Vol.:(0123456789)

Review of Industrial Organization 

https://doi.org/10.1007/s11151-021-09845-8 

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Economics at the FTC: Multi‐level Marketing and a Coal 

Joint Venture 

Marta Wosińska1 · David Givens1 · Yan Lau1 · Doug S. Smith1 · 

Christopher Taylor1

 · Benjamin Wallace1 

Accepted: 19 October 2021 

This is a U.S. government work and not under copyright protection in the U.S.; foreign copyright protection 

may apply 2021 

Abstract 

Economists in the Federal Trade Commission’s Bureau of Economics support the 

Commission’s dual missions of protecting consumers and maintaining competition 

by performing economic analyses. This article provides two examples of such work 

product: The frst is a description of an analytical framework that FTC consumer 

protection economists use to assess multi-level marketing organizations. The second is a description of economic analysis that was undertaken to assess the efect of 

a joint venture between two coal companies that ultimately was challenged by the 

Commission. 

Keywords Antitrust · Consumer protection · Multi-level marketing · FTC · Mergers 

• Yan Lau 

ylau@ftc.gov 

Marta Wosińska 

mwosinska@ftc.gov 

David Givens 

dgivens@ftc.gov 

Doug S. Smith 

dsmith2@ftc.gov 

Christopher Taylor 

ctaylor@ftc.gov 

Benjamin Wallace 

bwallace1@ftc.gov 

Federal Trade Commission, Bureau of Economics, 600 Pennsylvania Ave., N.W., Washington, 

DC 20580, USA 

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M. Wosińska et al. 

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1 Introduction 

The Bureau of Economics (BE) mainly supports the Federal Trade Commission’s 

(FTC’s) consumer protection and antitrust activities by providing economic analysis 

for investigations. This article discusses some of the modes of analysis that BE uses 

to assess the consumer impact of multi-level marketing (MLM) business opportunities, and also those used to determine how competition in coal markets would be 

afected by a proposed joint venture of coal companies.

While economic analysis in support of the FTC’s enforcement activities comprises most of the work done by BE staf—which currently consists of 81 Ph.D. 

economists, 11 research analysts and statisticians, six administrative professionals, 

and fve fnancial analysts—BE makes a variety of additional contributions to the 

missions of the FTC. For instance, BE economists also provide the Commission and 

other government entities feedback on the potential efects of legislation and regulation on competition and consumer well-being. BE engages the academic economics 

community in a variety of ways, including an annual microeconomics conference.

BE—together with co-sponsor, the Tobin Center for Economic Policy at Yale—

hosted the frst fully online FTC Microeconomics Conference on November 5 and 

6, 2020.1 The topics that were covered in keynote addresses and paper presentations 

included: bias in machine learning; competition in pricing algorithms; consumer 

impact of retailer scale and concentration; the efect of health care prices on wages; 

price discrimination and big data; merger efects on variety, and the efect of consumer ratings on competition. The next FTC Microeconomics Conference—again 

co-sponsored by the Tobin Center—will be held online on November 4–5, 2021.2 

BE economists regularly perform economic analysis in connection with virtually all consumer protection matters that are considered by the Commission while 

working alongside the legal staf on investigations. They also frequently serve as 

expert witnesses. Additionally, BE economists conduct original economic research 

on important consumer protection questions in order to improve the understanding 

of consumer protection problems. In their casework, economists help to evaluate a 

diverse set of potentially unfair or deceptive practices that harm consumers, including: identity theft; imposter scams; fake reviews in connection with online shopping; 

deceptive advertising; and unfair data-security practices. The Commission fled 

actions in 82 consumer protection matters and obtained orders in 97 cases in 2020.3 

Section 2 of this article describes some aspects of how BE economists assess the 

economic incentives that are put into place by MLM organizations, and the potential 

for harm to participants. 

1 Copies of the papers that were presented along with a video of the conference are available at https://

www.ftc.gov/news-events/events-calendar/thirteenth-annual-federal-trade-commission-microeconomicsconference. 2 Details are available at: https://www.ftc.gov/news-events/events-calendar/fourteenth-annual-federaltrade-commission-microeconomics-conference. 3 See FTC Annual Highlights 2020, Stats & Data at https://www.ftc.gov/reports/annual-highlights-2020/ 

stats-data-2020. 
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BE’s antitrust economists fulfll similar duties when working with their attorney 

colleagues on investigations of horizontal and vertical mergers and other potentially 

harmful transactions, in addition to investigations of single-frm conduct that may 

violate the antitrust laws. The FTC in 2020 entered into consent orders for 12 mergers and fled suits that challenged nine transactions, while the FTC staf investigated 

11 proposed transactions that subsequently were abandoned by the merging parties.4 

Section 3 of this article describes the economic questions that confronted BE economists in the course of the FTC’s investigation of a proposed joint venture of two coal 

companies in Wyoming, as well as the work that was done in support of the FTC’s 

testifying expert in the court challenge that sought a temporary restraining order and 

preliminary injunction. 

2 Multilevel Marketing and Consumer Protection 

2.1 Background 

A multi-level marketing (MLM) frm is a business that raises special consumer protection concerns due to the role of participant recruitment. MLMs supply products 

(or provide services) and grant independent distributors the opportunity to earn 

income by selling the products directly to consumers and by recruiting other distributors. The MLM concept was developed in the United States in the mid-twentieth century as an ofshoot of traditional door-to-door selling and has since spread 

around the world.5 Its broad reach is due to relatively low entry barriers and startup 

costs, as well as the self-propagating nature of participation through recruitment. 

Well known U.S.-based MLMs include Amway, Herbalife, Avon, Mary Kay, Neora, 

and Vemma. 

Accurate data on the scale of MLM activity is challenging to obtain. Globally, 

the leading international MLM trade group estimates 125.4 million distributors and 

$179.3 billion in retail sales for 2020, with 16.7 million distributors and $40.1 billion in retail sales in the United States.6,7

 The sales fgures are difcult to interpret 

though, since they largely refect wholesale purchases by distributors (valued at 

suggested retail price) rather than verifable retail sales for end-use consumption. 

MLMs generally do not track retail sales by their distributors in the feld, and MLM 

4 Ibid. 

5 Biggart (1989), Fitzpatrick (2020), Keep and Vander Nat (2014). 6 World Federation of Direct Selling Associations (2021). While the aggregate U.S. fgures cited above 

suggest that per-distributor retail sales averaged approximately $2400 in 2020, we warn against assigning 

too much signifcance to that average for the reasons mentioned in the above paragraph. Moreover, MLM 

records examined by BE show signifcant variation in purchasing across distributors—in part because of 

difering product prices and purchasing requirements—suggesting that national averages do not refect 

“typical” distributor experiences.

