Competition in the Soft Drink Industry (2024)

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Competition in the Soft Drink Industry

byBarbara G. Katz

Paper(PDF Format)

Off-campuslink for NYU students/faculty/staff

Abstract
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The market structure of the soft drinkindustry is a two-tiered one in which a small group of nationwide syrupproducers grant exclusive territorial franchises to local bottlers, making themthe sole distributors of items trademarked by the syrup producers within aspecific geographic area. The Coca-Cola Company in the years 1900 to 1920 wasthe first to partition the entire United States into exclusive salesterritories. Rivals entering the market pursued the same strategy. Had thelocal bottlers producing and selling each trademarked soft drink agreedtogether to establish these territorial divisions this would have been per seillegal, based on a long tradition from Addyston Pipe and Steel Company v.United States through United States v. Sealy, Inc. and UnitedStates v. Topco Associates, Inc. The fact that the territories werestipulated vertically by the parent syrup companies and not horizontally by thebottlers themselves only recently aroused interest at the Federal TradeCommission.

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

Attempting to remove discretion in thismatter from the FTC and possibly at a later date the courts, the syrupcompanies expended considerable energies through the National Soft DrinkAssociation and other channels introducing legislation into both the House ofRepresentatives and the Senate. These bills, in varying degrees, would permitexclusive territorial arrangements for trademarked soft drinks (and certainother food products) as long as they do not unreasonably re- strain trade. Themost recent (May 1976) House bill (H.R. 6684) states that territorialexclusivity is not a per se violation, and must be assessed by a "rule ofreason" test applicable to either intrabrand or interbrand competition. Underthe most recent (May 1976) Senate bottlers' bill (S. 978), territorialexclusivity could only be found illegal with respect to the "rule ofreason" test as applied to interbrand competition.

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

Thelegality surrounding the elimination of intrabrand competition due to theexistence of vertical territorial restrictions was first explored by the SupremeCourt in White Motor Co. v. United States in 1963. The Court noted itdid not know enough about the competitive impacts of such arrangements todecide that they ought to be per se illegal. A suggestion that verticalterritorial arrangements were acceptable, given only reasonable profits and noevidence 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 perse illegal under certain conditions. Given this regulatory climate, it isnot surprising that the syrup manufacturers claimed that interbrand competitionwas the arena in which they wish to be judged. While still awaiting a decisionby the FTC on the appeal by the Bureau of Competition of the initial decisionrendered by the administrative law judge in 1975, the Supreme Court in ContinentalT.V. Inc., et al. v. GTE Sylvania, Inc. in June 1977 threw out the perse rule stated in Schwinn, requiring instead that locationrestrictions be judged under the traditional rule of reason standard.

Part I of this paper discussesinterbottler competition, while part II concentrates on the two broaddimensions of interbrand competition, price and non-price behaviors within andbetween territories. No discussion of intrabrand competition is needed forterritorial exclusivity effectively suppresses any such competition. Part IIIis a detailed study of a multi- plant, multifranchise bottling firm that isable to engage successfully in third degree price discrimination. A summary andconclusions follow in part IV.