UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

) 

In the Matter of ) File No. 901 0061 

) 

Waterous Company, Inc., ) AGREEMENT CONTAINING 

a corporation, ) 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 here attached. 

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 

2
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 here attached, 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 § 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 here attached 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 

3
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. 

O R D E R 

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 

4
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 

5
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. § 13. 

III 

IT IS FURTHER ORDERED that Respondent Waterous shall provide a copy of 

this Order with the attached 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 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. 

6
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 HartScott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a, and at least ten 

(10) days in the case of transactions subject to the notification provisions of the HartScott-Rodino Act. 

VI 

IT IS FURTHER ORDERED that this order shall terminate twenty (20) years 

from the date this order becomes final. 

7
Signed this day of , 1995. 

WATEROUS COMPANY, INC. COUNSEL FOR THE FEDERAL TRADE 

a corporation, COMMISSION 

By: 

Steven W. Balster 

V. L. Richey 

Chairman, Board of Directors

AMERICAN CAST IRON PIPE Brenda W. Doubrava 

COMPANY 

a corporation and the parent of 

Waterous Company, Inc. 

By: 

V. L. Richey 

President 

APPROVED:

Gary M. London Phillip L. Broyles, Director

Counsel for Waterous Company, Cleveland Regional Office

Inc. and American Cast Iron Pipe

Company

Mary Lou Steptoe, Acting Director 

Bureau of Competition 

8
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. 

# # # # #

9
UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

In the Matter of 

Waterous Company, Inc., 

a corporation. 

) 

) 

) 

) 

) 

) 

) 

DOCKET NO. 

COMPLAINT 

Pursuant to the provisions of the Federal Trade Commission Act, as amended, 

15 U.S.C. §§ 41 et seq., and by virtue of the authority vested in it by said Act, the Federal 

Trade Commission, having reason to believe that Waterous Company Inc. (sometimes referred 

to as ``Waterous'' or ``Respondent''), has violated Section 5 of the Federal Trade 

Commission Act, as amended, 15 U.S.C. § 45, and that a proceeding by it in respect thereof 

would be in the public interest, hereby issues this complaint stating its charges as follows: 

1. For the purposes of this complaint, the following definitions shall apply: 

a. ``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.'' 

b. ``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. 

Respondent 

2. Respondent Waterous Company, Inc., is a corporation organized, existing and doing 

business under and by virtue of the laws of the state of Minnesota with its principal place of 

business located at 300 John E. Carroll Avenue East, South Saint Paul, Minnesota 55075. 

Waterous manufactures and sells Mid-Ship Mounted Fire Pumps in the United States. In 

1993, Waterous accounted for more than 40 percent of U.S. Mid-Ship Mounted Fire Pump 

sales. 
Jurisdiction 

3. Respondent Waterous sells and ships Mid-Ship Mounted Fire Pumps from its 

production facility located in Minnesota to customers located throughout the United States. 

Respondent maintains and has maintained a substantial course of business, including the acts 

and practices herein alleged, which are in or affecting commerce, as ``commerce'' is defined 

in the Federal Trade Commission Act. 

Mid-Ship Mounted Fire Pump Industry 

4. The market for Mid-Ship Mounted Fire Pumps in the United States includes three 

principal competitors. In addition to Respondent Waterous, two other companies sell MidShip Mounted Fire Pumps to OEM's in the United States, Hale Products, Inc. (sometimes 

referred to as ``Hale Products''), and W.S. Darley & Company, Inc. (sometimes referred to 

as ``Darley''). These three firms have each sold fire pumps in the United States for over 50 

years, and in that time there has been little if any attempted de novo entry into the United 

States market. Respondent Waterous and Hale Products are the two largest manufacturers and 

together account for close to or more than 90 percent of Mid-Ship Mounted Fire Pump sales in 

the United States. 

5. For over 50 years, and until approximately 1991, Respondent Waterous sold Mid-Ship 

Mounted Fire Pumps through a network of exclusive OEM's. Respondent Waterous sold or 

contracted for the sale of such pumps to OEM's with the understanding that those OEM's 

would commit to selling only Waterous Mid-Ship Mounted Fire Pumps. Hale Products also 

sold on an exclusive basis, but to a different group of OEM's. Thus, prior to approximately 

1991, few if any OEM's offered Mid-Ship Mounted Fire Pumps manufactured by more than 

one fire pump manufacturer, and fire truck buyers were able to choose between Mid-Ship 

Mounted Fire Pumps manufactured by different firms only by considering different OEM's. 

6. Respondent Waterous believed that continued adherence to the exclusive sales policy by 

both itself and Hale Products would exclude or tend to exclude other competitors and would 

tend to reduce competition between manufacturers of Mid-Ship Mounted Fire Pumps over 

price and over non-price terms such as quality differences and delivery times. 

7. During the 1980's and until approximately 1991, Respondent Waterous continued to 

adhere to its exclusive dealing policy. Waterous terminated or threatened to terminate OEM's 

that resold Mid-Ship Mounted Fire Pumps manufactured by Waterous Company to OEM's 

outside of Waterous Company's exclusive OEM network, or delayed or threatened to delay 

shipments to such OEM's. 

2
Anticompetitive Effects 

8. The acts, practices, and methods of competition of Respondent Waterous as alleged in 

Paragraphs 5 through 7, were and are substantially to the injury of the public in the following 

ways, among others: 

a. By substantially lessening competition in the sale and marketing of Mid-Ship 

Mounted Fire Pumps, or by excluding or tending to exclude other actual or potential 

pump manufacturers from selling Mid-Ship Mounted Fire Pumps to a substantial 

number of OEM's; and 

b. By facilitating an allocation of customers between Respondent Waterous and 

Hale Products. 

Violation of Law 

9. Therefore, the acts, practices and methods of competition of Respondent Waterous, as 

herein alleged, were and are all to the prejudice and injury of the public and constitute unfair 

methods of competition in violation of Section 5 of the Federal Trade Commission Act, as 

amended, 15 U.S.C. § 45. The acts practices and methods of competition of Respondent, as 

herein alleged, or the effects thereof, are continuing or could recur in the absence of the relief 

herein requested. 

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on 

this day of , A.D., 1996, issues its complaint against said Respondent. 

By the Commission. 

Donald S. Clark 

Secretary 

3
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 

2
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 require notification to such customers that respondent will not 

restrict the brand of pumps they may use. 

3
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 

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. 

4
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


1
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.


2
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.


3
DISSENTING STATEMENT OF COMMISSIONER MARY L. AZCUENAGA


in Waterous Company, Inc., and 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. § 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" 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 

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 

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 

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. 

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. 

2
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 

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 

6 vertical section of the 1984 Merger Guidelines 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 

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. 

6 U.S. Department of Justice, Merger Guidelines, § 4.2 (1984), 4 Trade Reg. Rep. (CCH) 

¶ 13,103. 

7 The 1984 Merger Guidelines (§ 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 

3
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 

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 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. 

entry into the primary market significantly more difficult and 

therefore less likely to occur. 4 Trade Reg. Rep. (CCH) ¶ 13,103 at 20,565-66; see also Blair and 

Kaserman, LAW AND ECONOMICS OF VERTICAL INTEGRATION AND CONTROL 152 

(1983). 

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. 

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. 

I cannot endorse an ineffective remedy for a nonexistent harm. 

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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