Toys”R”Us was accused of limiting access to various manufacturers’ products at competition retailers, thus harming competition./Do you think Toys”R”Us was guilty of the alleged offense? If so, why? If not, why not?
How could Toys”R”Us have avoided bringing this situation to this level?
This case is somewhat unusual: toys ‘R Us, the retailer, rather than a manufacturer, was accused of limiting access to various manufacturers’ products at competing retailers.80 In May 1996, the Federal trade commission filed charges against toys ‘R Us, alleging that the retailer threatened not to buy any toy whose manufacturer also sold the toy through a warehouse club store chain. It thus effectively forced the suppliers into exclusive dealing with toys ‘R Us for the most popular toys in the market. In particular, toys ‘R Us sought to prevent warehouse clubs like Sam’s club, price club, and costco from competing with it. Their competitive threat to toys ‘R Us was real, because the warehouse clubs had much lower cost structures than the retailer and could therefore price compete effectively, given product supply (e.g., Mattel’s hollywood hair Barbie sold for $10.99 at toys ‘R Us; at warehouse clubs, it was required to come packaged with an extra dress, forcing the retail price up to $15.99 and preventing direct price comparisons). hasbro, another toy manufacturer, refused to supply hall of Fame G.I. Joe dolls directly to warehouse clubs; Mattel also declined to offer Fisher-price brand pool tables to them. Toys ‘R Us allegedly blocked sales of Disney’s Toy Story movie figures to the discount chains too.
The FTC noted a substantial anticompetitive threat, because toys ‘R Us had an approximately 20 percent market share of all U.S. retail toy sales—somewhat low overall, but the relevant manufacturers sold as much as 30 percent of their total volume through toys ‘R Us, creating significant dependence on the retailer, such that it could force them to participate in anticompetitive actions. After toys ‘R Us started the enforced boycott in 1993, costco’s toy sales dropped by 1.6 percent, even as its overall sales grew by 19.5 percent. Mattel’s sales to warehouse clubs also fell from more than $23 million in 1991 to only $7.5 million in 1993.
Thus, on October 1, 1997, an FTC administrative judge ruled against toys ‘R Us; while awaiting review by the full Ftc, New York’s attorney General also filed a lawsuit against toys ‘R Us and three of its largest suppliers (Mattel, hasbro, and Little tikes), alleging an illegal conspiracy to raise prices and stifle competition. On November 17, the suit was amended to add 37 additional states, puerto rico, and Washington, Dc. eventually 44 of the 50 states joined the lawsuit. On October 15, 1998, the FTC upheld the administrative judge’s 1997 ruling, issuing a cease-and-desist order to toys ‘R Us. The FTC chair wrote that toys ‘R Us had “used its dominant position as toy distributor to extract agreements from and among toy manufacturers to stop selling to warehouse clubs the same toys that they had sold to other toy distributors.” The retailer appealed the decision, to the U.S. Circuit Court of Appeals.
But in December 1998, hasbro settled the suit filed by the states, agreeing to pay $6 million in donations and other payments to the states and charities. In May 1999, toys ‘R Us and the other suppliers also settled. The retailer agreed to pay $40.5 million in cash and toy donations; Mattel would pay $8.2 million, and Little tikes agreed to pay $1.3 million in cash and toys. None of the parties admitted wrongdoing though. The key to this case was twofold: the degree of harm to competition and the concerted effort made to influence multiple manufacturers, who all agreed to the restrictive dealing practices.