Waterous Company, Inc.; Proposed Consent Agreement With Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 901-0061]

Waterous Company, Inc.; Proposed Consent Agreement With Analysis

To Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

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SUMMARY: In settlement of alleged violations of federal law prohibiting

unfair or deceptive acts or practices and unfair methods of

competition, this consent agreement, accepted subject to final

Commission approval, would prohibit, among other things, the St. Paul-

based manufacturer of fire pumps for fire trucks from entering into,

continuing, or enforcing any requirement that fire truck manufacturers

refrain from purchasing mid-ship mounted fire pumps from any company,

or that they purchase or sell only Waterous's pumps. The consent

agreement settles allegations that Waterous and Hale Products, Inc.,

which together account for 90 percent of the market, sold their pumps

on an exclusive basis to fire truck manufacturers and that this

arrangement allowed the two companies to allocate the customers each

would serve and made it more difficult for other pump makers to enter

the market.

DATES: Comments must be received on or before September 30, 1996.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.

FOR FURTHER INFORMATION CONTACT: William Baer, Federal Trade

Commission, 6th and Pennsylvania Avenue, NW, H-374, Washington, DC

20850. (202) 326-2932. Mark Whitener, Federal Trade Commission, 6th and

Pennsylvania Avenue, NW, H-374, Washington, DC 20850. (202) 326-2845.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and section 2.34 of

the Commission's Rules of Practice (16 CFR 2.34), notice is hereby

given that the following consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. Public comment is

[[Page 40230]]

invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with section 4.9(b) (6) (ii) of the Commission's

Rules of Practice (16 CFR 4.9(b) (6) (ii)).

Agreement Containing Consent Order To Cease and Desist

The Federal Trade Commission (``Commission'') having initiated an

investigation of certain acts and practices of Waterous Company, Inc.,

(sometimes referred to as ``Proposed Respondent'' or ``Waterous''), and

it now appearing that Proposed Respondent is willing to enter into an

Agreement containing an Order to Cease and Desist from the use of the

acts and practices being investigated,

It is hereby agreed by and between Proposed Respondent, by its duly

authorized officers, and their attorneys, and counsel for the

Commission that:

1. Proposed Respondent Waterous Company, Inc., is a corporation

organized, existing, and doing business under and by virtue of the laws

of the State of Minnesota. Its principal place of business is 300 John

E. Carroll Avenue East, South Saint Paul, Minnesota 55075.

2. Proposed Respondent admits all the jurisdictional facts set

forth in the draft of complaint.

3. Proposed Respondent waives:

(a) Any further procedural steps;

(b) The requirement that the Commission's decision contain a

statement of findings of fact and conclusions of law;

(c) All rights to seek judicial review or otherwise to challenge or

contest the validity of the order entered pursuant to this agreement;

and

(d) Any claim under the Equal Access to Justice Act.

4. This agreement shall not become part of the public record of the

proceeding unless and until it is accepted by the Commission. If this

agreement is accepted by the Commission it, together with the draft of

complaint contemplated thereby, will be placed on the public record for

a period of sixty (60) days and information in respect thereto publicly

released. The Commission thereafter may either withdraw its acceptance

of this agreement and so notify the Proposed Respondent, in which event

it will take such action as it may consider appropriate, or issue and

serve its complaint (in such form as the circumstances may require) and

decision, in disposition of the proceeding.

5. This agreement is for settlement purposes only and does not

constitute an admission by Proposed Respondent that the law has been

violated as alleged in the draft of complaint, or that the facts as

alleged in the draft complaint, other than jurisdictional facts, are

true.

6. This agreement contemplates that, if it is accepted by the

Commission, and if such acceptance is not subsequently withdrawn by the

Commission pursuant to the provisions of Sec. 2.34 of the Commission's

Rules, the Commission may, without further notice to Proposed

Respondent, (1) issue its complaint corresponding in form and substance

with the draft of complaint and its decision containing the following

order to cease and desist in disposition of the proceeding and (2) make

information public in respect thereto. When so entered, the order to

cease and desist shall have the same force and effect and may be

altered, modified or set aside in the same manner and within the same

time provided by statute for other orders. The order shall become final

upon service. Delivery by the U.S. Postal Service of the complaint and

decision containing the agreed-to order to Proposed Respondent's

addresses as stated in this agreement shall constitute service.

