9010061

B209456

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

COMMISSIONERS:

Robert Pitofsky, Chairman

Mary L. Azcuenaga

Janet D. Steiger

Roscoe B. Starek, III

Christine A. Varney

 

)

In the Matter of ) DOCKET NO. C-3693

)

Waterous Company, Inc., ) DECISION AND ORDER

a corporation, )

 )

The Federal Trade Commission having initiated an investigation of certain acts and practices

of the respondent named in the caption hereof, and the respondent having been furnished

thereafter with a copy of a draft of complaint which the Bureau of Competition proposed to

present to the Commission for its consideration and which, if issued by the Commission, would

charge respondent with violation of the Federal Trade Commission Act; and

The respondent, its attorney and counsel for the Commission having thereafter executed an

agreement containing a consent order, an admission by the respondent of all the jurisdictional

facts set forth in the aforesaid draft of complaint, a statement that the signing of said agreement is

for settlement purposes only and does not constitute an admission by respondent that the law has

been violated as alleged in such complaint, or that the facts as alleged in such complaint, other

than jurisdictional facts, are true and waivers and other provisions as required by the

Commission's Rules; and

The Commission having thereafter considered the matter and having determined that it had

reason to believe that the respondent had violated the said Act, and that a complaint should issue

stating its charges in that respect, and having thereupon accepted the executed consent agreement

and placed such agreement on the public record for a period of sixty (60) days, and having duly

considered the comments filed thereafter by interested persons pursuant to Section 2.34 of its

Rules, now in further conformity with the procedure prescribed in Section 2.34 of its Rules, the

Commission hereby issues its complaint, makes the following jurisdictional findings and enters the

following order:
1. Respondent Waterous 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 at 300 John E.

Carroll Avenue East, South Saint Paul, Minnesota 55075.

2. The Federal Trade Commission has jurisdiction of the subject matter of this proceeding

and of the respondent, and the proceeding is in the public interest.

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 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. 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.

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.

 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 on November 22, 2016.

By the Commission, Commissioners Azcuenaga and Starek dissenting.

[Seal] Donald S. Clark

Secretary

ISSUED: November 22, 1996

Attachments: Separate statement of Chairman Pitofsky, Commissioner Varney,

and Commissioner Steiger

Dissenting Statement of Commissioner Azcuenaga

Dissenting Statement of Commissioner Starek
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.

# # # # #
1

Separate statement of Chairman Pitofsky, and 

Commissioners Varney and Steiger

In the Matter of

Waterous Company, Inc./Hale Products, Inc.,

Docket Nos. C-3693, C-3694

We write separatel y 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.
2

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
3

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 Waterous Company, Inc. , Docket C-3693,

and Hale Products, Inc. , Docket C-3694

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.
1

DISSENTING STATEMENT OF COMMISSIONER ROSCOE B. STAREK, III

In the Matter of

Waterous Company, Inc./Hale Products, Inc.,

Docket Nos. C-3693, C-3694

I respectfully dissent from the Commission's decision to issue complaints and final consent

orders against Waterous Company, Inc., and Hale Products, Inc., two producers of midshipmounted pumps for fire trucks. The complaints claim anticompetitive effects arising from alleged

exclusive dealing arrangements between each 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 remain unpersuaded that the arrangements between

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

orders issued today 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
2

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 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 exac erbated 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 Waterous and Hale allegedly maintained exclusive distribution

agreements.4 Thus, even if one could overcome the defects in the Commission's collusion theory,

 

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.

4

For example, just since 1990, at least four major OEMs -- Grumman, Mack, FMC, and Beck --
3

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

vertical section of the 1984 Merger Guidelines6 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

 

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 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 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).
4

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.

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 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

 

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).

11 Dissenting Statement of Commissioner Roscoe B. Starek, III, in Silicon Graphics, Inc.,
5

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 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.

 

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).