7 According to the Direct Selling Association, the leading U.S. trade group for MLMs, approximately 

three-quarters of MLM distributors in the U.S. are women. (Direct Selling Association, 2018, 2021). 
M. Wosińska et al. 

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participation often creates incentives for distributors to purchase product independent of consumption demand, as will be discussed below.

This section highlights some aspects of BE’s approach to analyzing MLMs and 

their potential for consumer harm. While far from comprehensive, this overview 

provides an introduction to some of the key concepts and methods employed. 

2.2 Introduction to MLM 

A distributor’s pursuit of an MLM business opportunity typically begins with signing a distributor agreement and paying a signup fee. Doing so gives the distributor 

the right to sell products, recruit other distributors (who sign the same agreement 

and pay the same signup fee), and earn commissions (“rewards”) on the activity of 

those recruits, and the recruits of those recruits, etc.—potentially down many levels 

of what is called the distributor’s “downline”. Because distributors are independent contractors with no salaries or benefts, their revenues depend entirely on their 

own retail sales, their recruiting of a downline, and the activity (purchasing, selling, 

and recruiting) of their downline. Expenses that are borne by the distributor include: 

the wholesale cost of products; attending MLM trainings and events; marketing and 

recruiting expenses (e.g., hosting parties); shipping; taxes; and the opportunity cost 

of one’s time. 

The retail side of the MLM business involves the opportunity to sell the MLM’s 

products to the public.8

 MLMs market exclusively through their distributors, which 

means distributors do not face competition in the same branded products from retail 

outlets. MLMs often do not limit recruitment, however, which means distributors 

may face competition from other distributors in their local area or online. MLMs 

also set rules around permissible retailing, which can govern the venues, online 

channels, marketing practices, sale prices, efcacy claims, return policies, and other 

terms that are connected with selling to customers.9 Among other objectives, these 

rules aim to limit retailing to the distributor’s social network.

The recruiting side of the MLM business opportunity is more complicated, but 

the basic structure relies on two ideas: “downline volume” and “qualifcation.” To a 

frst approximation, an MLM pays commissions to a distributor in proportion to her 

downline volume: the total product volume that is purchased or sold by her direct 

recruits and the recruits of her recruits, etc. In general, bigger downlines who generate more volume will produce higher commissions for the distributor; but there can 

be non-linearities in the way that this volume translates to commissions. 

8 Historically, distributors have purchased product from the MLM at a wholesale price—the suggested 

retail price less a discount—which (in principle) provides them with a potential retail markup. This 

wholesale model remains the norm, although there are now some exceptions.

9 Many MLMs ofer distributors some kind of return, or “buyback,” policy for product. These policies 

often have had various restrictions on when and how product may be returned, and they often require a 

distributor to quit the business. A particular buyback policy’s efectiveness in mitigating potential consumer harm has to be analyzed in the context of the totality of the MLM’s practices and its participants’ 

behavior. 
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The second concept—qualifcation—refers to a distributor meeting performance 

thresholds that secure for her the right to earn at certain percentages on certain 

downline volume. In the simplest instance, qualifying might require that, to be eligible for any rewards, the distributor herself must purchase or sell a certain minimum 

volume each month. However, qualifcation requirements can get considerably more 

complicated as a distributor advances in the opportunity. For instance, qualifying 

for ranks with higher earning potential can entail satisfying multiple independent 

thresholds on the volume, recruiting and rank advancement of other distributors in 

the recipient’s downline. 

2.3 MLMs and Chain Letters 

The FTC has a history—dating back to the 1970s—of enforcement actions against 

MLMs that engage in deceptive or unfair practices, under the broad authority of 

Sect. 5 of the FTC Act.10 In the case of these MLMs, one allegation has been that 

their structure and messaging have deceived participants with respect to the nature 

of the opportunity and the potential for income. Often, a central concern of the FTC 

staf’s economic analysis is the potential that an MLM is incentivizing behavior that 

is similar to that of a “chain letter”: a scheme that puts forth a false promise that all 

participants can earn recruitment-based wealth.

In a chain-letter scheme, a participant pays some amount to obtain the right to 

recruit other participants. When recruits are found, they make the same payments 

to join, and a portion of their payments go to the original participant as a recruiting “commission”. The right to earn commissions may extend through multiple 

levels, with the original participant receiving commissions when her recruits, and 

her recruits’ recruits, etc., bring in successive new cohorts. A chain letter thus operates as a transfer scheme, with money from new recruits fowing upward to (earlier) successful recruiters. In other words, all new participants initially lose money 

as their payments are transferred to earlier entrants into the scheme. Furthermore, 

because participants expend time and resources in recruitment eforts, and because 

the scheme’s creators may also siphon a fraction of the payments, the structure is a 

negative-sum transfer scheme.

A participant’s success in such a scheme typically requires recruiting multiple 

other individuals, who each, in turn, face the identical situation as their recruiter. 

Consequently, the scheme relies on unending geometric growth in order for each 

generation of participants to proft. If current participants are all able to successfully 

recruit multiple other individuals, the un-recruited population will quickly dwindle. 

Recruiting must eventually stop, and the majority of participants, who lack recruits, 

will not earn their initial payments back. When condemning chain-letter schemes, 

law enforcement agencies have often relied on this kind of framing, with its emphasis on rapid expansion, saturation, and collapse. This scenario illustrates the inevitability of widespread failure in a chain-letter scheme. 

See, for example, FTC in the matters of: Bestline (1971), Ger Ro Mar (1974a), Holiday Magic 

(1974b) and Koscot Interplanetary (1975). 

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M. Wosińska et al. 

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However, such a scenario assumes that, up to the point of collapse, participants 

generally succeed at recruiting multiple participants each. In practice, recruiting 

others is likely to be hard, and many participants at every stage may routinely fail 

to meet the plan’s recruiting objectives. In that case, a scheme may avoid collapse 

indefnitely, with most participants never recruiting enough other participants to 

break even, but enough recruitment happening for the organization to continue on. 

In other words, collapse need not happen in a chain letter scheme. The ongoing difculty of meeting recruiting goals can mean both the failure of most participants and 

the organization’s ability to persist over a long time horizon.

To hide the structural inevitability of widespread failure and negative average outcomes, those who run or participate in such schemes typically engage in deceptive 

messaging when attempting to recruit. Such messaging often has common themes: 

that anyone can succeed at recruiting; that anyone can receive signifcant income; 

and that now is the time to “get in early” while the organization is growing. Because 

some successful recruiters do receive signifcant income, they can be presented as 

examples of what is possible, even if it is mathematically impossible for more than a 

tiny fraction of participants to achieve their level of success.

