Potential Contributions of Consumer Research to Antitrust Decision Making

Paul N. Bloom, University of Maryland
ABSTRACT - A review is presented of several antitrust issues that might be resolved with the help of consumer research. Some research methodologies that could be used to examine these issues are also suggested. It is concluded that consumer research could play an important role in antitrust decision making.
[ to cite ]:
Paul N. Bloom (1978) ,"Potential Contributions of Consumer Research to Antitrust Decision Making", in NA - Advances in Consumer Research Volume 05, eds. Kent Hunt, Ann Abor, MI : Association for Consumer Research, Pages: 138-144.

Advances in Consumer Research Volume 5, 1978      Pages 138-144

POTENTIAL CONTRIBUTIONS OF CONSUMER RESEARCH TO ANTITRUST DECISION MAKING

Paul N. Bloom, University of Maryland

[This research was supported in part by a grant from the Bureau of Business and Economic Research of the University of Maryland.]

ABSTRACT -

A review is presented of several antitrust issues that might be resolved with the help of consumer research. Some research methodologies that could be used to examine these issues are also suggested. It is concluded that consumer research could play an important role in antitrust decision making.

INTRODUCTION

Numerous authors have written about the need for consumer research to help public policy decision making (Wilkie and Gardner, 1974; Rosch, 1975; Hunt, 1976). These authors have stimulated a growing volume of research studies designed to assist policy making in the consumer protection area (Day and Brandt, 1974; Jacoby, Speller, and Kohn, 1974a, 1974b) and other more "functional" areas (Richie and LaBreque, 1975) such as pollution control (Kinnear, Taylor, and Ahmed, 1974), transportation (Brown and Schary, 1977), and energy conservation (Reizenstein and Barnaby, 1977). However, one area of public policy decision making that has tended to be overlooked by consumer researcher is antitrust policy. Although several authors have recognized that consumer research could aid antitrust enforcement efforts (Wilkie and Gardner, 1974; Howard, 1977; Day and Shocker, 1977), very little research has been done with the specific goal of helping antitrust decision making. Moreover, rarely have consumer researchers considered whether there are antitrust implications in the findings of any of their studies.

In an effort to stimulate more research and thinking about antitrust on the part of consumer researchers, this paper contains a discussion of several areas where consumer research could contribute to antitrust decision making. The focus of the discussion is on how consumer research could help to resolve some of the less traditional issues that have arisen in current antitrust cases involving the four major ready-to-eat breakfast cereal manufacturers, the legal and medical professions, and ReaLemon. However, the discussion also briefly covers how consumer research could help to resolve more traditional antitrust questions involving subjects such as tying agreements, defining market boundaries, and parallel pricing.

It should be noted that the following is not intended to provide an exhaustive survey of antitrust issues that might be resolved with the help of consumer research; nor is it intended to provide an exhaustive review of previous consumer research findings that could contribute to the resolution of antitrust issues. The discussion is merely intended to suggest a few antitrust issues that are ripe for consumer research, and to point out some previous research efforts that might illustrate methods for resolving these issues.

Table 1 contains an outline of the types of antitrust issues or questions that consumer research could help to resolve. The body of the paper is organized to follow this outline. The concluding section of the paper contains a short discussion of some of the practical problems that could arise in trying to expand the role of consumer research in antitrust decision making.

TABLE 1

SELECTED ANTITRUST ISSUES THAT CONSUMER RESEARCH MIGHT HELP TO RESOLVE

CASE SELECTION ISSUES

The procedures followed by the Antitrust Division of the Justice Department and the Federal Trade Commission in selecting antitrust cases are not well-defined or widely understood. Clearly, consideration is given to a host of factors in deciding whether to take action against a given industry or firm. Among the factors generally considered are: the structure, conduct, and performance of the suspect industry; the likelihood of winning the case; the amount of agency resources needed for litigation; and the political pressures favoring or opposing a suit or complaint (Green 1972). There are at least two ways consumer research could help to make the case selection process more efficient and equitable.