Proposed Respondent waives any right it may have to any other manner of

service. The complaint may be used in construing the terms of the

order, and no agreement, understanding, representation or

interpretation not contained in the order or the agreement may be used

to vary or contradict the terms of the order.

7. Proposed Respondent has read the proposed complaint and order

contemplated hereby. Proposed Respondent understands that once the

order has been issued, it will be required to file one or more

compliance reports showing that it has fully complied with the order.

Proposed Respondent further understands that it may be liable for civil

penalties in the amount provided by law for each violation of the order

after it becomes final.

Order

I

It Is Ordered that, as used in this Order, the following

definitions shall apply:

(a) ``Respondent Waterous'' means (1) Waterous Company, Inc.; (2)

its predecessors, subsidiaries, divisions, and groups and affiliates

controlled by Waterous Company, Inc., and their successors and assigns;

(3) all companies or entities that any parent of Waterous Company,

Inc., creates in the future and that engage in the manufacture or sale

of Mid-Ship Mounted Fire Pumps, or Waterous' parent if it engages in

the manufacture or sale of Mid-Ship Mounted Fire Pumps; (4) the

respective directors, officers, employees, agents and representatives

of any of the entities described in subparagraphs (1), (2) and (3)

above.

(b) ``Mid-Ship Mounted Fire Pumps'' are truck mounted fire pumps

that meet the National Fire Protection Association Standard for Pumper

Fire Apparatus known as ``NFPA 1901.''

(c) ``Commission'' means the Federal Trade Commission.

(d) ``OEM's'' are original equipment manufacturers who buy and

install Mid- Ship Mounted Fire Pumps, as well as many other components,

into a final fire truck. OEM's then sell the trucks to fire departments

in the United States.

II

It Is Further Ordered that Respondent Waterous, directly or through

any corporation, subsidiary, division, or other device, including

franchisees or licensees, in connection with the offering for sale or

sale of any Mid-Ship Mounted Fire Pump in or affecting commerce, as

``commerce'' is defined in the Federal Trade Commission Act, does

forthwith cease and desist from entering into, continuing, or enforcing

any condition, agreement or understanding with any OEM that such OEM

will refrain from the purchase or sale of Mid-Ship Mounted Fire Pumps

of any manufacturer, or will purchase or sell Mid-Ship Mounted Fire

Pumps of only Respondent Waterous; provided however, that nothing in

this Order shall prohibit any price differentials that make only due

allowance for differences in the cost of manufacture, sale, or delivery

resulting from the differing methods or quantities in which Mid-Ship

Mounted Fire Pumps are sold or delivered, or that are otherwise lawful

under the provisions of the Robinson-Patman Act, 15 U.S.C. Sec. 13.

III

It Is Further Ordered that Respondent Waterous shall provide a copy

of this Order with the complaint, and a copy of the notice set out in

Appendix A:

(a) within thirty (30) days after the date this Order becomes

final, one notice to each OEM to whom it sold a Mid-Ship Mounted Fire

Pump at any time during the two (2) years prior to the date this order

becomes final; and

(b) for a period of three (3) years after the date this Order

becomes final, to each OEM not covered by sub-paragraph (a) above to

whom it provides a price

[[Page 40231]]

list for or a price quotation on a Mid-Ship Mounted Fire Pump. Such

notice shall accompany the price list or price quotation, or in the

case of telephone quotations shall be delivered as soon as practical

after such quotation, and need only be provided once to each OEM not

covered by sub-paragraph (a) above.

IV

It Is Further Ordered that Respondent Waterous shall file with the

Commission within sixty (60) days after the date this order becomes

final, and annually on the anniversary of the date this order becomes

final for each of the three (3) years thereafter, a report, in writing,

signed by the Respondent, setting forth in detail the manner and form

in which it has complied and is complying with this order.