The MLM structure poses a risk of chain-letter-style harm: The risk comes from 

ofering—in return for one’s own purchases from the company—the right to earn 

commissions on the purchases of recruits who face the same inducement. The transfer scheme, if present, is less direct than a chain letter’s because of products changing hands, but it can also be more economically wasteful as a result. 

2.4 Analyzing MLMs 

MLMs can vary in the features of their compensation, products, and marketing. 

There is no single template for BE’s analytical approach in MLM investigations. 

Below, we describe three types of analyses that have been frequently used in past 

cases as appropriate. 

2.4.1 Compensation Plan, Promotional Materials, and Distributor Training 

The starting point for analysis is to understand the fnancial incentives and messaging that distributors face. Of particular importance is the MLM’s “compensation 

plan”: a document that lays out the rules for earning income in the organization.

To fgure out whether a plan may be encouraging the type of chain-letter behavior 

of concern, there are a number of important questions: First, with respect to retailing, does a real retailing opportunity exist? Given the wholesale price, retail demand 

conditions, and potential competition from other distributors, could retailing be 

proftable, and—if so—at what scale? Another area of interest is the rules around 

the payment of recruitment-related commissions (“rewards,” for short): 

• Are rewards paid only when distributors sell product to retail customers, or are 

they also paid when distributors make wholesale purchases? 
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• Do wholesale purchases count towards qualifying the purchaser for earning 

rewards on her own recruits? 

• Are rewards paid only in connection with direct recruits, or is it possible to earn 

on recruits of recruits many levels below in the downline? 

• Are rewards substantial—both in absolute terms and relative to potential retailing income?

• Finally, do elements of the plan create convexity of rewards in downline volume? 

E.g., do commission percentages increase when certain downline volume thresholds are met? Do rewards increase discontinuously at certain recruitment thresholds? 

In all, the questions about the compensation plan aim to uncover the extent to which 

a plan incentivizes the pursuit of transfer payments from recruits. Where answers to 

these questions suggest that wholesale purchases amount to de facto participation 

payments and that rewards amount to bounties on those payments, it raises concerns 

that the MLM depends on a continual chain of recruitment to fulfll its promise of 

positive returns. In such cases, the chain letter model becomes an increasingly likely 

explanation of the dynamic driving distributors’ investment of time and money.

Many of these questions relate to the idea of “duplication”: where a distributor 

is encouraged to succeed by meeting volume requirements and recruiting multiple 

distributors who will then approach the opportunity with the same goal: recruiting 

recruiters. Such an approach, if successful, can potentially create a large downline 

for the original distributor, and—depending on the rewards structure—substantial 

earnings. At the same time, the concept of duplication implies unending recruitment—regardless of the actual demand for the MLM’s product.

FTC economists also consider representations that the MLM and recruiters make 

about the opportunity. Questions asked include: 

• What income or lifestyle claims are used to attract prospective distributors, and 

how truthful are they? 

• What recruiting tactics are used, and who is targeted? 

• What do distributors tell new recruits to do after joining, and what is the relative 

emphasis on recruiting a downline versus retailing to customers? 

• Are new recruits told that duplication is the way to earn a high income? 

• Are distributors told that consuming the product at a high level is part of pursuing the business? 

Income representations and promotional messages help BE infer distributors’ reasons for joining and their income aspirations. (MLMs sometimes dispute that distributors are seeking income, claiming instead that they are mainly interested in 

product discounts.) Distributor training can refect how the MLM works (or is meant 

to work) in practice, by highlighting what the organization really wants new recruits 

to focus on. Training may be developed and conducted by high-level distributors 

rather than the frm, and may be propagated through the downline. The hierarchical, 

networked structure of MLMs may elevate recruiters or high-level distributors into 

a downline distributor’s (or prospective distributor’s) most important contact point; 
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she exemplifes success and sets expectations around income and the level of investment that is required. 

2.4.2 Simulated Participation Scenario 

Analyzing an MLM may require synthesizing the many explicit and implicit incentives and messages that are contained in compensation plans, income representations, and training materials. One technique that is used by the FTC is to simulate 

a participation scenario. A simulated participation scenario lays out a best-case 

hypothetical that models the activity of a distributor and her downline in pursuing 

the MLM’s income opportunity. The time period that is modeled by the scenario 

can vary, but the objective is to follow a representative distributor’s advancement 

through the MLM’s hierarchy, and to map the recruiting, purchasing, and retailing 

activity that one would expect, given plan guidelines.

An approach to building the scenario that the BE staf has used in the past is 

to assume that all distributors follow the path of participation that the MLM presents as optimal and that they face no practical constraints along the way: e.g., weak 

product demand, a shortage of recruits, time constraints, etc. These assumptions are 

often unrealistically optimistic, but imposing them makes it easier to determine the 

extent to which an MLM, under the best possible circumstances, could deliver on its 

promises of potential income. It also allows an understanding of the relative strength 

of incentives in the compensation structure and clarifes where a distributor should 

focus her time and money if she wants to maximize her net income.

One beneft of the scenario analysis is that it produces a transparent accounting of 

the links between particular features in the compensation plan and their downstream 

efects on behavior and welfare. It can identify which plan features (if any) risk creating a harmful chain-letter dynamic: such as certain kinds of minimum purchase 

requirements, minimum recruiting requirements, or “deep” rewards on downline 

activity that discourage retailing and incentivize duplication.

Another beneft to the scenario analysis is that this type of analysis provides a 

characterization of the business opportunity that is comprehensive and internally 

consistent. It does so by assuming that all distributors seek the kind of income that 

is advertised, and by factoring in the outcomes for all distributors—not just the most 

successful—in its assessment of the plan’s overall impact on welfare. This approach 

is in contrast to some MLM marketing materials that highlight the potential earnings 

of a single hypothetical recruiter, while assuming tacitly that their recruits are content to earn signifcantly less or even to lose money.

Finally, where the analysis shows that an MLM is operating like a chain letter, the 

scenario can illustrate the magnitude of ongoing consumer losses and the urgency 

for enforcement action. MLMs that have been prosecuted by the FTC sometimes 

contend that distributors are not injured so long as the MLM has not collapsed. 

However, a scenario may demonstrate in a salient way that for a given MLM—even 

under best-case circumstances—while individuals may move up the hierarchy and 

into positions of high net earnings, the vast majority of distributors at any point in 

time will reside at the organization’s bottom levels and in a position of fnancial loss. 

Consequently, total losses accumulate over time, as the profts of the small fraction 
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of successful distributors are more than ofset by the losses sustained by newer 

recruits. 

Because the simulated scenario assumes all distributors achieve the same benchmarks of success, it can be a poor predictor of actual distributor outcomes. When 

analyzing an MLM’s distributor database, it may turn out, contrary to the scenario’s 

predictions, that a substantial majority of distributors fail to meet required levels of 

recruiting and volume, and fail to earn recruitment-related rewards. 

