agreement. The reasons for my decision in this matter are summarized below. Effect of precedent There should be no mistake about the effect of the Commission decision today. The principles of legality for this joint venture cannot be limited to one hermetically sealed experiment in Freemon California. This joint venture is between the largest U.S. car producer and the largest Japanese car producer--both price-leade for their makes of cars; thus, any similarly-structured joint venture between any other members of the industry must be sanctioned. How could we deny to other companies what we have authorized for the industry giants? In effect, this is rule-making for the industry. It is predictable that several features of this joint venture will result in a reduction of competitive vigor between GM and Toyota. Concern about that should deepen when the strong likelihood that these features will be copied in "me-too" joint ventures between the remaining domestic car companies and foreign partners is considered. This joint venture, then, must be seen as a protot for the industry that may well produce changes which are quantitatively more significant than those caused by it alone. The auto See, e.g., New York Times, December 21, 1983, p. Dl "If it gives them the FTC some comfort and seals the deal, then it's of (quoting General Motors Chairman Roger Smith); Washington Post, December 21, 1983, p. D1 "The precise terms of the order likely to include no more than a written agreement to abide by thr elements of the venture that have already been publicly announced. (According to Toyota's U.S. Counsel.) are industry is clearly undergoing a concentration trend; the question is whether the Federal Trade Commission should accelerate that process by an action which will almost inevitably touch off a reactive pattern of strategic pairing between car manufacturers. That is especially a troubling concern since the purpose behind these cooperative ventures would not be the creation of a new competitor, but rather a decrease in the overall number of market participants, leading to increased likelihood of tacit, if not actual, collusion. Nature of the transaction Some joint ventures can be highly pro-competitive, although this is not likely to be one of them. Particularly prized are ventures where the combination of the parent firms' resources achieves what neither can manage alone: an increase in pure research, a technological breakthrough, product innovation, or entry into a new market. **/ This joint venture has none of those output-enhancing features. Manifestly, neither GM nor Toyota is a new entrant into the automobile market. The car to be produced by this joint venture likewise is nothing new: it is a derivative of Toyota's Corolla. The design differences between the two models are "modest" and beneath the sheet metal the cars will be "essentially identical." (BC staff memo, I, 10) On its face the GM/Toyota arrangement falls into the most suspect category of joint ventures: ソ Professor Pitofsky has observed that a market setting with numerous joint ventures raises particular antitrust concerns. Pitofsky, Joint Ventures Under the Antitrust Laws: Some Reflec tions on the Significance of Penn-Olin, 82 Harv. L. Rev., 1007, 1033 (1969). U. S. Department of Justice Antitrust Guide Concerning Research Joint Ventures, 466 CCH Trade Reg. Reports, 35 (December 1980); Brodley, Joint Ventures and Antitrust Policy, 95 Harv. L. R 1523 (1982); Pitofsky, op. cit. of all joint ventures, the horizontal is inherently Or, as another commentator puts it: When one or both parent firms actively compete in Initial concerns about the joint venture's anticompetitive potential are only intensified when it is analyzed in its market context. Our economic and legal staffs have calculated the Berfindahl indices for various probable markets. They range from a low of 1262 (dollar sales, subcompact cars) to a high of 2413 (unit sales, all cars). (BC staff memo VI, 9; BE memo, Appendix H). This means that a plausible market is at best moderately concentrated, and at worst highly concentrated--but in any event structured in a way which mandates a very hard look at any combination of competitors. Entry barriers to this market are obviously quite high, consisting of economies of scale in producti and distribution and, for foreign car manufacturers, import limita tions. (BC staff memo VI, 22, 26). Within this oligopolistic mar GM holds the longstanding leading market share (44% as compared wi the 16.7% of its closest rival, Ford) and is the price leader amon domestic auto producers. (BC staff memo, VI, 10, 12) / Toyota holds the same price leader position among Japanese importers. staff memo, VI, 15). (BE Toyota is the fourth largest car manufacturer in the U.S. and the third largest in the world. (BC staff memo, III, 1). **/ In short, this is a market which is prone to effective collusion, and a collaboration between two major competitors resembles a partial merger more than a true joint venture. In these circumstances the degree of anticompetitive risk and the genuine need for the venture must be stringently examined. See, e.g., U.S. v. Penn-Olin, 378 U.S. 158, 170-72 (1964); Brunswick Corp., 94 F.T.C. 1174, 1265-66 (1979), aff'd and modified on other grounds sub. nom., Yamaha Motor Co. v. FTC, 657 F.2d 971 (8th Cir. 1981), cert. denied, 102 S. Ct. 1768 (1982). Anticompetitive Risks The two principal aspects of the joint venture which I fear will lead to blunted competition between the two companies are the transfer price formula and the ongoing exchange of a broad range of product planning, engineering design, and marketing information. General Motors is clearly the price leader among domestic auto producers, both because it announces prices first and because its prices virtually dictate Ford and Chrysler decisions. (BC staff me VI, 12) **/ In the subcompact portion of the U.S. market which is most directly affected by this joint venture, Ford, Toyota and GM are ranked respectively first, second and third, with the following market shares: 19.10%, 16.06%, 14.41%. (BC staff memo, VI, 96). 36-253 0-84-35 Toyota's Corolla is The price which the joint venture will charge GM for the car is calculated by a formula which consists of a weighted average of wholesale prices of competitive small cars. given special weight in the formula. Simply between GM and Toyota this formula reduces price competition, because any price cuts Toyota gives its dealers must be passed on to GM, with a correspond ing reduction in Toyota's joint venture profits. Consequently, Toyota's incentives are to raise the Corolla price, knowing that such a price rise is incorporated into the cost of the joint ventur car to GM; and knowing, moreover, that both it and GM are the 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. **/ - 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 practic */ The phrase "lockstep" pricing was first used by one of Toyota' Counsel when describing to his client a probable effect of the transfer price formula. (GM 25945, quoted in Koch meno, 30) **/ 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 (Professo of Economics, Georgetown University Law Center; Consultant to the Chrysler Corporation). |