated the Ophthalmic Practices Rules (“Eyeglass
Rule”) in 1978.6 The Commission also recently issued the Contact Lens Rule to implement the
FCLCA.7 In addition to its regulatory role, the Commission has long advocated policies for the
optical goods industry that would benefit consumers and competition. The FTC has provided
comments to state agencies and legislatures regarding the effects of restrictions on the sale of
replacement contact lenses.8 The FTC also has studied the effects of state-imposed restrictions in
the optical goods industry.9 In October 2002, the Commission held a public workshop to
evaluate possible anticompetitive barriers to e-commerce,10 and in March 2004, the Commission
staff issued a report analyzing potential barriers to Internet commerce in contact lenses.11
To conduct this study, the FTC reviewed comments from, and met with, various
interested parties.12 In addition, the Commission conducted its own research, including a survey
of contact lens prices and availability. Drawing on these resources and its experience in
analyzing the optical goods industry, the Commission reached the following conclusions:
have an impact on competition in the sale of prescription contact lenses.” Id. at (1)-(5).
6
Advertising of Ophthalmic Goods and Services, Statement of Basis and Purpose
and Final Trade Regulation Rule, 43 Fed. Reg. 23,992 (June 2, 1978).
7
69 Fed. Reg. 40481 (July 2, 2004) (to be codified at 16 C.F.R. Part 315).
8
See FTC Staff Comment Before the Connecticut Board of Examiners for
Opticians (Mar. 27, 2002) (“Connecticut Board Comment”), at
http://www.ftc.gov/be.v020007.htm; Letter from Maureen K. Ohlhausen et al., Acting Director,
Office of Policy Planning to Arkansas State Representative Doug Matayo (Oct. 4, 2004)
(“Matayo Letter”), at http://www.ftc.gov/os/2004/10/041008matayocomment.pdf.
9
THE EFFECTS OF RESTRICTIONS ON ADVERTISING AND COMM ERCIAL PRACTICE
IN THE PROFESSION : THE CASE OF OPTOM ETRY , FTC BUREAU OF ECONOM ICS STAFF PAPER
REPORT (1980).
10
67 Fed. Reg. 48,472 (2002).
11
POSSIBLE BARRIERS TO E-COMMERCE : CONTACT LENSES: A REPORT FROM THE
STAFF OF THE FEDERAL TRADE COMMISSION (Mar. 29, 2004) (“CONTACT LENS REPORT ”), at
http://www.ftc.gov/os/2004/03/040329clreportfinal.pdf.
12
The FTC received 19 responses to a Federal Register Notice requesting comments
for the study. 69 Fed. Reg. 21,833 (Apr. 22, 2004). The comments are available at
http://www.ftc.gov/os/comments/contactlensstudy.
2
•
Overview of the industry: The advent of standardized disposable soft contact
lenses, along with the FCLCA’s prescription portability requirement, have
enabled contact lens sales to be unbundled from the fitting process, allowing
consumers to choose among several retail channels to purchase replacement
lenses. Retail optical sales appears to be highly fragmented. Independent ECPs
account for the majority of contact lens sales, followed by national optical chains
and mass merchandisers.
•
Manufacturer-distributor relationships: Exclusive relationships – in the sense
of either a manufacturer agreeing to supply only one seller or prescriber, or a
seller or prescriber agreeing to distribute contacts from only one manufacturer –
appear to be rare in the optical goods industry. Some manufacturers, however,
limit the distribution channels through which they sell their contact lenses.
Further, some retail chains and independent ECPs offer so-called “private label”
lenses, which may bear a brand name unique to the seller – or a subset of sellers –
but are identical to lenses sold under a national brand name. The information
available does not support the hypothesis that sellers are able to limit competition
or harm consumers by charging supracompetitive prices for limited distribution or
private label lenses.
•
Differences between online and offline sellers: The FTC surveyed availability
and prices for a six-month supply of ten popular contact lenses at 20 online and 14
offline outlets. The data indicate that most lenses are widely available through the
various retail channels. Overall, independent ECPs and optical chains offer the
highest prices, and wholesale clubs offer the lowest prices. Not accounting for
intrachannel differences, contact lenses sold online are on average $15 less
expensive than those sold offline. There is no statistically significant difference
among the prices charged by independent ECPs, optical chains, Web sites of
offline retailers (“hybrids”), and mass merchandisers for specialty lenses. Mass
merchandisers and hybrids do offer statistically significantly lower prices for
spherical lenses, however.
•
Impact of the Eyeglass Rule: In 1978, the Commission issued the Eyeglass
Rule,13 which requires optometrists and ophthalmologists to provide their patients,
immediately after completion of an eye examination, a free copy of their eyeglass
prescription. The FTC’s Eyeglass Rule appears to have made it easier for
consumers to comparison shop, leading to lower prices and more choices for
consumers.
13
16 C.F.R. Part 456.
3
•
Other issues that impact competition: State laws and regulations have the
potential to limit competition in contact lenses, raise consumer costs, and harm
public health. Licensing requirements may insulate in-state sellers from out-ofstate competition or insulate ECPs from competing non-ECP sellers. State
restrictions on truthful, non-misleading advertising are likely to inhibit the
competitive process and frustrate informed consumer choice.
The remainder of this report is organized as follows. The Commission presents an
overview of the contact lens industry in Chapter 1 to provide the context for addressing the
specific issues Congress directed the FTC to examine. Several of these issues concern
relationships between contact lens manufacturers and contact lens distributors, such as
independent ECPs, retail merchandisers, optical chains, and online sellers. Accordingly, Chapter
2 examines types of manufacturer-distributor arrangements – including exclusive relationships,
private labeling, and limited distribution – and analyzes their effects on competition and their
potential to cause consumer harm. Another issue Congress raised is the difference between
online and offline contact lens sales. Thus, in Chapter 3, the Commission presents the findings
of its study comparing online and offline prices for 10 different contact lenses. In Chapter 4, the
Commission addresses Congress’ questions about the impact of the Eyeglass Rule on
competition. Finally, Chapter 5 covers other issues that have an impact on competition, such as
state licensing requirements for contact lens sellers and advertising restrictions.
4
Chapter 1
Overview of the Contact Lens Industry
When contact lenses first were introduced, they were made of rigid material that required
an ECP to custom fit each pair. In 1971, the FDA approved the first soft contact lenses. Still, at
this early stage of development, soft lenses were manufactured in a way that did not always
accurately reproduce the original prescription. These early lenses were designed to last for long
periods, so consumers generally purchased them from their ECP after an exam and replaced them
infrequently. Beginning in the late 1980s, manufacturers began to sell disposable lenses that
were designed to be replaced on a daily, weekly, or monthly basis.14 Further, technological
improvements have solved standardization problems, eliminating the need for an ECP to fit each
replacement pair once the prescription has been finalized at the end of the fitting process.15
Today, the replacement lens a consumer purchases pursuant to a prescription that specifies a
brand will be identical, regardless of whether the patient receives this lens from the prescribing
ECP or from another seller.
The evolution in contact lens technology now allows the sale of lenses to be unbundled
from the fitting exam.16 The FCLCA, moreover, prohibits ECPs from requiring that consumers
14
The majority of contact lenses are “spherical” and designed to be replaced every
two weeks. Toric lenses are a relatively new product, allowing astigmatism to be corrected with
a soft lens rather than a gas permeable lens. Also new are multifocal lenses, which
simultaneously correct for near and far sightedness, like bifocal glasses.
15
Although not required in all states, a contact lens prescription will almost
invariably include a brand name because different brands of contact lenses that have the same
prescription will produce different fits. See American Optometric Association (“AOA”),
Comment #3, at 1-2; Illinois Optometric Association (“IOA”), Comment #11, at 2; Dr. Charles
Kissling (“Kissling”), Comment #13, at 2; 1-800 Contacts, Comment #1, at 24; Wal-Mart,
Comment #19, at 5. Replacement lenses typically are sold in packages containing six lenses of
the same prescription (“six-packs”). Thus, if a consumer wears lenses that must be replaced on a
monthly basis, a year’s supply would consist of four six-packs – two six-packs for each eye.
16
The current contact lens fitting process includes an examination to determine eye
health, lens power, and contact lens curvature and diameter. ECPs use a “fitting set,” or a sample
pair of contact lenses, as a diagnostic tool to determine whether the prescription is correct. A
follow-up appointment in 7-10 days to assure visual acuity, fit, and comfort is typical. See 1-800
Contacts, Comment #1, at Attach. 2, p. 10-11 (1-800 Contact’s submission in response to the
5
purchase their contact lenses from the prescribing ECP. Under the Act, a standard contact lens
prescription typically must last one year.17 Consumers usually purchase less than a year’s supply
at a time – with a six months supply serving as the most popular quantity. 18 Thus, most contact
lens consumers will purchase replacement lenses at least twice during the length of their
prescription. Although ECPs still control the prescription process, consumers now have a variety
of channels to consider other than their prescribing ECP when they purchase replacement lenses.
Traditional retailers, membership clubs, and optical chains all sell lenses to customers who
received their prescription from a non-affiliated ECP. A number of online retailers that sell
contacts offer no ECP services at all.
I.
Consumer Sales
Recent data indicate that 36 million people – almost 13 percent of all Americans – wear
contact lenses.19 According to Census Bureau data released in 2004, U.S. shipments of contact
lenses were valued at $1.9 billion in 2002.20 This estimate is consistent with data from Jobson
Optical Research, which projected U.S. sales of contact lenses in 2003 to reach $1.92 billion, or
11.8% of total U.S. retail optical sales.21 Estimates place annual U.S. soft contact lens sales at
FTC’s request for comments on the proposed Contact Lens Rule (Apr. 5, 2004)).
17
15 U.S.C. § 7604(a).
18
In June 2004, surveyed ECPs reported that after the exam 64% of patients
purchased a six-month supply, 20% purchased a year’s supply, and 6% purchased a three-month
supply. FTN Midwest Research Securities Corp., Monthly Contact Lens Industry Survey, at 10
(June 15, 2004) (“FTN Contact Lens Survey”). Research prepared for Johnson & Johnson
(Vistakon) also suggests that consumers purchase less than a year’s supply of contact lenses,
showing that only 12% of consumers from a national survey purchased a year’s supply at once,
whereas 31% purchased lenses two times a year, and 43% purchased 3 - 4 times a year. 1-800
Contacts, Comment #1, at Attach. 2, App. 4, p.89.
19
See CONTACT LENS REPORT at 1.
20
U.S. Census Bureau, Ophthalmic Goods Manufacturing: 2002 at 6 (Aug. 2004).
21
The same data estimate sales of prescription lenses and frames to account for
84.2% of total U.S. retail optical retail sales in 2003, and that eye examinations generated $3.6
billion in revenues in 2002. See The State of The Optical Market, 20/20 MAGAZINE (2003)
(hereinafter “State of the Optical Market”), at
http://www.2020mag.com/index.asp?page=3_190.htm; Jobson Optical Research, The State of the
Optical Market, 2nd Quarter, 2003, at http://optistock.com/jobson-som-2003-06.pdf.
6
between $1.4 and $1.8 billion.22
Contact lenses are classified in two major categories – spherical and specialty. Spherical
lenses contain a single refractive power and are by far the most commonly prescribed lens.
Varieties of specialty lenses include toric (to correct astigmatism), multifocal (to correct near and
far-sightedness simultaneously), cosmetic tint, and extended wear. According to industry data,
spherical lenses accounted for 70 percent of dispensing visits and 57 percent of total soft lens
sales in 2003.23 Within the specialty segment in 2003, toric, cosmetic tint, and multifocal lenses
accounted respectively for 16 percent, 9 percent, and 5 percent of patient visits when contacts
lenses were dispensed.24
Most consumers wear lenses that are taken out every night and disposed of according to a
replacement schedule. Lenses requiring replacement every two weeks are the most popular
option, followed by lenses that are replaced on a monthly basis.25
II.
Contact Lens Manufacturers
There are five major contact lens manufacturers: Vistakon, CIBA Vision, Occular
Sciences (“OSI”), Bausch & Lomb, and CooperVision.26 Table 1 summarizes market share data
22
CooperVision reports that total U.S. sales of soft lenses are $1.4 billion. The
Cooper Companies, Inc., 2003 Annual Report at 18, at
http://ccbn.mobular.net/ccbn/7/516/565/print/print.pdf. The 2002 Census data lists U.S. soft
contact lens sales at $1.8 billion. See Ophthalmic Goods Manufacturing: 2002 at 6.
23
See 1-800 Contacts, Comment #1, at Attach. 20, p.2 (Optistock MarketWatch
(Oct. 2003)) (“MarketWatch”) (clear spheric accounted for approximately 70% of patient visits
where a lens was dispensed for the first three quarters of 2003); The Cooper Companies, Inc.,
2003 Annual Rep. at 21 (specialty lenses account for 43 percent of U.S. soft lens market sales).
The disparity in data for sales and lenses dispensed may reflect the fact that specialty lenses
typically are more expensive than spherical lenses.
24
Id.
25
See MarketWatch at 2 (for first three quarters of 2003, two-week and monthly
replacement lenses account for 64% and 20% of new contact lens fits); FTN Contact Lens
Survey, at 7 (June 15, 2004) (62% and 22% of ECPs surveyed responded that two-week and
monthly disposables were the most common lenses prescribed, respectively).
26
The information provided by commenters does not reflect CooperVision’s
acquisition of OSI, which was completed on January 6, 2005. See
7
provided by OSI based on 2003 “patient visits” – both total and new – when soft contact lenses
were dispensed.
Table 1
Shares of Patient Visits for Soft Contact Lenses
Manufacturer
Total Patient Visits
New Patients
Vistakon
36.2%
30.9%
Ciba Vision
23.1%
19.9%
Bausch & Lomb
14.0%
17.0%
CooperVision
13.1%
18.0%
OSI
12.4%
13.2%
Source: OSI, Com ment # 7, at 5. It is unclear whether these numbers reflect spherical only, or
include specialty lenses, like multi and bifocal and toric.
1-800 Contacts provided market data estimating that Johnson & Johnson (Vistakon) is the
market leader in spherical lenses, with a 48 percent share.27 These data, however, rank the
remaining companies differently; OSI has the second largest share (23 percent), followed by
Bausch & Lomb and CooperVision. For toric contact lenses, 1-800 Contacts reports that
CooperVision is the leader with approximately 34 percent of sales followed by CIBA Vision with
about 30 percent. For multifocal contact lenses, Johnson & Johnson is the claimed leader with
about 80 percent of sales, followed by CIBA Vision with about 20 percent. 1-800 Contacts
reports, however, that CooperVision and Bausch & Lomb are beginning to penetrate sales of
multifocal lenses.28
III.
Distribution Channels
Manufacturers distribute their contact lenses through a variety of channels. Sellers can be
http://www.coopervision.com/us/patient_aboutus_news.asp?id=27.
27
1-800 Contacts, Comment #1, at 13 (citing MarketWatch at 2).
28
Id.
8
grouped into a number of different categories marked by their professional credentials,
commercial focus, and mode of selling. The two principal groups are independent and
commercial sellers, although there is significant variation within each.
Independent ECPs are optometrists and ophthalmologists who both prescribe and sell
optical products. Most are single entities, although some have more than one outlet.29
Commercial operations include local and national optical chains (e.g, LensCrafters, Pearle), mass
merchandisers (e.g., Target, Wal-Mart), and wholesale clubs (e.g., Sam's, Costco, BJs). These
firms sell optical goods, and many have affiliated ECPs who conduct examinations and prescribe
contact lenses, although the share of their optical revenues from examinations tend to be less than
the share registered by the independents. Online and mail order retailers (e.g., 1-800 Contacts,
Vision Direct) form a unique segment of the commercials, because they do not perform
examinations and concentrate primarily on the sale of replacement contact lenses. As shown in
Table 2, independent ECPs by far operate the largest number of outlets, followed by major
chains, smaller chains, mass merchandisers, warehouse clubs, and HMOs.
