[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)]
[Notices]
[Pages 40229-40234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19592]


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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

[[Page 40232]]

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