Market Power and Vertical Restraints in Retailing Private and an Analysis of Ftc V Toys "r" Us

The FTCs action against Toys "R" Us centers on the implementation by Toys "R" Us of a policy in which it reserved the right not to carry the same toy items sold by a manufacturer to warehouse clubs. The FTC alleges that the Toys "R" Us policy reflects an attempt to exercise market power by impeding competition from warehouse clubs. Toys "R" Us defends its policy as an efficiency-enhancing vertical restriction designed to lessen the ability of warehouse clubs to "freeri'de" on services provided by Toys "R" Us. This paper presents the results of several economic analyses designed to distinguish between these hypotheses. The FTC claims that Toys "R" Us organized a horizontal agreement among toy manufacturers to boycott the warehouse clubs. The FTC also claims that Toys "R" Us engaged in unlawful vertical agreements with manufacturers not to deal with warehouse clubs. According to the FTC, these actions had the result of excluding.a more efficient rival and raising the price consumers pay for toys, without affecting the incentive or ability of Toys "R" Us to provide dealer services that promoted industry output. Together with its economics expert, the FTC argued that: (i) Toys "R" Us is a monopsonist purchaser of toys; (ii) Toys "R" Us has monopoly power at retail in many local markets; and (iii) Manufacturers unilaterally would have chosen to sell to warehouse clubs absent the coordination among toy manufacturers engineered by Toys "R" Us. The paper summarizes the economic analysis presented in expert testimony on behalf of Toys "R" Us. The analysis indicates that the Toys "R" Us warehouse club policy did not harm competition in the toy industry. While a firm's ability to exclude a more efficient rival may reflect an exercise of market power that harms competition in an industry, Toys "R" Us' policy cannot be characterized in this manner. First, Toys "R" Us' policy was limited in its