Table 2
Number of Retail Locations (in thousands) 2003*
Independent ECP
22.5
Major Chain
8.7
Other Chain
3.5
Mass Merchants
1.8
Warehouse Club
1.2
HMOs
.7
*Pro jected . Source: The State of The Optical Market.
Table 3 lists the ten largest commercial optical retailers for 2003, which together
accounted for 24 percent of all optical sales.30 The largest retailer is the Luxottica Group, which
29
Jobson Optical Research is a primary provider of optical market data and typically
defines independents as any entity controlled by an Optometrist or MD that operates three or
fewer outlets. See The State of The Optical Market at 10.
30
The rankings are based on data from Jobson Research in Top 50 Companies
Ranked by Domestic Net Sales for Calendar Year 2003, 18 (no.6) VISION MONDAY (May 17,
9
owns the optical chains LensCrafters and Pearl Vision Centers, as well as the optical departments
at Target, Sears, and BJ’s Wholesale Club (“BJ’s”).31 Other important optical chains include Eye
Care Centers of America with 372 outlets and 2003 sales of $370 million, and Consolidated
Vision Group, operating under the names America's Best Contacts & Eyeglasses (“America’s
Best”). Mass merchandisers and department stores are also significant optical retailers. WalMart, for example, generated $967.5 million in retail optical sales from 1,690 company-owned
optical departments and 384 Sam’s Club optical outlets.
Table 3
Largest Eyecare Retailers 2003
Rank
Retailer (Retail Trade Names)
Sales ($mil)
1
Luxottica G roup (LensCrafters, Pearle Vision, Sears, Targe t, BJ’s)
$2,508
2
W al-Mart
$968
3
Eye Care Centers of America (EyeMasters, Visionworks, Vision
W orld, Hour Eyes, Dr. Bizer’s Vision Wo rld, Dr. Bizer’s Value
Vision, Do ctor’s V aluV ision, D octor’s Visio nworks, Stein Op tical,
Eye D rX, B inyon’s)
$370
4
Costco Wholesale
$269
5
National Vision (The Vision Center (operated in W al-Mart), The
Op tical Sho ppe (in Fred M eyer), N ational Vision Op tical)
$242
6
U.S. Vision (J.C. Penney O ptical)
$150
7
Consolidated Vision Group (America’s Best, America’s Contacts and
Eyeglasses)
$126
8
D.O.C. Optics (D.O.C. Eyeworks, D.O.C. Optique, SportVision, SEE,
City Eyes)
$97
9
Eme rging Vision (Sterling Optical, Site for Sore Eyes, Singer S pecs)
$92
10
Emp ire Vision Centers (Empire Vision C enters, Davis V ision Centers,
Total Vision Care)
$86
Source: Vision Monday Top 50 .
2004) (“Vision Monday Top 50").
31
See Luxottica Passes Hurdles to Win Cole, DAILY DEAL, 2004 WL 84554816
(Sept. 27, 2004); Italy’s Luxottica Closes Cole National Acquisition on October 5, 2004, ASNSA
ENGLISH CORPORATE NEWS SERVICE, 2004 WL 86545365 (Oct. 5, 2004).
10
In their comments, OSI and 1-800 Contacts both provided data on the share of lenses sold,
which are reproduced in Tables 4 and 5.
Table 4
Patient Visits By Channel
Channel
Share of Patient
Visits
Estimated Share of
Filled Prescriptions
Independent M.D.
14.1%
12.3%
Independent O.D.
52.6%
45.8%
Independent Stores
and OD Groups
12.2%
10.6%
Chain Retailers and
Optical Stores
21.0%
18.4%
Mail Order/Internet
N/A
13.0%
Source: OSI, Comment #7, at 12.
Table 5
Share of Sales By Channel
Channel
Share of Sales
Independent M.D.
4.3%
Independent O.D.
64.3%
Mass Merchandisers
13.9%
Retail Chains
9.5%
Mail Order/Internet
8.0%
Source: 1-800 Co ntacts, Comm ent #1, at 13. Shares are derived from "1-80 0's marketing
records." It is unclear whether these shares are measured in sales or units .
OSI and 1-800 Contacts categorize channels differently. OSI groups optical chains, general
retailers, and wholesale clubs together under the "chain retail" heading. 1-800 Contacts groups
retailers like Target and Wal-Mart together with wholesale clubs like BJ's and Sam's Club under
the heading "mass merchandiser" and places general retailers' (like Sears and JC Penney) optical
11
stores in the same category as optical chains like Pearle and LensCrafters.
Notwithstanding these differences in categorization, the data generally tell the same story
with regard to shares by distribution channel. Manufacturers distribute the largest share of lenses
through independent ECPs and the smallest through the online/mail-order channel. Independent
research confirms this result. Research prepared for Johnson & Johnson (Vistakon), for example,
shows 48 percent of consumers from a national survey purchased their lenses from an
independent ECP, followed by 30 percent from optical chains, 9 percent from mass
merchandisers, and 5 percent from mail order.32 The data also suggest that optical chains,
general retailers, and wholesale clubs together account for between 21 and 24 percent of
distribution.33 Further, for 2003, Jobson Research estimated that independent ECPs and all other
retailers (including optical chains, wholesale clubs, and department stores) accounted for 56.3
percent and 40.8 percent of total optical sales, respectively, and that sales of contact lenses
through “alternate channels” (i.e., online or mail order) would reach $200 million, or 10.2
percent of total contact lens sales.34
IV.
Managed Vision Care
Managed vision care (MVC) plays an increasingly important role in the eyecare product
market. According to a Jobson Optical Research survey conducted in the first quarter of 2003,
90 percent of responding independent ECPs are managed care providers, and these ECPs receive
on average 50 percent of their revenue from customers and patients participating in managed care
programs.35 Many employers, government entities, unions, and associations offer vision benefits
as part of their overall health benefits for their employees or members.36
These plan sponsors contract with sellers of MVC services to provide discounted rates on
eye exams, eyeglasses, and contact lenses for their members.37 The MVC providers, in turn,
32
1-800 Contacts, Comment #1, at Attach. 2, App. 4, p.71.
33
Id.
34
See State of The Optical Market at 12.
35
Cathy Ciccolella, Managed Care’s New Momentum, 17 (no. 15) VISION MONDAY
18 (Aug.18, 2003).
36
Id. at 13 (noting that in 2002, 73% of employers surveyed by the Society for
Human Resource Management offered some form of managed vision care).
37
The largest MVC is Vision Service Plan (“VSP”). VSP was established over
thirty years ago by independent practitioners, and its current retail network is composed of only
12
create a network of optical retailers who agree to participate in the network for discounted
reimbursements in exchange for being able to service the covered individuals in the network. A
typical MVC plan offers members a yearly eye exam, typically with a co-payment, and set dollar
amounts off the retail prices of eyeglass frames, lenses, and contact lenses.
V.
Conclusion
Due to advances in lens technology, a growth in the types of retail outlets, and new legal
requirements, consumers now have a wider than ever choice of channels through which to
purchase their replacement contact lenses. Market data indicate that ECPs distribute the greatest
share of contact lenses and that Internet/mail order sellers distribute the smallest share, with
optical chains, mass merchandisers, and other retailers ranked somewhere in between.
independents. In addition to stand-alone operations such as VSP, some MVC providers are part
of optical chains and health insurers. For example, Cole Managed Vision, Cole National’s MVC
services division, offers a national retail network of approximately 18,000 retail providers,
including all Pearle Vision, Sears, Target, and BJ’s optical locations. See id. at 14-17.
13
Chapter 2
Manufacturer-Distributor Relationships:
Exclusive Dealing, Private Label Lenses, and Limited Distribution Lenses
Congress directed the Commission to examine two issues related to relationships between
lens manufacturers and lens distributors to determine their incidence and evaluate their impact on
competition and consumers. The first issue is exclusive relationships between prescribers or
other sellers of contact lenses and lens manufacturers. The second issue involves custom label
contact lenses, which bear the prescriber or other seller’s private label rather than a national
brand name. The chapter also considers an additional, related issue, the limited distribution of
contact lenses by some manufacturers. This chapter first evaluates the incidence of such
relationships and then examines their potential to reduce competition and harm consumers.
I.
Types of Arrangements Between Manufacturers and Sellers
Exclusive relationships generally fall into two broad classes: those that prohibit a retailer
from carrying competing manufacturers’ products and those that prohibit a manufacturer from
selling to competing retailers.38 Neither of these types of exclusive relationships between
manufacturers and retailers appear to be common in the contact lens industry. Private labeling
and limited distribution strategies, although also rare, appear to be more prevalent than exclusive
relationships.
Although most contact lenses are sold under their national brand name, some
manufacturers also distribute their lenses to ECPs and retailers under so-called “private labels.”
Private labeling occurs when an outlet sells a national name brand lens under a different name,
sometimes unique to that seller. Wal-Mart, Pearle Vision, Target, and LensCrafters, for example,
offer OSI’s Biomedics55 lens under the names UltraFlex, Polysoft, Target55, and Versaflex,
respectively. 39 In some instances the term private label may be a misnomer, however, because a
38
See 1-800 Contacts, Comment #1, at 3-7; OSI, Comment #7, at 29; AOA,
Comment #3, at 1. But see 1-800 Contacts, Comment #1, at Attach. 13 (a copy of an Extreme
H20 contract that includes a provision where Hydrogel Vision promises “not to sell or make sales
calls in retail chains that would be in direct competition with the” contracting ECP); IOA,
Comment # 11, at 1 (“it is fairly common for large practices to agree to sell predominantly one
manufacturer’s lenses in exchange for improved wholesale pricing”).
39
OSI, Comment #7, at 32-33.
14
specific private label brand may be available at multiple outlets.40 Thus, a private label brand
may not be exclusive to a seller in the way that a generic store brand would be. OSI estimates
that private label sales account for less than 8 percent of all sales of soft contact lenses.41
OSI claims to be the only manufacturer that makes private label sales its principal
business strategy.42 OSI reports that, of the other major contact lens manufacturers, only
CooperVision participates in private label lens production in any significant way, with about 10
percent of CooperVision’s total contact lens sales accounted for by private label sales.43 The
private label sales of all of the other manufacturers are insignificant.44
Distinct from the concept of private labeling, some contact lens manufacturers limit the
retail distribution of their lenses to outlets that have some form of eye care service. OSI, for
example, distributes its lenses only through retailers that “provide substantial eye care
services.”45 This means that OSI’s lenses are available to most optical retailers, including mass
merchandisers, optical chains, and wholesale clubs. In addition, OSI permits these retailers to
sell its lenses through their Web sites.46 Only pure online retailers are unable to acquire OSI’s
lenses through traditional wholesale channels.47 OSI has a more limited distribution policy for its
Hydrogenics product, selling it only to ECPs with five or fewer offices.48
40
For example, the FTC survey discovered that the UltraFlex private label is
available at Wal-Mart, BJ’s, Sam’s Club, and America’s Best.
41
OSI, Comment #7, at 33.
42
Id.
43
Id. at 33, n.92.
44
Id.
45
Id. at 29. OSI states that its agreements with sellers prohibit the sale of OSI lenses
to “anyone other than the consumers for their personal use,” but do not prohibit sellers from
carrying competing lenses. Id.
46
Id.
47
According to OSI, its “flagship” product, the Biomedics lens, is available under its
national brand name in 11,500 U.S. locations and an additional 8,300 U.S. locations under
various private labels. Id.
48
Id. at 28. OSI currently sells its Hydrogenics lens to approximately 5,000 outlets,
and it is available to 20,000 additional outlets. Id. at 29 According to data provided by OSI, in
15
CooperVision distributes its Proclear Compatible lenses only through outlets that
specialize in providing eye care. Under this policy, although unavailable through traditional
wholesale channels to online sellers, CooperVision (or an authorized distributor) sells Proclear
Compatibles to retailers ranging from independent ECPs, to optical chains, to some wholesale
clubs and mass merchandisers.
1-800 Contacts reports that other smaller manufacturers have exclusive distribution
policies that prohibit sales through online and mail order channels.49 Although limited
distribution lenses are not available to pure online sellers like 1-800 Contacts through traditional
wholesale channels, these sellers can obtain supplies on the “grey” market from retailers and
distributors that are willing to resell their supplies of these lenses.50
II.
Potential Consumer Harm from Private Labeling and Limited Distribution
For a consumer, the full cost of purchasing contact lenses includes the cost of the eye
examination, during which a prescription is written, plus the cost of purchasing the contact lenses
that the ECP prescribes. The typical consumer easily can determine the cost of the eye
examination in advance. By contrast, consumers likely cannot easily determine the price of the
contact lenses in advance because they lack the specialized knowledge necessary to determine
which lens is appropriate for them. Thus, consumers must rely on an ECP to select a lens that
safely and comfortably corrects their vision. Although advertising and other forms of
information may help to educate consumers, ECPs likely possess more information concerning
the relative quality of a particular lens.
Patients want their ECPs to prescribe for them a contact lens that represents their
preferred combination of price and quality.51 1-800 Contacts, however, has raised the concern
2003, the Hydrogenics lens accounted for .5 percent of the soft contact lens market, measured by
patient visits. Id.
49
1-800 Contacts, Comment #1, at 5-7 (reporting that Hydrogel Vision Corp. sells
its Hydrogel and Extreme H2Os lenses through “qualified independent eye care professionals,”
and that Sauflon Pharmaceuticals sells its lenses direct from the manufacturer).
50
See Id. at 4. Despite the pejorative name, “grey” market sales are not illegal.
51
In the context of contact lenses, quality encompasses such attributes as comfort
and recommended length of wear, which in turn depend on factors such as oxygen permeability
and water content. Holding fit and vision correction constant, more comfortable lenses (e.g.,
16
that an ECP may have a competing incentive to prescribe a lens that provides him or her the
largest profit.52 Given this incentive, ECPs could take advantage of their role in selecting contact
lenses for consumers in a way that thwarts the prescription portability mandate of the FCLCA.53
Under this theory, the ECP evades prescription portability and locks the consumer into
purchasing replacement contact lenses from him by prescribing a lens for which there are few or
no alternative sellers.54 For example, an ECP may prescribe a private label lens that is only
those with higher oxygen permeability or water content) typically are more expensive.
Consumers are likely to differ with respect to their willingness to tradeoff additional comfort for
a higher price.
52
See 1-800 Contacts, #1, at 15 (“When it comes to prescribing contact lenses, most
ECPs are free to settle in their own favor, the conflict between their interests in maximizing
profits, and the patient’s interest in saving money”). Without data on retailer margins on private
label or limited distribution lenses in relation to those for other lenses, however, we cannot reach
any conclusions as to the relative profits associated with each type of lens.
53
See 1-800 Contacts, Comment #1 at 4-5 (“The ‘doctor-exclusive’ program has an
insidious impact on consumers prescribed such lenses. Consumers requiring a refill of their
prescription – or replacement lenses – are left with a Hobson’s choice: (1) purchase the lenses
directly from the prescribing ECP – often at an inflated price, or (2) pay to be re-examined by
another ECP who does not prescribe ‘doctor exclusive’ lenses.”); id. at 10 (“[I]f consumers learn
about the limits imposed on prescription portability by [private label and limited distribution]
lenses only after they have been fitted into [private label and limited distribution] lenses, then
their only options are to purchase the lenses from the ECP or pay for a second eye exam by a
different ECP.”); id. at 25 (same). 1-800 Contacts argues that historically ECPs “have done
everything they could to prevent patient knowledge of prescription portability,” and notes that
ECPs that prescribe private label or limited distribution lenses “are often trained to tell their
patients that the lenses are special lenses, which the patient needs.” Id. at 9-10. In support of its
contentions, 1-800 Contacts attaches several advertisements or excerpts from the trade press that
describe how private label and doctor exclusive lenses may help ECPs to capture their patients’
replacement contact lens business.