First, consumer research could be used to develop improved measures of the "performance" of an industry or firm. At present, the antitrust enforcement agencies utilize performance measures suggested by industrial organization economists. These include measures of allocative efficiency (rates of return on equity), technical efficiency (production costs), and so on (Stern and Grabner, 1970). An additional performance measure that could be of value to the agencies is "consumer satisfaction" (or dissatisfaction). The techniques currently being developed by consumer researchers to measure consumer satisfaction, through monitoring consumer complaints and other procedures (Aiello, Czepiel, and Rosenberg, 1977; Handy, 1977), could be used by the agencies to detect which industries or firms are producing relatively undesirable outcomes through their methods of competition.

Second, consumer research could be used to estimate the social benefits of winning alternative antitrust cases before a complaint or suit is filed. These estimates could help the enforcement agencies decide whether it would be a wise investment of public funds to litigate a particular case (Hunt, 1976). The kinds of research that would help to make these estimates would be essentially the same as the kinds of research needed to determine the effects of certain questionable business practices or the effects of certain proposed antitrust remedies. These research areas are discussed in the following sections.

CASE RESOLUTION ISSUES

Once an antitrust suit or complaint has been filed, consumer research could help to resolve a wide range of issues. Testimony and evidence drawn from consumer research studies could help the courts, administrative law judges, and FTC obtain (1) a more accurate picture of the structural characteristics of a given industry and (2) a better estimate of the anticompetitive effects of certain business practices. Potential research contributions in both of these areas are discussed at length below.

Structural Characteristics Questions

One of the most basic questions that must be answered in any antitrust case is: What is the relevant market? This question must be answered before concentration ratios can be computed, injured competitors can be identified, or other important judgments can be made. Historically, the courts have determined relevant markets by looking at evidence such as cross-elasticity of demand figures, statements and memos from employees concerning who they see as their competitors, and descriptions of manufacturing processes (Day, Massy, and Shocker, 1977). But several observers have recommended that more attention should be paid to consumer perceptions of competing products in determining relevant markets (Stern and Grabner, 1970; Day and Shocker, 1977).

In a recent paper, Day and Shocker (1977) review an assortment of consumer research approaches that could be used to obtain consumer perceptions of market boundaries. They recommend the concurrent use of several of these approaches in defining any given market. Suggested approaches include (1) the study of brand-switching rates (to see which brands are used as substitutes for one another), (2) the use of decision sequence analysis to obtain protocols of brand choice processes (Bettman, 1971, 1974) (to see which other brands are considered when making a choice), (3) the use of direct consumer judgments of substitutability, perhaps employing techniques such as the "dollar metric" approach of Pessemier et al. (1971) (to see how much money consumers would want before substituting one brand for another), and (4) the use of perceptual mapping techniques. Etgar and Jain (1976) demonstrated how this last approach might be used when they employed multidimensional scaling and cluster analysis techniques to identify market boundaries for beverages.

In addition to helping to identify the competitors in a given market, consumer research could be useful in determining the extent of product differentiation in the market or the height of product differentiation barriers to entry. Barriers of this type are said to exist when brand loyalty makes it difficult for new brands to attract buyers without spending large sums on advertising and promotion (Bain, 1956; Comanor and Wilson, 1974). Whether these barriers exist has been an issue in several antitrust cases--the most notable being the cereal case (Root, 1972).

Research on the degree of brand loyalty in several different industries could shed light on the height of product differentiation barriers in any one of those industries. The existence of relatively strong brand loyalties in one industry would indicate that differentiation was great and that entry barriers were relatively high in that industry. Data on brand loyalty could be obtained from consumer surveys, panel diaries, and experimental investigations. The last approach might make use of procedures similar to those used by Ehrenberg and Charlton (1973, 1976) to assess how difficult it is to use various marketing tactics to overcome brand loyalty. They have conducted several longitudinal, quasi-field experiments on repeat-buying, using door-to-door salespersons to administer treatments and obtain measures.

