FTC Staff Comment to the Hon. Michael J. Bragman Concerning New York A.B. 3643 to Permit Increased Competition in Milk Distribution
us-ftc-advocacy-filings-b7893076d5fbb6537c96e4b19851acfaFTC Staff Comment to the Hon. Michael J. Bragman Concerning New York A.B. 3643 to Permit Increased Competition in Milk DistributionAdvocacy Filing
Matter Number
P874652
v-- • ..".,......,- .. Federal Trade Commission Offtee of the RtgionaJ Director 26 Federal Plaza. 22nd F1. N~ York. New York 10278 (212) 264-1200 March 20, 1987 Michael J. Bragman, Chairman N.Y.S. Assembly Committee on Agriculture State Capitol Building Albany, New York 12248 Dear Chairman Bragman: The staff of the Federal Trade Commission is pleased to respond to your invitation to comment on Assembly Bill No. 3643 (WA. 3643-), a proposal to permit incre~sed competition in milk distribution throughout New York State. Milk distribution in New Yqrk State is currently subject to a licensing law, Section 258 of the Agricultur~ and Markets Law, that inevitably frustrates competition and injureS'consumers. A. 3643 would open New York's milk markets to increased competition. This, in turn, would result in greater efficiency in milk processing and distribution and ,lower prices to consumers. Accordingly, we strongly urge its passage. The Federal Trade Commission (the wCommission W ) is an agency charged by Congress with preserving competition in the marketplace and pr0 2ectin g consumers from deceptive and unfair business practices. In furtherance of this mandate, the Commission frequently appears before other regulatory agencies, ,.... ' 1 This letter presents the comments of the New York Regional Office and the Bureaus of Competition, Economics, and Consumer Protection of the Federal Trade Commission. The views· expressed are not necessarily those of the Commission or of any individual Commissioner, although the Commission has authorized the presentation of these comments. 2 The Commission enforces Section 5 of the Federal Trade Commission Act, 15 U.S.C. S 45 (1982), which proscribes ·unfair methods of competition w and wunfair or deceptive acts or practices.· The Commission also undertakes economic studies at the request of Congress and the Executive branch. 15 U.S.C. S 46(f) (1982/. ; . t Ij I ; .
Michael J. Bragman, Chairman 1 - 2 - legislatures, and the courts to help assess the consumer benefits that result from free and open competition. 3 We hope that our comments will assist the Assembly in its present deliberations. I. THE CURRENT LAW Section 258-c of the Agriculture and Markets Law ~ermits the Commissioner of Agriculture and Markets (the Commissioner") to deny a license to distribute milk in New York if he finds th3t entry by an applicant will "tend to a destruc- tive competition in a market ~lready adequately served" or is "not in the public interest." Section 258-c also permits the Commissioner to deny, revoke, or suspend a license to distribute milk because the applicant or dealer has committed an act -in demoralization of the price structure" of milk. In addition, Sections, ~58-r and 258-u of the Agriculture and Markets Law 3 The Federal Trade Commission, its Chairman, and its staff have addressed New York State's milk licensing regulations on previous occasions. Most recently, by letter of October 28, 1986, Federal Trade Commission Chairman Daniel Oliver urged Governor Cuomo to support repeal or in its absence adoption of a less restrictive interpretation of the statut.. Earlier, on November 1, 1985, David Scheffman, then Aeting Director of the~Bureau of Ec6homics, wrote to Chairman Richard J. Keane of the Assembly Agriculture Committee recommending repeal of New York's statutory _ restrictions on entry into milk marketing. Prior to that; by letter of February 27, 1984, the full Commission urged the Department of Agriculture and Markets Commissioner Joseph Gerace to adopt a pro-competitive interpretation of the statute in his consideration of the license application of Tuscan Dairy Farms, Inc. 4 Section 258-c of the Agriculture and Markets Law (McKinney Supp. 1986) provides that -[n)o license shall be denied to a person not now engaged in business as a milk dealer ••• unless the commissioner finds by a preponderance of the evidence • that the issuance of the license will tend to a destructive competition in a market already adequately served; or ••• is not in the public interest." , II I I, i r I t i I~ t ~I i
Michael J. Bragman, Chairman 1 - 3 - regulate the advertising and sale of milk -below cost.- 5 Nowhere in the statute, however, are the terms -destructive comfetition,- -already adequately served,- -in the public interest,- demorali- zation,- or -below cost- defined. Thus, while the statute purports to provide standards for the Commissioner to use in determining whether to grant a license to a potential entrant, it really vests almost total discretion in the Commissioner. As a result, the Commissioner has wide latitude to apply the statute in such a way as to exclude competitors and protect the pecuniary interests of firms already in the market, all at the expense of the public. Indeed, application of New York's milk distribution regulations was recently held unconstitutional by Judge Wexler of the u.s. District Court. In overturning the denial of Farmland Dairies'~'application to distribute milk in New York City, Judge Wexler found that the Commissioner's, ~enial was pure economic protectionism of in-market firms and that it placed an unconsti- tutional burden on interstate commerce. While Judge Wexler's decision invalidated Section 258-c only as applied by the Commissioner, his analysis appears to make a constitutional .. ,...... ' ~ ' ....' .' 