54
The lock-in theory of consumer harm rests on the following assumptions: (1) the
ECP must be able to prevent the consumer from purchasing replacement lenses from competing
sellers; (2) the consumer must not anticipate that the ECP is likely to write a prescription for a
high-priced lens; (3) the ECP must make the choice of lenses completely independent of
consumer input; (4) consumers must be unable to determine that they have been prescribed a
high-priced lens, or alternatively, ECPs must either place a low value on their reputation or holdups must be unlikely to affect an ECP’s reputation. There is a substantial economic literature on
17
available from him. Alternatively, an ECP may prescribe a “limited distribution” lens, which is
unavailable from online or mail order sources, or may be available only from other independent
ECPs. Insulated from retail competition from lower-priced contact lens sellers, an ECP may be
able to “hold-up” the patient by charging him a higher price to fill his prescription than the ECP
could charge if he prescribed a lens available from multiple outlets.55 The consumer’s only
option to avoid lock-in would be obtain a new eye exam and prescription from an ECP who
prescribes widely available lenses. In theory, the prescribing ECP could charge the consumer a
premium for the limited availability lenses up to the cost to the consumer of escaping the lock-in
by obtaining a prescription for widely available lenses from a different ECP.
There are, however, countervailing reasons why ECPs likely lack the ability and
incentive56 to take advantage of consumers in this way, and the following subsections explore
these reasons in detail. This theoretical examination is buttressed by an even stronger factor: the
available empirical evidence, discussed more fully below, reveals that popular private label and
limited distribution lenses are widely available from various retail channels, that the prices for
private label lenses are not higher than the prices for their national name-brand counterparts. The
“strategic opportunism” that addresses the predicate conditions on which such a strategy rests
and the possible anticompetitive effects that can result. See, e.g., OLIVER E. WILLIAMSON, THE
ECONOMIC INSTITUTIONS OF CAPITALISM (1985); Oliver E. Williamson, Transaction Cost
Economics: The Government of Contractual Relations, 22 J.L. & ECON. 233 (1979); Benjamin
Klein et al., Vertical Integration, Appropriable Rents and the Competitive Contracting Process,
21 J.L. & ECON. 297 (1978).
55
“Hold-up” is a common term used in the literature on post-contractual
opportunism, and refers to the extraction of additional surplus from a party that has made a fixed
investment in a contractual relationship. See, e.g., Benjamin Klein, Market Power in Antitrust:
Economic Analysis After Kodak, 3 S. CT . ECON. REV . 43 (1996); Klein et al., supra note 54.
56
Importantly, not all ECPs receive income from sales of optical goods and thus
lack the incentive to hold-up consumers in the first place. Some states prohibit an ECP from
being directly employed by an optical retailer or from receiving compensation from sales of
optical goods by an optical retailer See, e.g., DEL. CODE § 2113; TENN. CODE§ 63-8-113(c).
Where these laws apply, ECPs who provide examinations at optical chains or retailers may
charge a fee for an eye examination but may not receive compensation for contact lens sales.
(The Commission’s view on these types of restrictions is set forth in Letter from the Federal
Trade Commission to the Honorable Ward Crutchfied (Apr. 29, 2003), at
http://www.ftc.gov/be/v030009.htm.) ECPs affiliated with national optical and retail chains also
may have contracts that exclude compensation for contact lens sales. To the extent that such
laws and business relationships are common, the lock-in theory may be relevant primarily for
independent ECPs, who receive income directly from the sale of contact lenses.
18
data, moreover, do not suggest that limited distribution lenses are sold for higher prices than
similar lenses that are widely available. Finally, there may be efficiencies from limited
distribution and private label lenses that could lead to increased competition among sellers.
A.
Competing Outlets Sell Private Label and Limited Distribution Lenses
Legal and practical factors constrain an ECP’s ability to write a prescription for either a
private label or a limited distribution lens that locks a consumer into purchasing replacement
lenses from the prescribing ECP.
First, the FCLCA mandates prescription portability and allows competing retailers to fill
private label prescriptions with either national brand-name or private label equivalents.57
Additionally, the FTC’s Contact Lens Rule states that “[i]n the case of a private label contact
lens, [a contact lens prescription must contain] the name of the manufacturer, trade name of the
private label brand, and, if applicable, trade name of equivalent brand name.”58 These provisions
allow a customer who receives a private label prescription to take it to other competing retailers
that sell the same lens under either the national brand name or equivalent private label. For
example, a patient with a prescription for a VersaFlex lens from LensCrafters can have Wal-Mart
fill her prescription with UltraFlex, Wal-Mart’s private label of OSI’s Biomedics, or go online
and have it filled with Biomedics55.59
57
15 U.S.C. § 7609(4)(f).
58
16 C.F.R. § 315.2 (A)(8).
59
There is some evidence that, prior to enactment of the FCLCA, competing sellers
typically knew the national brand name associated with private label prescriptions and were
willing to fill them. For example, OSI notes:
It is well known in the industry and among contact lens distributors that these products
[private label lenses], although sold under a number of different brand names, are
identical. It is not uncommon for distributors (including online distributors) to substitute
their private label brand of the Biomedics product when presented with a Biomedics or
other private label prescription.
OSI, Comment # 7, at 35. See also 1-800 Contacts, Comment #1, at Attach. 4 (a trade magazine
noting that “Private labeling doesn’t stop patients from getting their lens elsewhere, because all
the ‘elsewheres’ know that Mediflex, Ultraflex, etc. are OSI lenses.”); Kissling, Comment #13, at
2 (under Kansas law an ECP is required to include in a prescription the common name brand for
a private label lens). Some comments received during the Contact Lens Rulemaking, however,
19
Second, even limited distribution lenses appear to be available from many competing
retailers other than the prescribing ECP. For example, FTC data show that OSI’s Biomedics55
lenses – or its private label equivalents – are available from all offline and nearly all online
outlets sampled, including all optical chains sampled, Wal-Mart, Sam’s Club, BJ’s, Target, and
Sears.60 These lenses also were found on Wal-Mart’s, BJ’s, and America’s Best’s Web sites.
CooperVision’s Proclear Compatibles were found at 88 percent of online sellers’ sites, as well as
such offline stores as Target, BJ’s, Sears, LensCrafters, Pearle, and HourEyes.
Because private label and limited distribution lenses are widely available from competing
outlets, a prescribing ECP likely faces competition for sales of such replacement lenses. Even if
a specific consumer is unaware that his prescription is portable and that alternative sellers exist,
competition will constrain an ECP’s pricing for contact lenses as long as a sufficient proportion
of his patients know that they can purchase replacement lenses elsewhere, and the ECP cannot
distinguish between informed and uninformed patients.61 While the Commission lacks data on
consumers’ awareness that private label and limited distribution lenses are available from
retailers other than their prescribing ECP, some empirical evidence suggests that most consumers
know that they can use a prescription from an ECP to purchase contact lenses elsewhere,
including from mail-order companies.62
suggested that not all sellers were aware of the national name brand of all private labels. See 69
Fed. Reg. 40481, 40488 (July 2, 2002), Comment # 974 (ACLens) and Comment # 1061 (Costco
Wholesale Corp.). Additionally, prior to the Act, some state laws prohibited sellers from filling a
prescription with anything but the brand listed on the prescription.
60
In its comments, OSI notes that it provides its most popular brand to over 15,000
retailers nationwide, including Wal-Mart, Costco, and leading optical chains. OSI’s least widely
distributed brand is available at 5,000 ECPs nationwide. See OSI, Comment #7, at 28. Because
local availability is most relevant to consumers, however, this data does not provide much
information regarding intrabrand competition in the sale of OSI’s lenses.
61
Whether equilibrium is characterized by uniform supracompetitive prices,
uniform competitive prices, or some firms charging high prices and some firms charging low
prices depends on such factors as the proportion of informed consumers, consumer demand
functions, firms’ cost curves, the number of firms, and consumer search costs. See DENIS W.
CARLTON & JEFFERY M. PERLOFF , MODERN INDUST RIAL ORGANIZATION 431-42 (3d ed. 2000);
Steven Salop & Joseph Stiglitz, Bargains and Ripoffs: A Model of Monopolistically Competitive
Price Dispersion, 44 REV . ECON. STUD . 493 (1977).
62
1-800 Contacts, Comment #1, at Attach. 33, App. C, p.10 (national survey of
contact lens wearers used in expert report filed in Contact Lens MDL shows that 76% of those
surveyed were aware that lenses can be purchased elsewhere and that 68% were aware that they
20
B.
Competition for Profits from Lock-In
Competition between ECPs – both independents and those affiliated with retailers or
optical chains – for contact lens fittings constrains ECPs’ ability to lock consumers into highpriced lenses. Data suggest that the market for eye examinations is highly fragmented, such that
no individual ECP would possess the power to charge supracompetitive prices for
examinations.63 Thus, even if they are able to lock consumers into high-priced lenses, ECPs are
likely to compete for the opportunity to charge supracompetitive prices for such lenses by
reducing the price charged for fitting until all excess profits from the high-priced lens prices are
dissipated.64 To the extent that consumers anticipate a high-cost prescription, eye exam prices
are likely to adjust accordingly so that the total cost does not exceed the competitive level.65
Moreover, even if consumers do not anticipate being locked-in, a competitive market for contact
lens fittings should lead to a fitting price sufficiently low to compensate consumers for being
locked-in.
C.
Informed Consumers
The lock-in theory assumes that ECPs choose a lens for a patient without regard to the
patient’s preferences. Advertisements for national brands of lenses are commonplace,66 however,
and 1-800 Contacts offers information on its Web site regarding the limited distribution policies
of OSI and CooperVision.67 Thus, consumers may possess sufficient knowledge about contact
could purchase lenses from mail-order companies); Wal-Mart, Comment # 19, at 3 (due to
national advertising by manufacturers, most consumers “have an expectation that they can take
their prescription to other sellers to purchase contacts”).
63
OSI reports that there are approximately 35,000 ECPs in the U.S., and there is
significant competition between them on such variables as exam price, contact lens price,
convenience, hours, and insurance accepted. OSI, Comment # 7, at 16. See also Connecticut
Board Comment at 5 (noting that retail sources for contact lenses “advertise heavily”).
64
See Carl Shapiro, Aftermarkets and Consumer Welfare: Making Sense of Kodak,
63 ANTITRUST L.J. 483, 493-94 (1995).
65
See Klein, supra note 55, at 53 (noting that when consumers anticipate a highpriced tie-in, competition in the tying market will eliminate the potential for consumer harm).
66
Wal-Mart notes that due to advertising by manufacturers, “consumers have an
expectation that they can take their prescription to other sellers.” Wal-Mart, Comment #19, at 3.
67
For example, with respect to OSI’s Biomedics 55, 1-800 Contacts provides the
following information on its Web site:
21
lens brands to ask their prescribing ECP for a specific, widely available brand. Moreover,
according to an interview in a trade journal, some ECPs are reluctant to prescribe private label
lenses because consumers want national brand lenses and carrying such brands lends prestige to a
practice.68 These factors also limit an ECP’s ability and incentive to lock a consumers into a
private label lens.
Consumers also may be able to gain information regarding which ECPs are likely to
prescribe lenses that are widely available. For example, 1-800 Contacts offers financial
incentives for its customers to use affiliated ECPs – Pearle and Sears – to obtain contact
prescriptions.69 Further, 1-800 Contacts and Cole National have set up a “doctors referral
network” where customers of 1-800 Contacts in need of a new prescription will be referred to a
network of optometrists associated with Cole National. In return, Cole will refer patients in need
of replacement contact lenses to 1-800 Contacts,70 although patients are free to purchase lenses
If you are interested in wearing a different contact lens, one available any place you chose
to shop, you might consider requesting a prescription for a different brand during your
next exam. In addition, if your eye care provider will only prescribe a contact lens that
he/she believes you can't buy anywhere else, you might want to go elsewhere for your eye
care.
See http://www.1800contacts.com/product.aspx?itm=001528&cv=000360 (last visited Jan. 12,
2005). According to OSI, 1-800 Contacts has spent $20.2 million in advertising in 2003 and
$130 million “over the last several years.” OSI, #7, at 18 (citing 1-800 Contacts’ 2003 10-K).
68
In the March 15, 2002 issue of Review of Optometry, some ECPs noted the
following with regard to private labels:
“Consumers want popular products – that’s why they’re popular,” Dr. Gerber says. . . .
“TV advertising does not support private label, so there’s a disconnect with patients who
get a lens they’ve never heard of.” . . . “I’ve never bought into the private-label concept,”
says Glenda Secor, O.D., who has a contact lens-only practice in Huntington Beach,
Calif. “I feel it gives me more credibility to have a nationally recognized contact lens
armamentarium. The off-label brand is not the image I wanted to give patients.”
See 1-800 Contacts, Comment #1, at Attach. 4, p. 3.
69
See http://www.1800contacts.com/exam.html (last visited Jan. 15, 2005)
(advertising a $78 contact lens exam at Pearle Vision or Sears); OSI, Comment #7, at 20 (noting
that 1-800 Contacts is using promotional expenditures to transition customers to new ECPs who
will prescribe lenses available from 1-800 Contacts) (citing 1-800 Contacts' “recent” 10-K).
70
See 1-800 Contacts, Comment #1, at Attach. 52.
22
elsewhere. These programs may make it easier for consumers to find an ECP who will write a
widely available prescription.
D.
Reputation
Even if ECPs have the ability to charge supracompetitive prices for contact lenses by
locking consumers into a limited availability lens, it is unclear that they have an economic
incentive to do so, because such behavior may adversely affect their reputation for fair dealing.71
The greater the reputation for fair dealing, the more an ECP has at stake for behaving
opportunistically.72
An ECP who takes advantage of a consumer to sell him or her over-priced lenses risks
losing that patient’s repeat business if the patient becomes aware of the ECP’s opportunistic
behavior. Advertising and information disseminated from other sources (e.g., friends, coworkers, online) over the life of the prescription are likely to help a consumer discover that he is
paying a supracompetitive price for lenses. A patient who discovers this situation is unlikely to
return to the prescribing ECP for replacement lenses or for another examination. If that patient
informs other consumers, the ECP also risks losing the business of potential new patients as his
reputation for opportunistic behavior spreads.73
71
See Timothy J. Muris, Opportunistic Behavior and the Law of Contracts, 65
MINN. L. REV . 521, 527 (1981) (“[I]f good reputation has importance to the potential opportunist,
the risk of a bad reputation may deter some acts of opportunism.” Reputation concerns,
however, “will fail to deter opportunism in some situations. For example, reputation provides
little deterrent when potential opportunists can conceal their actions from those with whom they
expect to contract.”)
72
See Benjamin Klein & Keith Leffler, The Role of Market Forces in Assuring
Contractual Performance, 89 J. POL. ECON. 615 (1981).
73
It is not necessary that all consumers in the market know which ECPs have a
reputation for behaving opportunistically for those ECPs to be driven from the market. All that
is required is that a sufficient proportion of consumers can differentiate between ECPs that take
advantage of consumers’ lack of information and those that do not, and that ECPs cannot present
different offers to informed and uninformed consumers. Whether an equilibrium without ECPs
acting opportunistically obtains is also a function of such factors as consumer demand functions,
information costs, and firms’ costs curves. See, e.g., Russell Cooper & Thomas W. Ross, Price,
Product Qualities and Asymmetric Information: The Competitive Case, 51 REV . ECON. STUD .
197 (1984); Yuk-Shee Chan & Hayne Leland, Prices and Qualities in Markets with Costly
Information, 49 REV . ECON. STUD . 499 (1982).
23
An ECP is likely to risk losing this business only if the expected gain from locking
consumers into a private label or limited distribution lens is greater than the value of lost repeat
business. As noted previously, we do not have data on retailer margins, so we are unable to
determine the relative benefits that accrue to an ECP when prescribing private label or limited
distribution lenses versus other lenses.
Importantly, ECPs caught taking advantage of consumers sacrifice future revenue not
only from selling replacement lenses to such patients but also from eye examinations, which
produced almost twice the revenue of contact lens sales in 2002.74 The frequency of contact lens
purchases and exams are likely to exacerbate the costs of opportunistic behavior.75 Thus,
although reputational effects do not ensure against opportunistic behavior, they do provide a
market-based check on such behavior, particularly when sellers have strong economic incentives
to retain repeat business.
E.
