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September 01, 1996
In a spasm of inaccuracy, a textbook writer once enthused that antitrust law is the "Magna Carta of free enterprise." A more accurate label for antitrust is "enemy of entrepreneurship." Antitrust is too often the playground for hyperactive and economically illiterate bureaucrats. Consider the recent Federal Trade Commission (FTC) accusation that some of Toys R Us' business practices keep toy prices too high. The main practice under attack is Toys R Us request that toy makers stop selling popular toys through discounters such as warehouse clubs. Toys R Us will not distribute some toys of manufacturers who refuse Toys R Us' request. The FTC alleges that because Toys R Us is the nation's largest toy retailer -- with about 25 percent of the retail toy market -- toy makers have no real option but to agree to Toys R Us' request. With discounters out of the picture, the FTC concludes, Toys R Us keeps toy prices monopolistically high. The FTCs reasoning is childishly inept. In fact, Toys R Us' behavior is highly competitive and benefits consumers.
Toys R Us has no monopoly power. Retailing is among the most competitive of industries. Toys R Us daily confronts competition from other toy retailers such as Kay-Bee Toys, from general retailers such as Wal-Mart, and from catalog sellers. If Toys R Us would ever be so foolish to try to behave as a monopolist, it would rapidly find toy makers and consumers switching from Toys R Us to other retailers.
Toys R Us is the nation's largest toy retailer not because it is a monopolist, but because it efficiently provides consumers and toy makers with valuable services. Indeed, it is Toys R Us' provision of these services that has gotten it into trouble with the FTC.
Toys R Us regularly makes two heavy investments that help toy makers and consumers. The first investment is advertising. Advertising informs consumers of product availabilities and prices. As consumer demands for specific toys increase in response to this advertising, toy makers benefit from greater sales.
The second investment is in inventory. Toys R Us stocks a full line of toys year round. Consumers know that they can walk into any of its 900 stores worldwide and probably find just the toys they want. But stocking a full inventory line is costly given that many toys never sell as well as hoped. Still, carrying a full line of toys helps Toys R Us over the long run because consumers value the convenience of having a reliable full-line retailer nearby. Also, toy makers prize the willingness of a retailer standing ready year round to carry as-yet-unproven new toys. Toys R Us advertises and carries an extensive inventory only because it expects to recoup in the price of successful toys the costs it incurs promoting toys that flop.
Toys R Us' rivals, however, steal these investments. Although not as obvious as purse snatching, such theft is no less real.
During the holiday season, toy discounters begin stocking those toys -- and only those toys -- that are proven hits with consumers. But these discounters do little product promotion. Consumers learn about toys through Toys R Us advertising and by inspecting the toys in Toys R Us stores. Many consumers then buy the toys from discounters who can charge low prices only because they steal Toys R Us' promotional investments.
To protect its investments, Toys R Us requests that toy makers not distribute their most popular toys through discounters. Toy makers agree to stop such distribution because these manufacturers know that if they refuse Toys R Us' request, Toys R Us will cut its advertising efforts and stop carrying a full inventory. And Toys R Us will do so not because it is a savage monopolist -- it is no such thing -- but because it cannot afford to pay for product promotions that benefit its competitors.
If Toys R Us actions raised prices without at the same time providing valuable services to consumers, not only would consumers suffer -- toy makers would also be harmed. After all, monopoly prices charged at the retail level result in fewer goods sold at retail. Monopoly retailers thus buy fewer goods from manufacturers. Toy makers would resist any monopolizing demands issued by Toys R Us. If Toys R Us stubbornly refused to change its demands, toy makers would see to it that any number of the nation's other retailers would displace Toys R Us as the leading toy retailer. But toy makers cooperate with Toys R Us -- indicating that Toys R Us is not behaving monopolistically.
Outside of the FTC's New Deal era headquarters are two statues showing a determined man restraining a wild-eyed, muscular horse. The idea is that unless bureaucrats bridle commerce, it will trample citizens underfoot. Experience shows, however, that it is the bureaucrats who most need restraining.
Donald Boudreaux (email@example.com) is an Associate Professor of Law and Economics at Clemson University, and a CEI Research Scholar.