5 Section 258-r of the New York Agriculture and Markets Law (McKinney 1972) provides that a dealer may not advertise or sell milk at a price below the dealer's cost unless the dealer notes in advertisements and at the point of sale that the milk is being sold below cost. Section 258-u of the Ag r icul ture and Markets Law (McKinney Supp. 1986) provides that it is unlawful to purchase or sell milk -at prices below cost where the purpose or effect of such transaction is to destroy competition or eliminate a competitor.- - 6 Farmland Dairies is Fair Lawn Dairies' parent corporation. For ease of reference, throughout this letter both will be referred to as -Farmland Dairie~.- ~" ., .' . -:." .... . " ~.. ...:.'-. i t, ![', .. I I ' I~
Michael J. Bragman, Chairman f application of Section 258-c extremely difficult, if not impossible. 7 - 4 - Moreover, the license application process itself increases entry costs and serves as a deterrent for potential competitors. Firms already in the market are afforded an opportunity in the license application hearings conducted by the Department of Agriculture and Markets to delay entry of competigors in order to preserve their positions in the market. For example, when Farmland Dairies applied for a license to serve Nassau and Suffolk Counties, its request remained pending in various forums for seven years. Indeed, its application might not yet have been decided but for the settlement agreement resulting from Judge Wexler's decision. 9 Other via~le potential entrants less able to pursue an applica~ion with such vigor might choose to forego entry rather than subject themselves to the substan£6al expense and uncertainty of this regulatory system. 7 Indeed, Judge Wexler stated that -a decision by this Court striking down S 258-c would not be without foundation;- however, he found that considerations of state/federal comity counseled against determining the consti~utionality of the statute as written. Farmland Dairies v: Gerace, No. CV 86-1933, slip op. at n.4 (E.D.N.Y. Jan. 8,1987). See also id. at 7,9-10, and 17- 18. I After Judge Wexler's 'decision, the--srate entered into a settlement with Facmland granting the dairy...,.the sought-after- licenses to sell milk in New York City and Nassau and Suffolk Counties. 8 The Legislative Commission on Expenditure and Review, .in April 1985 Audit, State Milk Dealer Licensure and Regulation, noted that -competing milk dealers almost always oppose granting raj license.- 9 Discussion of the administrative delay to which applicants for New York State milk licenses are subjected is contained in o.s. Department of Agriculture, State Milk Regulation: Extent, Economic Effects, and Legal Status 5 (USDA Econ. Research Service, Apr. 1986). 10 Cf. Salop & Scheffman, Raising Rivals' Costs, 73 Am. Econ. Rev.-r6"7 (1983). · , · . , , ·. I •• r:
Michael J. Bragman, Chairman 1 - 5 - I By permitting the exclusion of competitors, the current licensing scheme insulates existing licensees from the spur of competition. In so doing, it suppresses innovation, encourages the adoption of wastefu 1lcost-inflating practices, and misallocates resources. It is New York's consumers who have ultimately borne the brunt of the current restrictive licensing provisions. The injury to consumers finds its most dramatic expression in the vast overcharges they pay for milk. The New York Public Interest Research Group, Inc. (RNYPIRG R) released a study on May 8, 1985, that found New York City consumers paid $.36 more per gallon on average than consumers in nearby northern New Jersey. Relying upon a study conduct~d by the Department of Agricultural Economics at Cornell University, NYPIRG calculated that only $.02 to $.06 of the per gallon· price difference was attributable to the higher cost of retailing in New York City. The remaining $.30 to $.34 per gallon Rare a direct result of a monopolistic milk distributi~~ industry that is being perpetuated by the State of New York.- Th us, in New Yor k 'Ci ty alone, the cos t to consumer s of exc1 ud ing efficient competitors from the milk market under the supposed 11 See Manchester, Milk Pricing, Econ. Res. Serv., U.S. Dept. of Agci~ Agric. Econ. Rpt. No. 315 at 12 (Nov. 1975): Ialnother effect of resale price regulation, whether done directly by price setting or more circuitously through trade practice regulation, is to maintain the status quo ... Since ·any change represents a po~!!ntial competitive threat to someone, there usually is resistance to change. Often th~ r~te of innovation -- whether new containers, new services, new products, or changes in the price structure -- tends to be slower in areas with such regulation than elsewhere. See also Kahn, The Theory and Application of Regulation, 55 Antitrust L.J. 177, 178 (1986); F1exner, Braden, Clinton, Collins, Forrest & Gorinson, Report on Regulatory Reform by the Industry Regulation Committee, Section of Antitrust Law, 54 Antitrust L.J. 503, 512-13 (1985). 12 Letter of June 3, 1985, from Paul Herrick, NYPIRG Assistant Legislative Director, to New York State Assembly Agriculture Committee members.