Prices for Private Label and Limited Distribution Lenses
If the lock-in theory were true, one would expect outlets – both independent ECPs and
other retailers – that prescribe and sell private label and limited distribution lenses to charge
higher prices for these lenses than for comparable more broadly distributed lenses. The data do
not appear to support the lock-in theory. Price data gathered by the FTC suggest that private label
versions of Biomedics55 sell for prices similar to those of their national brand-name counterparts.
Similarly, there is no substantial price difference between what retailers with an affiliated ECP
charge for Proclear Compatibles lenses in relation to comparable lenses that are available to
online sellers through traditional wholesale channels.
1.
Biomedics55 and Private Label Equivalents
In a sample of 34 sellers, 12 sold Biomedics55 under a private label.76 These sellers were
74
See State of the Optical Market at 4 & 12 (in 2002, contact lens sales generated
$1.96 billion and eye examinations generated $3.6 billion). An ECP also may lose eyeglass sales
considering that most contact lens wearers also are likely to wear eyeglasses. Frames and
eyeglass lenses together accounted for 84.5% of retail optical sales in 2003, compared with just
11.8% for contact lenses. See Jobson Optical Research, The State of the Optical Market, 2nd
Quarter 2003, supra note 21, at 1.
75
A prescription typically must last at least one year under the FCLCA. 15 U.S.C.
§ 7604(a).
76
These sellers were America’s Best Online, Wal-Mart Online, BJ’s Online, WalMart, Sam’s Club, BJ’s, Pearle Vision, LensCrafters, Hour Eyes, Sears, Target, and Northern
24
all either offline retailers with ECPs or these retailers’ Web sites. Table 6 shows the price for
private label and branded versions of this lens, sorted by channel.
Table 6
Prices for Branded and Private Label Biomedics55
Branded Price
Private Label Price
Pure Online
$74.65 (n=15)
-
Hybrid
-
$77.65 (n=3)
W holesale Club
-
$56.40 (n=2)
Mass Merchandiser
-
$70.94 (n=2)
Op tical Chain
-
$84.94 (n=4)
Independent ECP
$88 (n=5)
$88.00 (n=1)
Source: FT C P rice Su rvey.
All but one private label seller charge less than independent ECPs charge for the branded
version of Biomedics55, and wholesale clubs and mass merchandisers sell private labels less
expensively than either pure online sellers or independent ECPs. The average price for a sixmonth supply of the private label versions of Biomedics55 was $76.28, compared to lenses sold
under the Biomedics55 brand-name, which averaged $77.99.77 This difference, however, is not
statistically significant, so we cannot reject the hypothesis that private label lenses sell for the
same price as the Biomedics55 brand.78
The statistical equality in prices does not appear to be attributable to the identity of the
channel through which the lenses are sold. Although the average private label seller prices the
private label version of Biomedics55 1.3 percent below the average price of all sellers of
Biomedics55, the average private label seller charges 8.7 percent above average for the rest of the
Virginia Doctors of Optometry. See Chapter 3, infra, for more details on the sample.
77
Data provided by OSI also show private label lenses to be priced very similarly to
their more widely available counterparts. On June 22, 2004, OSI compared its Biomedics 55
private labels from online sellers with Vistakon’s Acuvue2 and CIBA Vision’s focus 1-2 week,
and found OSI lenses to be less expensive. OSI, Comment #7, at 34-35.
78
A two-sample t-test assuming unequal variances does not reject the hypothesis of
equal means (t = .341).
25
lenses it sells.79 Thus, the data do not seem to support a lock-in theory, pursuant to which
prescribing outlets charge consumers supracompetitive prices for private label versions of
Biomedics55.
2. Proclear Compatibles, Acuvue Advance, and Acuvue2
It is more difficult to identify price effects of a limited distribution marketing strategy
than to identify price effects of private label lenses. In the case of private label lenses, there is an
identical national name brand lens, which can control for lens qualities that affect price, thus
allowing the effect of distribution method to be isolated. For limited distribution lenses, however,
there is no such identical product that provides this type of a control for lens qualities.
Of the lenses sampled by the FTC, commenters have identified Proclear Compatibles as a
limited distribution lens sold primarily through outlets that have an ECP present. An FTC sample
found these lenses to be available in 86 percent of offline outlets sampled and 88 percent of pure
online outlets sampled.80 There is no lens in the sample that is identical to Proclear Compatibles,
but Acuvue Advance and Acuvue2 are two widely available lenses that have similar water content
and polymers.81
Price data gathered by the FTC shows that at offline retailers with an ECP, a six-month
79
This difference is statistically significant at the 10 percent level (t = -1.59). See
Table A-1 in the Appendix for methodology.
80
See Table 8, infra.
81
Proclear lenses are 62 percent water, compared with 58 percent for Acuvue2 and
47 percent for Acuvue Advance. A trade publication notes that Acuvue 2, Acuvue Advance, and
Proclear Compatible lenses have dK values (measuring oxygen permeability) of 28, 60, and 34,
respectively, which are higher than the other spherical lenses sampled. See 21 TYLER’S
QUARTERLY SOFT CONTACT LENS PARAMETER GUIDE at 35 & 50 (June 2004). Further, Proclear
and Acuvue Advance may be closer to each other in product space than to Acuvue2. Proclear
Compatibles are made from omafilcon A, which is purported to have superior qualities with
regard to preventing dry eyes. Acuvue Advance is make from galyfilcon A, which is marketed as
Hydraclear and likewise is purported to be unique in its moisture retention abilities. Compare
add for Proclear Compatibles on CooperVision’s Web site at
http://www.coopervision.com/us/patient_clensesbycat.asp?id=8 with add for Acuvue Advance
on 1-800Contacts’ Web site at http://www.1800contacts.com/product.aspx?itm=001466. In
addition, in discussions with FTC staff, ECPs identified Acuvue Advance lenses as potential
substitutes for Proclear Compatible lenses given each lens’ level of comfort. The same ECPs
also noted that Proclear Compatibles offer unique advantages with regard to dry eyes.
26
supply of Acuvue Advance lenses is on average $9.82 more expensive than the same supply of
Proclear Compatibles, and a six-month supply of Proclear Compatibles are on average $8.83 more
expensive than a six-month supply of Acuvue2 lenses.82 These data indicate that sellers are
unable to charge a premium for Proclear Compatibles, the limited distribution lens, over Acuvue
Advance, which is available to all retailers through traditional wholesale channels. Because
Acuvue Advance is not a limited distribution lens, its higher price is likely attributable to some
combination of quality, costs, and branding. As for the price difference between Acuvue2 and
Proclear Compatibles, we are unable to control for other factors (such as cost, quality, or branding
differences) in addition to different distribution methods that may be affecting the price
differential.83 The limited data, however, do not support an inference that the manufacturer’s
limited distribution strategy affects the pricing of Proclear Compatibles.
*
*
*
Price data do not seem to support the lock-in theory pursuant to which ECPs are able to
charge consumers supracompetitive prices for private label and limited distribution lenses.84 This
conclusion, however, may be limited with regard to Proclear Compatibles due to the inability to
isolate the price effect, if any, of limited distribution.
82
Both differences are statistically significant at standard levels.
83
Proclear Compatibles lenses have a higher dK value and water content than
Acuvue2 lenses. See note 81, supra. In addition, in discussions with FTC staff, ECPs identified
Proclear Compatibles lenses as superior to Acuvue2 with regard to comfort, given its unique
polymer.
84
The limited empirical evidence submitted by commenters also does not support
the lock-in theory because it is not consistent with widespread ECP use of private label or limited
distribution lenses to charge supracompetitive prices to consumers. First, OSI estimates that
private label sales account for less than 8 percent of all soft lens sales. OSI, Comment #7, at 33.
Second, data provided by OSI show that independent ECPs distribute lenses from OSI and
CooperVision – the leading manufacturers that adopt limited distribution strategies in
proportions roughly equivalent to their national shares. Id. at 10-11. OSI also points to the fact
that Vistakon’s share of patients who begin wearing contacts for the first time has increased since
it began distributing through 1-800 Contacts in response to its settlement in the antitrust
litigation. If ECPs tended to favor limited distribution lenses, we would expect to see a decline
in prescriptions from Vistakon lenses once Vistakon began wide distribution. Id. at 39. Of
course, no conclusions can be drawn from a simple correlation that fails to control for other
relevant factors. For example, it is possible that Vistakon’s share was rising for unrelated
reasons, and that it would have been higher but for its shift in distribution policies.
27
F.
Effect on Manufacturer and Retail Competition
Exclusive dealing – in the sense that a retailer restricts its sales to a particular
manufacturer’s lenses – in the contact lens industry appears to be rare, and neither private labeling
nor limited distribution limits the ability of competing lens manufacturers to sell their lenses
through retail outlets. These practices, therefore, are not likely to threaten competition at the
manufacturer level.
Under some theories, a necessary – but not sufficient – condition for distribution
restrictions to affect retail competition adversely is foreclosure of a substantial number of retailers
from distributing a substantial share of lenses for a significant period of time.85
The largest-selling limited distribution lenses – OSI’s Biomedics55 and CooperVision’s
Proclear Compatibles – are still widely available from numerous outlets. Data gathered by the
FTC found Biomedics at all offline and 94 percent of pure online outlets sampled. Proclear
Compatibles are almost as widely available; at 86 percent of offline outlets sampled and 77
percent of pure online sites sampled.86 Thus, few retailers appear to be unable to distribute the
most popular limited distribution lenses. Moreover, neither of these lenses represents a
substantial amount of soft contact lens sales. According to submissions, OSI has between a 12.4
and 24 percent share of spherical lenses, and CooperVision has a 13 percent share.87 Considering
that these companies sell many more lenses than Biomedics and Proclear Compatibles, the share
of sales for these specific lenses are lower than the share of sales for each firm.
Although ostensibly available only from a specific seller, private label versions of
85
See Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327-28 (1961) (a
plaintiff challenging an exclusive deal must show that it “foreclose[s] competition in a
substantial share of the line of commerce affected,” so that “the opportunities for other traders to
enter into or remain in that market must be significantly limited”); see also See Concord Boat
Corp. v. Brunswick Corp., 207 F.3d 1039, 1059 (8th Cir. 2000) (to assess the likely competitive
effects of market foreclosure, courts examine such factors as the defendant’s market share and
entry barriers, and the likelihood that rivals can find alterative means to reach the downstream
market); Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 394 (7th Cir. 1984) (in addition
to substantial foreclosure, a necessary condition for exclusive dealing to be unlawful is that “the
probable (not certain) effect of the exclusion will be to raise prices above (and therefore reduce
output below) the competitive level, or otherwise injure competition”).
86
Since the survey was conducted, 1-800 Contacts has stopped carrying Proclear
Compatibles on its Web site. See http://www.1800contacts.com/Discontinued.aspx?itm=000735.
87
See Table 1 and accompanying text, supra.
28
Biomedics55 constitute a very small fraction of all soft contact lens sales. OSI estimates that
private label lenses account for less than 8 percent of all soft contact lens sales. Given that
numerous outlets sell private label lenses under various names, any individual private label is
likely to have less than a one percent share.88 The FCLCA, moreover, allows a customer who
receives a private label prescription to take it to other competing retailers that sell the same lens
under either the national brand name or equivalent private label.89 Thus, although competing
sellers technically may not distribute each other’s private label lenses, they are able to compete for
consumers by selling an equivalent national brand name or private label lens.
OSI notes in its submission that its Hydrogenics lens is available only from ECPs with
five or fewer offices.90 Data collected by the FTC confirm that OSI’s Hydrogenics is available
primarily from independent ECPs.91 As noted above, according to data OSI submitted to the FTC,
Hydrogenics represents only 0.5 percent of soft contact lens sales. Further, independent ECPs are
highly fragmented and are the largest retail channel for replacement contact lenses.92 Thus, this
strategy is highly unlikely to affect retail competition.
The data indicate that there is little foreclosure of retailers from distribution of lenses.
Moreover, as discussed infra in more detail, these practices may be associated with efficiencies.
Thus, private labeling and limited distribution are unlikely to reduce competition at the retail
level.
G.
Efficiencies from Limited Distribution
Because a manufacturer and a retailer typically have different incentives to promote a
particular product and provide services related to that product, a manufacturer may find it efficient
to place restrictions on the distribution of its product. By placing limits on intrabrand
88
See OSI, Comment #7, at 33.
89
See 15 U.S.C. § 7609(4)(f) and 16 C.F.R. § 315.2 (A)(8).
90
See OSI, Comment #7, at 28.
91
From the list of sellers from whom prices were surveyed in Chapter 3, only two
online and three offline sources (two of which were independent ECPs) carried this lens.
92
Jobson Research estimates that in 2003 there were 22,500 independent ECP
locations in the U.S. The State of The Optical Market, at 12. See also data presented on
distribution channels at pages 8-12, supra.
29
competition,93 a manufacturer can enhance interbrand competition with its rivals.94 Given that
ECPs can charge directly for their services, however, the role played by limited distribution and
private label strategies in spurring competition between contact lens manufacturers is unclear. We
explore these concepts more fully below.
1. Distribution Restrictions to Promote Interbrand Competition
Retail promotion and service are important complements to many consumer goods. To
reach an optimal level of output, a manufacturer often will find it efficient to provide those
consumers who are indifferent about purchasing its product with extra services to make the
purchase worth their while. For instance, relatively uninformed consumers of high-end electronic
equipment may require expert assistance to determine the proper product for them; without such
assistance, they may choose not to purchase at all. A manufacturer also may desire a retailer to
take steps to assure that a product maintains the level of quality that consumers expect from a
given brand.95
In many cases, however, retailers will have less incentive to engage in sales-generation
efforts than manufacturers. For instance, when the manufacturer’s profit margin for additional
sales is large in relation to the retailer’s (as may be the case for branded products), the retailer
rationally will provide a lower level of promotion than is optimal for the manufacturer.96 Further,
93
Intrabrand competition refers to competition among different sellers of the same
brand of product. For example, two department stores may compete with each other to sell the
same national brand of television.
94
Interbrand competition refers to competition among manufacturers of different
brands of products. For example, JVC and RCA compete with each other to sell their brand of
television.
95
For example, a brewer may insist that a retailer store its beer in a certain way to
preserve its quality. Without proper storage, total demand for the beer (i.e., not merely demand
at the one retail location) would be lower because consumers would be likely to associate the
poor quality not with the retailer’s inadequate storage, but with the manufacturer’s product. See,
e.g., Adolph Coors Co. v. FTC, 497 F.2d 1178 (10th Cir. 1974).
96
For example, one study reports that apparel manufacturers’ average gross profit
margin is 46 percent compared with only 9 percent for “multiple apparel retailers.” The authors
note that this disparity in compensation for marginal sales “will limit the incentive of retailers to
invest in developing and promoting their Web sites unless there is some form of co-op funding or
restructured pricing.” Robert Gertner & Robert Stillman, Vertical Integration and Internet
Strategies in the Apparel Industry, 49 J. INDUS. ECON. 415, 427 (2002).
30
because retailers do not reap all of the benefit from a manufacturer’s reputation, they are likely to
have less of an incentive to provide the effort necessary to maintain a level of quality associated
with a manufacturer’s brand name.97 Thus, a manufacturer will need to compensate the retailer
for putting forth the desired effort and may enter into a contract that spells out the services that a
retailer must perform. Because retail service provision can be complex and difficult to measure,
however, often a manufacturer will find it impracticable to specify in a contract the exact type and
level of promotional services it desires from retailers.
One solution to this problem is for a manufacturer to have distribution policies, such as
exclusive territories, that insulate its retailers from intrabrand competition from other sellers of
that manufacturer’s product. In this way, a manufacturer can provide its retailers with sufficient
compensation to create incentives to supply the desired retail service.98
Limited distribution policies also can prevent discounters from free-riding on a fullservice retailer’s efforts to increase demand.99 Under this “special services free-riding” theory,
absent exclusive territories, a consumer may come to the full-service retailer to learn about the
product from a knowledgeable and attentive sales staff, but purchase from a discounter that offers
lower prices because it does not provide any service. Full-service retailers that are insulated from
discounters can capture the full return on their service efforts, thereby helping to assure that the
retailer provides the optimal level of service.100
97
This phenomenon is likely to arise in a franchise context. For example, although
a restaurant franchisee using low-quality ingredients would lose repeat sales at its outlet, it may
also cause fewer patrons to visit other franchisees’ outlets as well. In this way, the low-quality
franchisee does not internalize the full costs of actions that depreciate the brand name capital of
the franchisor. See Benjamin Klein, The Economics of Franchise Contracts, 2 J. CORP . FIN . 9
(1995); Paul H. Rubin, The Theory of the Firm & the Structure of the Franchise Contract, 21 J.L
& ECON. 223 (1978).
