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 first 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 effect of a joint venture between two coal companies that ultimately was challenged by the Commission.
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Notes
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-microeconomics-conference.
See FTC Annual Highlights 2020, Stats & Data at https://www.ftc.gov/reports/annual-highlights-2020/stats-data-2020.
Ibid.
World Federation of Direct Selling Associations (2021). While the aggregate U.S. figures cited above suggest that per-distributor retail sales averaged approximately $2400 in 2020, we warn against assigning too much significance to that average for the reasons mentioned in the above paragraph. Moreover, MLM records examined by BE show significant variation in purchasing across distributors—in part because of differing product prices and purchasing requirements—suggesting that national averages do not reflect “typical” distributor experiences.
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.
Many MLMs offer 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 effectiveness in mitigating potential consumer harm has to be analyzed in the context of the totality of the MLM's practices and its participants' behavior.
For details on the FTC action, see https://www.ftc.gov/news-events/press-releases/2020/02/ftc-files-suit-block-joint-venture-between-coal-mining-companies last visited 5/6/2021.
For the full complaint, see https://www.ftc.gov/system/files/documents/cases/d09391_peabody_energy-arch_coal_administrative_complaint_0.pdf, last visited 5/6/2021.
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).
For a legal summary of the decision see, https://www.natlawreview.com/article/peabody-and-arch-coal-walk-away-joint-venture-after-district-court-grants-ftc-s. For the complete decision see, https://law.justia.com/cases/federal/district-courts/missouri/moedce/4:2020cv00317/178907/449/ (visited on 6/7/2021).
For the FTC findings of fact submitted to the court see, https://appliedantitrust.com/14_merger_litigation/cases_doj/peabody_arch_coal2020/1_section13b/peabody_edmo_pff_ftc021_01_28redacted.pdf (visited on 6/11/2021).
For the parties’ findings of fact submitted to the court see, https://appliedantitrust.com/14_merger_litigation/cases_doj/peabody_arch_coal2020/1_section13b/peabody_edmo_pff_def021_01_28redacted.pdf (visited on 6/11/2021).
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 first product’s price. Werden (1998, p. 398).
See FTC findings of fact at page 25, https://appliedantitrust.com/14_merger_litigation/cases_doj/peabody_arch_coal2020/1_section13b/peabody_edmo_pff_ftc021_01_28redacted.pdf (visited on 6/11/2021).
For a discussion of this method of market definition, see Werden (1998).
Similar results for the price elasticity of demand for coal appeared in the economics literature; see EIA (2012).
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 firm 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.
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 testified 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 that suggested less-than-proportional diversion among fuels and methods of generating electricity as well.
The FTC’s expert also analyzed publicly available electricity dispatch data. He used these data to show that a five-percent price increase in SPRB coal would result in a small decrease in the dispatch of electricity plants that used SPRB coal.
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Acknowledgements
We thank Kathleen Daffan, 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 reflect those of the Federal Trade Commission or any of the individual Commissioners.
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Wosińska, M., Givens, D., Lau, Y. et al. Economics at the FTC: Multi-level Marketing and a Coal Joint Venture. Rev Ind Organ 59, 629–650 (2021). https://doi.org/10.1007/s11151-021-09845-8
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DOI: https://doi.org/10.1007/s11151-021-09845-8