Michael J. Bragman, Chairman 1 - 6 - protection of Section 258-c may have exceeded fifty-six million dollars in each of the last several years. 13 NYPIRG's analysis is supported by a recent survey conducted by Ne .... York Attorney General Robert Abrams. The Attorney General found that milk prices in Staten Island dropped approximately 10% follo .... ing the entry of Farmland Dairies into that market. For instance, milk prices in small Staten Island groceries and dairies declined from $2.51 to $2.22 a gallon; and in Staten !sland supermarket~ prices declined from $2.34 to $2.22 a gallon. l More recently, after Judge We~ler overturned 'the denial of Farmland's application to distribute milk in New York City, Farmland Dairies began selling milk in all of New York City and in Nassiu and Suffolk Counties. Press reports indicate that milk prices'to consumers at numerous outletsl~n those areas already have fallen by S.18 to $.71 per gallon. The overcharges that consumers have paid over the last several years may -reflect the protection afforded by the current la.... to inefficient firms in the market; they also may reflect above-normal profits that result from tacit or express price' fixing or customer allocations among in-market firms -- conduct facilitated by the exclusion, under Section 258-c, of potential competitors. For example, the five largest processors in New York City (who account for over 80% of milk sales in that market) have been recidivist antitrust violators. In 1956, 1966, ( .' ,..~. ' ~'". - .... 13 This estimate is derived by multiplying annual milk consumption in New York City, roughly 178,044,060 gallons per year according to the June 1986 Fluid Milk Reports published by the Ne .... York State Department of Agriculture and Markets, by the, average per gallon overcharge noted in the NYPIRG study discussed above: 178,044,060 X $.32 • $56,974,099. 14 -Abrams Finds Lower Milk Prices In Staten Island; Urges Legislature To Deregulate Milk Licensing,· News From Attorney General Robert Abrams (Mar. 2, 1986). 15 New York Times, Jan. 17, 1987, at 29, col. 2. See also New York Daily News, Jan. 17, 1987, at 3, col. 1, and The Wall Street Journal, Jan. 15, 1987, at 22, col. 1.
Michael J. Bragman, Chairman 1 - 7 - and again in 1982, these five processors were found to have conspiratorially fixed prices and allocated markets. 16 Additionally, the record in the recently concluded Farmland Dairies hearing is replete with evidence that once the ordinary milk retailer sely~ts its first supplier, he becomes the property of that supplier. In all these cases, it is New York's consumers who have borne the burden of the resulting higher milk prices. II. JUSTIFICATIONS FOR THE CURRENT LAW ARE UNPERSUASIVE The proponents of present Section 258-c argue that entry into a milk market may result in intense price competition, or as some say Wdestructive competition.- As a result, the propon~nts argue, weaker dealers may abandon routes or be driven from the market, leaving some accounts underserved or over- charged. If, however, milk dealers are driven from the market by new competition, it is because their costs are higher than those of the new entrants,18 and indeed are too high to enable them to survive in the more competitive environment. If high-cost selle,rs exit the market, consumers are not harmed. Rather, the 16 . Peo Ie (N. Y'. Sup. Processors 197 s.); a nd ,.=.'P~e~o:.:pF:-l~e~v~.r--=r;r;;:':':~~~..:.;I:-~-;;~~~~~~....,;,..,:n-;:::;.:.;.~ 2d 140, 455 N.Y.S.2d Dairylea Coop. Inc., Br 0 nx Co. 1982); .,:;:p;-ie~o~7l.;e-,;v:-i.ir-or'=--7-~~~~~~~-=-=~~;;;';:;'~,*,-~~ir 83 Trade Cas. (CCa , , New York v. Dairylea Coop. 17 In the Matter of the Application of Fair Lawn Dairies, Inc. For an Extension of Its Milk Dealer's License, Before Lyle , Newcomb, Hearlng Offlcer, June 23, 1986 (·Transcript~) at'1454- 59, 1873-77, 1920-29, 1943, 1955, 1969-70, and 1985-86.,': ':' \ .... ' .. " .. , 18 Vigorous competi tion -dr iv [es] out surplus and' inefficient production capacity and compel[s] the reallocation of resources into more remunerative lines.- F. Scherer, Industrial Ma'rket Structure' Economic Performance 213 (2d ed. 1980). See also International Tel. , Tel. Corp., 104 F.T.C. 280, 402-03,425 (1984). ..or , .;-. ~ i,,I