2.4.3 Distributor Data 

In the course of an investigation, the FTC may subpoena from the MLM its data on 

distributors and their purchasing, recruiting, and commission earnings. These panel 

datasets allow us to look for patterns in distributors’ behaviors and outcomes, which 

can complement the analysis of the compensation plan and other materials.

One area of interest is the degree and proftability of retail activity. If distributors 

do not earn signifcant income from retailing products, then that strongly suggests 

that the business opportunity rests on de facto recruitment rewards rather than productive retail sales. The empirical challenge is that many MLMs do not keep records 

of retail sales by their distributors. Distributor wholesale purchases, in general, do 

not necessarily refect consumption demand, because the former could refect motivations unrelated to customer demand: e.g. spending to qualify for commissions. 

Thus, it may be that both quantity and price of retail sales are not observable from 

the data. 

Nevertheless, wholesale purchasing data can provide an upper bound on distributors’ retailing revenue. It can be useful to start with that upper bound and then to 

consider progressively more pessimistic scenarios. To impute retail earnings that 

paint the most positive picture for the retail opportunity, a simple approach is to 

assume that distributors sell all of their wholesale purchases at 100% suggested 

retail price (SRP) and then subtract their wholesale product costs, so as to calculate their gross retail proft. This type of analysis can show in practice that virtually 

no distributor could have made anywhere close to the advertised level of earnings 

through retailing alone.

To reiterate: The imputation methodology above relies on assumptions about the 

ability to retail that are most favorable to the company. If product sells below SRP, 

or if portions of wholesale inventory go unsold, then gross retailing earnings will 

be lower than in these projections. When the evidence suggests doing so, imputed 

earnings can be estimated based on less than 100% SRP, or less than 100% of product sold. Deducting non-product costs and unobserved expenses (such as storage or 

transportation) will cause net retailing earnings to be even lower.

Another focus is recruitment-related commissions, which, unlike retailing earnings, often are fully observed in the data. The distribution of commissions shows 

who receives recruitment-based earnings and how much; in particular, it sheds further light on the probability of success in the business opportunity and the extent 

to which recruitment rewards are concentrated among a small number of unusually 

successful recruiters or more broadly distributed. A highly unequal distribution is 
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consistent with commission fows within a chain letter scheme and within MLMs 

that have been found to be deceptive in the past.

Moreover, these retailing and recruitment earnings can be combined to estimate 

total distributor income. Statistics based on these estimates can be compared to the 

MLM’s representations to evaluate the accuracy of such claims. The same data can 

also give a sense of the importance of recruitment earnings in the overall opportunity. How are the most successful distributors making their money, and what does 

that imply about the way that other aspiring distributors will approach the two parts 

of the business: recruiting and retailing?

Beyond earnings, another empirical question is how long distributors participate 

in the MLM before quitting the business opportunity. Survival analysis techniques 

can be used to estimate the probability that a distributor persists in the business for 

specifc lengths of time, and to diagnose the factors that predict longer tenure (such 

as early recruiting success). Survival data provides further evidence on whether distributors fnd the MLM opportunity worth pursuing.

Another area of particular interest is the size and timing of wholesale purchases, 

and what that timing may indicate with regard to the motivations for purchasing. 

If purchasing is driven primarily by the idiosyncrasies of retail demand that face 

each distributor, then it seems reasonable to expect little to no correlation in the 

amounts or timing of wholesale purchasing across distributors. On the other hand, if 

purchasing is driven by the desire to qualify for commissions, then one might expect 

that purchases would be made in the amounts and at the times needed to meet those 

qualifcation requirements.

For example, in many compensation plans, the volume that is needed to qualify 

is the sum of a distributor’s own purchases and those of her downline. A distributor 

who wishes to reach a qualifying volume threshold while minimizing her own outof-pocket spending may choose to time her wholesale purchases towards the end of 

the period over which qualifying occurs, so as to maximally rely on already-booked 

downline purchases. Moreover, these own purchases would be in amounts that 

enable her just to surpass the qualifying threshold; this purchasing strategy would 

result in mass points in the density of volume amounts at or just above qualifying 

thresholds. 

2.5 Discussion 

MLMs can put distributors at risk because their compensation structures share features of a chain letter. Chain letters promise the impossible by purporting to ofer all 

participants the ability to generate proft from the payments of other participants. 

MLMs risk making the same impossible promise when they structure compensation 

to incentivize a pay-to-qualify dynamic.

While each MLM investigation is diferent, BE’s economic analysis focuses 

at a high level on the strength of resemblance to a chain letter—and in particular 

on the relative balance of retailing and recruiting incentives. This balance determines the extent to which distributors seek their income through accumulating 
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recruitment-based commissions from their downline, and ultimately whether 

the compensation structure relies on the false promise of an unending chain of 

recruitment. 

3 Market Defnition and Competitive Efects in the Peabody Energy/ 

Arch Resources Joint Venture 

3.1 Introduction 

In February 2020, the FTC issued an administrative complaint challenging a proposed joint venture (JV) between Peabody Energy Corporation and Arch Resources. 

The transaction would have combined the frms’ coal mining operations in the 

Southern Powder River Basin (SPRB), which is located in northeastern Wyoming.11 

The FTC complaint alleged that the JV would eliminate competition between 

Peabody and Arch: two major frms that mine thermal coal, which is a type of coal 

that is burned to generate electricity.12 The complaint alleged that, if completed, the 

proposed JV would substantially lessen competition for the production and sale of 

SPRB coal, which would likely result in signifcant harm to SPRB coal customers. 

Higher SPRB coal prices would be passed through to electricity customers throughout a sizeable portion of the U.S.

The FTC fled an administrative complaint to block the JV and authorized the 

legal staf to seek a temporary restraining order and preliminary injunction in the 

U.S. District Court for the Eastern District of Missouri to maintain the status quo 

pending an administrative trial. Prior to and during the trial, BE economists supported the FTC’s economic expert witness in developing the economic theories of 

harm that were ultimately presented to the court, and assisted in identifying defenses 

of these theories from attacks by the defendants’ multiple expert witnesses.

