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industry price leaders, so that competitors are likely to match the higher prices. The competitors' price hikes in turn are reflected in the transfer price formula-and so the formula assures an ascending spiral of lockstep pricing, although without explicit cooperation or collusion. 15

It is important to note that infirm price competition between the Corolla and the joint venture car can infect the prices on other car models. Car manufacturers who offer a full line of cars maintain price differentials between various carlines and models. (BC staff memo, VIII, 12). GM will undoubtedly follow this practice and seek to keep a consistent dollar gap between the joint venture car and the next biggest model, and between each model further up the line. Thus a rise in the price of the joint venture car will force reactive price rises all the way up the GM line and, because of GM's price-leader position, the same ripple effect can be expected in competitive car lines. Consumers will still be offered a choice of prices, but the overall level of price competition will be artifically elevated.

The Bureau of Competition Director has dismissed the price rises flowing . from the transfer formula as too small to worry about. However, the problem is not so much how much prices rise, but the fact that there has been a major change in car manufacturers' incentives to engage in price competition. Because there will be several new disincentives to price competition at work in the market, cartel stability will be encouraged.

Alternatives to this competitor-based pricing formula apparently were never explored by the parties. (BC staff memo, VIII. 7). The consent does not cover the matter at all. In particular, there has

been no consideration of an alternative, suggested by Professor Salop, of a price escalator provision that is triggered by a cost index which is not under Toyota's control yet is highly correlated with Toyota's costs. Such indexed contracts have been used for the purpose of major car components and are apparently

"The phrase "lockstep" pricing was first used by one of Toyota's counsel when describing to his client a probable effect of the transfer price formula. (GM 25945. quoted in Koch memo, 30).

14 For a more vigorous analysis of this phenomenon. see the comments of John Kwoka (Professor of Economics, George Washington University, Consultant to the F.T.C.) and Steven C. Salop (Professor of Economics, Georgetown University Law Center. Consultant to the Chrysler Corporation).

1 For example, Chrysler has furnished us with examples of two such contracts which it has with Mitsubishi and Volkswegen both for the supply of Autorative engines.

common to various industries. I fail to see why the Commission was not provided with a comparative analysis of all practical pricing formulae.

Finally, I should point out that the transfer price formula is a bit of a red herring, since the agreement between GM and Toyota allows them to negotiate directly an appropriate selling price whenever the transfer formula yields a selling price which is at significant variance with then current market conditions. The consent agreement would not prevent operation of this proviso.

Unfortunately, even if a well-drafted consent could cure the transfer price infirmities of this joint venture, I would still object to it. That is because I see the overriding problem as incurable. This joint venture, by its very nature, necessitates coordination of GM and Toyota product marketing and research efforts. The joint venture will produce a car for GM which is manufactured according to Toyota production techniques. The most significant components of the car, representing wellover half the value of all its parts and material, will be produced by Toyota. How could the joint venture not act as a clearinghouse for exchanges between customer (GM) and supplier (Toyota) as to what the end product should and could be? The twelve-year life of the joint venture covers two complete model cycles, and certainly there are a host of changes in car features from year to year. Improvements in the vehicle's designs and technology will be known to the parent companies well in advance of public announcements or even industry gossip. Moreover many features on small cars are common to large portions of the entire fleet; therefore knowledge that either parent can produce, say, extended corrosion protection or a significantly lighter engine, gives a window onto overall marketing strategies, not "just" plans for compact and subcompact cars.

It has been argued that GM and Toyota are such fierce competitors that they will jealously guard all their secrets. This argument ignores the fact that, even if a major technological breakthrough or some other "hush hush" project were carefully isolated, merely in the legitimate daily operations of the joint venture GM and Toyota can glean enough additional hard data to vastly improve educated guesses about each other's competitive activities. There does not have to be a complete swap of technical plans for competition to be dulled. For example, in the course of negotiations, Toyota has already supplied GM with certain detailed

product information which otherwise would certainly not be exchanged between these competitors. (BC staff memo. VIII 17-18; Kwoka, 37-38) It may be too late for GM to match certain technological improvements, but it certainly can adjust its marketing efforts to defuse any Toyota impact. This 'would leave it free to focus its competitive energies on car companies other than Toyota-a strategic luxury not available to Ford, Honda, Chrysler et al.

As a final example of why I have trouble accepting this rosy picture of uncompromising competitors who will never be tempted to do each other favors, consider that Toyota has already offered, and GM has acted upon, suggestions on retail price differentials for the joint venture car relative to the Corolla. (BC staff memo, VIII, 18-19, Kwoka, 38-39).

I cannot improve upon the BC staff's summary of these instances of the most competitively sensitive information exchange:

The point here is that the joint venture facilitates discussions about price that GM conceded were forbidden and this is the only example we happen to know about; should the joint venture proceed, others may well occur due to the introduction of new models and/or changes in the product itself.... Concern over the occasion and necessity for such information exchanges arises again when a new joint venture model needs to be negotiated after several years. (BC staff memo, VIII, 19).