presence of low-cost firms benefits consumers by affording them the opportunity to purchase milk at a lower price. Similarly, there is no reason to believe that if a current competitor exits the market, there will be a ·void- in the distribution system (i.e., smaller retailers will be left without service). Rather, any unserviced accounts can fg expected to be served both by competitors in the market and-- absent government restrictions -- by new entrants who will seek to expand into any profit opportun~oy resulting from another firm's withdrawal from the market. Likewise, the justification for the statutory prohibi- tion against sales below cost is unpersuasive. Below cost pricing tnat is injurious to consumers is generally known as ·predatory pricing.- This term usually refers to sustained sales below cost with the intent of driving competitors from the market, and under circumstances, namely where there are high entry barciers, that would thereafter permit the predator to raise and sustain prices at supracompetitive levels. 2l It is unlikely, however, that New York State milk markets will be subject to predatory pricing. As previously discussed, absent government restrictions on entry, potential competitors stand ready to enter and compete in New York's milk markets •. Thus, the presence of these potential competitors should restrain a predator's ability to raise price above competitive levels in order to recoup its earlier losses on -below cost· sales. Michael J. Bragman, Chairman 1 - 8 - . , i i ~ I , I & Ii !Ii II I ; I : I , I I r . ~ , I I' f Additionally, the mere existence of the prohibitions on wbelow cost pricing- may well hqve a chilling effect on vigorous I 19 For example, in the Farmland Dairies hea;in~ in-market firms testified that they would be more than happy to serve any customer abandoned by another. See, e.g., Transcript at 341 and 771. 20 For example, Farmland Dairies stated during its license extension hearing that it planned to service the milk requirements of outlets of all descriptions if the requested license were granted. Transcript at 1524. Moreover, in addition to other New Jersey (and, of course, New York) dairies, the present-day pool of potential marketers of milk in New York State extends into Connecticut and even the non-contiguous New England states. See N.Y. Agric. , Mkts. Law S 258-p (Mclinney 1972). 21 See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 106 S. Ct. 1348, 1357-58 (1986).
Michael J. Bragman, Chairman - 9 -
'1
price competition. 22 Scholars and jurists have devoted great
attent~~n to the distinction between a predatory and competitive
price, a distinction not easily made. The greater danger under
the present statute is not that the Commissioner may overlook an
instance of predatory' pricing, but rather that he may wrongly
prohibit vigorous price compe~ition. Moreover, fearing such
action by the Commissioner, milk dealers may refrain from active
price competition. In either event, the public would be harmed,
without a real countervailing benefit.
Finally, prohibitions on sales below cost contained in
the present milk licensing regulations are not necessary to
redress below cost pricing conduct that is predatory. Both state
and federal antitrust laws already have prohibitions against such
activitr and could be used to address any such conduct in the
marketplace.
III. ASSEMBLY BILL No. 3643
Assembly Bill No. 3643 addresses the major infirmities
of the present scheme. A. 3643 would ease entry into New York
State milk markets by establishing st~te-wide licensure 24 and by
eliminating the Rdestructive competition- standard and the
similarly broad ·public interest R standard from the Sta~e's
licensing system. 25 A. 3643 also would repeal the port10n of
Section 258-c that permits the Commissioner to deny, revoke, or
suspend a license to distribute milk because the applicant or
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A. 3643 S 9.2S
23' ~, e.g., Matsushita flec. Indus. Co.
10 6 S. Ct. 13 48 , 360 (198 ): -:",I_n_t_e_r_n_a_t_l_o_n_a_~:,--,,""=-=--:,--~=-=--::--,::-:
104 F.T.C. 280, 415 (1985); Scherer, supra note 18, at 212~15;
and Areeda , Turner, Predatory Pricing and Related Practices' ;
Under Section 2 of the Sherman Act, 88 Barv. L. Rev • ..:::697.. (1975) •.