V

It Is Further Ordered that Respondent shall notify the Commission

at least thirty (30) days prior to any proposed change in the corporate

respondent, such as dissolution, assignment or sale resulting in the

emergence of a successor corporation, or the creation or dissolution of

subsidiaries or any other change in the corporation that may affect

compliance obligations arising out of this order. Such notification

shall be at least thirty (30) days in cases not subject to the

notification provisions of the Hart-Scott-Rodino Antitrust Improvements

Act of 1976, 15 U.S.C. Sec. 18a, and at least ten (10) days in the case

of transactions subject to the notification provisions of the Hart-

Scott-Rodino Act.

VI

It Is Further Ordered that this order shall terminate twenty (20)

years from the date this order becomes final.

Appendix A

[Waterous' Letterhead]

PLEASE READ THIS

Enclosed with this notice is a copy of a Consent Order agreed to

between the Federal Trade Commission and Waterous Company, Inc. In the

Order, Waterous has agreed that it will not refuse to sell, or refuse

to contract to sell, Mid-Ship Mounted Fire Pumps on the grounds that an

OEM refuses to sell Waterous pumps exclusively. The Order does not

prohibit OEMs from purchasing only Waterous Mid-Ship Mounted Fire Pumps

if, in the OEM's sole discretion, it deems it advisable. Moreover,

Waterous retains the right to refuse to sell Mid-Ship Mounted Fire

Pumps to any OEM for lawful reasons. THE TYPE OF PUMP YOU USE IS YOUR

BUSINESS, AND YOU ARE FREE TO OFFER AND INSTALL COMPETING PUMPS AS

ALTERNATIVES TO WATEROUS PUMPS.

Analysis of Proposed Consent Order To Aid Public Comment

The Federal Trade Commission has accepted an agreement to a

proposed consent order, subject to final approval, from Waterous

Company, Inc.

The proposed consent order has been placed on the public record for

sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record. After sixty (60) days, the Commission will decide whether it

should withdraw from the agreement or make final the agreement's

proposed order.

The Complaint

The complaint prepared for issuance along with the proposed order

alleges that the proposed respondent violated Section 5 of the Federal

Trade Commission Act by maintaining exclusive dealing arrangements with

its customers--manufacturers of municipal fire trucks.

The complaint alleges that respondent Waterous and Hale Products

are the two largest manufacturers of mid-ship mounted fire pumps

(``fire pumps'') sold in the United States. Together, respondent

Waterous and Hale Products account for close to or more than ninety

(90) percent of the fire pump market in the United States. Except to

the extent that competition has been restrained as alleged in the

complaint, respondent Waterous and Hale Products have been and are now

in competition among themselves and with other fire pump manufacturers

in the United States.

The complaint alleges that, for over fifty (50) years and until

approximately 1991, both respondent Waterous and Hale Products

maintained exclusive dealing arrangements. Each sold fire pumps to its

customers on the condition or understanding that such customers would

deal in its pumps exclusively, or that such customers would refrain

from buying and selling pumps made by the other. The complaint, and a

companion complaint against Hale Products, further allege that both

companies believed that continued exclusive dealing by the two

companies would tend to exclude competitors from the market, and that

continued exclusive dealing, if maintained by both companies, would

tend to reduce competition between them over price and over non-price

terms, such as quality differences and delivery times. Consequently,

both continued to maintain and to enforce exclusive dealing policies.

The complaint alleges that, under these circumstances, respondent's

exclusive dealing agreements violated Section 5 of the Federal Trade

Commission Act. Specifically, the complaint alleges that exclusive

dealing substantially reduced competition in the sale and marketing of

fire pumps by facilitating an allocation of customers between

respondent Waterous and Hale Products, and by excluding or tending to

exclude other actual or potential manufacturers of fire pumps from the

market. Facilitating coordinated interaction, and raising entry

barriers that exclude competition, are two ways that exclusive dealing

restraints can be anticompetitive. See Beltone Electronics Corp., 100

F.T.C. 68, 207 (1982).

The Proposed Consent Order

The proposed consent order would prohibit respondent Waterous from

entering into, continuing, or enforcing any condition, agreement, or

understanding with any fire truck manufacturer that such manufacturer

will refrain from the purchase or sale of any other manufacturer's fire

pumps. The proposed order, however, would allow certain lawful

discounts such as volume discounts that do not run afoul of the

provisions of the Robinson-Patman Act.