98
See Benjamin Klein & Kevin M. Murphy, Vertical Restraints as Contract
Enforcement Mechanisms, 31 J.L. & ECON. 265 (1988).
99
See Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. &
ECON. 86 (1960).
100
Empirical studies of online marketing strategies find that manufacturers have
tended to pursue Internet retailing in a way that preserves incentives to provide retail service. For
example, one study finds that high-end fragrance producers that have restrictive distribution
practices in the physical world are more likely to practice similarly restrictive distribution
strategies online, such as offering their product online only through their own Web site at an
equal or higher price than is available elsewhere. See Judith Chevalier & Dennis Carlton, Free
31
2. Efficiencies from Limited Distribution and Private Label Lenses
The extent to which these theories apply to limited distribution and private label
strategies in the contact lens industry is unclear. Given that each new lens requires substantial
research and development and time-consuming regulatory approval, contact lens manufacturing
appears to fit the mold of a high fixed-cost, low marginal-cost industry.101 Unless ECPs enjoy a
substantial profit margin on lenses sold, it is likely that ECPs have less incentive to pursue
incremental sales than do manufacturers. Additionally, manufacturers may be concerned with free
riding by discounters. For instance, if an ECP provides services to show how one lens is superior
to another, patients could take this information and order the lens from a discounter that does not
provide this service. Thus, limited distribution and private label strategies may help solve these
conflicts.
In its comments, OSI claims that its limited distribution and private label strategies are
important ways to encourage retailers to promote its product. For example, with regard to limited
distribution, OSI notes:
OSI uses very little consumer advertising and promotion. OSI primarily promotes its
contacts to eye care professionals and affiliated chains, and relies on these retailers to
promote its products to consumers. . . . OSI’s limited distribution strategy is one of the
ways it can encourage independent eye care professionals and chains to promote its
products. It is well accepted that when one channel (e.g. Internet outlets) can free ride off
the promotional efforts of other channels, limited distribution is an important element in
encouraging other channels to invest in advertising.102
Riding and Sales Strategies for the Internet, 49 J. INDUS. ECON. 441 (Dec. 2001); see also Robert
Gertner & Robert Stillman, Vertical Integration and Internet Strategies in the Apparel Industry,
49 J. INDUS. ECON. 415 (2002). More generally, the empirical literature tends to shows that
vertical integration and restraints like resale price maintenance and exclusive dealing/exclusive
territories typically tend to reduce price and/or induce demand-increasing investments. See
James C. Cooper et al., Vertical Antitrust Policy as a Problem of Inference, INT ’L J. OF INDUS.
ORGANIZATION (forthcoming 2005).
101
These are industries in which the costs of developing a product and bringing it to
market are high but, once the product is on the market, the cost of producing an additional unit of
the product is low. The prescription drug and software industries are other examples of high
fixed-cost, low marginal-cost industries.
102
OSI, Comment #7 at 30. See also id. (“The branding strategies that firms choose
are among the ways they compete. OSI’s distribution methods are a crucial aspect of its strategy
to compete with its larger and better-capitalized rivals, which include firms like Johnson &
32
OSI also notes that “Private label products can increase the competitiveness of OSI and benefit
consumers in a number of ways [including providing] individual retailers and retail chains
incentives to expend resources on promotion of these products and make consumers aware of
additional non-brand name alternatives ... [and expanding sales, which] better allow OSI to
capture economies of scale in production, and thus enhance[ ] its competitiveness and ability to
offer lower prices to consumers.”103
It is important to note, however, that ECPs are likely able to recoup at least part of the
cost of promotional services as part of the contact lens fitting fees. If the examination fee
provides ECPs with adequate compensation for providing promotional services, this payment may
ameliorate any divergence between manufacturers’ and retailers’ incentives to provide these
services. Further, even if ECPs cannot recoup the cost of providing promotion services from
consumers, contact lens manufacturers may be able to compensate ECPs directly. For example, a
manufacturer could supply ECPs with education on the attributes and proper fitting techniques
related to a lens. Without empirical evidence on the extent to which ECPs are compensated for
promotional services through exam fees or directly from the manufacturer, however, it is
impossible to determine the role limited distribution or private label strategies play in determining
an ECP’s promotional effort.
III.
Conclusion
Our examination of these issues – exclusive relationships, private label lenses, and
limited distribution lenses – suggests that such relationships are not prevalent in the market for
contact lenses and are unlikely to limit competition and harm consumers. Exclusive relationships
are rare; private label lenses, while more common, still represent a small portion of all sales of
soft contact lenses; and limited distribution policies are not widely used. Moreover, our inquiry
showed that a common, limited distribution lens, or its private label equivalent, was available
from the overwhelming majority of outlets sampled. Given that the FCLCA permits sellers to fill
prescriptions with equivalent national brand or private label lenses, consumers have a number of
channels through which to obtain such lenses. In addition, these relationships may be an efficient
way for manufacturers to provide beneficial incentives to their lens distributors, which in turn may
lead to increased competition among various brands of lenses. In sum, the theory and the
evidence examined do not support the conclusion that these distribution practices harm
competition and consumers by allowing prescribers to lock in their patients to supracompetitively
priced lenses.
Johnson (Vistakon), Novartis (CIBA Vision), and Bausch & Lomb. OSI uses its distribution
strategy to help differentiate itself from these rivals, and OSI believes that its freedom to choose
its distribution methods is important to its future success.”).
103
Id. at 28-40.
33
Chapter 3
Prices and Availability in Online and Offline Retail Channels
Congress also directed the Commission to examine the difference between online and
offline sellers in regard to price, access, and availability. Section I of this Chapter discusses the
existing evidence on these points, which is sparse and, in some cases, out of date. Section II
presents the results of the Commission’s study of prices and availability, which finds that most
lenses are widely available through the different types of retail channels and that ECPs have the
highest prices and wholesale clubs have the lowest prices. The study also indicates that contact
lenses sold online are on average $15 less expensive than those sold offline.
I.
Online Sales of Contact Lenses
The share of contact lens sales transacted over the Internet is relatively small but has
grown rapidly since mid 1990s.104 One estimate places online contact sales at $200 million, or
10.2 percent of all contact lens sales in the United States, for 2003.105 1-800 Contacts is the
leading online seller, with $187 million in revenue for 2003.106 Several offline commercial
retailers, including BJ’s, Wal-Mart, and Sears, also operate Web sites on which they sell lenses.
The study refers to such sellers as hybrids, because they have both an offline and online presence.
Information on price differences between online and bricks-and-mortar sellers of
replacement lenses is sparse. One nationwide survey by SRI Consulting commissioned by the
state attorneys general as part of a multidistrict antitrust litigation107 revealed that, in 1998, the
104
See OSI, Comment #7, at 24.
105
See State of The Optical Market at 12.
106
1-800 Contacts Inc., 10-K at 23 (Mar. 18, 2004), at
http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker. Other online sellers for which revenue
information could be found were Coastal Contacts, with $28 million in revenue for 2003, and
VisionDirect, with an estimated $40 million in revenue. See Coastal Contacts, Management
Discussion and Analysis of Financial Conditions and Results of Operations (Sept. 21, 2004), at
http://media.integratir.com/V.COA/financials/MD+ASept22.pdf; Drugstore.com, 2003 10-K at
43 (Mar. 12, 2004), at http://www.shareholder.com/drugstore/Edgar.cfm?Page=8.
107
In re: Disposable Contact Lens Antitrust Litigation, No. MDL 1030, (complaints
filed M.D. Fla. 1994).
34
average price of a six-pack purchased via mail order was $19.90, compared to an average of
$23.76 for lenses purchased from ophthalmologists, optometrists, and optical chains – a 19
percent difference.108 The survey data also suggested, however, that consumers who purchase
their lenses from traditional suppliers could achieve equivalent savings at a mass merchant
discounter, such as Wal-Mart, Costco, or BJ’s; the average price at such retailers was $19.98.109
In its comments, Wal-Mart suggests that current pricing patterns in the retail market are
similar to those found by SRI:
[P]rices will be higher for contact lenses from a private optometrist or
ophthalmologist than the prices charged by retailers and internet sellers.
Furthermore, retailers and internet sellers typically will have slightly higher prices
than wholesalers. Contact lens prices will be comparable among major retailers
and on-line merchants.110
1-800 Contacts provided the results from a March 2004 survey comparing the price for a six-pack
of three different lenses – Focus Toric, FreshLook Colorblends, and Acuvue 2 – across five retail
channels – Mass Merchandisers, Optical Retail Chains, Independent Optometrists,
Ophthalmologists, and 1-800 Contacts.111 These results – replicated below as Table 7 – generally
are consistent with the SRI survey and Wal-Mart’s comments. Mass merchandisers typically
have the lowest prices. 1-800 Contacts’ prices are somewhat higher than those of mass
108
Susan Russell, Nationwide Survey of Contact Lens Wearers, SRI Consulting
(1999). It is not clear whether the mail-order price includes shipping and handling. Survey
takers were instructed to tell respondents to omit shipping and handling charges only if the
respondent asked about the issue. In addition, some mail-order and Internet firms offer free
shipping and handling. OSI points out potential drawbacks to the SRI study outlined above. For
example, OSI states that the survey did not account for practitioners that sell contact lenses
bundled with an examination, as a means of offering a discount on the bundle. The comment
also notes that price differences among different types of providers may vary by the number of
contact lenses purchased.
109
Id.
110
Wal-Mart, Comment # 19, at 4.
111
See 1-800 Contacts, Comment #1, at 17-18 and Attach. 23. In the survey, the
“Mass Merchandisers” sample was comprised of Wal-Mart, Target, and Costco, and the “Optical
Retail Chain” sample was comprised of LensCrafters and Pearle Vision. Optometrists and
ophthalmologists and the mass merchandisers and optical retail chain stores that were sampled
were selected at random from 1-800 Contacts’ database.
35
merchandisers for two of the three lenses sampled, but are lower than prices charged by national
optical chains. Independent ECPs have the highest prices.
Table 7
1-800 Contacts Price Comparison
Channel
Focus Toric
FreshLook
Colorblends
Acuvue 2
Mass Merchandisers
$53.21
$35.40
$18.05
Optical Retail Chains
$66.69
$42.09
$22.85
Independent
Optometrists
$70.91
$46.67
$24.39
Ophthalmologists
$73.18
$46.54
$25.74
Average of ECPs
$67.87
$44.43
$23.31
1-800 Contacts
$59.00
$34.95
$19.95
Source: 1-800 Contacts, Comm ent #1 , at 17-1 8 and Attach. 23.
II.
FTC Study
To examine more rigorously prices and availability for online and offline channels, the
Commission undertook its own study of prices. During the week of November 29, 2004, FTC
staff collected price information for a six-month supply of 10 different contact lenses from 20
online and 14 offline retailers.112 Staff selected six spherical lenses, three toric lenses, and one
multifocal lens for the study. No data exists on market share of individual lenses, but our
experience suggests that the lenses sampled are among the most frequently purchased and are thus
likely to represent typical consumer patterns. Of the online retailers, 16 were pure online sellers –
those with no offline presence – and 4 were hybrids, meaning that they had both online and offline
sales. The Commission selected the pure online sellers based on the results of a search for
112
A six-month supply was chosen because this quantity appears to be the most
popular quantity purchased. See note 18, supra. Data for a smaller sample of lenses and outlets
also were collected the week of October 25. A comparison between these data and those
collected during the week of November 29 revealed very small changes in price (average change
-$.08 for all channels, -$.18 for online, and -$.04 for offline). Given the lack of variation in
prices over time, we used only data from the larger November 29 sample.
36
“contact lenses” at shopping.com, a price comparison search engine. Hybrid sellers were selected
by determining whether well-known offline outlets also had a Web site.113
The offline retailers sampled were all located in the Northern Virginia Area fall into four
broad channels:114 two wholesale clubs;115 two mass merchandisers;116 four optical chains;117 and
six independent ECPs.118 The non-independent ECP channels sampled represent many of the
largest optical retailers.119
A.
Availability
As Table 8 shows, most lenses are widely available. Of the ten lenses surveyed, five were
available in 90 percent of sampled outlets, and all were available in at least 76 percent of sampled
outlets. Of the 340 attempted price observations, in only 30 cases did an outlet not carry the lens
113
This methodology is common in studies of online and offline pricing. See, e.g.,
Karen Clay et al., Retail Strategies on the Web: Price and Non-Price Competition in the Online
Book Industry, 50 J. INDUS. ECON. 351 (2002); A Longitudinal Price Comparison for Music CDs
in the Electronic and Brick-and-Mortar Markets: Pricing Strategies in Emergent Electronic
Commerce, 19 J. BUS. STRAT EGIES 55 (2002); Karen Clay et al., Prices and Price Dispersion on
the Web: Evidence from the Online Book Industry, 49 J. INDUS. ECON. 521 (2001); Erik
Brynjolfsson & Michael D. Smith, Frictionless Commerce? A Comparison of Internet and
Conventional Retailers, 49 MGM ’T SCIENCE 563 (2000).
114
It is possible that results may differ in other localities where relative prices
between online and offline channels and within the offline channel are significantly different than
those found in Northern Virginia. Because, however, the ranking of prices charged by channels
is similar to those found in other data submitted to the FTC, there is no indication that the data
here are unrepresentative.
115
Sam’s Club and BJ’s.
116
Wal-Mart and Target.
117
Sears, Hour Eyes, Pearle Vision, and LensCrafters.
118
FTC staff searched for “optometrists”in the Yahoo yellow pages for the zipcode
22301 and received a list of 21 independent ECPs from Alexandria, Falls Church, and Arlington.
To assure reliability, this list was cross-referenced with another list of independent ECPs from
the area to arrive at 13 ECPs. From this list, 6 were chosen at random.
119
See Table 3, supra.
37
in question. Fifteen outlets, of which six were offline and nine were online, did not carry at least
one lens (for some outlets, multiple lenses were unavailable).
On average, the lenses sampled were available at a larger proportion of offline outlets than
online outlets (95.8% versus 88.5%). With the exception of Acuvue lenses and Softlens Toric
lenses (which were available from all outlets sampled), moreover, each lens was available from a
larger proportion of offline than online stores. With regard to the online channel, the lenses
sampled were more likely to be available from hybrid Web sites than from pure online retailers.
The largest pure online retailer (1-800 Contacts), however, carried all of the lenses in the sample.
With the exception of Acuvue, all independent ECPs sampled carried all of the sampled
lenses. Likewise, with the exception of one optical chain outlet that did not carry Softlens
Multifocal, all outlets sampled from this channel carried all lenses. With the exception of
Proclear Compatibles, mass merchandisers and wholesale clubs in the sample carried all lenses.
38
Table 8
Percentage of Outlets with Lens Available by Channel
Online
(n = 20)
90%
95%
80%
90%
95%
70%
100%
85%
95%
85%
Pure Online
(n = 16)
88%
94%
75%
94%
94%
88%
100%
94%
94%
88%
Hyb rid
(n = 4)
100%
100%
100%
75%
100%
0%
100%
50%
100%
75%
86%
100%
100%
100%
100%
86%
100%
93%
100%
93%
W holesale Club
(n = 2)
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
Mass Merchandiser
(n = 2)
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
Op tical Chain
(n = 4)
100%
100%
100%
100%
100%
100%
100%
100%
100%
75%
Independent ECP
(n = 6)
67%
100%
100%
100%
100%
100%
100%
100%
100%
100%
88%
97%
88%
94%
97%
76%
100%
88%
97%
88%
Offline
(n = 14)
All C han nels
(n=34)
Source: FT C P rice Su rvey.
