FTC Staff Comment to the Honorable Bill Seitz Concerning Ohio H.B. 306 to Amend the Operation of Wine Wholesale Franchises

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Office of Policy Planning
Bureau of Competition
Bureau of Economics
December 12, 2005
The Honorable Bill Seitz
Ohio House of Representatives
Riffe Center
77 South High Street
Columbus, OH 43215
Re: 	Comment on Proposed Wine Franchise Legislation
Dear Representative Seitz:
The staffs of the Federal Trade Commission’s (“FTC” or “Commission”) Office of Policy
Planning, Bureau of Competition, and Bureau of Economics1 are pleased to respond to your
invitation for comments on Ohio HB 306,2 with which you propose to amend the operation of
wine wholesale franchises in Ohio.
The Proposed Legislation likely would increase wholesalers’ incentives to lower
wholesale prices and to undertake efforts to increase the demand for wine suppliers’3 brands, and
therefore is likely to decrease the costs of wine distribution and to increase competition among
wholesalers. Further, the Proposed Legislation is likely to increase competition among suppliers
of wine. Consequently, we believe that, if enacted, the Proposed Legislation is likely to lead to
lower wine prices for Ohio consumers, and may increase the variety of wines from which Ohio
consumers can choose.
1 This letter expresses the views of the Federal Trade Commission’s Office of Policy Planning, Bureau of
Competition, and Bureau of Economics. The letter does not necessarily represent the views of the Federal Trade
Commission or of any ind ividual Com missioner. The Comm ission has, however, voted to autho rize us to subm it
these comments.
2 H.B. 306 , 126th Gen. Assem., Reg. Sess. (Ohio 2005) (hereinafter referred to as “HB 306 ” o r “the
Propo sed Legislation”).
3 As used herein, the term “supplier” refers to both vintners and importers of wine sold in Ohio.

Representative Seitz
December 12, 2005
Page 2 of 13
Interest and Experience of the FTC
The FTC enforces laws prohibiting unfair methods of competition and unfair or deceptive
acts or practices in or affecting commerce.4 Pursuant to this statutory mandate, the Commission
seeks to identify business practices and regulations that impede competition without offering
countervailing benefits to consumers.5 The Commission and its staff have considerable
experience in analyzing the competitive impact of regulations affecting the alcoholic beverage
industry. For example, the FTC staff has commented in the past on proposed restrictions on the
vertical relationships between alcoholic beverage producers and wholesalers.6 Further, in 2003,
the Commission staff released a report on the competitive effects of bans on direct shipments of
wine,7 and in 2004, the FTC staff commented on a proposed New York bill involving direct
shipment of wine.8
The Proposed Legislation
The Proposed Legislation would make several changes to the manner in which wholesale
wine franchises operate in Ohio. First, HB 306 would eliminate the current minimum markup on
wine at the wholesale level.9 Ohio law currently requires wholesalers to mark up their wine
prices by a minimum of 33.3 percent,10 and further requires retailers to mark up their wine prices
4 Federal T rade Commission Act, 15 U.S.C. § 4 5.
5 Specific statutory authority for the FTC’s competition advocacy program is found in Sections 6(a) and (f) of
the FT C Act, under which Co ngress authorized the FT C “[t]o gather and comp ile information concerning, and to
investigate from time to time the organization, business, conduct, practices, and management of any person,
partnership, or corporation engaged in o r whose business affec ts commerce,” and “[t]o make public fro m time to
time such portions of the inform ation o btained by it hereund er as are in the public interest.” 15 U.S.C. § 4 6(a), (f).
6 See, e.g., Letter from FT C Staff to Cal. State Sen. W esley Chesbro (Aug. 24 , 200 5), at
http://www.ftc.gov/os/2005/08/050826beerfranchiseact.pdf; Letter from Chicago R egional Office to Ill. State Sen.
Dan Cro nin (M ar. 31 , 199 9), at http://www .ftc.gov/b e/v99 000 5.htm; Letter from Atlanta Regional Office to North
Carolina State Sen. Hamilton C . Horton, Jr. (Mar. 22 , 199 9), at http://www .ftc.gov/b e/v99 000 3.htm; Statement of
Pho ebe Morse, D ir., Boston R egional Office to the M ass. Alcoholic Beverages Co ntrol Comm ’n (June 26, 1 996 ), at
http://www .ftc.gov/b e/v96 001 2.htm.
