Petition by two manufacturers of lead antiknock gasoline additives to review and set aside a final order of the Federal Trade Commission entered pursuant to its decision holding that their adoption of certain trade practices amounted to unfair methods of competition in violation of § 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. § 45(a)(1), even though each acted independently, unilaterally, and without any collusion or coercion. The Commission reasoned that the practices, by reducing some of the uncertainties about price determination, tended to facilitate price parallelism at non-competitive levels thereby preventing competitive pricing that might have otherwise existed. The order is set aside. Judge Lumbard concurs and dissents in a separate opinion.
Lumbard, Mansfield and Kearse, Circuit Judges.
MANSFIELD, Circuit Judge:
E.I. Du Pont De Nemours and Company ("Du Pont") and Ethyl Corporation ("Ethyl"), the nation's two largest manufacturers of lead antiknock gasoline additives, petition this court pursuant to § 5(c) of the Federal Trade Commission Act, 15 U.S.C. § 45(c), to review and set aside a final order of the Federal Trade Commission ("FTC") entered with an accompanying opinion on April 1, 1983. The FTC held that Du Pont, Ethyl and two other antiknock compounds manufacturers, PPG Industries, Inc. ("PPG") and Nalco Chemical Company ("Nalco"), had engaged in unfair methods of competition in violation of § 5(a)(1) when each firm independently and unilaterally adopted at different times some or all of three business practices that were neither restrictive, predatory, nor adopted for the purpose of restraining competition. These challenged practices were: (1) the sale of the product by all four firms at a delivered price which included transportation costs, (2) the giving by Du Pont and Ethyl of extra advance notice of price increases, over and above the 30 days provided by contract, and (3) the use by Du Pont and Ethyl (and infrequently by PPG) of a "most favored nation" clause under which the seller promised that no customer would be charged a higher price than other customers.*fn1 The Commission reasoned that, although the petitioners' adoption of these practices was non-collusive, they collectively had the effect, by removing some of the uncertainties about price determination, of substantially lessening competition by facilitating price parallelism at non-competitive levels higher than might have otherwise existed.*fn2 The order is set aside.
Lead-based antiknock compounds have been used in the refining of gasoline since the 1920s. The compounds are essentially homogeneous, consisting in part of tetraethyl lead (TEL), originally produced in the 1920s, and tetramethyl lead (TML), first produced in 1960. They are now usually sold as mixtures, sometimes with additives. The compounds are added to gasoline to prevent "knock," i.e., premature detonation in a gasoline engine's cylinders. Resistance to knock is measured by octane ratings; for a gasoline refiner use of lead-based antiknock mixtures is the most economic way to raise the octane rating of gasoline for vehicles that take leaded gas. Since the compounds are highly toxic and volatile, great care must be taken in transporting and storing them. Refiners therefore maintain only limited inventories. Since an uninterrupted supply is important, the refiner usually purchases the compounds periodically from at least two antiknock producers pursuant to one-year contracts.
From the 1920s until 1948, Ethyl was the sole domestic producer of antiknock compounds. Demand for the compounds increased with the increase in gasoline use, however, and in 1948 Du Pont entered the industry and captured a substantial market share. In 1961 PPG (then known as Houston Chemical Company) began to manufacture and sell the compounds; and in 1964 Nalco followed suit. By 1974, Du Pont had 38.4% of the market; Ethyl 33.5%; PPG 16.2%; and Nalco 11.8%. During 1974-1979, the period of the alleged violations, these were the only four domestic producers and sellers of the compounds. No other firm has ever made or sold the compounds in this country. Thus the industry has always been highly concentrated. However, there are no technological or financial barriers to new entries.
The only purchasers of lead antiknocks are the gasoline refining companies which are large, aggressive and sophisticated buyers. Indeed, several are among the largest industrial corporations in the world.*fn3 If prospective profits from the sale of antiknock compounds were sufficiently attractive, nothing would prevent them from integrating backwards into the antiknock industry. Of the 154 refiners who purchase the product, the ten largest buy about 30% of the total amount produced in this country.
The steady increase in demand for antiknock compounds during the 1960s allowed PPG and Nalco to enter the market. From August 1971 to January 1974, however, federal controls froze the price of the compounds and beginning in 1973 the federal government initiated steps that were to lead to a drastic reduction in demand. At that time the Environmental Protection Agency ("EPA") required that all automobiles made in the United States, beginning in 1975, be equipped with catalytic converters; since the lead in antiknock compounds fouls such converters, almost all new cars produced since 1975 require unleaded gasoline. At about the same time, in order to reduce the amount of lead in the atmosphere the EPA imposed severe limitations on the amount of lead that could be used in gasoline. As a result of these two measures the use of lead antiknock compounds sharply declined from more than one billion pounds in 1974 to approximately 400 million pounds in 1980, leaving manufacturers with excess capacity. Additional EPA regulations are likely to cause a further decline in the use of the product from an estimated 260 million pounds in 1985 to an estimated 90 million pounds in 1990.