39
l
Softlens
Multifoca
Frequency55 Toric
Focus Toric
Softlens Toric
Proclear
Compatible
Frequency55
Biomedics55
Acuvue Advance
Acuvue2
Acuvue
Channel
B.
Prices
Table 9 below shows average total prices for each lens sampled by distribution channel.
Total prices include shipping and handling charges from online sellers, when applicable. Because
Virginia does not charge sales tax on contact lens purchases, this number does not include sales
tax for offline sellers. As shown in the last column, the sample wholesale clubs have the lowest
average price for lenses, followed by pure online retailers. For all of the ten lenses, the lowest
price was found at one of these channels, four at pure online and six at wholesale clubs.
Independent ECPs have the highest average price for lenses in the sample, followed by
optical chains, mass merchandisers and hybrids. For all lenses except Focus Toric and Softlens
Toric, the highest price was found at independent ECPs or optical chains. The price range
between independent ECPs and the lowest cost channels (wholesale clubs and pure online
retailers) appears to be the lowest for Acuvue lenses and the highest for Frequency55.
40
Table 9
Average Lens Price by Channel
l
All
Lenses
Softlens Multifoca
Frequency55 Toric
Softlens Toric
Focus Vistint Toric
Proclear Compatible
Frequency55
Biomedics55
Acuvue Advance
Acuvue2
Acuvue
$72.45
$71.71
$90.00
$75.15 $44.53
$66.47
$123.55
$92.94
$99.13 $174.17
$91.14
Pure Online
$71.94
$71.04
$88.01
$74.65 $40.07
$66.47
$112.79
$88.87
$94.44 $170.92
$87.77
Hybrid
$74.23
$74.23
$95.99
$77.65 $61.27
-
$166.63
$123.45
$116.71 $189.33
$106.38
Offline
$77.45
$79.53
$98.18
$80.17 $68.42
$88.36
$145.01
$118.04
$107.56 $198.94
$107.42
Who lesale Club
$55.90
$55.90
$77.48
$56.40 $44.93
$79.96
$109.26
$91.73
$94.94 $163.68
$83.18
Mass Merchandiser
$74.94
$74.94
$95.86
$70.94 $74.99
$90.00
$153.94
$129.99
$110.99 $198.00
$108.38
Optical Cha in
$86.94
$86.94
$105.97
$84.94 $64.25
$91.93
$162.94
$116.25
$103.50 $206.60
$109.20
Independent ECP
$80.00
$84.00
$100.67
$88.00 $76.83
$87.67
$152.00
$125.20
$113.33 $207.17
$112.35
$74.45
$75.02
$93.82
$77.35 $54.67
$76.10
$134.15
$103.81
$102.71 $184.89
$97.80
Channel
Online
All C han nels
Source : FTC Price Survey. Unit of obse rvation is price of lens j at outlet i. Average p rices for All Lenses, O nline, Offline, and All Channels
are we ighted by ob servation.
41
A regression analysis of the price of a six-month supply of lenses on variables that
control for distribution channel and lens effects reveals the same patterns illustrated in Table 8.120
Specifically, the analysis showed that contact lenses are on average $15.48 less expensive online
than offline. Wholesale clubs, however, are the least expensive channel overall, offering prices
that average around $30 less than independent ECPs, around $9 less than all online outlets, and
about $6 less than pure online retailers. The difference between the wholesale club price and the
independent ECP price is slightly larger for toric and multifocal lenses ($34.42) than for spherical
lenses ($26.36).
Within the online channel, there is a difference between pure online sellers and hybrids.
Pure online sellers offer prices that are on average $23.95 less expensive than independent ECPs.
Further, the price difference between pure online sellers and wholesale clubs – the least expensive
channel – is only around $6 for all lenses, and less than $2 for toric and multifocal lenses.121 The
difference between pure online sellers and wholesale clubs for spherical lenses is less than $9.122
For specialty lenses, there is no statistically significant difference between hybrid sites’ prices and
those charged by independent ECPs. Hybrids, however, do charge around $9.62 less for spherical
lenses, on average, than do independent ECPs.123
There also are differences within the offline channel. As noted above, the study showed
that wholesale clubs charge on average the lowest prices of any channel for both spherical and
specialty lenses, whereas results suggest that independent ECPs and optical chains charge the
highest prices on average for both categories of lenses. In the results for all lenses sampled, the
difference between mass merchandisers’ and independent ECPs’ average pricing is fairly small
(-$4.38), with the difference between optical chains and independent ECPs even smaller (-$0.90).
The hypothesis that the sampled independent ECPs, optical chains, and mass merchandisers all
120
Two six-packs (one six-pack for each eye) are a six-month supply of lenses that
are replaced on a monthly basis. Four six-packs (two six-packs for each eye) are a six-month
supply of lenses that are replaced on a bi-weekly basis. For full regression results see Appendix
Table A-2.
121
The difference in prices charged by pure online sellers and wholesale clubs for all
lenses sampled is statistically significant at the 7% level (F 1,295 = 3.32). There difference in
prices for toric and multifocal lenses is not significant at standard levels (F 1,118 = .08, 22%
confidence level).
122
This difference is statistically significant at the 1% level (F 1,172 = 8.10).
123
This difference is statistically significant at the 1% level.
42
charge the same price for the specialty lenses included in the sample cannot be rejected.124 For
spherical lenses sampled, however, the results suggest that mass merchandisers offer prices that
are on average $7.07 less than independent ECPs.125
The analysis presented shows that for the lenses and outlets sampled, wholesale clubs
and pure online retailers offer the lowest prices on average. Although independent ECPs have the
highest average prices, there is no statistically significant difference between the prices offered by
independent ECPs, mass merchandisers, optical chains, and online hybrids for specialty lenses.
For spherical lenses, however, all channels except optical chains offer lower average prices than
independent ECPs.
There are several benign explanations for why the data show independent ECPs typically
charging more than other channels.126 For example, the majority of contact lens exams are
performed by independent ECPs.127 Consumers may enjoy the convenience of one-stop shopping
and may be willing to pay for this value in the form of higher prices. Similarly, the survey data
may bias upwards independent ECPs’ prices if they offer lower contact lens prices when bundled
with exams and if most of their sales are made in this manner. Further, the relative price for
independent ECPs may be biased upwards to the extent that consumers purchasing from
independent ECPs tend to receive discounts due to managed vision plans in greater proportions
than do consumers purchasing from other channels.
III.
Conclusion
The FTC’s study found that most lenses are widely available through all the retail
channels, with five out of ten lenses surveyed available in 90 percent of the outlets sampled and
all ten lenses available in at least three-quarters of the outlets sampled. As for the prices of lenses,
the study’s results indicate that ECPs and optical chains have the highest prices and wholesale
clubs have the lowest prices. Without taking into account differences within the online and
124
The estimated coefficients on mass merchandiser and optical chain in
specification 4 reported in Appendix Table A-2 are statistically indistinguishable from zero.
Further, a test that the coefficients of mass merchandiser and optical chain are equal cannot be
rejected at standard statistical levels (F 1,118 = .03, 13% confidence level).
125
This difference is statistically significant at the 10% level.
126
Although independent ECP prices are statistically indistinguishable from those
charged by optical chains.
127
See VISION MONDAY (Nov. 8, 2004) (noting that for the 12 months ending June
2004, 65.1% of adults who received eye examinations, received them from an independent ECP),
at http://www.visionmonday.com/articles/details.asp?ID=13820.
43
offline channels, contact lenses sold online are, on average, $15 less expensive than those sold
offline. For the outlets sampled, there is no statistically significant difference in the price
independent ECPs, optical chains, hybrids, and mass merchandisers charge for specialty lenses.
For spherical lenses, however, the results show that mass merchandisers and hybrids offer
statistically significantly lower prices vis-á-vis independent ECPs.
44
Chapter 4
Impact of the Eyeglass Rule on Competition
In 1978, the FTC promulgated the Eyeglass Rule, which requires an optometrist or
ophthalmologist to provide a patient, at no extra cost, a copy of the patient’s eyeglass prescription
at the completion of an eye exam.128 Congress directed the Commission to evaluate the impact of
the Eyeglass Rule on competition, the nature of enforcement of the Rule, and the impact of such
enforcement on competition. As discussed further below, the Eyeglass Rule has facilitated
comparison shopping by consumers, thereby spurring competition and leading to lower prices and
more choices for consumers.
I.
The Eyeglass Rule
Before the Commission issued the Eyeglass Rule, many ECPs either refused to release
prescriptions to their patients, even if the patient requested it, or charged an additional fee to do
so.129 Without their prescriptions, consumers were unable to purchase eyeglasses from sellers
other than their ECPs and therefore were unable to comparison shop.
Prohibitions and restrictions on advertising of ophthalmic goods and services were also
commonplace: ECP advertising, especially price advertising, was restricted in 48 states and the
District of Columbia, either by governmental or private regulation.130 An absence of advertising
for eyeglasses also hindered the ability of consumers to comparison shop. Without such
advertising, consumers generally knew little about their options in purchasing eye exams and
eyeglasses, including that they had the option of purchasing them separately. 131 Evidence in the
rulemaking record indicated that prices for eyeglass lenses, frames and complete eyeglasses varied
widely (as much as 100 to 300 percent).132 Comparison shopping would be expected to decrease
128
See 16 C.F.R. § 456.2(a), (c).
129
Advertising of Ophthalmic Goods and Services, Statement of Basis and Purpose
and Final Trade Regulation Rule, 43 Fed. Reg. 23,992, 23,998 (June 2, 1978). The Commission
found, for example, that in nearly every survey of practicing optometrists considered in the
rulemaking record, more than 50 percent of optometrists imposed a restriction on the availability
of eyeglass prescriptions to patients. See id.
130
Id. at 23,994.
131
Id. at 23,993, 23,995-96.
132
See id. at 23,994.
45
this variance. Advertising, especially comparative price advertising, would facilitate such
comparison shopping.
The Commission issued the Eyeglass Rule to make it easier for consumers to
comparison shop. In addition to requiring that they provide their patients a free copy of their
eyeglass prescription, the Rule also prohibits optometrists and ophthalmologists from
conditioning the availability of an eye examination on a requirement that the patient agree to
purchase eyeglasses or other ophthalmic goods from the practitioner.133 The Rule further prohibits
optometrists
and ophthalmologists from making certain disclaimers and waivers of liability. 134
Since it issued the Rule in 1978, the Commission has conducted reviews of the Rule’s
impact. These reviews analyzed whether the Rule should be retained, eliminated, or revised in
light of technological, regulatory, or other changes in the marketplace. These reviews have
shown that the Rule has had a beneficial effect on competition and consumers.135
In February 2004, the Commission concluded its most recent review of the Rule. The
FTC received many comments supporting retention of the Rule, arguing that the prescription
release requirement in particular continues to benefit consumers by increasing competition and
providing consumers with more choices and lower prices.136 Moreover, even those who urged that
the prescription release requirement be rescinded acknowledged that the Rule had improved the
ability of consumers to comparison shop and increased competition in the market for
eyeglasses.137
133
16 C.F.R. § 456.2(b).
134
16 C.F.R. § 456.2(d) (an ECP may not waive or disclaim “the liability or
responsibility of the ophthalmologist or optometrist for the accuracy of the eye examination or
the accuracy of the ophthalmic goods and services dispensed by another seller”).
135
In 1985, for example, the agency published a notice of proposed rulemaking that
invited comments on whether the rule should be modified or repealed. See Ophthalmic Practice
Rules, Proposed Trade Regulation Rule, Notice of Proposed Rulemaking, 50 Fed. Reg. 598, 602603 (Jan. 4, 1985). In 1989, the FTC concluded the review and decided to retain the rule,
because there remained significant non-compliance with the Rule and a continued lack of
consumer awareness about their ability to obtain their prescription and purchase eyeglasses
separately. See Ophthalmic Practice Rules, Final Trade Regulation Rule, 54 Fed. Reg. 10,285,
10,303 (Mar. 13, 1989).
136
See Ophthalmic Practice Rules, Final Rule, 69 Fed. Reg. 5,451-52 (Feb. 4, 2004).
137
See id. at 5,452.
46
The Commission determined that it was in the public interest to retain the Rule without
substantive modification.138 The FTC concluded that the Rule enhances consumer choice among
eyeglass sellers at a minimal compliance cost to eye care prescribers.139 The Commission did
note, however, that there was some evidence in the record suggesting that some eye care
practitioners continue to refuse to release eyeglass prescriptions,140 which would deprive some
consumers of the benefits of the Rule.
II.
Impact of the Rule on Competition
For the current study, the Commission received few comments and little empirical data
in response to a request for comments on the impact of the Rule on competition. Those who did
comment presented differing views on the question of whether the issuance and enforcement of
the Eyeglass Rule has affected competition and prices in the market for the retail sale of
prescription eyeglasses.
Wal-Mart stated that there was generally less competition in the optical industry prior to
the Eyeglass Rule.141 Since the Rule was issued, consumers have been able to shop for eyeglasses
from a variety of sellers, which has increased competition among the sellers to best meet
consumers’ needs.142 According to Wal-Mart, the increased competition has allowed optical
shops to compete better with independent optometrists in selling prescription eyewear, thereby
reducing prices for consumers.143 In addition, Wal-Mart noted that the increased competition may
have provided an incentive for some sellers to begin manufacturing their own eyeglass products,
thereby further reducing prices to consumers.144
138
See id. at 5,454.
139
See id. at 5,453.
140
See id.
141
Wal-Mart, Comment #19, at 6.
142
See id.
143
See id.
144
See id. Wal-Mart also noted that, although the Eyeglass Rule has reduced costs to
consumers, barriers to competition and market efficiencies still exist. Specifically, it pointed to
some state laws that prohibit the sale of prescription eyeglasses and optical goods by any retail
establishment unless the majority of the establishment’s income is derived from the sale of
prescription optical goods and materials. According to Wal-Mart, such laws preclude it from
entering the market as a brick-and-mortar eyeglasses seller, and the removal of such barriers to
entry would further reduce prices to consumers for eyeglasses. Id. at 7 (citing 59 OKLA . STAT .
47
The American Optometric Association (“AOA”) stated generally that the eye wear
market currently “exhibits all of the hallmarks of a very competitive marketplace,” and that
consumers now “have a broad range of choices for their vision correction needs, spectacles,
contact lenses, refractive surgery; all provided by a large and varied base of sellers, at various
prices.”145 AOA, however, did not comment on the state of the market prior to the Rule.146
By contrast, the Illinois Optometric Association (“IOA”) contended that the Rule did not
cause a large change in the eyeglasses market; rather, in IOA’s view, consumer demand has had a
much larger impact on prices.147 For example, the IOA asserted that “[t]he state of competition in
the market for the retail sales of eyeglasses was more mature in 1978 than the contact lens market
is today, in that independent opticals (sellers) were very common.”148 Further, the IOA observed
that most prescribers released eyeglass prescriptions before the Eyeglass Rule, contending that if
prescribers refused to release prescriptions and charged more for eyeglasses, consumers would
seek out prescribers with lower prices.149 The IOA did not provide any empirical data in support
of its position, pointing generally to a “limited” but unquantified number of prescribers who have
been disciplined under the Rule as evidence that prescription release was prevalent before the
Rule.150
In its comments, 1-800 Contacts cited a study indicating that almost 20 years after
issuance of the Eyeglass Rule, almost two-thirds of consumers were unaware of their right to
receive their eyeglass prescriptions. 1-800 Contacts asserted that many consumers still are not
aware of their right to obtain their eyeglass prescription under the Eyeglass Rule151 and that some
ANN . § 596).
145
AOA, Comment # 3, at 1.
146
See id.
147
IOA, Comment #2.
148
Id. The IOA did not indicate what a “more mature market” for eyeglasses implied
for the impact of the Eyeglass Rule on prices.
149
See id. This commenter stated that the Rule has had a significant impact only on
those practitioners who did not release eyeglass prescriptions prior to the Rule’s promulgation.
Id.