7
http://www.ftc.gov/os/2003/07/winereport2.pdf.
8 Letter from FTC Staff to New York State Rep. William Magee et al. (M ar. 29 , 200 4), at
http://www.ftc.gov/be/v040012.pdf.
9 HB 306 § 1 , at 6. HB 306 also would p rohibit the Ohio Liquor Co ntrol Commission from establishing
minimum wholesale prices for wine. Id.
10 O H IO A D M IN . C O D E 4301:1-1-03(C )(2)(b).
at	,	(2003)	EPORT	R	TAFF	, FTC S	INE	: W	OMM ERCE	E-C	A R R IE R S T O	B	NTICOMPETITVE	A	OSSIBLE	P

Representative Seitz
December 12, 2005
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by a minimum of 50 percent.11 Elimination of the minimum wholesale markup for wine would
mirror current Ohio law regarding beer, which has no minimum wholesale markup.12 You have
indicated that, to the best of your knowledge, only Ohio and Washington currently require such a
wholesale markup on wine.
HB 306 also would eliminate mandatory exclusive territories for the wholesale
distribution of wine.13 In addition, HB 306 would repeal current statutory requirements for
terminating a wholesale wine franchise agreement.14 Specifically, Ohio law currently requires
“just cause” for such terminations.15
Further, under the Proposed Legislation, suppliers and wholesalers would be free to
extend to wholesalers and retailers, respectively, up to thirty days of credit for wine purchases.16
Current law requires that wholesalers and retailers pay by cash or check immediately upon
receipt of any wine shipment.17
Finally, HB 306 would create a committee tasked with “study[ing] the best means of
improving wholesale distribution of wine in Ohio” and reporting its findings to the Ohio
Legislature within 210 days18 of the effective date of HB 306.19
11 Id. at (C)(2)(c). Although HB 306 does not address this minimum retail markup, such markup generally has
the same negative effects on competition among retailers that the wholesale markup has on competition among
wholesalers. See infra Section A.3. That is, it limits price competition and protects inefficient, high-cost retailers
from competition from more efficient rivals, all to the detriment of wine consumers in Ohio.
12 See O H IO R EV . C O D E § 430 1.041 (granting Ohio Liquor C ontrol Co mmission authority to establish
minimum retail markup on beer); see also O H IO A D M IN . C O D E 4301:1-1-72(B )(1)-(3) (requiring 25% minimum
retail markup on beer).
13 HB 306 § 1, at 1-2 (eliminating prohibition of “[a]ward[ing] an additional franchise for the sale of the same
brand within the same sales area or territory”).
14 Id. at 1-3.
15 O H IO R EV . C O D E § 13 33.8 4(A).
16 HB 306 § 1, at 7-8.
17 O H IO R EV . C O D E § 43 01.2 4.
18 All other provisions in HB 306 would become operative one year after the bill’s effective date. HB 306
§ 3, at 10.
19 Id. § 4, at 10-11. HB 306 also wo uld expressly prohibit the use of volume or quantity discounts in
connection with sales of wine (or any other alcoho lic beverage) to who lesalers and retailers. Id. § 1, at 6. Such a
prohibition would likely increase the price that Ohio consumers pay for wine. It is our understanding, however, that
this amendm ent to the Revised C ode would merely codify a rule already co ntained in the Ad ministrative Co de. See
O H IO A D M IN . C O D E 4301:1-1-43(A )(2) (prohibiting “discounts based on quantity of sales or any other reason”). If

Representative Seitz
December 12, 2005
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Competitive Effects of the Proposed Legislation
Ohio law has created a “three-tier” wine distribution system. Ohio law prohibits
suppliers (the first tier) from selling their product directly to retailers (the third tier).20 Instead,
suppliers must sell their wine to licensed wholesalers (the second tier), which in turn supply
retailers. Ohio law currently prohibits suppliers from holding ownership interests in either
wholesalers or retailers, just as it prohibits wholesalers from holding ownership interests in
retailers.21
Within this three-tier system, wholesalers perform several key functions to create and
maintain demand for the wine brands that they distribute. Wholesalers are responsible for storing
and delivering a supplier’s wine in a manner that maintains the wine’s quality. Additionally,
wholesalers establish retail networks to sell the brands of wine that they carry. Although
suppliers typically are responsible for providing national and regional advertising, wholesalers
often provide point-of-sale promotion, such as enhanced product placement, setting up displays,
conducting in-store events, and supplying retailers (and ultimately consumers) with information
on the brands that wholesalers distribute.