In September 2020, the U.S. District Court for the Eastern District of Missouri 

granted the FTC’s request for a preliminary injunction. Shortly thereafter, the parties 

abandoned the proposed JV and pursued independent and somewhat divergent business strategies.13 

Economic modeling to determine the relevant antitrust market—based on customers’ ability and willingness to substitute away from one product to another—and 

quantitative approaches to balancing potential efects and efciencies played substantial roles in the investigation and the subsequent litigation, and formed the principal basis for the court’s decision.14 Below, we discuss how FTC economists and 

11 For details on the FTC action, see https://www.ftc.gov/news-events/press-releases/2020/02/ftc-flessuit-block-joint-venture-between-coal-mining-companies last visited 5/6/2021. 12 For the full complaint, see https://www.ftc.gov/system/fles/documents/cases/d09391_peabody_

energy-arch_coal_administrative_complaint_0.pdf, last visited 5/6/2021. 13 For a description of the parties’ reaction to the judge’s decision see, https://www.bizjournals.com/ 

stlouis/news/2020/09/29/coal-pact-is-abandoned.html (visited on 6/7/2021). 14 For a legal summary of the decision see, https://www.natlawreview.com/article/peabody-and-archcoal-walk-away-joint-venture-after-district-court-grants-ftc-s. For the complete decision see, https:// 
M. Wosińska et al. 

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the expert economic witness for the FTC and the parties and their expert economic 

witnesses approached these issues, as well as how they disagreed over the appropriateness of diferent analytical methods and the interpretation of the results.

First, we describe the evidence and methods that were used by the FTC and its 

expert to defne the relevant product market with the use of various measures of the 

own-price elasticity of coal.15 FTC economists and the government’s expert witness 

spent considerable efort estimating the own-price elasticity with the use of multiple 

data sources and methods. 

Second, we describe the parties’ experts’ aggregate diversion analysis and event 

studies, as well as their more detailed criticisms of the FTC’s evidence on product 

market.16 Many of these criticisms involved the complexity of downstream competition in electricity. We then describe some of the additional analysis that were done 

by the FTC and its expert in response to these criticisms.

All parties agreed that the demand for coal for electricity generation was declining. It was unclear, however, why the declining demand and the factors that caused 

the decline should not be incorporated in the estimates of the own-price elasticity 

of coal. Ultimately, the product market question hinged on whether competition 

between coal-fred generation and other methods of generating electricity was suffciently intense so that even a monopolist (or a dominant frm) in SPRB coal would 

have little ability to proftably raise the price of SPRB coal.

Third, we describe the application of the Cournot model of oligopolistic competition to this proposed transaction and, more specifcally, the use of the model to 

balance potential anticompetitive efects and efciencies. The parties claimed that 

they would be able to achieve signifcant efciencies from joining the adjacent Peabody and Arch SPRB mines, but the FTC disputed the magnitude of these efciencies. In order to determine the ultimate efects of the transaction, we had to simulate 

the potential anticompetitive efects of the transaction and balance those against the 

credible efciencies. 

3.2 The Use of Elasticities to Defne the Relevant Market 

The Horizontal Merger Guidelines (Guidelines) (US DOJ and FTC, 2010) point

out that a key part of a merger investigation is defning the relevant market(s). The 

Guidelines discuss the need to determine the product or the line of commerce and 

the geographic market that may be afected by a given transaction. Once the relevant product and geographic markets have been defned, one can then identify the 

Footnote 14 (continued) 

law.justia.com/cases/federal/district-courts/missouri/moedce/4:2020cv00317/178907/449/ (visited on 

6/7/2021).

15 For the FTC fndings of fact submitted to the court see, https://appliedantitrust.com/14_merger_litig

ation/cases_doj/peabody_arch_coal2020/1_section13b/peabody_edmo_pf_ftc021_01_28redacted.pdf

(visited on 6/11/2021).

16 For the parties’ fndings of fact submitted to the court see, https://appliedantitrust.com/14_merger_

litigation/cases_doj/peabody_arch_coal2020/1_section13b/peabody_edmo_pf_def021_01_28redacted.

pdf (visited on 6/11/2021). 
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Economics at the FTC: Multi‐level Marketing and a Coal Joint...

market participants, measure their market shares, and compute market concentration. Though these measures do not by themselves completely determine a transaction’s likely efects, antitrust case law (as discussed in the judge’s decision) gives 

them signifcant weight.

The judge’s decision also discusses how a product market is defned by the “reasonable interchangeability” of use (that is, the cross elasticity of demand) between 

the candidate product itself and its substitutes. This was a crucial issue in this case. 

The parties’ experts pointed out that electricity producers had been switching from 

coal to natural gas, solar and wind, and that this trend would continue. The parties were essentially arguing that there existed a high cross elasticity between coalfred generation and other methods of generating electricity. If true, this might imply 

that an attempt by a coal monopolist anticompetitively to increase the price of coal 

would be rendered unproftable as electricity producers switched from coal to other 

raw energy sources.

The FTC and its expert emphasized that current purchasers of SPRB coal were 

not particularly sensitive to the price of coal and that they would be reluctant to 

switch from coal to other methods of electricity generation given the need for capital 

investments for a small price increase. We were in efect arguing that the demand for 

SPRB coal for electricity generation was relatively inelastic for small price changes 

and that previous switching was not due to small changes in relative prices.

This disagreement in emphasis raised the issue of the relationship between own 

and cross-price elasticities and their relevance for market defnition and competitive 

efects. A cross-price elasticity is the percentage change in quantity of a good in 

response to a percentage change in the price of a substitute good. Upon initial examination, cross-price elasticities sound like an appropriate measure for product market defnition. After all, cross-price elasticities measure substitution among products 

based on changes in price.

However, there are number of issues with using a cross- price elasticity in market defnition. First, since cross-elasticities are measured in percentages, the product 

with the highest positive cross elasticity may not be the one with the largest absolute 

quantity change. In other words, a product with small absolute sales may see the 

greatest level of percentage diversion. Second, for any pair of products there are two 

cross-price elasticities of demand and these cross-price elasticities can be, and often 

are, very diferent from one another. Equation (1) defnes both cross-price elasticities of demand between products i and j, clearly illustrating that  ̃i is not necessar- ,j 

ily equal to  ̃j i. , 

°qi pj %Δqi %Δqj °qj pi

 ̃i = = ≠ = =  ̃ ,j j , i (1) °pj qi %Δpj %Δpi °pi qj 

Most important, an own-price elasticity measures the willingness of consumers 

to switch from the current good given a price increase of that good, which is a direct 

measure of market power. The cross-price elasticities measure the goods to which 

consumers switch when they switch. As Werden (1998) notes, “Although there is 

a direct relationship between the own-elasticity of demand for a product and the 

potential to exercise market power over that product, the same cannot be said for 
M. Wosińska et al. 

1 3

 

 

the cross elasticity of demand between that product and any other product. Except 

through their efect on the own-elasticity, cross-elasticities have nothing to do with 

market power.”17 

The Guidelines advise that both product and geographic markets be defned 

using the “Hypothetical Monopolist Test” (HMT). The HMT is a measure of the 

own-elasticity of the product(s) in question. The HMT asks whether a hypothetical 

monopolist of a set of products (in specifc areas) could proftably increase prices by 

a small but signifcant and non-transitory amount (SSNIP). Typically, this increase 

is defned as a 5–10% increase in price. In practice, the parties and antitrust agencies 

are looking for real world data to evaluate the sensitivity of the amount of purchases 

of the candidate product or products to variations in the price(s). Depending on the 

availability of data or qualitative information, standard econometric tools for analyzing observational data are combined with other sources of information from market 

participants to assess market defnition.

