Competition in the Soft Drink Industry

Competition in the Soft Drink Industry

by Barbara G. Katz

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Abstract

The market structure of the soft drink industry is a two-tiered one in which a small group of nationwide syrup producers grant exclusive territorial franchises to local bottlers, making them the sole distributors of items trademarked by the syrup producers within a specific geographic area. The Coca-Cola Company in the years 1900 to 1920 was the first to partition the entire United States into exclusive sales territories. Rivals entering the market pursued the same strategy. Had the local bottlers producing and selling each trademarked soft drink agreed together to establish these territorial divisions this would have been per se illegal, based on a long tradition from Addyston Pipe and Steel Company v. United States through United States v. Sealy, Inc. and United States v. Topco Associates, Inc. The fact that the territories were stipulated vertically by the parent syrup companies and not horizontally by the bottlers themselves only recently aroused interest at the Federal Trade Commission.

In 1971 the FTC charged several of the largest syrup manufacturers, including The Coca-Cola Company, Pepsico, Inc., Royal Crown Cola, Seven-Up and Dr. Pepper with violation of section 5 of the Federal Trade Commission Act which prohibits "unfair methods of competition." Specifically, it was claimed that by delimiting geographical territories in which bottlers were permitted to manufacture and sell the trade- marked sodas, the syrup manufacturing companies were eliminating competition for three distinct groups of competitors: (1) independent bottlers of their own products (i.e., intrabrand competitors), (2) wholly owned bottling subsidiaries and independent bottlers of their own products (again intrabrand competitors), and (3) licensed and wholly owned bottlers of one syrup company and those of other syrup companies (i.e., inter- brand competitors).

Attempting to remove discretion in this matter from the FTC and possibly at a later date the courts, the syrup companies expended considerable energies through the National Soft Drink Association and other channels introducing legislation into both the House of Representatives and the Senate. These bills, in varying degrees, would permit exclusive territorial arrangements for trademarked soft drinks (and certain other food products) as long as they do not unreasonably re- strain trade. The most recent (May 1976) House bill (H.R. 6684) states that territorial exclusivity is not a per se violation, and must be assessed by a "rule of reason" test applicable to either intrabrand or interbrand competition. Under the most recent (May 1976) Senate bottlers' bill (S. 978), territorial exclusivity could only be found illegal with respect to the "rule of reason" test as applied to interbrand competition.

Congressional debate notwithstanding, an initial opinion favorable to the syrup companies was rendered in October 1975 by an administrative law judge at the FTC. The judge held that while the licensing contracts did restrict intrabrand competition, substantial and effective interbrand competition existed and was more significant than the eliminated intra- brand competition. He stated that the elimination of territorial exclusivity would force the smaller bottler from the industry as well as increase the use of non-returnable packages and cans which was alleged to be detrimental to the environ- ment.4 The Bureau of Competition of the FTC appealed this decision to the Commission.

The legality surrounding the elimination of intrabrand competition due to the existence of vertical territorial restrictions was first explored by the Supreme Court in White Motor Co. v. United States in 1963. The Court noted it did not know enough about the competitive impacts of such arrangements to decide that they ought to be per se illegal. A suggestion that vertical territorial arrangements were acceptable, given only reasonable profits and no evidence of horizontal conspiracy, followed the Sandura Co. v. FTC and Snap-On- Tools Corporation v. FTC decisions. In the United States v. Arnold, Schwinn & Co. decision, however, the Supreme Court viewed vertical territorial restrictions as per se illegal under certain conditions. Given this regulatory climate, it is not surprising that the syrup manufacturers claimed that interbrand competition was the arena in which they wish to be judged. While still awaiting a decision by the FTC on the appeal by the Bureau of Competition of the initial decision rendered by the administrative law judge in 1975, the Supreme Court in Continental T.V. Inc., et al. v. GTE Sylvania, Inc. in June 1977 threw out the per se rule stated in Schwinn, requiring instead that location restrictions be judged under the traditional rule of reason standard.

Part I of this paper discusses interbottler competition, while part II concentrates on the two broad dimensions of interbrand competition, price and non-price behaviors within and between territories. No discussion of intrabrand competition is needed for territorial exclusivity effectively suppresses any such competition. Part III is a detailed study of a multi- plant, multifranchise bottling firm that is able to engage successfully in third degree price discrimination. A summary and conclusions follow in part IV.