As discussed in more detail below, HB 306 would make it easier for a wine supplier to
enforce contractual arrangements designed to reduce wholesale prices and to increase wholesaler
incentives to provide demand-enhancing services, and therefore is likely to lower suppliers’ costs
of distribution and to enhance competition among both wholesalers and suppliers. HB 306 also
would enhance competition among wholesalers by increasing their incentives to lower wholesale
prices. Accordingly, if enacted, the Proposed Legislation would likely result in lower wine prices
for Ohio consumers and may lead to more variety.
A. 	Increase in Competition Among Wine Wholesalers
There are several reasons why HB 306 is likely to increase competition among wine
wholesalers for suppliers’ business and thereby benefit consumers.
1. 	Elimination of Mandatory Exclusive Territories Is Likely to Enhance
Competition Among Wholesalers
The currently mandated exclusive territories for wine sales in Ohio prevent a supplier
from simply hiring another wholesaler in the same territory to distribute its brand in competition
this is the case, this pro vision o f HB 306 would have no imp act.
20 Retailers includ e all outlets that sell directly to co nsumers, includ ing bars and restaurants.
21 O H IO R EV . C O D E § 4301.24.

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December 12, 2005
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with a non-performing incumbent wholesaler. Further, the exclusive territory requirement limits
suppliers’ freedom to respond to changes in market conditions. For example, the requirement
prevents a supplier from combining territories to achieve scale efficiencies, or from dividing
between two wholesalers an existing territory in which demand is growing.
HB 306 would eliminate the exclusive territory requirement, thus permitting suppliers – if
they so choose, based on their individual economic calculations – to contract with multiple
wholesalers in any given geographic area. In the absence of the exclusive territory requirement,
however, a supplier may nonetheless choose to utilize exclusive territories. Exclusive territories
can have procompetitive effects by better aligning supplier and wholesaler incentives to engage
in promotional and other activities designed to enhance demand for the supplier’s brands.22
Accordingly, it is better to let private parties determine whether it is in their interests to enter into
contracts that contain exclusive territory provisions than to mandate such terms. Because
suppliers have an incentive to minimize the cost and maximize the effectiveness of distribution,
they are likely to grant wholesalers exclusive territories only if such contracts are likely to
increase output. For these reasons, the elimination of mandatory exclusive territories is likely to
enhance competition among wine wholesalers.
2. 	Easing the Requirements for Termination of a Wholesaler Is Likely to
Enhance Competition Among Wholesalers
Typically, the ability of suppliers to terminate or not renew a franchise agreement
provides wholesalers with an incentive to perform their distribution functions to the satisfaction
of their suppliers. By prohibiting a supplier from terminating (or failing to renew) a contract
with a wholesaler except for “just cause,” and by requiring a supplier to give a wholesaler 60
days written notice of the reasons for such termination, current Ohio law limits a supplier’s
ability to ensure that a wholesaler is acting in the supplier’s best interests. Overly restrictive
termination requirements also prevent suppliers from reacting quickly and efficiently to changes
in market conditions and consumer preferences. The end result is that suppliers are often locked
into dealing with certain wholesalers, even if such distribution relationships are inefficient – not
just for the suppliers, but from a consumer welfare perspective as well. For example, suppliers
might be unable to restructure distribution networks that have become obsolete. The higher
prices associated with such inefficiencies would presumably be passed on to consumers.
By eliminating the “just cause” requirement, HB 306 would make it less difficult for a
supplier to terminate (or refuse to renew) its current wholesale contract in order to switch to a
more reliable or less expensive wholesaler. With this new threat of competition – from both
existing firms and new entrants – incumbent wholesalers’ incentives to improve performance or
to lower costs are increased, likely leading to lower wholesale wine prices, and ultimately lower
retail wine prices in Ohio.