The FTC complaint in this case specifed the relevant market as the sale of SPRB 

coal from the SPRB. The SPRB is a large coal-bearing geological formation that is 

located in northeastern Wyoming. The frms mine the coal and sell to power plants, 

which burn the coal to generate electricity. SPRB coal is attractive to electric power 

producers because its delivered price is relatively inexpensive (which, in turn is 

largely due to the low costs of extraction, as well the efciencies of unit-train rail 

transportation), and because the coal’s low sulfur content allows power plants to 

burn it without violating environmental regulations. These attributes of SPRB coal 

distinguish it from coal that is mined elsewhere in the United States.

There are seven frms that mine coal in the SPRB. Together, Arch and Peabody 

mine over two thirds of the coal in the SPRB.18 The other fve frms, split the other 

one-third of the coal sales from the SPRB. Two of those frms, Western Fuels Association and Black Hills Corporation, are vertically integrated companies that utilize 

their SPRB production to supply their own captive power plants. The other three 

producers are Navajo Transitional Energy Company, Eagle Specialty Materials, 

LLC, and Peter Kiewit Sons’ Inc. A combined Arch and Peabody would have been 

fve times as large as the next largest competitor.

The FTC’s market would not be valid if customers could defeat the hypothetical 5–10% price increase by buying alternative types of coal, or by switching to 

other fuels, to generate electricity. To support its market defnition, the FTC relied 

on a combination of qualitative and quantitative evidence. The qualitative evidence 

included testimony from customers about their purchases and the parties’ documents 

and analysis. Quantitatively, market defnition was addressed with a variety of analyses, including econometric analyses of the own-price elasticity used in a critical 

elasticity test to answer the HMT. 

17 The own elasticity of demand for a product is a weighted sum of the cross elasticities of demand for 

other products with respect to the frst product’s price. Werden (1998, p. 398). 18 See FTC fndings of fact at page 25, https://appliedantitrust.com/14_merger_litigation/cases_doj/

peabody_arch_coal2020/1_section13b/peabody_edmo_pf_ftc021_01_28redacted.pdf (visited on 

6/11/2021). 
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Economics at the FTC: Multi‐level Marketing and a Coal Joint...

To implement the HMT, our expert estimated the own-price elasticity of demand 

for SPRB coal using total shipments of SPRB coal and the average industry-wide 

mine-mouth price. Also included in the estimation were other factors that may afect 

demand for SPRB coal, such as the price of natural gas and the variation in temperature. The expert then compared the estimated elasticities to the critical elasticity 

that was computed as the average variable cost margin from Arch’s and Peabody’s 

accounting data classifying specifc costs as fxed or variable and concluded that a 

monopolist of SPRB coal could proftably raise the price.19 Our expert used the parties’ accounting data as the average industry variable cost margin to be conservative, 

since the other frms in the industry were less proftable..

The FTC argued that the estimated own-price elasticities accounted for the competitive pressures from potential substitutes like natural gas, and renewables such 

as wind and solar. The previous economic literature estimated the own-elasticity of 

demand for coal and suggested relatively inelastic demand.20 The parties’ experts 

argued that these estimated elasticities did not sufciently incorporate dynamic 

long-run substitution.

The FTC also used information from the parties’ own documents to gauge the 

own-elasticity of demand for SPRB coal. Peabody paid a consulting frm in 2019 

to analyze how many additional tons of coal—both North and South Powder River 

Basin coal—would have been sold in 2018 if rail rates were reduced by 10, 20, or 30 

percent. We used the estimates in this study to compute a range of demand elasticities that also implied that the SPRB was a relevant market.

The parties’ main objection to the use of this study was that it considered only a 

price decrease and that a price increase may not have a symmetric efect. The reason 

given for this potential asymmetry was electricity capacity issues in the electricity 

dispatch process. In some parts of the country, there are wholesale electricity markets that are run by Regional Transmission Organizations (RTOs)/Independent System Operators (ISOs) that dispatch electricity from those generating plants that are 

willing to provide it at the lowest cost. The RTO/ISOs conduct day-before and spot 

auctions to dispatch sufcient electricity to meet demand.

The parties argued that these auctions force coal prices to be competitive.21 If the 

price of coal makes electricity from coal plants too expensive, the coal plants are 

not dispatched, they will not purchase coal, and they may exit. The parties’ expert 

argued that price increases could lead to permanent decreases in demand for coal 

from plants exiting, but price decreases would not lead to a permanent increase in 

coal demand. However, Peabody’s consulting report suggested that the demand 

19 For a discussion of this method of market defnition, see Werden (1998). 20 Similar results for the price elasticity of demand for coal appeared in the economics literature; see 

EIA (2012). 21 In some parts of the U.S., regulated monopoly utilities supply electricity. In those areas the decision 

of the plants or fuels to use is determined by the frm and/or the regulator. Even in parts of the country with RTO/ISOs, utilities can inform RTOs/ISOs that the coal plants “must run” at minimum levels. Some electricity generating companies will also “self-commit” megawatts from their coal plants in 

excess of minimum required levels. 
M. Wosińska et al. 

1 3

 

increase would be permanent given a sustained decrease in the delivered price of 

coal. 

The Judge in her opinion found the FTC’s evidence from the company’s documents compelling, especially given that this approach may have overstated the 

demand elasticity since it included North Powder River Basin coal. North Powder 

River Basin coal might have a higher own-price elasticity than SPRB coal because 

its attributes are more similar to other types of coal. 

3.3 The Parties’ Response on the Own Price Elasticity and Downstream 

Competition 

The parties maintained that utilities could and would switch to other fuels to generate electricity in the face of an increase in the price of SPRB coal; this switching 

would occur with sufcient magnitude that it would defeat a price increase.

To support this position, the parties relied on a mix of qualitative and quantitative 

evidence. On the qualitative side, the parties emphasized documents and testimony 

that pointed out that the demand for coal was declining in the face of cheap natural 

gas and the increased use of wind and solar to generate electricity. On the quantitative side, the parties’ experts did multiple analyses. One analysis used an aggregate 

diversion calculation to show that a price increase for SPRB coal would be unproftable. Their second set of analyses looked at event studies to infer that coal prices 

were not being determined by coal competition but by other factors.