150
See id. This view appears to run counter to the Commission’s findings in
promulgating the Eyeglass Rule.
151
See 1-800 Contacts, Comment #1, at 29. This comment expressly references the
comment filed by 1-800 Contacts in conjunction with the Commission’s Contact Lens Rule
48
consumers still do not receive copies of their eyeglass prescriptions either automatically or even
when they ask.152 It contends that lack of education and enforcement of the Eyeglass Rule have
limited the rule’s efficacy.153
III.
Other Effects of the Rule
Issuance and enforcement of the Eyeglass Rule prompted some changes in state laws,
rules, and policies regarding prescription eyeglasses. The Nebraska Board of Optometry
(“NBO”) commented that it developed “Guidelines for the Release of Spectacle or Contact Lens
Prescriptions” in response to the Eyeglass Rule.154 Those guidelines, which the NBO provided
with its comment, set forth the Eyeglass Rule’s requirement that an optometrist or
ophthalmologist must provide a patient with a copy of the patient’s eyeglass prescription
immediately after the eye examination is completed.155 According to the NBO, the guidelines
were originally intended to serve as a guide for practicing optometrists, but they also have been
rulemaking. In its comment on the rulemaking, 1-800 Contacts cited to a 1997 study showing
that 65.8% of consumers were not aware of their right to their eyeglass prescription. See
Comment by 1-800 Contacts on the Proposed Contact Lens Rule, at 3 (available at
http://www.ftc.gov/os/comments/contactlensrule). The FTC addressed this study during its
recent regulatory review of the Eyeglass Rule. See 69 Fed. Reg. at 5,452.
152
See Comment by 1-800 Contacts on the Proposed Contact Lens Rule, at 3
(available at http://www.ftc.gov/os/comments/contactlensrule). 1-800 Contacts cited to a 1997
study showing that 29.3% of consumers surveyed did not receive their prescriptions, and that
10.1% were refused their prescriptions when they requested them. The FTC considered this
study during its recent regulatory review of the Eyeglass Rule. See 69 Fed. Reg. at 5,452. 1-800
Contacts also cited anecdotal evidence submitted in the regulatory review claiming that the
overwhelming majority of eye doctors who dispense eyewear do not automatically give patients
their eyeglass prescriptions. See id.
153
See Comment by 1-800 Contacts on the Proposed Contact Lens Rule, at 83
(available at http://www.ftc.gov/os/comments/contactlensrule/).
154
NBO, Comment #17, at 2.
155
See id. at Attach. 2. The guidelines also state that the Rule allows an optometrist
or ophthalmologist to condition provision of the prescription on payment for the eye
examination, but only if that optometrist or ophthalmologist would have required immediate
payment from that patient had the examination revealed that no ophthalmic goods were required.
See id.
49
provided to the public in response to questions regarding the release of eyeglass prescriptions.156
By contrast, the IOA commented that Illinois did not change its laws in response to the Eyeglass
Rule.157
Wal-Mart noted that the Eyeglass Rule may have prompted an increase in protectionist
legislation in some states, such as laws requiring opticians to be licensed before they can dispense
eyeglasses and laws affecting advertising of eyeglasses.158 Wal-Mart’s comments suggested that
such laws limit consumers’ ability to obtain prescription eyewear at the best possible price.159
IV.
Conclusion
The Eyeglass Rule has improved the ability of consumers to comparison shop for
eyeglasses. Its prescription release requirement, in particular, continues to benefit consumers by
spurring competition and providing consumers with more choices and lower prices.
156
See id. at 2.
157
IOA, Comment #2. The IOA further stated that it was not aware of any policy
changes by trade associations resulting from the Eyeglass Rule.
158
Wal-Mart, Comment #19, at 7.
159
See id.
50
Chapter 5
State Barriers to Competition
In addition to the specific issues discussed above, Congress also required the
Commission to examine whether there are any other issues that have an impact on competition in
the sale of prescription contact lenses. The FTC has expressed concern in the past that state laws
and regulations may limit competition in contact lenses, raise consumer costs, and harm public
health.160 Scholarly studies of the eye care industry have reached similar conclusions.161 For
example, licensing requirements may act to insulate in-state sellers from out-of-state competition,
or insulate ECPs from non-ECP sellers. As noted in the Contact Lens Report, health concerns do
not appear to justify the costs imposed by these requirements.162 Likewise, restrictions on
advertising and regulations that limit the amount of revenue that a store may derive from sales of
non-optical goods may adversely affect competition. Accordingly, in this Chapter we will
examine state licensing requirements for contact lens sellers, state restrictions on advertising, and
other state barriers.
I.
State Licensing Requirements
Several states have adopted laws or regulations that require anyone who dispenses lenses
160
See CONTACT LENS REPORT ; Matayo Letter.
161
See Deborah Haas-Wilson, The Regulation of Health Care Professionals Other
than Physicians, REGULATION (Fall 1992) (considering the impact of occupational regulation on
the market for vision care services and concluding that “self-regulating professionals may have
an incentive to enact business practice restrictions that increase rivals’ costs.”), at
http://www.cato.org/pubs/regulation/reg15n4d.html; Deborah Haas-Wilson, Strategic Regulatory
Deterrence: An Empirical Test in the Ophthalmic Market, 8 J. HEALTH ECON . 339 (1989)
(econometric study of optical goods markets concluding that “form of practice” restrictions have
been used to deter entry and maintain higher prices.”); Deborah Haas-Wilson, The Effect of
Commercial Practice Restrictions: The Case of Optometry, 29 J. L. & ECON . 165 (1986); Roger
Feldman and James W. Begun, The Welfare Cost of Quality Changes Due to Professional
Regulation, 34 J. INDUS. ECON. (1985) (concluding that in the case of optometry “[p]rofessional
and legal sanctions prevent would-be price cutters from expanding their share of the market.”);
THE EFFECTS OF RESTRICTIONS ON ADVERTISING AND COMM ERCIAL PRACTICE IN THE
PROFESSIONS : THE CASE OF OPTOM ETRY , FTC BUREAU OF ECONOM ICS STAFF PAPER REPORT
(1980).
162
CONTACT LENS REPORT at 3.
51
to hold a valid ECP license issued by their state, or that impose other restrictions on out-of-state
sellers’ ability to sell in that state.163 For example, in some states, personalized vision products,
such as prescription eyeglasses and contact lenses, may be sold only at retail by a licensed optical
establishment, under the direct supervision of a licensed optician.164
By contrast, other states impose a registration requirement, rather than a license
requirement, on out-of-state contact lens sellers. For example, California requires a non-resident
contact lens seller to be authorized by its home state, to maintain records of lenses sold into
California, and to provide a toll-free numbers for patients to ask questions or make complaints
and for ECPs to confirm their prescriptions.165 Not all registration requirements completely
supplant professional license requirements, however. Some states require out-of-state contact lens
sellers to register with state boards and, as a condition of the registration, require the seller to have
a professional license – such as an optometry or pharmacy license – in the seller’s home state.166
A.
Effect on Competition
By restricting the supply of professionals that enter an occupation, state licensing tends
to raise the wages of those professionals; these restrictions in turn can lead to higher prices for
products and services.167 State licensing restrictions on entry can also lead to higher prices by
163
1-800 Contacts, Comment # 1, at 29, notes several states with licensing or other
restrictive requirements: North Carolina, Tennessee, Mississippi, and Washington (with similar
laws pending in Alaska and Georgia). Id. (citing N.C. GEN . STAT . §§ 90-235, 90-236.1, 90.252;
TENN. CODE §§ 63-8-102, 63-8-113; Tennessee Dispensing Opticians, § 63-14-102; MISS. CODE
ANN . § 73-19-61; Mississippi State Board of Optometry Board Rule 8.1(a); Washington
Consumer Access to Vision Care Act, ARWC § 18.195.020; The Dispensing Opticians Act,
ARWC § 18.34.141; Alaska House Bill 502, “An Act relating to dispensing opticians and
dispensing optician apprentices,” introduced Feb. 16, 2004 (legislation pending)); Georgia, S.B.
513, dated Feb. 13, 2004).
164
See, e.g., GA CODE ANN . § 31-12-12(h) (2003).
165
CAL . BUS . & PROF . CODE § 2546.5 (2004).
166
See ARIZ . REV . STAT . ANN . § 32-1773 (2004) (a nonresident dispenser may
register with the board of optometry to dispense replacement soft contact lenses; registered
dispensers shall maintain a valid pharmacy license in their state of domicile); N.H. RSA 327:31
(No person shall operate a business outside the state for the retail sale of contact lenses into the
state unless the business has a permit issued by the board of pharmacy, if the business is a
pharmacy, or by the board of registration in optometry, if the business is not a pharmacy).
167
CONTACT LENS REPORT at 16-28.
52
limiting the availability of lower cost suppliers to consumers.168 In its comment, Wal-Mart argues
that state licensing requirements adversely affect out-of-state sellers’ abilities to compete with instate sellers, including prescribers, for the sale of prescription contact lenses.
The need to employ a state-licensed professional, such as an optometrist, an
ophthalmologist, or a dispensing optician, would likely be a costly proposition for an Internet or
mail-order seller of replacement lenses.169 Because such firms may not sell eyeglasses or conduct
contact lens fittings, they may not already have a state-licensed professional on staff.170 Likewise,
licensing requirements also impose costs on in-state offline sellers of replacement lenses that
likely would induce such sellers to charge higher prices to consumers or – alternatively – exit
sales entirely.171
In it comments, 1-800 Contacts noted that regulation by state bodies affects its pricing
decisions.172 Similarly, Wal-Mart noted that state requirements that licensed opticians or
optometrists be involved in the shipping and handling of contact lens orders restrict competition
and that the burden of such restrictions may fall disproportionately on “consumers who may not
have an optometrist, ophthalmologist or contact lens seller in their area, and thus no access to
purchase contact lenses and have them delivered to their homes.”173
B.
Effect on Quality of Service Provided
Although there are significant health issues concerning the use and sale of contact lenses,
requiring a professional license to sell replacement contact lenses is not likely substantially to
increase consumer health protections.174
First, the effect of licensing on quality is ambiguous. Although the restriction of supply
resulting from licensing may lead to a higher average competence level for the professionals
168
Id.
169
See CONTACT LENS REPORT at 21.
170
See id.
171
See id. at 23.
172
1-800 Contacts, Comment #1, at 22.
173
Wal-Mart, Comment # 19, at 4.
174
See CONTACT LENS REPORT at 3, 21-22; See also Matayo Letter.
53
allowed to practice, the higher price for their services can lead to less utilization by consumers.175
It is unclear, moreover, that licensing would have any impact on the quality of dispensing prepackaged replacement contact lenses. There is little reason to believe that a licensed professional
ECP would be any more competent than someone who is not licensed (e.g., a store clerk) to
dispense pre-packaged contact lenses pursuant to a valid prescription. Further, a license
requirement may limit the market to providers who are initially more qualified, but reduced
competition may allow the incumbent licensees to offer less innovative service without fear of
losing their customers to new, more up-to-date entrants.176
Second, by increasing the cost of purchasing replacement lenses, licensing requirements
may cause consumers to wear their lenses longer than medically recommended. The primary
health concern with contact lenses appears to be ensuring that contact lens wearers visit their
doctors regularly for eye examinations.177 To the extent that licensing increases the cost or
inconvenience of obtaining disposable replacement lenses, it may induce more individuals to
over-wear their replacement contact lenses or exacerbate the practice by persons already doing
so.178 In this manner, licensing may increase the incidence of health problems associated with
contact lens use.179 In particular, to the extent that contact lens wearers choose to over-wear
disposable contact lenses in response to a price increase, as a way to save money, they increase the
risk of severe eye damage.180
Some commentators have argued that a potential benefit of requiring contact lens sellers
to obtain a state license is that the license may give the state additional leverage over out-of-state
sellers.181 If a seller fails to comply with prescription requirements, for example, then the state
175
Id.
176
Id. at 16-28.
177
Id. at 8.
178
Id. at 19-20.
179
Id.
180
Id.
181
For example, comments submitted in connection with the FTC’s E-commerce
workshop argued that it was difficult for state boards to reach out-of-state sellers. See Summary
of Testimony of J. Pat Cummings, Jr. O.D., President, American Optometric Association;
Summary of the Position of the National Association of Optometrists and Opticians, at
http://www.ftc.gov/os/2004/03/040329clreportfinal.pdf.
54
could prompt compliance by threatening to revoke the seller’s license.182 The FCLCA, which
provides for federal enforcement of its requirement that contact lenses be sold pursuant to a
prescription, however, obviates much of this concern about the difficulty of reaching out-of-state
sellers.183
FTC staff previously has recommended that policymakers and other officials rescind, or
refrain from adopting, requirements that out-of-state sellers have a professional license to sell
replacement contact lenses and instead adopt a simple registration requirement, which is likely to
provide consumer protections at a lower cost.184 In their comments, Wal-Mart and 1-800 Contacts
expressed similar views.185
Unlike licensing, a registration system would not require individuals or firms that want
to sell replacement lenses to satisfy expensive and unnecessary training requirements. Rather,
replacement lens sellers would merely file their names and other required contact information
182
CONTACT LENS REPORT at 19-20.
183
Id. at 22.
184
See id. at 3, 21-22; Matayo Letter; Wal-Mart, Comment #19, at 8 (“there are
undoubtedly other ways to provide this protection to consumers without imposing licensing
requirements for individual opticians to sell contact lenses. . . . For example, a state could simply
require registration in lieu of licensing”).
185
For example, Wal-Mart observes:
[T]he sale of contact lenses does not require any specialized technical expertise.
Contact lenses are pre-packaged, pulled from a store’s stock, and are simply
matched to the prescription written by the doctor. Nonetheless, many states
require a licensed optician to be involved in the process. . . . [T]he mere selling of
pre-packaged replacement contact lenses to a customer is a simple transaction of
matching the prescription with the product. Laws and regulations that require a
licensed optician to be involved in the basic sales transaction of replacement
contact lenses are unnecessary and only limit the in-state and out-of-state sellers’
ability to compete with private optometrists and ophthalmologists, thereby
increasing costs to consumers.
Wal-Mart, Comment #19 at 7-8. See also 1-800 Contacts, Comment #1, at 29-30 (“[T]here is no
health justification for these state licensing requirements. . . . Given that there is no evidence that
it is safer for an ECP to sell a sealed box of contact lenses than for a non-ECP to do so, these
state laws have no real purpose other than to shield ECPs from competition by alternative
sellers.”).
55
with the state. The state would then have sufficient information in the event that a particular
seller engages in practices that create health risks for consumers. In addition, registration systems
can provide further protection to consumers by requiring out-of-state sellers to submit to the
jurisdiction of the states in which they register, and to maintain pertinent business records.186
In its comment, the NBO indicates that it has such a system: “We require out-of-state
sellers to register with the Board of Pharmacy. Once registered, they may compete with in-state
sellers. In-state sellers are regulated through their professional licenses as optometrists,
physicians, or pharmacies.”187 Likewise, the COA notes that its registration requirement “does
not affect the ability of out-of-state sellers to compete with in-state sellers or prescribers in the
sale of prescription contact lenses.”188 COA notes that out-of-state sellers of replacement lenses
must meet the following requirements:
The seller must be in good standing in the state where its business is located and from
which the lenses are sold; the seller must comply with requests for information made by
the medical board; must maintain records of contact lenses shipped, mailed or delivered
to patients in California for a period of at least three years; must provide a toll free
telephone service for responding to patient questions and complaints during the
applicant’s regular hours of operation . . .; provide a notice to consumers to advise them
to contact an eye care practitioner in the event of discomfort or other visual problems;
[and] provide a toll free number, facsimile line and electronic mail address for the use of
prescribers confirming contact lens prescriptions.189
II.
State Restrictions on Advertising
Advertising generally informs consumers of options available in the marketplace and
encourages competition among firms seeking to meet consumer preferences. Advertising may
also facilitate the entry of new competitors by making them known to consumers and helping
them reach more quickly an efficient competitive size. These benefits are as true of advertising by
professionals as they are of advertising by other kinds of businesses.
Research indicates that advertising for professional services tends to benefit consumers.