The proposed consent order would also require respondent Waterous

to notify its customers of the terms of the order. Specifically, the

proposed consent would require respondent Waterous to send a copy of

the order to each fire truck manufacturer it sold a pump to during the

two (2) years prior to the entry of the order; for three (3) years

after the order is entered, respondent Waterous must send a copy of the

order to each new customer to whom it provides a price list or a price

quotation. The order would also requre notification to such customers

that respondent will not restrict the brand of pumps they may use.

The proposed consent order would also require respondent Waterous

to file with the Commission compliance reports setting forth the manner

in which it has complied and is complying with the terms of the order.

Such reports are due within sixty (60) days after the order becomes

final, and for three (3) years annually on the anniversary of the date

the order becomes final. Respondent Waterous must also notify the

Commission at least thirty (30) days prior to any proposed change in

the corporate respondent, such as dissolution, assignment, or sale

resulting in the emergence of a

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successor corporation. In cases subject to the provisions of the Hart-

Scott-Rodino Act, however, such prior notification may be made at least

ten (10) days prior to the proposed change. Finally, the proposed

consent provides that the order will terminate automatically twenty

(20) years after the date it becomes final.

The purpose of this analysis is to facilitate public comment on the

proposed order, and it is not intended to constitute an official

interpretation of the agreement and proposed order or to modify in any

way their terms.

Donald S. Clark,

Secretary.

Separate Statement of Chairman Pitofsky, and Commissioners Varney and

Steiger

In the Matter of Waterous Company, Inc./Hale Products, Inc.,

File No. 901-0061

We write separately to respond to some of the concerns raised in

Commissioner Starek's dissent.

First, we cannot concur with Commissioner Starek's suggestion that,

for customer allocation of a component product to work, the

participants must be able to allocate the ultimate customers of the

finished product (p.1). There will be situations where downstream

competition will undermine a customer allocation scheme of a component

of a final good. For example, that might be the case where the

component is a significant part of the cost of the final product, or

where the ultimate consumers have a much stronger preference for the

component than the ultimate good.

None of those conditions was present in this case. Fire truck

buyers make purchase decisions primarily on the basis of truck brand,

the pump price is only a small part of the final purchase price, and

pump features are only a small part of the entire truck package.

Evidence of relatively high profits at the component level supports

this interpretation.

Second, Commissioner Starek suggests that these exclusive dealing

arrangements would not increase the likelihood of successful collusion

because of the difficulty of detecting cheating. (p.2) We agree that

maintaining collusion requires the ability to detect and discipline

cheating. But here that methodology was simple: if a fire engine

manufacturer used an alternative pump it would be readily identified.

Moreover, the fact that the customer allocation through exclusive

dealing was maintained over almost five decades suggests that there was

an effective method for enforcing the exclusive dealing arrangements.

Third, Commissioner Starek observes that instability at the truck

manufacturing stage (i.e., changes in market share) may lead to the

demise of any customer allocation agreement with respect to a

component. We agree that might be the case where a very large portion

of a pump manufacturer's sales were tied to a single truck

manufacturer. Here, however, the arrangements were durable; the fact is

that instability among truck manufacturers did not deter the

effectiveness of these agreements.

Finally, Commissioner Starek suggests that the arrangements did not

foreclose new entry because they were not really exclusive. He relies

on the fact that some OEMs were willing to install the pumps of a third

manufacturer at customers' request. (p. 3) The fact that the exclusive

policy was not perfect and that some truck manufacturers may have

offered the pumps of a third pump manufacturer, accounting for a very

small share of pump sales, did not have a significant effect on

competition at the pump level. The key to competition in this market

was the competitive positions of Hale and Waterous, which together

account for more than 90% of the market. The evidence establishes that

Hale and Waterous understood that as long as both firms maintained the

exclusive dealing arrangements, competition between them would be

diminished, prices would be higher and entry would be more difficult.

That is in fact how things worked in this industry for several decades,

and those are the anticompetitive effects that the Commission's orders

are intended to address.

Dissenting Statement of Commissioner Mary L. Azcuenaga

In the matter of Waterous Company, Inc./Hale Products, Inc. File

No. 901-0061.

I generally endorse the views expressed by Commissioner Starek in

his dissenting statement. The evidence does not in my view suggest a

market in which competition has been unlawfully restrained, and I do

not find reason to believe that the law has been violated.