One of the parties’ experts presented an aggregate diversion analysis and concluded that SPRB coal was not a product market.22 In implementing this test, the 

parties’ expert used a 5-percent price increase and his estimate of SPRB coal margins to calculate the “critical loss.” He then calculated the aggregate diversion ratio: 

the share of sales that would be retained by [all] SPRB coal frms when the price of 

SPRB coal increases. He calculated this diversion by assuming proportional diversion between all methods of generating electricity. Since SPRB coal is approximately one-ffth of electricity generation, a 5 percent price increase of SPRB coal 

would not be proftable.

The main problem with this approach is the assumption that aggregate diversion is proportional to shares of electricity generation: This assumption essentially 

guarantees a fnding that SPRB could not constitute a relevant product market. The 

aggregate diversion methodology has been applied in prior cases where actual data 

about diversion—switching in response to actual price increases—exists; when such 

data are available, it is possible meaningfully to estimate (rather than assume) the 

aggregate diversion ratio.23 

22 For a discussion of using aggregate diversion as a proxy for elasticity, see: Katz and Shapiro (2003),

Moresi and Zenger (2018), Conlon and Mortimer (2018). 23 In this case there was evidence contrary to proportional diversion among fuels and methods of generating electricity. When a competitor in SPRB coal declared bankruptcy and stopped selling coal, customers testifed that they switched to other SPRB coal producers and paid a higher price rather than using 

other fuels or ways to generate electricity. There was additional evidence with respect to mine outages 
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Economics at the FTC: Multi‐level Marketing and a Coal Joint...

The parties’ other economic expert admitted that the data that were necessary 

to estimate diversion ratios reliably do not exist in this case. Assuming that aggregate diversions in electricity generation are determined purely by shares assumes 

that each of the fuels can sustain a proportionate diversion from SPRB coal. There is 

not sufcient surplus generating capacity for a proportionate increase in electricity 

generation using solar, wind, or nuclear power.

A second series of analyses that the parties presented relied on several natural 

experiments: or event studies, to support their claim that the SPRB coal competed 

very closely with natural gas in electricity generation and that the HMT that was 

performed by the FTC’s expert did not comport with real world facts. The frst of 

these studies compared SPRB coal prices and margins before and after the sharp 

drop in natural gas prices that occurred around 2014; it used the pre- and post-periods of 2010–2011 and 2018–2019 to measure the efect of “a precipitous drop in 

natural gas prices” on SPRB coal prices and margins. One of the parties’ experts 

showed that natural gas prices, coal prices, and coal margins were all falling as 

SPRB production became more concentrated. She concluded that the changing price 

of natural gas explained these real world facts.

The FTC countered that there were no specifc events during these periods; that 

the pre- and post-time periods were chosen arbitrarily; and that there were a number 

of other potential causes of the decline in coal margins. New environmental regulations were put in place during this period; moreover, strip ratios at the mines—the 

amount of waste relative to the amount of coal—increased during the post period. 

Both of these changes would lead to higher mining costs and lower margins. In addition, using a diferent control period, the FTC’s expert showed that the coal margins 

declined while natural gas prices were very similar.

The judge concluded “rather than conduct a regression analysis to determine how 

natural gas prices afect SPRB coal margins, Defendants rely on a fawed ‘event’ 

study that fails to prove that Dr. Hill’s HMT analysis diverges from real-world facts.”

The second event study that was presented by the parties analyzed the competitive impact of a supply disruption on SPRB coal prices. In particular, the parties 

analyzed the competitive impact of a temporary production outage during May–June 

2018, which was caused by heavy rains that disrupted operations at several of the 

mines that were not operated by Arch. Arch’s operations were relatively unafected 

by the weather. One of the parties’ experts compared SPRB coal spot prices during 

May–June 2018 to SPRB coal spot prices in April 2018 and argued that if Arch’s 

direct competitors were the SPRB coal producers we should expect to observe an 

increase in prices during the outage. She found that spot prices did not increase during the outage.

There were two main issues with this study: First, if a diferent time period—

May–June 2017—was used as the control period, there was an increase in the price 

of coal during the 2018 outage. The parties argued that their control was the correct 

Footnote 23 (continued) 

that suggested less-than-proportional diversion among fuels and methods of generating electricity as 

well. 
M. Wosińska et al. 

1 3

one. However, showing that a plausible alternative control period leads to diferent 

results suggested that the Dr. Bailey’s fndings and conclusions were not robust.

The second issue was that Arch’s sales of coal increased when their competitors 

were sufering an outage and a number of customers testifed that they were not able 

to substitute other fuels or methods of producing electricity.

In addition to putting forward their own analyses, the parties criticized the FTC’s 

expert’s approach(es) to estimating the demand elasticity for SPRB coal because 

those approach(es) did not sufciently incorporate the complications of downstream 

competition in the electricity market. In particular, the parties argued that Dr. Hill 

did not sufciently account for dynamic changes in the fuels and/or technologies 

that were used to generate electricity. In anticipation of these criticisms, FTC economists worked with our expert to identify additional analyses that could rebut such 

arguments.

Electricity power producers and RTO/ISOs use simulation models to make decisions in the ordinary course of business. One of these models and associated data set 

is called PROMOD. PROMOD has also been relied upon by economists, courts, and 

federal agencies for a variety of purposes. PROMOD includes all sources of electricity generation—not just SPRB coal units—and includes detailed data on electricity-generation costs, operating constraints, transmission constraints, and predictions 

about future prices of various inputs, and expected plant additions and retirements. 

Power producers use PROMOD for coal burn forecasting.

We contracted with an energy consulting frm to use PROMOD to simulate the 

efect of a 5-percent mine-mouth price increase for SPRB coal on how often SPRB 

coal units would run in RTO/ISO auctions, with the use of the consulting frm’s 

own default price forecasts for SPRB coal, natural gas, and other inputs; additional 

scenarios included Peabody’s March 2020 forecasts for SPRB coal and natural gas 

prices, along with the consulting frm’s forecasts for other input prices. Based on 

the price elasticity of demand that was derived from the resulting PROMOD data, 

our expert concluded that SPRB coal satisfed the HMT and was a properly defned 

relevant antitrust market.24 

A second response to the parties’ criticism that the demand elasticities did not 

incorporate dynamic considerations was a coal plant retirement study. The FTC’s 

expert used data on the retirement of electricity plants that used SPRB coal to analyze the factors that drove the closures and then to estimate the price elasticity of 

demand for SPRB coal. Using this approach, he concluded that SPRB prices had 

only a modest efect on plant closures and SPRB demand. Based on the price elasticity of demand that was derived from the plant retirement data, SPRB coal again 

satisfed the HMT and was a relevant product market.