Another structural characteristic of a market that could be important in antitrust cases, and that could be studied through consumer research, is the size of economies of scale in advertising. Such economies could serve to bar entry by smaller competitors by putting them at a cost disadvantage. The possibility that such economies could emerge was cited by the Supreme Court as a reason for voiding the merger of Procter and Gamble and Clorox (Fusilier and Darnell, 1971).

Economies of scale in advertising can emerge if quantity discounts are offered for media purchases or if some minimum number of advertising messages must be received by consumers before the advertising becomes effective--i.e., a threshold level of advertising expenditures must be reached, above which increasing returns to advertising can be obtained (Comanor and Wilson, 1974). Experimental studies with consumers could conceivably be used to gain insights into whether economies of scale in advertising can emerge because of a threshold effect. Some of the research that has been done to examine how consumers react to repeated persuasive communications over time (Ray and Sawyer, 1971; Mitchell and Olson, 1977) could possibly be extended to study the economies of scale issue.

Anticompetitive Practices Questions

The focus of the discussion in this section is on business practices that have been accused of being exclusionary or restrictive in recent antitrust cases. While the use of deceptive or misleading practices has also been an issue in several recent antitrust cases, the need for research on the competitive effects of these practices will not be elaborated upon here. Consumer researchers have already recognized the need to study the effects of deceptive and misleading practices (Gardner, 1975; Russo, 1976), although previous research has tended to be most concerned with how these practices hurt consumers as opposed to competition.

Four practices that have been accused of having exclusionary effects in the cereal case are: brand proliferation, product differentiation, intensive advertising, and shelf-space allocation. In a trial currently in progress, the FTC staff is presenting a complex set of interwoven arguments to convince an administrative law judge that the use of these four practices has allowed the four largest manufacturers of ready-to-eat breakfast cereals to exclude entry and maintain a "shared monopoly" (FTC Complaint Counsel, 1976). The arguments of the FTC staff are summarized (and somewhat simplified) below, accompanied by a discussion of how consumer research might be used to test the validity of these arguments.

The FTC staff is first arguing that the major cereal manufacturers (Kellogg, General Mills, General Foods, and Quaker) have essentially used brand proliferation and product differentiation to monopolize every profitable "position" in the "product space" of the cereal market. Describing a multi-attribute product space of the type presented by Lancaster (1975), the FTC staff claims that:

1. All profitable positions in the product space are currently occupied by brands of the major manufacturers.

2. With so many brands competing to let consumers know where they stand in the space, the costs to a new brand of getting the attention of consumers and establishing itself in a preferred location in the space are very high.

3. With so many brands already established in preferred locations in the space, it is virtually impossible for one brand to create enough preference for itself to obtain a share of the cereal market large enough to take advantage of economies of scale in production. This means that to attain competitive production costs a new firm will need several successful brands established in multiple locations across the product space. The promotional costs or lower prices needed to establish several brands in preferred locations in the space serve to deter entry.

4. The entry of a new firm in an unoccupied, profitable position would only attract the introduction of new, established-firm brands in that position.

5. The proliferation of numerous differentiated brands confuses consumers and makes it difficult for them to recognize the physical similarities that exist among brands. This makes it more difficult for new brands to become established in preferred locations in the space--particularly private labels that are meant to be seen as copies of existing brands.

Testing the validity of the above arguments would surely be a challenging task. Nevertheless, there are several consumer research approaches that might prove helpful. For instance, perceptual mapping or multidimensional scaling techniques could be used to determine whether, from the perspective of a representative sample of consumers, all desirable locations are occupied in the product space for the cereal market. If "ideal points" were found that are not being served by existing brands, then the FTC staff would have a weaker case. In addition, perceptual mapping techniques could be used to test how confused consumers are about the attributes of different brands. If the perceptual maps of cereal brands obtained from consumers did not differ greatly from maps drawn using objectively-measured characteristics, the argument about consumer confusion could be questioned.