.. ~,:,,,: ::{~;~.::.:~.;::'..' '. .... '.
24 A. 3643 55 3 and 5. While we believe 1icensin9'scheiDes'~ught
to be scrutinized carefully to ensure that the costs, to < ..- t . . t
competi tion and consumers do not outweigh any intended,ber:tefits ~.~'.' .....,. «"-. t"
we recognize that New York has a legitimate interest::in,.'·. ".:.: '.~ '-':.;-.~.,)'.
protecting the health and safety of its milk consumers. ','.' ."v=,' .. ' .~ :' .
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22 -Similarly, the statute',s requirement that dealers accompany
anY/below cost pricing with advertising and point-of-sale
disclosures may subject 'discounters to potential retaliation from
other industry memberi. As a result, this, may limit the v1gorof
reta i 1 pr ice competi tion. ,..... . . .
. ." -.'-.- .
Michael J. Bragman, Chairman 1 - 10 - dealer has committed an act that tends to demoralize the price structure of milk. 26 In addition, A. 3643 would repeal the provisions of the current law, discussed in note 5 supra, that regulate the advertising of milk offered for sale -at a price w~ich is 10we 27 than the price paid by the dealer for such mllk •••• - Taken together, these provisions will go a long way toward restoring the benefits of competition to consumers. Indeed, as retail milk prices go down, the quantity of milk demanded by consumers will tend to in=rease. Thus, pas&age of A. 3643 should result in expanded opportunity for efficient marketers of raw and finished milk and widespread availability to consumers of milk at dramatically reduced prices. We see no credible countervailing considerations. , There is, however, one provision of A. 3643 that in our view continues to limit competition. Section 15 of A. 3643, like Section'258-u of the current law, proscribes below cost pricing. In the new law, however, below cost pricing is defined as pricing below average variable cost. The inclusion of a definition of this term is an improvement over the current law, which contains no statutory definition. However, the retention of the statutory proscription of below cost pricing, even if defined, has the potential to stifle honest competition. For example, this provision might prohibit a new entrant from engaging in "loss leader" pricing, in which brief episodes of below cost pricing are used to develop goodwill and, ultimately, increase patronage in general. Such an investment in goodwill is an effective and honestly competitive tactic of particular importance to firms seeking to break into a market. 28 And~ of course, loss leader pricing presents consumers with the immediate boon of lower prices on select purchases. t As we noted previously, below cost prlclng that:._is_ predatory already is adequately proscribed 'by state and federal antitrust laws. To the extent that Sectio'n'lS"of A. 3643 would continue to bar predatory pr icing, it is redundant; to .the extent that it threatens to punish non-predatory pricing, it is "harmful 26 27 28 A. 3643 S 10. N.Y. Agric. & Mkts. Law S 258-r(2) (McKinney 1972). See General Foods Coro., 103 F.T.C. 204, 344 (1984). I,
.. Michael J. Bragman, Chairman f - 11 - to producers and consumers alike. In order to optimize consumer well-being the Assembly may wish to repeal, rather than merely revise, the current Section 258-u. Finally, apparently -to safeguard dairy farmers against losses resulting from defaults in payments for milk,· A. 3643 would impose more restrictive payment, surety, and other conditions upon milk dealers. 29 We are not in a position to determine the need for such conditions. We note, however, that such requirements im~ose costs on would-be milk dealers that may discourage entry. Therefore, some of the competitive thrust of A. 3643 may be forfeited. These regulatory costs should be considered in assessing whether the adoption of more restrictive conditions, on balance, serves the public interest. IV. CONCLUSION We share the interest of New York State in assuring the availability of affordable wholesome milk to its citizens. We are concerned, however, that the current milk licensing law does not serve that interest. By limiting competition in the distri- bution of milk, these regulations restrict commercial opportuni- ties' and burden milk consumers with vast overcharges. In our view, A. 3643 will restore competition to New York's milk market to the benefit of all consumers. With the caveat discussed above, that Section 258-u (regarding below cost pricing) be repealed rather than merely revised, we strongly urge passage of A •• 3643. We hope these comments assist the Assembly in its deriberations. Please do not hesitate to contact us if you have -ani questions or would _~ike further information. Very truly- yours, -z E~?1~. · a1 ~_7& ......._-=- ...-,~_ Edward Manno Shumsky Regional Director 29 For instance, A. 3643 S 8(c) requires milk dealers to file a -mandatory minimum surety bond in an amount equal to the sum of the value of milk purchased for two consecutive months and the amount owed for the same two months to the equalization or producer settlement fund. I II I ,
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