Dissenting Statement of Commissioner Roscoe B. Starek, III

In the matter of Waterous Company, Inc./Hale Products, Inc. File

No. 901 0061.

I respectfully dissent from the Commission's decision to accept

consent agreements with Waterous Company, Inc., and Hale Products,

Inc., two producers of midship-mounted pumps for fire trucks. The

proposed complaints claim anticompetitive effects arising from alleged

exclusive dealing arrangements between each proposed respondent and its

direct customers, the original equipment manufacturers of fire trucks

(``OEMs''), in violation of Section 5 of the Federal Trade Commission

Act, 15 U.S.C. Sec. 45. I am unpersuaded that the arrangements between

proposed respondents and their customers can be characterized

accurately as ``exclusive.'' More important, however, there is no sound

theoretical or empirical basis for believing that these relationships,

even if exclusive, harmed competition; in fact, there are good reasons

to believe the contrary. In any event, even if one assumes arguendo the

validity of the theories of anticompetitive effects, the proposed

orders are unlikely to remedy those alleged effects.

The complaints allege, inter alia, that the arrangements between

Waterous, Hale, and their OEM customers reduce competition in two

ways--by facilitating an allocation of customers between Waterous and

Hale, and by creating a barrier to the entry of new pump manufacturers.

The first theory posits that Waterous and Hale wish to set the prices

of their fire pumps collusively but find themselves unable to reach and

maintain a direct agreement on price. Under this hypothesis, in order

to achieve collusive pricing without a direct agreement on prices,

Waterous and Hale have entered into a de facto agreement to allocate

fire truck OEMs between themselves. That agreement, combined with an

agreement not to bid for each other's OEM business, makes each pump

maker a monopolist with respect to its OEMs. As monopolists, it is

argued, the pump manufacturers are able to set supracompetitive prices.

This theory is fatally flawed. For a customer allocation scheme to

allow Waterous and Hale to set supracompetitive prices, it necessarily

must entail the allocation of the final customers--the fire

departments--between the two pump makers. Absent such an allocation, an

exclusive dealing contract between a pump maker and one or more OEMs--

or even outright vertical integration between the pump producer and one

or more OEMs--does not allow the pump producer to raise prices

anticompetitively. Under the Commission's theory of competitive harm,

Waterous and Hale ``allocate customers'' in lieu of trying to enter

into direct pump price agreements that presumably would break down

under each party's incentives to undercut the collusive price. In other

words, the pump makers'' ``customer allocation''

[[Page 40233]]

scheme solves this instability problem. However, unless Waterous and

Hale also agree not to compete against one another for the patronage of

the fire departments--i.e., unless they collusively allocate fire

departments between themselves--each pump maker retains its incentive

to take business from its rival through price cuts. Absent allocation

of fire department customers, one should expect the same sort of

``cheating,'' with the equivalent competitive result, that the

Commission believes frustrated direct collusion between Waterous and

Hale.1

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1 The majority's assertion that pump prices and pump brands

are relatively unimportant to final consumers (i.e., fire

departments) is inconsistent with the events that triggered this

investigation--namely, complaints from OEMs that they suffered

significant competitive harm from their alleged inability to offer

multiple pump brands. It is hard to reconcile those complaints with

the majority's claimed end-user indifference to pump brands.

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Thus, it is implausible that ``exclusive dealing'' arrangements

between the proposed respondents and their OEMs increase the likelihood

of successful collusion between Waterous and Hale. Indeed, there are

compelling reasons why such an arrangement might actually reduce this

likelihood. Maintaining collusion requires the reasonably accurate

identification and punishment of cheating.2 If Waterous and Hale

bid directly and repeatedly for OEM business, cheating might be

inferable from one firm's loss of a pump sale to its rival. On the

other hand, when Waterous and Hale compete indirectly--i.e., when, as

here, their affiliated OEMs submit bids to a fire department

incorporating not merely the pump price but rather the prices of all of

the truck's components--it will be more difficult for a pump maker to

determine whether a loss of business is attributable to price-cutting

by the rival pump maker or to reductions in the prices of other

components.3

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2 See, e.g., Stigler, ``A Theory of Oligopoly,'' 72 J. Pol.