Some insights into the validity of the above arguments could also be obtained by conducting more general (less case-specific) experimental studies with several classes of products. Experiments could test whether increasing the number of alternative brands in a product category produces effects such as:

1. Increased confusion for consumers when processing information about the brands. The research being done on "information overload" (Jacoby, Speller, and Kohn, 1974a, 1974b) suggests that this does, in fact, happen, but more research on this matter is definitely needed.

2. Increased difficulty in using persuasive communications to alter the cognitive structures of consumers and establish a brand in a preferred location in the product space. The research that is being done on the use of persuasive communications to alter cognitive structures or perceptual maps (Olson and Dover, 1976; Lutz, 1975; Moinpoir et al., 1976) could be extended to test whether having more brands means that more communications are needed to change beliefs, salient attributes, ideal points, and so forth.

If these experiments found that increasing the number of brands did not increase confusion or the difficulty of "positioning" brands in desirable locations, then the arguments against brand proliferation and product differentiation would be weakened.

Finally, studies about the variety-seeking or novelty-seeking behavior of consumers (Venkatesan, 1973; Raju, 1976) could also prove helpful in evaluating the arguments about brand proliferation and product differentiation. If it were found that consumers obtain more satisfaction over time when large numbers of differentiated brands are made available--because they tend to try out more brands--then a case could be made for claiming that brand proliferation and product differentiation produce important social benefits.

Intensive advertising is another practice being attacked in the cereal case. The FTC staff is arguing that this practice excludes entry to the industry in the following ways:

1. It supports the brand proliferation and product differentiation activities.

2. It allows existing large firms to take advantage of economies of scale in advertising which new small firms cannot obtain.

3. It creates brand loyalty which makes it difficult for new brands to attract customers--i.e., product differentiation barriers to entry are created.

The latter two charges are arguments that have frequently been offered by economists who view advertising as being anticompetitive (Bain, 1956; Comanor and Wilson, 1974).

As discussed earlier, consumer research could help to establish whether economies of scale in advertising or strong brand loyalties exist in a given market. To be sure, the discovery of advertising scale economies would indicate that the use of intensive advertising was probably having exclusionary effects. However, the discovery of strong brand loyalties would not necessarily suggest anything about the effects of intensive advertising. Loyalty could be created by many factors other than advertising. In fact, attempting to isolate the role that advertising plays in creating consumer brand loyalty represents an exceedingly difficult research problem.

Although it might be possible to use experimental procedures such as those used by Ehrenberg and Charlton (1973, 1976) to determine whether intensive advertising can create strong brand loyalties, it would probably be more fruitful to use consumer research to evaluate, in a general way, several arguments that will probably be offered in the cereal case in defense of the use of intensive advertising. These pro-advertising arguments have been offered by economists such as Brozen (1974), Ferguson (1974), and Nelson (1974, 1975) to counter claims that advertising is anticompetitive. If these pro-advertising arguments are shown to have some validity, then the case against intensive advertising would be weakened (or vice versa). In addition, evaluations of these pro-advertising arguments would probably prove helpful in reaching decisions about the appropriateness of permitting advertising in the professions. Interestingly enough, the FTC and Antitrust Division have essentially adopted these pro-advertising arguments in their cases against lawyers, doctors, pharmacists, and optometrists.

Economists such as Brozen and Nelson have basically argued that advertising is pro-competitive because it makes demand curves more elastic. It does this, in the case of goods which can be evaluated without actually trying them (Nelson's "search" goods), by providing inexpensive information to consumers and making it cheaper for them to comparison shop. With more comparison shopping being done as a result of advertising, consumers will react more sharply to price changes and thus encourage more price competitiveness on the part of sellers.