For example, a 1996 survey of empirical economics literature on professional advertising revealed
186
See California Optometric Association (“COA”), Comment #5, at 2-3.
187
NBO, Comment #17, at 2.
188
COA, Comment #5, at 1.
189
Id at 1-2.
56
that most studies find that advertising tends to reduce the price of professionals’ services without
reducing quality.190 The authors concluded, “[T]he overwhelming impression from the results
reviewed . . . is of advertising having a downward effect on professional fees.”191 In addition, they
concluded that the empirical literature generally shows that advertising does not lead to lower
quality.192
Consumers benefit from robust competition among professionals and from the important
price and quality information that advertising can provide. Not all advertising, however, is
beneficial. False or misleading advertising is likely to harm both consumers and competition.
Such deceptive advertising may skew consumer purchasing decisions, make it more difficult for
honest sellers to compete, and undermine confidence in the industry.
Consumers benefit when state advertising regulations are narrowly tailored to prevent
unfair or deceptive acts or practices.193 Imposing overly broad state restrictions may inhibit the
190
See James H. Love and Frank H. Stephen, Advertising, Price and Quality in SelfRegulating Professions: A Survey, 3 INTL. J. ECON. BUS. 227 (1996). See also FTC STAFF
REPORT ON THE EFFECTS OF RESTRICTIONS ON ADVERTISING AND COMM ERCIAL PRACTICE IN THE
PROFESSIONS: THE CASE OF OPTOMETRY (1980); Lee Benham & Alexandra Benham, Regulating
Through the Professions: A Perspective on Information Control, 18 J.L. & ECON. 421 (1975);
Lee Benham, The Effects of Advertising on the Price of Eyeglasses, 15 J.L. E ECON. 337 (1972);
Lee Benham, Licensure and Competition in Medical Markets, in Frech, ed., REGULATING
DOCTO RS’ FEES (1990); John F. Cady, RESTRICTED ADVERTISING AND COMPETITION : THE CASE
OF RETAIL DRUGS (1976).
Research also has confirmed that advertising may have the same effects in markets for
routine legal services. See Terry Calvani, James Langenfeld & Gordon Shuford, Attorney
Advertising and Competition at the Bar, 41 VAND . L. REV . 761 (1988); John R. Schoreter, Scott
L. Smith & Steven R. Cox, Advertising and Competition in Routine Legal Service Markets: An
Empirical Investigation, 35 J. INDUS. ECON. 49 (1987). Further research indicates that the likely
effects on price and quality might be different for different kinds of services, with advertising
more likely to lead to lower prices at no loss in quality for relatively routine services that could
be standardized. See Timonth J. Muris & Fred McChensey, Advertising and the Price and
Quality of Legal Services: The Case for Legal Clinics, 1979 AM . BAR. FOUND . RESEARCH J. 179
(1979).
191
Love & Stephen, supra note 190, at 236.
192
Id. at 239.
193
See Letter from J. Howard Beales et al., to the Alabama Supreme Court (Sept. 30,
2002), at http://www.ftc.gov/be/v020023.pdf.
57
competitive process and frustrate informed consumer choice.194 As the FTC said in American
Medical Association, “broad bans on advertising and solicitation are inconsistent with the nation’s
public policy.”195 Broad bans on truthful, non-misleading advertising also raise significant First
Amendment concerns.196
1-800 Contacts identified Arkansas and South Dakota legislation as examples of broad
prohibitions on contact lens advertising.197 In contrast, the NBO emphasized that Nebraska only
194
Indeed, private restrictions on professional advertising may violate the federal
antitrust laws, if there is evidence of the restriction’s likely anticompetitive effects sufficient to
overcome any competitive benefit of the restriction. See generally California Dental Ass’n v.
FTC, 56 U.S. 756 (1999) (describing legal standard, although finding insufficient evidence of
anticompetitive effects on the particular record established at trial). See also Submission of the
Staff of the Federal Trade Commission to the American Bar Association at 10 (June 24, 1994)
(noting that unnecessarily broad advertising bans may prohibit messages that consumers find
useful in choosing a lawyer) (copy attached to Letter from J. Howard Beales et al., to the
Alabama Supreme Court (Sept. 30, 2002), at http://www.ftc.gov/be/v020023.pdf).
195
94 F.T.C. 701, 1011 (1979).
196
See Central Hudson Gas & Electric Corp. v. Public Service Commission, 447
U.S. 557 (1980); see also American Optometric Ass’n v. Federal Trade Commission, 626 F.2d
896, 908-9 (D.C. Cir. 1980) (“Bates left little doubt that laws regulating the advertising of
medical goods and services were susceptible to First Amendment scrutiny, and that total bans on
such advertising would not survive such scrutiny.”).
197
1-800 Contacts, Comment #1, at 11. Specifically, the Arkansas statute makes it
unlawful to “solicit the sale of spectacles, eyeglasses, lenses, contact lenses. . . by radio, window
display, television, telephone directory display advertisement, newspaper advertisement,
handbills, circulars, prospectuses, posters, motion pictures, stereopticon slides, or any other
printed publication or medium or by other means of advertisement.” Arkansas State Code § 1790-104(10). The same provision further prohibits the use of “any method or means of baiting,
persuading, or enticing the public into buying spectacles, eyeglasses, lenses, contact lenses” and
other eyecare products and services. Id.
The South Dakota statute defines “unprofessional conduct” to include “advertising by
printed matter, radio, display, or any other means, the quotation of prices for a discount on or any
specific amount of payment for . . . ophthalmic lenses. . . or the phrases ‘free examinations,’
‘moderate prices,’ ‘low prices,’ ‘guaranteed glasses,’ ‘satisfaction guaranteed,’ or any variations
thereof, or words of similar import.” S.D. CODIFIED LAWS § 36-7-25(8). The South Dakota
statute further defines “unprofessional conduct” to include “seeking patronage by means of
handbills, posters, circulars, newspapers, radio or periodicals, which means set forth more than
58
prohibits optometrists from advertising in a manner that “deceives, misleads, or defrauds the
public.”198 On the more specific issue of restrictions on ECP advertising about prescribing
practices, neither commenter identified any state law or regulation that addresses an ECP’s
willingness to advertise that he or she prescribes lenses that are commonly available.199
III.
Other State Barriers
In addition to licensing requirements and advertising restrictions, Wal-Mart has noted
that other state regulations impede competition. For example, Wal-Mart is precluded from
entering Oklahoma as a brick-and-mortar contact lens and eyeglasses seller.200 Oklahoma law
makes it unlawful for retailers that derive less than half of their income from “the sale of such
prescription optical goods and materials” to “display, dispense, sell, provide or otherwise purvey
to the public, prescription eyeglasses, prescription lenses, frames or mountings for prescription
lenses, within or on the premises of in any manner.”201
IV.
Conclusion
State licensing requirements, prohibitions on truthful advertising, and other state barriers
may have an adverse impact on competition in the sale of prescription contact lenses. These
restrictions may insulate some sellers from competition from more innovative or lower-cost
contact lens sellers, leading to fewer choices and higher prices for consumers. In addition, there is
no evidence that such restrictions benefit consumers by improving the quality of the services they
receive.
the name, profession, title, location, phone number and office hours of the optometrist.” S.D.
CODIFIED LAWS § 36-7-25(9).
198
NBO, Comment #17 at 1(citing 72 NAC 120, Regulations Governing the Practice
of Optometry – § 011.14 Unprofessional Conduct).
199
1-800 Contacts, Comment # 1, at 11. The NBO noted that Nebraska’s laws do not
address this point either. NBO, Comment #17 at 1-2.
200
Wal-Mart, Comment #19, at 7.
201
Id. (citing 59 OKL. ST . ANN . § 596.)
59
Conclusion
In this study of the strength of competition in the contact lens industry required by the
FCLCA, the Commission examined the issues Congress directed it to consider. In brief, the
Commission reached the following conclusions on these issues.
• Overview of the industry: Technological innovations in contact lens manufacturing,
along with the FCLCA’s prescription portability requirement, have resulted in greater
consumer choice of outlets from which to purchase contact lenses.
• Manufacturer-distributor relationships: Exclusive relationships appear to be rare
in the optical goods industry. Some manufacturers, however, limit the distribution
channels through which they sell their contact lenses, and some retail chains and
independent ECPs offer private label lenses. Limited distribution and private label
lenses comprise a relatively small share of all contact lens sales. The information
available, including the FTC’s own survey of lens availability, does not support the
hypothesis that sellers are able to limit competition or harm consumers by charging
higher prices for limited distribution or private label lenses.
• Differences between online and offline sellers: The FTC’s study of online and
offline availability and prices for popular lenses indicates that most lenses are widely
available through the various retail channels. Overall, independent ECPs and optical
chains have the highest prices, and wholesale clubs have the lowest prices. Without
accounting for different classes of retailers within online and offline channels, contact
lenses sold online are on average $15 less expensive than those sold offline. While
mass merchandisers and hybrids offer statistically significantly lower prices than
independent ECPs for spherical lenses, there is no statistically significant difference
among the prices charged by these retail channels for specialty lenses.
• Impact of the Eyeglass Rule: The FTC’s Eyeglass Rule appears to have made it
easier for consumers to comparison shop, thereby making an important and positive
impact on competition in the market for the retail sale of eyeglasses, leading to lower
prices and more choices for consumers.
• Other issues that impact competition: State laws and regulations have the potential
to limit competition in contact lenses, which may raise consumer costs and harm
public health. FTC staff previously has recommended that policymakers and other
officials rescind, or refrain from adopting, requirements that out-of-state sellers have a
professional license to sell contact lenses. In addition, restrictions on truthful, nonmisleading advertising are likely to frustrate the competitive process and inhibit
consumer choice.
60
APPENDIX
1. Private Label Lenses
To control for channel effects, we compare private label prices to an outlet’s overall
pricing. To the extent that pricing of private labels is similar to pricing of other lenses, any
difference between private label prices and brand name prices may be attributable only to the fact
that private label versions of Biomedics55 are sold through certain channels.
One way to control for channel effects is to examine how an outlet’s prices deviate from
average prices. The deviation from the average price of lens i at outlet j (“deviation”) is defined
as follows:
.
In table A-1, column 3 provides the average deviation for all non-private label lenses at each
outlet that sells private label versions of Biomedics 55. This statistic is calculated as:
.
An outlet that tended to offer lower prices for lenses other than Biomedics55 should have a
negative average deviation, and a high-price seller should tend to have a positive average
deviation. For example, the data show that the only independent ECP in the sample that sells
private label Biomedics55 typically sells the rest of its lenses 30 percent above average prices.
Sam’s Club, alternatively, on average sells it non-private label lenses 25 percent below average
prices. These findings are consistent with characterizing independent ECPs and wholesale clubs
as high and low-priced channels, respectively.
Column 1 of Table A-1 lists the deviation for private label versions of Biomedics55 by
outlet, which is defined as
,
where j denotes outlet, PL denotes private label version of Biomedics55, and the subscript 55
denotes Biomedics55 lenses sold under both national name-brand and private labels. If sellers are
able to command a premium for private label lenses by locking consumers into purchasing from
them, one would expect to see the deviation for private label Biomedics55 greater than the
61
average deviation for other lenses sold. The difference between the deviation for private label and
other lenses is shown in column 4 of Table A-1. A number close to zero indicates that an outlet is
pricing its private label version of Biomedics55 consistent with how it prices its other lenses
relative to other outlets. A positive number would indicate a premium on private label lenses
relative to other lenses, whereas a negative number indicates that an outlet is pricing its private
label lens lower (relative to other outlets’ prices) than it prices other lenses.
Table A-1
Deviation from Average Lens Prices for Private Label Sellers
Outlet
Deviation fo r Private
Label Biomedics55
Average Deviation for nonPrivate Label Lenses
Difference
America’s Best Online
34.4%
19.8%
14.6%
BJ’s
-26.3%
-7.1%
-19.2%
BJ’s Online
-18.7%
-1.0%
-17.7%
Hour Eyes
-7.2%
19.6%
-26.8%
LensCrafters
13.8%
4.7%
9.1%
Northern Virginia Doctors
of Optometry
13.8%
29.6%
-15.8%
Pearle Vision
3.4%
15.7%
-12.3%
Sam’s Club
-27.9%
-25.1%
-2.8%
Sears
29.2%
17.5%
11.7%
Target
-7.0%
9.6%
-16.6%
W al-Mart
-9.6%
15.2%
-24.8%
W al-Mart Online
-14.5%
0.9%
-15.4%
Average
-1.3%
8.7%
-9.7%
Source: FTC Price Survey.
Private label sellers charge on average 8.7 percent more than the average price for nonprivate label lenses, but 1.3 percent less for private label versions of Biomedics55 than the
average price of all sellers of Biomedics55. This difference is statistically significant at the ten
percent level (t = -1.59). Seven of the twelve private label sellers, moreover, price the private
label lens lower relative to other outlets than they did for any other lens.
The largest difference in deviation was found at Hour Eyes; its non-private label lenses
are priced 20 percent above average, but its private label Biomedics55 sells at a price 7 percent
62
less than the average price for Biomedics55. Three sellers – America’s Best Online, LensCrafters,
and Sears – have higher deviations for private label lenses than for non-private label lenses. Five
sellers – America’s Best Online, LensCrafters, Northern Virginia Doctors of Optometry, Pearle
Vision, and Sears – list higher-than-average prices for private label Biomedics55.
2. Price Regressions
A regression of the price of lens j at outlet i on dummy variables that control for
distribution channel and lens fixed-effects was run. Formally, the following equation was
estimated:
,
where # is a vector of coefficients and Dk is a matrix of dummy variables that are equal to 1 if
firm i is in channel k, and zero otherwise, "i is a lens-specific constant, and eij are error terms.
Specifications (1) - (3) were estimated using price data for all lenses, specification (4)
was estimated using price data for only spherical lenses, and specification (5) was estimated using
price data for only specialty lenses. For specification (1), the constant represents the average price
for Acuvue lenses across all offline channels, and in specifications (2) - (4), the constant
represents the average price for Acuvue lenses at an independent ECP. For specification (5), the
constant represents the average price for Focus Vistint Toric. Estimated channel coefficients
represent the change in average price from purchasing a six-month supply of contacts lenses at
channel k versus an independent ECP. Results are reported in Table A-2.
63
Table A-2
Price Regression
Specification
(1)
(2)
(3)
(4)
(5)
Constant
83.74 ***
(2.48)
89.24***
(3.69)
88.72***
(3.78)
86.30***
(2.41)
122.81***
(9.08)
Online
-15.48 ***
(2.46)
-20.64 ***
(3.97)
-
-
-
Pure Online
-
-
-23.95 ***
(3.93)
-17.90 ***
(2.36)
-32.69 ***
(9.04)
Hyb rid
-
-
-5.36
(5.81)
-9.62 ***
(3.58)
.565
(12.87)
W holesale Club
-
-29.68 ***
(4.74)
-29.58 ***
(4.72)
-26.36 ***
(3.63)
-34.42 ***
(10.33)
Mass Merchandiser
-
-4.48
(5.08)
-4.38
(5.01)
-7.07 **
(3.83)
-1.10
(10.54)
Op tical Chain
-
-0.95
(4.42)
-0.90
(4.42)
.11
(3.00)
-2.40
(10.12)
R2
.760
.786
.802
.703
.664
F
65.40 ***
69.42***
67.21***
53.35***
30.68***
310
310
310
183
127
Independent Variables
Obs.
Notes: Dependent variable is price of lens j at outlet i. Robust standard errors in parentheses. *** denotes significance at
the 1% level; ** denotes significance at the 10% level. Lens fixed-effects used in all specifications not reported.
Most parameter estimates are significant at standard levels, and measured by R 2 and Fstatistics, the equations tend to explain variation in the data fairly well. Controlling for specific
offline channels improves the fit of the model substantially, and controlling additionally for
specific online channels provides a marginal improvement in fit. In all specifications, wholesale
clubs are estimated to offer the lowest prices and optical chains offer prices that are statistically
indistinguishable from those offered by independent ECPs.
64
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.