Analysis of Proposed Consent Order
To Aid Public Comment


The Federal Trade Commission has accepted a proposed consent order from Fair Allocation System, Incorporated (“FAS”). FAS is an organization of twenty-five automobile dealerships from five Northwest states that was formed to address dealer concerns over the marketing practices of automobile manufacturers. In particular, FAS members were concerned about an automobile dealership -- Dave Smith Motors of Kellogg, Idaho -- which was attracting customers from around the Northwest and taking substantial sales from FAS members by selling cars for low prices and marketing them on the Internet.

According to the complaint, because of these concerns, the members of FAS collectively attempted to force Chrysler to change its vehicle allocation system. Chrysler allocates vehicles based on the dealer’s total sales; FAS members wanted Chrysler to allocate vehicles based on the expected number of sales from a dealer’s local area, which would have substantially reduced the number of cars available to a dealership like Dave Smith Motors that drew customers from a wider geographic area. According to the complaint, the members of FAS threatened to refuse to sell certain Chrysler vehicles and to limit the warranty service they would provide to particular customers unless Chrysler changed its allocation system so as to disadvantage dealers that sold large quantities of vehicles outside of their local geographic areas.

The complaint charges that FAS’s agreements or attempts to agree with its dealer members to coerce Chrysler violate Section 5 of the FTC Act, as amended, 15 U.S.C. 45. According to the complaint, FAS members constitute a substantial percentage of the Chrysler, Plymouth, Dodge, Jeep and Eagle dealerships in eastern Washington, Idaho, and western Montana, and FAS’s threats would have harmed competition and consumers in those areas. In particular, FAS’s efforts would have deprived consumers of local access to certain Chrysler models and to warranty service, and would have reduced competition among automobile dealerships, including rivalry based on price or via the Internet.

The goal of the boycott was to limit the sales of a car dealer that sells cars at low prices and via a new and innovative channel -- the Internet. FAS’s threatened action against Chrysler is a per se illegal group boycott. In United States v. General Motors, 384 U.S. 127 (1966), the Supreme Court held per se illegal a comparable dealer cartel in Los Angeles that sought to prevent other area dealers from selling automobiles through discount brokers. Since General Motors, the Supreme Court has twice cited its per se condemnation of dealer cartels with approval. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58 n. 28 (1977); Business Electronics v. Sharp Electronics, 485 U.S. 717, 734 n. 5 (1988). Such dealer cartels are “characteristically likely to result in predominantly anticompetitive effects,” Northwest Wholesale Stationers v. Pacific Stationery & Printing Co., 472 U.S. 284, 295 (1985), because they aim to limit competition while producing no plausible efficiencies.

Even where an agreement otherwise appears to fall in a category traditionally analyzed under a per se rule, a more extensive, rule-of-reason analysis may be necessary if there are plausible efficiency justifications for the conduct. Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979). Here, however, there appear to be no plausible efficiencies that would justify the dealers’ conduct. Even if there were reason to believe that

Dave Smith Motors, or similarly operated dealerships, were free-riding(1) on the efforts of more traditional dealers, no boycott would be needed to deal with the problem. Manufacturers have strong incentives to prevent free-riding by a few of their dealers at the expense of the rest, and can be expected to be responsive to complaints from their dealers acting individually if the free- riding concerns are genuine. In the absence of an efficiency justification that plausibly explains why concerted action is necessary, extensive searches for and investigations of justifications for such conduct would be unwarranted, and would only add a layer of complication and delay.

In this case, the absence of a justification is especially clear. Chrysler has previously rejected demands that it change its allocation system and publicly lauded Dave Smith Motors. See “Chrysler Corp. Will Let Dealers Shoot It Out In Cyberspace,” Automotive News, p. 1, January 27, 1997. Indeed, Chrysler’s Vice President of Sales and Marketing has flatly stated that Chrysler believes the best way to increase its sales penetration is to provide dealers as much product as they can sell, no matter where the customer comes from. See “Chrysler VP Has Calming Effect,” Automotive News, p. 28, February 10, 1997. Even if Chrysler had acceded to the boycotters’ demands, however, that would not have justified a horizontal boycott by the dealers.

The proposed consent order would prohibit FAS from participating in, facilitating, or threatening any boycott of or concerted refusal to deal with any automobile manufacturer or consumer. There is nothing in the proposed order, however, that would prohibit FAS from informing automobile manufacturers about the views and opinions of FAS members.

The proposed consent order has been placed on the public record for sixty (60) days for reception of comments from interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreement and the comments received, and will decide whether it should withdraw from the agreement or make final the agreement’s proposed order.

The purpose of this analysis is to facilitate public comment on the proposed order. It is not intended to constitute an official interpretation of the agreement containing the proposed consent order or to modify in any way its terms.


Endnotes

(1) "Free-rider" concerns may arise where two distributors sell the same product, but provide different levels of service in connection with the sale of that product. For example, one distributor may have a full-service showroom and the other may sell out of a warehouse that offers no service. Consumers may visit the showroom, learn all they need to know about the product, and then purchase the product from a "no-service" discounter. The problem is that over time the full-service distributor may lose its incentive or financial ability to provide the services, to the detriment of both the manufacturer and the consumers who value those services. Free- rider concerns generally do not exist if the full-service distributor is compensated for its services.