In the case of goods which cannot be evaluated without actually trying them (Nelson's "experience" goods), it is argued that advertising still makes demand curves more elastic, but for somewhat different reasons. Advertising informs consumers about which brands are the "best buys" (i.e., the lowest price per unit of utility). It does this, according to Nelson (1974, 1975), because the best buys will be the most heavily advertised brands. Heavier advertising would be done for the best buys basically because it does not pay to advertise a bad product and because most firms set their advertising budgets on a percentage of sales basis. With consumers knowing which brands are best, they can limit their sampling or trial of brands to a relatively small, homogeneous group and not be forced to consider a broad range of heterogeneous brands. Consumers will therefore react more sharply to price changes of brands in their "evoked set" when advertising exists than they would without advertising--since they will be more likely to notice price changes when less brands are considered for trial. Thus, advertising should produce more price competitiveness among sellers.

The pro-advertising authors have generally turned to studies using aggregate archival data to find support for their arguments. Two supportive studies that have frequently been cited are the works which found prices of eyeglasses (Benham, 1972) and prescription drugs (Cady, 1975) to be lower in states that permitted advertising of these goods. However, experimental studies obtaining data directly from consumers might also prove useful in evaluating the pro-advertising arguments. Experiments could be set up to study how the information-acquisition strategies, brand choices, and post-choice satisfaction of consumers are affected by varying (1) the amount of advertising available in a product category (none, moderate for a few brands, intensive for a few brands) and (2) the type of product category ("search" vs. "experience" goods or tangible vs. intangible goods). These experiments could attempt to measure the costs of search incurred by subjects under various experimental conditions by charging the subjects fees for information obtained (the fee for using advertising information would be set relatively low). Information display boards (Berning and Jacoby, 1974; Jacoby et al., 1976), verbal protocols (Bettman and Jacoby, 1976; Bettman, 1971, 1974), and eye-movement measures (Russo and Dosher, 1976) could all be used to obtain a better understanding of how advertising information is processed. The pro-advertising arguments would tend to be supported if the treatment groups which were exposed to brand advertising incurred lower search costs, examined a smaller set of advertised brands, chose brands which were better buys, and obtained more satisfaction.

Shelf-space allocation is the final practice that is being challenged by the FTC staff in the cereal case. The four major manufacturers have been charged with tacitly agreeing to persuade retailers to utilize a single shelf-space plan (Kellogg's) which: (1) gives their brands "better" locations at the center of the aisle and relegates other brands to "poorer" locations at the ends of the aisle, (2) has the brands of each manufacturer displayed in a different grouping, making it more difficult for consumers to compare similar brands (e.g., corn flakes) of different manufacturers, and also making it more likely that consumers will select second brands made by the same company which manufactured their first selection, and (3) has their brands "billboarded" in the displays (several facings are put next to one another), getting them more attention and impulse purchases. Clearly, experimental consumer research studies in either simulated shopping environments or real-world supermarkets, along the lines of work done by Cox (1970) and Curhan (1972), could be used to test the validity of these arguments.

While the previous discussion has focused on business practices that have been questioned in the cereal case and the cases involving the professions, there are many other practices that have been challenged in antitrust cases that could be evaluated using consumer research approaches. For example, surveys of consumers could probably provide guidance in cases involving tying agreements and dealer restrictions. Surveys of consumer attitudes and preferences could help to establish whether a manufacturer or franchisor could use the defense that the integrity of its product has been damaged when these restrictive practices have not been used. Similarly, surveys could be used in price discrimination cases to help determine whether consumers see two products as being of "like grade and quality" (Day, Massy, and Shocker, 1977). In addition, experiments with consumers could probably provide guidance in cases involving parallel pricing. Experiments on the sensitivity of consumers to price cuts in a certain market, or on consumer perceptions of a price-quality relationship, could help to establish whether the sellers in that market could defend parallel pricing behavior by arguing that consumers do not respond to lower prices.

