PUBLIC RECORD VERSION UNITED STATES OF AIMERICA BEFORE FEDERAL TRADE COMMISSION DOCKET NO. 9273 In the lMatter of TOYS “R” US a corporation. INITIAL DECISION James P. Timony Administrative Law Judge Date: September 25, 1997 —— UNITED STATES OF AMERICA BEFORE FEDERAL TRADE COMMISSION ) In the Matter of ) ) Docket No. 9278 TOYS “R” US ) a corporation. ) ) IMTIAL DECISION By James P. Timony, Administrative Law Judge L. Barry Costilo, Esq.; Richard B. Dagen, Esq.; Patrick J. Roach, Esq.; Sara Oxenham Allen, Esq.; James W. Frost, Esq.; Michael E. Antalics, Esq.; Mary Forster, Industry Analyst: Patrice Parker. FTC Assistant; and Bradley Podliska, Paralegal Counsel Supporting the Complaint Michael S. Feldberg, Esq.; Harry S. Da\is, Esq.; Royce L Wain, Esq. Todd S. Fishman, Esq. Schulte Roth & Zabel LLP 900 Third Avenue New York, New York 10022 Irving Scher, Esq. Weil Gotchal & Manges LLP 767 Fifth Avenue New York, New York 10153 Counsel for Respondent. I I I TABLE 01’ CONTENTS Introduction . ...1 FINDINGS . ...3 RETAIL SALE OF TOYS INTHE UNITED STATES . ...3 A. Respondent . ...3 Toy Industry . ...3 1. Retail sale oftoys . ...3 7 Toy manufacturing . ...4 B. warehouse Clubs . ...5 1. Growth . .5 -.7 Toy sales . ...8 AGREEhlE\”?’S . ...9 .\. lVarehouse Clubs as an Innovation . ...9 B. TRUandthe JVare!louse Clubs. ...12 1. Toy manufacturers..,,...,.. ...10 -.? Ceasing sales totheclul’s . ...13 . -’ Coordinated response . ...15 4, Nlanufhcturers . ...17 -.i O[{ici Pr”o 01{() . ...17 6. TRU”sorchestration oicombination . 18 71. TRU-s intent . ...23 c, .~greements . .,, . ., ., ., . ...24 1. Mattel . ..24 -.7 Hasbro . .....~~ . -.1 Fisher-Price, . ......~l 4. Tyco Toys . ..~~ 5. Little Tikes . ..~$ 6. Today’s Kids . ..52 7. Tiger Electronics . ...54 8. VTech Industries . ...57 9. Binney & Smith . ...57 10. Leg~, ,,, , ..,,,,,,,.,.,,, . ...58 11. Saga . ...59 12. Huffy . ...61 13. JustToys . ...63 14. New Bright . ...63 D. Success ofthe TRU Campaign. ...63 AXTICONIPETITIVEEF FECTS. ., . ...64 .4. Effects . ...64 1. TRUimpeded growthoftheclubs . ..64 a. gro~mllofthe~t’arellotlse clubs . ...64 _ b. the clubs’ ability toobtainregdar Iine toy products . .66 c. the clubs ability [o obtain products frollllnajor l~lan~lfactLlrers .67 -.7 Retail price competition . ...67 a. TRU’sprices to consumers . ...67 b. the clubs’ prices . ..68 3. The warehouse clubs’ pricecornpetition . .,, . ...69 B. \larket Power . , . ...71 1. TRU’s buyerpower . , . ...73 -.7 TRLT’spower atretail .,...... ...76 DEFENSES . ., . ...73 A. Economic Defenses . ...78 1. .\dvertisinS . ...79 -.7 In-store promotion . ...’..... ...80 . -~ Sho~vroom . ..81 4, Year-round ftdl line. ,,, ..,.,.,..,,...,,..,.,,, . ...82 -.5 Compensation . ...83 6. Benetlts to TRU . ...85 7, “Hot’’T oys . ...85 s. “Free-Ride” . ...86 9, Overall costs and benefits . ..S6 B, Other Defenses . ...87 RE}lEDY . ., . ..SS LEG~\L.4N-ALYSIS, .,,.,..,.. ,,, ,., ., . ..S9 .-\GREEYIEXTS . , . ...92 ,4. Vertical Agreement, .,.... ...92 1. klanufacturers’ acquiescence. ...93 -.? Advance approval . ...101 3. Colgat e . ...101 B. Horizontal Agreement . ...102 1. Manufacturers’i nterest . ...102 7-. Coordinated response .,....... ..103 3. Manufacturers would goalong . ...104 4. Ouid Pro Our . ...104 5. TRU’s assurances . ...105 6. Policing the agreemen t...... ...106 7. NlanLlfacttlrers contactect eacllotller. 107 s. Summary ofagreement . ...107 c. ProofofAgreement . ...109 D. RuleofReaso n . ......lo~ _ 1. Non-price vertical restraint . ., . ..