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The Toys “R” Us Case: Call Off the Antitrust Dogs

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Sometimes you wonder whether government lives in the same world as the rest of us.

Take the Federal Trade Commission’s action against Toys ‘R’ Us. The FTC charges that the nation’s largest toy retailer pressured toy manufacturers not to sell certain popular toys to discount stores, such as Wal-Mart. Toys ‘R’ Us denies the charges. But it points out that discounters often enjoy a “free ride” from its advertising, especially around Christmas. It seems that Toys ‘R’ Us heavily advertises some brand-name toys, but the discounters get the bulk of the business.

One obvious response to all this is: who cares? Why is the government wasting scarce resources investigating complaints over who sells Barbie and G.I. Joe? The last time we looked, the retail toy business appeared to be fiercely competitive. Almost every department and discount store sells toys, and there are several independent toy retail chains to boot. Toys ‘R’ Us manages to have only 21 percent of the national market, which is exactly 79 percent shy of a monopoly share. What is the government thinking?

Discount toy retailing is the fastest-growing part of the business. Some of that growth has been at the expense of full-service retailers such as Toys ‘R’ Us. Indeed, Toys ‘R’ Us is currently retrenching, closing stores, and reducing inventory on toys it will no longer carry. Its so-called monopoly power to push around important toy makers like Hasbro and Mattel is just not obvious to anyone outside the Beltway. Nor are Wal-Mart and other discounters helpless weaklings.

But let’s assume for the moment that Toys ‘R’ Us did pressure toy makers to exclude discount stores from certain toy sales. That is not a national calamity. It may simply be a rational market response to the free-riding problem already mentioned.

Recall that Toys ‘R’ Us frequently advertises toys that consumers end up buying at lower prices at the discount store. That sounds delightful from a consumer perspective, but there may be something wrong with this picture. What’s wrong is that Toys ‘R’ Us cannot continue to subsidize the sale of its competitors’ products. Nor should it be expected to.

In similar situations in other industries, retailers have made exclusive dealing agreements with manufacturers. Such agreements allow full-service retailers to more fully capture their investment in pre-sale service.

Manufacturers are sometimes encouraged to increase their own advertising. That allows the full-service retailer to lower its advertising cost and compete more evenly with the discounter. The point to be emphasized, however, is that those retailing arrangements must be worked out by the parties involved and not by the government or the courts. Regulatory agencies and judges just do not have the information needed to run an industry. Firms, on the other hand, have their investments at stake and are in the best position to know what ultimately will satisfy consumers, who are free to search for the best deal. What looks suspicious to a regulator is likely to be a rational long-term arrangement that will benefit consumers.

It is one thing for government to keep markets free from fraud and deception. That is a legitimate objective, since it protects the property rights of all citizens. But interfering with peaceful transactions is quite another matter. At that point, government becomes the violator of property rights. The FTC’s track record in antitrust regulation is worse than dismal. The agency is hopelessly inept at micromanaging business competition and should be relieved of that responsibility. Let the toy wars continue without any antitrust meddling.

This post was written by:

Dr. Armentano is professor of economics at the University of Hartford, the author of "Antitrust and Monopoly" (Holmes and Meier, 1990), and a former member of the board of trustees of The Future of Freedom Foundation.