Free Riding on Hot Wheels

Abstract

When warehouse clubs started making inroads into its market, Toys R Us responded with a policy designed to limit the clubs' access to certain toys. The FTC successfully challenged the policy, arguing that TRU had coordinated a horizontal agreement amongst the toy manufacturers to eliminate competition from this new class of competitors. TRU defended itself, invoking the free-rider rationale. This the Commission rejected as pretext. TRU's argument was better than the Commission gave it credit for, but it failed to press its best argument. That failure stems in part from the shortcomings of the standard free rider formulation, and in part from the defendant's need to tailor its arguments to ill-fitting doctrinal constraints. TRU attempted to convince the Commission that its actions were unilateral, within the Colgate exception. Perhaps they were, although the Commission found to the contrary. Regardless, the net result was suppression of an efficiency rationale that emphasized the benefits of cooperation by the toy manufacturers. In this paper, I will argue that TRU emphasized the wrong free rider problem. Properly framed, the behavior of TRU and the toy companies can be seen as consistent with the efficiency goals of antitrust policy. That a plausible efficiency argument can be constructed does not mean that the outcome itself was wrong. My narrow focus here is on showing that the standard formulation led to asking the wrong question. Part I provides a brief overview of the market and TRU's behavior. Part II summarizes the defense's rationale and the Commission's rejection of it. Part III provides an alternative explanation. Part IV concludes.