CASE REMEDY SELECTION ISSUES

Since many antitrust cases are concluded by voiding a merger or acquisition or by requiring firms to discontinue the use of an anticompetitive practice, the type of research discussed in the previous sections would obviously be useful in selecting case remedies. However, other forms of consumer research might prove helpful for locating effective case remedies that fall somewhere in between the restructuring of industries (which rarely is done) and the ordering of firms to discontinue the use of a practice (which may not restore competition to its former, pre-violation state). An example of this type of remedy is one currently being sought by the FTC staff in both the ReaLemon case and the cereal case: the royalty-free licensing of brand names and trademarks to new firms.

The FTC staff believes that royalty-free licensing will encourage new manufacturers to produce and market popular brands (e.g., ReaLemon reconstituted lemon juice, Rice Krispies cereal, Cheerios cereal), while at the same time discourage existing manufacturers from using practices such as brand proliferation, product differentiation, and intensive advertising. New manufacturers could obtain a valuable brand name at no cost, while existing manufacturers would no longer have an incentive to spend large amounts marketing a brand because they might only be helping a competitor by doing so. The result would presumably be more price competition among groups of homogeneous brands.

An implicit and crucial assumption that seems to exist in the arguments for royalty-free licensing is that consumers will react in a similar manner to Safeway's ReaLemon or Kroger's Rice Krispies as they have to Borden's ReaLemon and Kellogg's Rice Krispies. Such an assumption could probably be tested using experimental consumer research approaches. If it were found, for example, that a company name can serve to differentiate a product in the eyes of consumers almost as well as a brand name, then the new remedy would most likely prove to be ineffective for encouraging more competitive activity.

It might also prove useful to turn to past consumer research for ideas for additional antitrust remedies. For example, it has been found that information presentation format can have a significant effect on the way consumers acquire and process information (Bettman and Kakkar, 1977; Russo et al., 1975)--i.e., that certain displays will lead consumers to process information by brand and others will encourage processing by attribute. It has also been found (in a study of cereal brands) that processing by attribute is more characteristic of consumers who exhibit low brand loyalty (Jacoby et al., 1976). These findings suggest that an effective remedy in the cereal case might be one which required supermarkets to display cereal brands in a way that encouraged attribute processing of information--perhaps by arranging brands according to types of ingredients or by erecting signs which compare brands on certain attributes (with one attribute per sign). More attribute processing by cereal customers might conceivably lead to less brand loyalty, more comparative shopping, and more competition among cereal manufacturers. Of course, experimental tests of this remedy would be needed, since low brand loyalty might lead to attribute processing without the reverse being true.

CONCLUSION

Consumer research can clearly play an important role in the enforcement of the antitrust laws. There are many case-specific studies that could be done to help resolve individual antitrust cases. Moreover, there are a number of more general studies that could be done that might provide insights applicable to several cases. In particular, studies of the effects of brand proliferation, product differentiation, and intensive advertising could provide valuable guidance in attempts to resolve either present cases, like those involving the cereal industry and the professions, or potential future cases involving the manufacturers of automobiles, detergents, or other highly differentiated consumer goods.

Whether antitrust lawyers will be willing to submit the results of consumer research studies as courtroom evidence is another issue. As several authors have pointed out (Hunt, 1976; Gardner, 1974), there are substantial problems associated with submitting consumer research in court. It is also unclear whether a willingness to use consumer research results will be exhibited by those involved with selecting new cases or devising new remedies. These lawyers and economists generally have a weak understanding of the measurement techniques and research approaches used by consumer researchers. Nevertheless, given the growing tendency of FTC officials to utilize consumer research results in consumer protection decision making (Brandt and Preston, 1977), the prospects seem reasonably good for also seeing some increase in the use of consumer research in the antitrust area. Word-of-mouth advertising for consumer research by personnel in the FTC's Bureau of Consumer Protection seems likely to spark the interest of antitrust enforcers at the FTC's Bureau of Competition and Bureau of Economics, as well as at the Justice Department's Antitrust Division. Thus, if consumer researchers can begin to supply research findings that antitrust people find relevant and timely, the use of consumer research in antitrust decision making could expand rapidly.

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