Thus, even though there are no technological or financial constraints barring new entries into the industry and there were two new entrants during the 1960s, the cost of staying in production in a dying industry has made it unlikely that there will be new entrants in the future. The problem confronted by existing producers is the same as that faced by potentially new entrants. Indeed, PPG has recently ceased production of lead antiknock compounds, leaving only three manufacturers in this evaporating line of business.*fn4
The lifting of the price freeze on antiknock compounds in 1974 led, as in other industries, to a series of price increases, some compensating for the long period during which prices had been frozen and some reflecting increases in the cost of raw materials used by some antiknock producers (e.g., magnesium, sodium, electricity). Of the 30 list price changes during the 1974-1979 period, 6 were decreases. Of the remaining 24 increases, 20 followed public announcements of increases in the price of raw lead which antiknock producers must buy. Moreover, on 6 occasions the antiknock producers independently announced non-identical price increases.
The antiknock market, regardless of the price of the product, remained inelastic. In the face of a declining demand a price cut would not increase total industry sales. Lead antiknocks at higher prices were still more efficient and economical than alternative methods of raising octane levesl of gasoline and the compound accounted for a very small percentage of the total cost of the gasoline. The record reveals that, although some of the larger refiners sought to obtain price or other concessions from the producers, the refiners were not disturbed by the price increases. For instance, a purchasing agent for Exxon Corp., one of the largest buyers, testified:
"We think it's [respondents' antiknock fluid] a bargain. Even though we fuss at our vendors a lot, it really is a bargain for us as far as achieving higher quality at a lower price."
One reason for this complacent attitude, as the Administrative Law Judge ("ALJ") found, was that the cost of the compound per gallon of gasoline was "minimal." Indeed, there was no evidence that the price increases had any impact on the price of gasoline.
These characteristics of the industry -- high concentration, small likelihood of new entries because of a sharply declining market, inelastic demand, and homogeneity of product -- led to a natural oligopoly with a high degree of pricing interdependence in which there was far less incentive to engage in price competition that if there had been many sellers in an expanding market. Although a manufacturer in an inelastic market can temporarily capture an increased market share by price reductions or secret discounts, the reductions or discounts are usually discoverred and met sooner or later by some form of competition by the other producers without increasing the volume of total sales in the market. See United States v. United States Gypsum Co., 438 U.S. 422, 456, 57 L. Ed. 2d 854, 98 S. Ct. 2864 (1978). The sole effect of a price reduction in a declining, inelastic market, therefore, is to reduce the industry's total profits. For these reasons Du Pont and Ethyl (as distinguished from PPG and Nalco) each independently chose not to offer price discounts, which they believed would be unprofitable. Du Pont instead decided to raise its prices by an amount that would offset its increasing costs and in addition yield a 20% pre-tax return on investment. As a result, during the 1970s, profits in the industry -- particularly Du Pont's and Ethyl's -- were substantially greater than what is described as the benchmark in the chemical industry, which in this case is 150% of the average rate of return in that industry. During the 1974-1979 period under investigation by the FTC, the returns of Ethyl and Du Pont on investment substantially exceeded the 150% benchmark in each year; although PPG's and Nalco's returns on investment also exceeded the 150% benchmark in four of the five years, PPG operated at a loss in 1979 and in 1983 ceased production.
Notwithstanding the highly concentrated structure of the industry, there was substantial price and non-price competition during the 1974-1979 period that is the subject of the complaint. More than 80% of Nalco's sales during that period were at discounts off its list price, and more than one-third of PPG's sales during the same period were at discounts, rising to 58% of its sales in 1979. Despite the fact that the compounds were sold by all four firms on a delivered price basis, the record reveals that, because of the variations in secret discounts granted by Nalco to its customers, the other 3 producers were uncertain as to Nalco's strategy and the net prices actually received by it. Du Pont, for example, was unclear whether Nalco always followed price increases or even had a price list. Ethyl was unsure whether Nalco sometimes sold to certain customers on an f.o.b. basis. Nalco's discounting led to a substantial decline in the list price of TML and eventually to the elimination of the previous price differential between TML and TEL which had existed for many years.
Ethyl and Du Pont, apparently recognizing the futility of meeting price discounts in an inelastic, declining market, each individually chose to meet this price competition on the part of PPG and Nalco not by price discounts but by various forms of non-price competition. These included late billing and "advance buying," the latter of which permitted customers to order extra volume at the old price before a price increase went into effect. Du Pont and Ethyl also provided valuable "free" services, including (1) provision of free equipment, (2) education on how to use the product more efficiently, (3) assistance in building and monitoring facilities for the storage and blending of antiknock compounds, (4) computer programming assistance, (5) training of refiners' employees, (6) payment for consultant services, and (7) favorable credit terms. These competitive practices, ...