See infra Sections B.1 and B.2.
22

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December 12, 2005
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3. 	Elimination of the Minimum Wholesale Markup Is Likely to Increase
the Incentive for Wholesalers to Reduce Their Prices
Finally, elimination of the minimum wholesale markup will likely increase the incentive
for wholesalers to lower their prices.23 The currently mandated 33.3 percent minimum markup
ensures that wholesalers achieve a minimum margin on their wine sales to retailers. The
economic effect of this markup, however, is to limit price competition among wholesalers (to the
extent that such competition exists under the current regime) and to protect inefficient, high-cost
wholesalers from competition from lower-cost, more efficient rivals.24
Minimum wholesale markups have market-distorting effects similar to those caused by
sales-below-cost statutes in effect in many states.25 The FTC staff has commented on several
such statutes, particularly those directed at gasoline prices.26 As explained by the staff in such
comments, the primary concern with sales-below-cost statutes is that they deter firms from
lowering their prices, thus depriving consumers of the benefits of competition. The minimum
wholesale markup on Ohio wines similarly deprives consumers of the benefits of unbridled
competition among wine wholesalers: lower prices, increased output, higher quality products,
and greater variety of brands.
Just as sales-below-cost statutes were originally concerned with “fair” treatment of
(particularly, smaller) businesses, the minimum wholesale markup serves to protect inefficient
wholesalers from competition from more efficient marketplace rivals. This type of economic
protectionism, however, is anathema to the goals of competition law, which is focused on
23 The local media has reported that Ohio consumers pay the highest prices in the U nited States for wine, in
large p art due to the state-mand ated m inimum wholesale and retail markups. See John S. Long, Wine Co sts in Ohio
Are Highest in Nation, C LEV . P L AIN D EALER , Mar. 3, 2002 , at A1 (finding that “[c]onsumers can pay fro m one fourth
to one half more for a bottle of wine in Ohio than in other states.”).
24 Although HB 306 do es not address the minimum retail markup for wine (or any other alcoholic beverage),
that minimum markup similarly limits price competition among retailers and protects inefficient, high-cost retailers
from competition from more efficient rivals, all to the detriment of wine consumers in Ohio.
25 In fact, some of these statutes are b ased on minimum markups above som e definition of cost. See, e.g., M D .
C ODE A N N ., C O M . L A W § 11-401 (b) (cost to retailer defined as invoice and transportation costs plus 5-7% markup);
C AL . B U S . & P R O F . C ODE § 17026 (cost of distribution is invoice or replacement cost plus 6% markup in absence of
proof of “cost of doing business”).
26 See, e.g., Letter fro m FT C Staff to Mich. State Rep . Gene DeRo ssett (June 17, 200 4), at
http://www.ftc.gov/os/2004/06/040618staffcommentsmichiganpetrol.pdf; Letter from FT C Staff to Kan. State Sen.
Les D onovan (M ar. 12 , 200 4), at http://www.ftc.gov/be/v040009.pdf; Letter from FTC Staff to Ala. State Rep.
Demetrius Newton (Jan. 29, 20 04), at http://www .ftc.gov/b e/v04 000 5.htm; Letter from FTC Staff to Wis. State Rep.
Shirley K rug (O ct. 15, 200 3), at http://www.ftc.gov/b e/v03 001 5.htm; Letter from FTC staff to New York Attorney
Gen. Eliot Spitzer (July 24, 20 03), at http://www.ftc.gov/be/nymfmpa.pdf.

Representative Seitz
December 12, 2005
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protecting consumer welfare, rather than protecting competitors from “too much” competition.27
B. 	Increase in Competition Among Wine Suppliers
As explained below, the incentives of suppliers and wholesalers to engage in activities
designed to enhance demand for the suppliers’ products are likely to differ. For example,
wholesalers are unlikely to promote a specific brand as vigorously as the supplier would wish.
Suppliers therefore typically contract with wholesalers to require them to take certain demand-
enhancing actions with respect to the suppliers’ products. By decreasing the cost associated with
terminating wholesalers, the Proposed Legislation is likely to increase wholesalers’ incentives to
take such demand-enhancing actions. Further, by eliminating mandatory exclusive territories, the
Proposed Legislation is likely to reduce suppliers’ distribution costs. The net result thus is likely
to be more intense competition among suppliers, to the benefit of consumers.
