United States: Price Discrimination Markets Lead Antitrust Enforcers To Increased Success

In the last two years, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) brought, and won, several litigated merger cases by establishing narrow markets comprised of a subset of customers for a product. This narrow market theory, known as price discrimination market definition, allowed the agencies to allege markets in which the merging parties faced few rivals and, therefore, estimate high post-merger market shares. By their nature, price discrimination markets can lead to a challenge of a high-value deal where only a small number of the merging parties' customers are allegedly harmed. Given the increased usage by the agencies and now judicial acceptance of the theory, counsel for merging parties must consider the potential for price discrimination market definition in assessing the antitrust risks for transactions.

Price discrimination markets have gained increasing focus in each iteration of the Horizontal Merger Guidelines (Guidelines) published by the FTC and the DOJ. In § 1.12 of the 1992 Horizontal Merger Guidelines, the agencies discussed the possibility of a narrow price discrimination market in two paragraphs of a much larger section devoted to market definition. When the Guidelines were revised in 2010, the agencies decided that price discrimination markets deserved their own section.

This new Section 3 of the Guidelines addresses the possibility of price discrimination markets in detail and indicates that price discrimination markets may impact not only market definition, but also the calculation of market shares and the evaluation of competitive effects. Section 3 states that "[w]hen examining possible adverse competitive effects from a merger, the Agencies consider whether those effects vary significantly for different customers purchasing the same or similar products." Essentially the agencies are looking to determine whether the merged entity can raise prices on a select group of customers who, unlike other customers, cannot find reasonable substitutes. When the agencies find that price discrimination is possible, they will consider the impact of the merger on the targeted customers separately.

While price discrimination markets have long been part of the agency review process, this past year has seen them in a starring role in three high-profile litigations: Sysco/US Foods, GE/Electrolux, and Staples/Office Depot.

In Sysco/US Foods, the FTC challenged a proposed merger between the nation's two largest broadline foodservice distributors. On June 26, 2015, the US District Court for the District of Columbia granted the FTC's motion for preliminary injunctive relief. FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015). In its opinion, the court found two relevant product markets: one for broadline foodservice distribution to local customers and a second for broadline foodservice distribution to national customers. The narrow market here was distribution to national customers because, the court found, national customers have a smaller set of options for distribution since they "typically contract with a broadline foodservice distributor that has distribution centers proximate to all (or virtually all) of their locations." Sysco, 113 F. Supp. 3d at 38. While the court recognized the controversy concerning price discrimination market definition, it concluded that the evidence presented supported a market for broadline foodservice distribution to national customers. Just three days after the court announced its opinion, the parties abandoned the transaction.

In GE/Electrolux, the DOJ filed a complaint seeking to block the transaction between two manufacturers of cooking appliances. The DOJ complaint alleged a distinction between the retail sales channel for cooking appliances and the contract sales channel for cooking appliances. Complaint at 2-3, United States v. AB Electrolux, No. 15-cv-01039 (D.D.C. July 1, 2015). Contract-channel customers include homebuilders, property managers, hotels/motels and government entities, all of whom individually negotiate the prices charged by appliance suppliers. Id. at 6. These customers "demand delivery directly from the appliance supplier, in significant quantities, and on a specific schedule dictated by the contract-channel purchaser," as well as a wide variety of products. Id. at 6-7. The DOJ alleged that contract-channel customers could be independently harmed due to their individual negotiations with suppliers and these customers could not avoid price increases due to their unique needs. Id. at 8-9. Thus, even though the defendants sold the same appliances to retailers, DOJ alleged that those retail sales were in a different relevant product market from contract channel sales. After four weeks of trial, General Electric walked away from the transaction and collected a $175 million termination fee.

Similarly, in Staples/Office Depot, the FTC challenged a merger between the nation's two largest office supplies vendors. On May 10, 2016, the District of Columbia district court granted the FTC's motion for a preliminary injunction. FTC v. Staples, Inc., No. 15-2115, slip op. (D.D.C. May 10, 2016). The court concluded that the proposed merger would reduce competition in the business-to-business (B2B) contract space for office supplies sold to very large purchasers. Id. at 4. In this case, the FTC only alleged harm to a targeted group of customers and did not allege harm to the parties' retail customers or to smaller business customers (who had more viable supply options than the large customers). The court agreed with this narrow market definition because the large B2B customers individually negotiated contracts for their office suppliers, were more price sensitive, and required unique service from their office supplies vendors, including IT capabilities, personalized customer service, and next day and desktop delivery. Id. at 25-30. Less than a week after the court's decision was announced, the parties terminated the merger agreement and Staples paid Office Depot a $250 million termination fee.

With these cases establishing a strong precedent, especially in the District of Columbia district court, the antitrust agencies will continue to use price discrimination markets to shape their analysis of future mergers. Therefore, in order to determine the extent of the antitrust risk posed by a potential transaction, counsel for parties seeking to merge must determine whether a price discrimination market may exist. The Merger Guidelines lay out two conditions that must be met for price discrimination to be feasible. The first question the agencies will ask is whether the supplier can identify a group of customers to whom prices can be increased. Examples of relevant distinctions might be large buyers versus small buyers, customers with different end uses for the same product or customers with different geographic locations. If the agencies can determine a distinct group to whom prices can be increased, they will then determine whether those targeted customers could defeat a potential post-merger price increase through arbitrage, or purchasing the good from other purchasers that are not part of the narrow price discrimination customer set and therefore would not be subject to the price increase.

The agencies will utilize this framework to assess the evidence they gather in a merger investigation. This evidence will include merging party documents and testimony, as well as the documents and testimony of the competitors and customers of the merging parties. In order to assess the antitrust risks of the deal, counsel for the merging parties should also review this evidence. Questions to keep in mind during this review include:

  • Has price discrimination taken place in the past?
  • Does the supplier currently sub-divide its customers in any way?
  • Are certain customers individually negotiating their price for the product?
  • Do certain customers demand unique characteristics from a supplier that only certain competitors are capable of offering?
  • Are the merging firms only bidding against each other for a subgroup of customers?

Price discrimination markets lead to narrower markets, generally with higher market shares. This may lead to agency challenges where the merger appears lawful if markets are defined more broadly. Counsel should work with the client early in the process to determine whether an issue exists, whether it will be raise a concern for the agencies, and whether it can be fixed. Sometimes the price discrimination market may be a relatively small portion of the parties' businesses, but a relatively small problem can break up a much larger deal if the concerns cannot be easily remedied through divestiture. To aid in adequately evaluating these issues, it is important to involve expert antitrust counsel early in the transaction process.

Price Discrimination Markets Lead Antitrust Enforcers To Increased Success

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.