Econ. 44 (1964), reprinted in THE ORGANIZATION OF INDUSTRY, ch. 5

(1968).

3 The majority appears to have misunderstood my point

with regard to the detection of cheating. By ``cheating,'' I am not

referring to an effort by, say, Hale to sell to Waterous OEMs (or

vice-versa). Rather, I refer to Hale's hidden reduction in pump

prices to its own customers, which consequently allows those

customers to take business from OEMs affiliated with the rival pump

brand. This form of cheating is extremely difficult to detect,

because an OEM's capture of sales from a rival OEM could be

attributable to many reasons other than a reduced pump price.

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The difficulty of maintaining coordination is exacerbated if there

is substantial market share volatility among the affiliated customers

for reasons unrelated to the pumps. Such volatility makes it difficult

for a pump maker to infer whether a sales loss stems from secret pump

price concessions or from some other cause. Moreover, if the fortunes

of buyers (here, fire truck OEMs) are expected to differ over time--

some flagging, others flourishing--the utility of customer allocation

as a long-run aid to collusion appears questionable. The pump producer

with the misfortune to have affiliated with unsuccessful buyers will

have still greater incentives to depart from the collusive scheme. In

this regard, the fire truck OEM market witnessed substantial turnover

during the period in which the allegedly exclusive agreements were in

force.4 Thus, even if one could overcome the defect in the

Commission's collusive theory, these other factors would continue to

cast substantial doubt upon this theory's applicability.5

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4 For example, just since 1990, at least four major OEMs--

Grumman, Mack, FMC, and Beck--have exited the market. This period

also witnessed entry by such OEMs as Firewolf and Becker. As

discussed below, substantial entry into and exit from the OEM market

also bear on the applicability of the proposed complaints' second

theory of competitive harm (entry deterrence).

5 With regard to the pump makers' ostensibly high

accounting profits, antitrust economists no longer consider

accounting profits as a reliable indicator of high economic profits

(which can themselves be as consistent with superior efficiency as

with collusion). Fisher and McGowan, ``On the Misuse of Accounting

Rates of Return to Infer Monopoly Profits,'' 73 Am. Econ. Rev. 82

(1983). Moreover, concerning the longevity of the arrangements

between pump makers and OEMs, that factor testifies only to their

profitability; it does not distinguish between anticompetitive and

procompetitive (or competitively neutral) explanations for their

use. Indeed, the asserted instability of OEMs' market shares lends

greater credence to an efficiency explanation: one would not expect

the parties to an efficient exclusive dealing arrangement to abandon

it simply because a customer loses market share, while (as I have

explained above) the same cannot be said of an anticompetitive

arrangement.

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The Commission's second theory of harm alleges that exclusive

arrangements between pump makers and OEMs have created a barrier to the

entry of new pump manufacturers, thereby allowing the incumbent pump

sellers to set and maintain supracompetitive prices. Although the

vertical section of the 1984 Merger Guidelines 6 is not cited

explicitly, the theory here appears to have been drawn from those

Guidelines. That analysis focuses on a market in which, but for ease of

entry, conditions are favorable to the exercise of market power, and

asks whether a vertical merger (or, in the current case, vertical

integration through contract) might reduce entry so that market power

could be exercised.7

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\6\ U.S. Department of Justice, Merger Guidelines, Sec. 4.2

(1984), 4 Trade Reg. Rep. (CCH) para. 13,103.

\7\ The 1984 Merger Guidelines (Sec. 4.21) identify three

necessary but not sufficient conditions for this problem to exist.

First, the market in which power would be exercised (the ``primary''

market) must be sufficiently conducive to anticompetitive behavior

that the impact of vertical integration in reducing entry would

allow such behavior to occur. Second, the degree of vertical

integration subsequent to the merger must be so extensive that an

entrant into the primary market would also have to enter the other

market (the ``secondary'' market). If substantial unintegrated

capacity remains in the secondary market after the vertical merger,

it is less likely that the merger will facilitate an anticompetitive

outcome. Third, the requirement that a firm enter both the primary

and secondary markets--rather than just the primary market--must

make entry into the primary market significantly more difficult and

therefore less likely to occur. 4 Trade Reg. Rep. (CCH) para. 13,103

at 20,565-66; see also Blair and Kaserman, LAW AND ECONOMICS OF

VERTICAL INTEGRATION AND CONTROL 152 (1983).