1. 	Suppliers’ and Wholesalers’ Incentives to Increase Sales Are Likely to
Differ
Suppliers (such as wine manufacturers) typically treat distribution as one of many inputs
involved in getting a final product to consumers. And as is the case with other inputs, suppliers
want to receive the best distribution services at the lowest possible prices to allow them to
compete more effectively against their rivals for consumers’ business. Wholesalers, however,
typically care less about stimulating sales of a particular brand than suppliers do.28 Suppliers
tend to benefit more than wholesalers when wholesalers increase demand for the suppliers’
product. A consumer who discovers a wine supplier’s brand due to wholesaler effort (perhaps by
providing point-of-sale information or negotiating better product placement), for example, will
continue to purchase the brand regardless of which wholesaler supplies it; although the supplier
has gained a new customer, that new customer has no allegiance to the wholesaler.
Consequently, competing wholesalers that do not provide demand-enhancing services could
benefit when another wholesaler creates demand for a particular brand: the so-called “free-rider”
wholesaler could charge retailers lower wholesale prices for the brand because they do not have
to cover the costs of demand-enhancing efforts – and capture the increased demand.29 Of course,
27 Cf. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 , 488 (1977 ) (quoting Brown Shoe Co. v.
United States, 370 U.S. 294 , 320 (1962 )) (Congress designed the antitrust laws for “the protection of competition,
not competitors”).
28 See Benjamin Klein & K evin M . Murphy, Vertical Restraints as Contract Enforcement Mechanisms, 31
J.L. & E C O N . 265 (1988 ).
29 See Lester G. T elser, Why Should M anufacturers Want Fair Trade?, 3 J.L. & E C O N . 86 (1960). A supplier
also may have an incentive to act opportunistically when a wholesaler has made large investments to increase the
demand of a particular brand, for instance, by threatening to terminate its relationship with the incumbent wholesaler
and turn over the business to a co mpeting wholesaler (who could free-ride o n the incumbent wholesaler’s efforts)
unless it rec eives p rice co ncessio ns. Of course, private contra ctual solutions often are emplo yed by parties to

Representative Seitz
December 12, 2005
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knowing that other wholesalers may free-ride on its effort, a distributor is not likely to engage in
high levels of sales-generating activities in the first place. This is likely to reduce product
information available to consumers in the marketplace and ultimately consumer purchases.
Additionally, because a wholesaler does not reap the full benefit of a supplier’s
reputation, it is likely to have less incentive than the supplier to maintain a level of quality
associated with a particular brand. When this happens, consumers pay for more quality than they
actually receive, and thus are unlikely to purchase the supplier’s product again. For example,
when a consumer does not enjoy a wine because it has not been handled properly and
consequently decides not to purchase that particular brand again, the supplier loses all of that
customer’s potential future purchases, regardless of where they are made.30 The wholesaler, by
contrast, loses only the future sales to that customer that would have been made by retailers that
the wholesaler supplies.
Further, when a supplier’s profit margin for an additional sale is large in relation to the
wholesaler’s, the wholesaler rationally will not provide as much effort in securing an additional
sale as the supplier would desire, meaning that undecided consumers are less likely to receive
product information that they may find valuable in making purchase decisions.
Wholesale pricing also affects the demand for a supplier’s product. As discussed above,
from the supplier’s point of view, the cost of the services that a wholesaler provides are but one
part of the final price that consumers pay. As with other costs, suppliers would like the costs of
distribution to be as low as possible to make their product more competitive. Typically, the price
that wholesalers charge retailers – which includes both the price of the supplier’s product plus the
cost of distribution – will be higher than the price that a supplier would set if it distributed the
product itself. This is because the wholesale price is likely to include a markup over the cost of
distribution, which the supplier would not charge retailers if it distributed its own product.31
When a supplier’s product is marked up twice, this ultimately leads to higher retail prices and
eliminate or mitigate such opportunistic behavior. See, e.g., Benjamin Klein, Exclusive Dealing as Competition for
Distribution “on the M erits,” 12 G EO . M A S O N L. R EV . 119 (2003 ).