The consent agreement does not cure this problem. It specifically allows the parties to exchange information "necessary to accomplish... the legitimate purposes or functioning of the Joint Venture." This is a highly. significant loophole. What is "necessary" or "legitimate" is determined in the first instance by GM and Toyota. Their threshold sensitivity on these points is demonstrated by the fact that GM's counsel has represented that the information exchanges I just described were not used for any purpose other than determining suitable product options for the joint venture. (BC staff memo, VIII, 17-18). Alleged Procompetitive Benefits

We are assured that the joint venture will produce "efficiencies" which will offset any competitive effects such as I have described above. In the FTC merger guidelines we defined an efficiency as a cost saving that could not be obtained unilaterally by either company, but instead required a pooling of resources. The efficiencies alleged in

this matter do not meet even that general description.

Staff of the Bureau of Economics conclude that the joint venture will increase industry output and is therefore procompetitive. Such a conclusion, I note, requires a rejection of GM's own estimates to the contrary. Nonetheless, I am not convinced that staff has proved this special efficiency, as distinct from private benefits to GM and Toyota. There is no doubt that GM could use a new small car in order to maintain or increase market share in the compact/ subcompact market, as well as to safeguard its large car sales by accrual of CAFE credits. 17 However, it is highly doubtful that the GM/Toyota venture arrangement represents additional output that would not come into being without the joint venture. The best evidence on this point is GM's own predictions that the sales of the joint venture car will come largely at the expense of other GM and Toyota vehicles. The joint venture car is expected to divert sales especially from GM's Chevette and mid-size "J" car. (BB staff memo. VIII, 3-4; Kwoka memo, 51) Our economics staff finds "somewhat puzzling" that GM assumes no net increase in industry sales as a result of the joint venture, and deals with the puzzle by summarily rejecting GM's estimates and producing its own competitive supply and demand models. (BE staff memo, VIII, 5-14). I am troubled by this willingness to set aside a damaging admission, as well as by several of the assumptions underlying

11 The Corporate Average Fuel Economy ("CAFE) statute, part of the Energy Policy and Conservation Act of 1975, sets annually escalating efficiency standards for the average of each domestic car manufacturer's fleet. The law provides stiff fines for failure to meet the standard. CAFE essentially conditions the sale of a larger car on the sale of a small car. Firms need to lower their fleet average and so continue selling the more profitable large cars.

the BE calculations. Also, regardless of what minimal 19 output effects the joint venture may have, those same effects could be achieved in large part through alternatives. As Professor Kwoka demonstrates, absent the joint venture GM would very likely satisfy its small car needs by a variety of options. including domestic assembly of the "R" car now being produced by GM's Japanese affiliate Isuzu, and improving and retaining the Chevette. (Kwoka memo, 47-55A; Muris memo, 31). Similarly, though with less certainty, we can predict that Toyota would have to pursue U.S. manufacuturing options, absent the joint venture. (Toyota's two largest Japanese rivals, Honda and Nissan, have already taken that step.) Naturally these options are more expensive and presumably not as attractive to the companies, but from an overall industry viewpoint they are preferable to simply letting GM acquire.. 200,000 units of Toyota's production capacity for twelve years.

The second major 20 justification for the joint venture translates even less easily into an "efficiency" benefit. That is the claim that GM needs to have "hands-on" experience with Japanese management techniques in order to produce a cheaper car. No one denies that the Japanese have a significant cost advantage (approximately $2000) in the production of cars. However, it is not possible to isolate and quantify many of the sources of that advantage, other than differences between labor wages in the automotive industries of the U.S. and

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Japan, which account for 40% of the cost advantage. (Kwoka memo, 11). GM concedes that Japanese advantage does not derive from superior products or manufacturing hardware. I must ask. therefore, regardless of what value we assign to management skills, whether the fact that they differ justifies this sort of close cooperation between rivals. For example, if Ford had a 30% cost advantage over GM, attributable solely to some Ford management mystique, would the antitrust laws permit GM to learn Ford's special production techniques by jointly producing a Lincoln/Cadillac-type car? I think not.

Conclusion

In summary, then, if this joint venture between the world's first and third largest automobile companies does not violate the antitrust laws, what does the Commission think will? This is surely the question that potential joint venture partners will be asking themselves. In this decision, the Commission has swept another set of generally recognized antitrust law principles into the dustbin, using again the incorporeal economic rhetoric that now dominates Commission decision-making. In this case, the decision results in the blessing of a business proposal that is both breathtaking in its audacity and mindnumbing in its implications for future joint ventures between leading U.S. firms and major foreign competitors that seek to lend a friendly helping hand.

Perhaps in uneasy recognition of the controversy this antitrust generosity would otherwise ignite, the majority has thrown Br'er Rabbit into the briar patch by penciling in a last minute consent order that the proposed joint venture partners have themselves said merely restates the main features of the private agreement already existing between them. This will fool no one who has even a passing familiarity with the real issues in this antitrust decision.

(FR Doc. 83-34507 Filed 12-27-83; 8:45 am) BILLING CODE 6750-01-M