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Although this effect might occur in some settings, in this case I

find the evidence to support invoking this theory tenuous at best. The

Commission's complaints apparently rest on the difficulty allegedly

experienced by another pump maker in obtaining the patronage of

OEMs.8 An alternative explanation for that firm's failure to

achieve a larger market share is that fire departments find its pumps

significantly less attractive than those of Hale and Waterous for

reasons unrelated to the pump makers' distribution policies. The

evidence adduced by the staff is far from sufficient to establish that

this firm, or any other actual or potential competitor, was

anticompetitively excluded from selling pumps to OEMs.9

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\8\ The evidence supporting the Commission's entry-deterrence

theory appears to consist of that producer's experience in trying to

erode OEMs' preferences for Waterous and Hale pumps.

\9\ The majority's assertion with respect to the entry-deterring

effects of the arrangements is simply that--an assertion. All of the

evidence gathered in this investigation is easily reconciled with an

efficiency rationale for the challenged arrangements between pump

makers and OEMs. In this market, as in any other, superior

efficiency on the part of incumbents is a powerful entry deterrent.

It is not an antitrust violation.

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In addition to the weaknesses in the anticompetitive theories

outlined above, a factual problem plagues this case: evidence gathered

in the investigation calls into question whether Waterous's and Hale's

relationships with their respective OEM customers can even be

characterized as ``exclusive.'' Although many OEMs have tended to deal

principally with only one pump maker--a fact, I note in passing, that

is as consistent with an efficiency rationale for exclusivity as it is

with an anticompetitive theory--several larger OEMs affiliated with

Waterous and Hale have expressed a willingness to install another

manufacturer's pumps at customers' request. Indeed, several OEMs--

including at least one of the largest ones affiliated with Hale--have

installed another competitor's pumps, and this investigation produced

no

[[Page 40234]]

evidence to suggest that any dealer was terminated for selling that

firm's pumps. In any case, however, even if OEM exclusivity could be

convincingly demonstrated, it should be clear from the discussion above

that a great deal more is required to prove that the exclusive

arrangements had anticompetitive effects.10 The evidence on the

competitive effects of existing arrangements between pump makers and

OEMs is as consistent with the view that the arrangements induce

greater efficiency in the production and marketing of pumps as it is

with a market power theory.

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10 Cf. Continental T.V., Inc. v. GTE Sylvania Inc., 433

U.S. 36, 58-59 (1977) (plaintiff must demonstrate anticompetitive

effects and defendant's market power when challenging vertical

restraints).

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I am therefore unpersuaded that respondents' distribution policies

have harmed competition in any relevant market. Even had I concluded

otherwise, however, I would not endorse the proposed consent orders,

which require each respondent to cease and desist from requiring OEM

exclusivity as a condition of sale. As I have noted elsewhere,11

the problems with remedies of this sort are significant.12 A

formal ban on exclusive dealing accomplishes little if respondents have

alternative means available to achieve the same end. One readily

available method in this case, fully consistent with the terms of the

proposed orders, would be to establish a set of quantity discounts

providing a customer with substantial financial incentives to procure

all of its pumps from a single seller. Moreover, nothing in the orders

would prevent a pump manufacturer from unilaterally refusing to sell to

an OEM so long as the refusal was not conditioned on a promise of

exclusivity. Another possible method would be to give exclusive OEMs

better service (e.g., faster delivery times) than their non-exclusive

rivals receive.

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\11\ Dissenting Statement of Commissioner Roscoe B. Starek, III,

in Silicon Graphics, Inc., Docket No. C-3626.

\12\ For a discussion of why nondiscrimination remedies are

problematic, see Brennan, ``Why regulated firms should be kept out

of unregulated markets: understanding the divestiture in United

States v. AT&T,'' 32 Antitrust Bull. 741 (1987).

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I cannot endorse an ineffective remedy for a nonexistent harm.

[FR Doc. 96-19592 Filed 7-31-96; 8:45 am]

BILLING CODE 6750-01-P