One of the parties’ experts asserted that since this elasticity estimate was based 

on a price increase in one year that caused a plant closure in the following year 

the plant closure elasticities should be multiplied by at least 10 to account for the 

The FTC’s expert also analyzed publicly available electricity dispatch data. He used these data to 

show that a fve-percent price increase in SPRB coal would result in a small decrease in the dispatch of 

electricity plants that used SPRB coal. 

24 
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Economics at the FTC: Multi‐level Marketing and a Coal Joint...

 

long-run efect of plant closures. However, as was pointed out by the FTC expert, 

plants that close due to a small price increase are plants that were already operating 

at the margin of closure, likely due to their small size or age. A plant that survived a 

year of higher input prices would be relatively unlikely to close in subsequent years 

since its survival suggests that it was not a marginal plant.

The FTC provided further evidence in support of the SPRB market by considering the efect of an increase in the Black Lung Excise tax (BLET). In January 2020, 

Congress increased the BLET on coal. While this increase was somewhat less than 

the normal fve-percent SSNIP—it was three percent—the coal companies directly 

passed the price increase through to customers as a surcharge. The FTC presented a 

number of customers as witnesses who testifed that they did not reduce their coal 

purchases in response to this price increase. Weighting the totality of the FTC’s and 

the parties’ arguments, the judge concluded that SPRB coal was a relevant product 

market. Ultimately, the parties’ arguments were not enough to persuade the court to 

ignore the standard analytic and economic tools that were used by the FTC. 

3.4 Unilateral Efects Using the Cournot Model Incorporating Efciencies 

and Discounts 

As we referenced in a previous FTC paper in this Review concerning merger analysis, (Greenfeld et  al., 2019), the Cournot model is a standard model to simulate 

merger efects in homogenous product industries where quantity is a strategic variable.25 With the use of demand and cost curves calibrated by prices, market shares, 

and margins we can generate predictions of optimal post-merger pricing. Since 

mergers often produce both cost savings and incentives for higher pricing, merger 

simulation can be used to calculate the implied marginal cost reduction that is 

needed to ofset the merging frms’ incentives to increase price (Froeb & Werden, 

1998). The model can also directly incorporate claimed marginal cost efciencies 

to see if those efciencies are enough to ofset the merged frm’s incentive to reduce 

output and increase price.

In this case, the parties were planning to join two adjacent mines, Peabody’s 

North Antelope Rochelle and Arch’s Black Thunder. These mines had been operating separately; but under the JV, they would be operated as one mine by Peabody. 

The parties estimated cost savings of the unifed operation of the mines of approximately $120 million per year. In February 2020, Peabody and Arch ofered customers a reduction in the base price of already contracted coal volumes of 15 cents 

per ton, an approximately 1.2 percent discount, from the time the JV was approved 

until December 31, 2022. The parties suggested this was a down payment on future 

efciencies. 

The FTC’s expert used a Cournot model to predict the efects of the transaction with the use of the variable cost efciencies that were claimed by the parties:

a 5.5 percent marginal cost reduction. He also incorporated the 15-cents-per-ton 

For more information on using the Cournot model in merger simulations, see Werden and Froeb 

(2008), Farrell and Shapiro (1990). 

25 
M. Wosińska et al. 

1 3

 

discount that the parties had ofered customers. In addition, he allowed consumers to switch to an outside good based on the elasticity of demand for coal that

was estimated as part of the product market defnition analyses. The baseline

version of the model assumed that coal demand remained constant. Despite the

efciencies, this simulation showed consumer harm of $1.7 billion over the next 

decade. 

The parties’ expert objected to this static model of demand. The parties again

argued that the model missed the important dynamic risk of coal-plant closure,

and that if the FTC’s expert had incorporated this concern, there would be no

anticompetitive efects of the JV. Having anticipated this critique, the FTC’s 

expert considered a version of the model that used declining demand for coal 

over the 10-year period based on the parties own projections of SPRB coal

demand. Under this version of the model, the amount of harm from the JV was 

smaller but was still $1 billion over the 10-year period. The parties’ documents

made clear that their predictions of coal demand over this period incorporated

the dynamic competition with other fuels such as natural gas.

The FTC’s expert included in his simulations various demand forecasts based

on multiple Peabody projections of SPRB coal demand going forward. The

judge accepted the results of the efects analysis and suggested that it sufciently

incorporated the parties’ own data, which included their projections of declining

demand for coal due to dynamic competition. 

3.5 Discussion 

The market defnition exercise and the modeling of harm in Peabody Energy/

Arch Coal JV refect a common dynamic in FTC merger cases: The government

submits to the court an afrmative case against the proposed transaction (as is

described in its complaint); and in support of that complaint, the FTC also submits one or more expert reports that present an economic analysis of the potential harm that would result from the transaction. The defendants raise issues 

with the complaint and expert report(s); the parties suggest, for example, that

the markets are much more complex than the simple calculations or estimates 

suggest.

In this case, the parties focused on the declining demand for coal and the

complexity of the market for electricity generation. However, the economic

analysis that was presented by the FTC’s expert incorporated these issues—at

least to some extent—and the parties’ experts were left suggesting that these

issues were more signifcant and would ultimately undermine the FTC’s product 

market and estimated efects. 

In the Peabody/Arch case, neither critique was sufcient to dissuade the judge 

from granting the preliminary injunction. This may indicate that the parties were 

never able to demonstrate to the court’s satisfaction that incorporating these issues 

would lead to signifcantly more elastic demand for SPRB coal or to merger simulations that would suggest that the merger was procompetitive on net. 
1 3

Economics at the FTC: Multi‐level Marketing and a Coal Joint...

 

 

 

 

 

 

 

 

 

 

 

 

 

4 Conclusion 

This article has highlighted just two of the signifcant eforts of BE economists to 

contribute to the work of the FTC in 2020 to protect consumers and maintain competition by providing objective economic analysis. The business practices of MLM 

frms represent a topic that has not previously been covered extensively in the economics literature, but it is a topic that clearly lends itself to the fundamental tools of 

microeconomics: exploring how contracts create incentives that promote particular 

behaviors. Viewing these frms through that lens can help us to understand better 

the objectives of the organization, and the likely impact on those who participate 

in these ventures. The coal investigation demonstrated how BE economists must be 

prepared not only to provide an initial analysis of the economic efects of a proposed 

transaction, but also to anticipate and address the counter-arguments that are made 

by the parties’ economists—such as the impact of the dynamic nature of the coal 

market. 

Acknowledgements We thank Kathleen Dafan, Melissa Dickey, Lois Greisman, Dave Schmidt, Mike 

Vita, and Nathan Wilson for helpful comments. We thank Andrew Stivers for helpful discussions that 

contributed to some of the ideas in this article. The views that are expressed in this article are those of 

the authors and do not necessarily refect those of the Federal Trade Commission or any of the individual 

Commissioners. 

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