30 W ithout proper handling, total demand for the wine (i.e., not merely demand at the one retail location)
would be lower beca use co nsumers likely wo uld associate the po or quality not with the retailer’s inadequate
hand ling, but with the manufacturer’s product. Similarly, a fast food franc hisee that uses inferio r products at its
restaurant do es not internalize the full costs of its actions, because consumers will associate the bad experience with
the franchisor’s brand name , not a particular franchisee. See Benjamin Klein, The E cono mics of F ranch ise
Contrac ts, 2 J. C ORP . F IN . 9 (19 95); Paul H. Rubin, The Theory of the Firm & the Structure o f the Fran chise
Contract, 21 J.L & E C O N . 223 (1978).
31 Of course, as discussed supra, state-mandated minimum wholesale and retail markups lead to even higher
retail prices.

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December 12, 2005
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concomitantly lower rates of output.32
2. 	Vertical Arrangements Can Mitigate Misaligned Incentives
Because wholesalers are unlikely to promote a specific brand as vigorously as the supplier
would wish, suppliers and wholesalers typically enter into agreements that require wholesalers to
take certain actions designed to enhance competition with competing brands. For example,
contracts may include quality standards or sales quotas to limit wholesaler markups. They also
may include exclusive territory provisions designed to provide wholesalers with additional
incentives to provide sales-generating efforts33 or exclusive dealing requirements to focus dealer
efforts on the supplier’s – rather than a rival’s – product.34 As many economic studies have
found, such provisions tend to benefit consumers in the form of higher output, lower prices, and
improved services.35 Further, the U.S. Supreme Court has noted on numerous occasions how
32 Not only are consumers worse off (due to higher prices and lower output) because of the double markup,
but the joint profits earned by the supplier and the wholesaler are lower as well, because when one of these two firms
raises its price, the gain from the increment in price is accrued entirely by the price-raising firm, while the loss from
fewer consumers buying the product is distributed over both firms. That is, the final price ends up being higher than
if a single, integrated firm had been exposed to all gains and losses.
33 See Tim R. Sass & D avid S . Saurm an, Mandated Exclusive Territories and Economic Efficiency: An
Em pirical Analysis of the M alt-Bevera ge Ind ustry, 36 J.L. & E C O N . 153 (1993 ) (finding that in states where
exclusive territories are mandated for beer wholesalers, prices tend to be higher and demand tends to be higher,
consistent with exclusive territories leading beer wholesalers to provide more sales-generating effort).
34 Exclusive dealing agreem ents can be used to prevent distrib utors fro m using direct investments ma de by a
supp lier to promote rivals’ prod ucts. See Ho ward P. M arvel, Exclusive Dealing, 25 J.L. & E C O N . 1 (19 82).
Additionally, exclusive dealing can be used to assure that suppliers receive the sales-generating effort that they have
bargained for from distributors (e.g., through direct payment or through increased revenue that comes with exclusive
territories), rather than distributors focusing their efforts on comp eting brands. See Klein, supra note 2 8.
35 See, e.g., Tasneem Chipty, Vertical Integra tion, M arket Foreclosure, and C onsum er Welfare in the Cable
Television In dustry, 91 A M . E C O N . R EV . 428 (2001); Michael G. V ita, Regulatory Restrictions on Vertical
Integration and Control: The Competitive Impact of Gasoline Divorcement Policies, 18 J. R EG . E C O N . 217 (2000 );
Margaret E. Slade, Beer and the T ie: Did D ivestiture of Brew er-Ow ned P ublic Houses Lead to H igher Beer Prices? ,
108 E C O N . J. 565 (1998 ); Jan B . Heid e, Shantanu D utta & Mark B ergen, Exclusive Dealing and Business Efficiency:
Evidence from Industry Practice, 41 J.L. & E C O N . 387 (1998); Michael G. V ita, Mu st Carry Regu lations for Cable
Television S ystem s: An Em pirical Ana lysis, 12 J. R EG . E C O N . 159 (19 97). Two recent pap ers that have reviewed the
empirical literature on vertical restraints find that most studies’ results are consistent with vertical restraints being
procom petitive. See James C. C oop er, Luke M . Froeb, Daniel P . O’B rien & Michael G. V ita., Vertical Antitrust
Policy as a Problem of Inference, 23 I N T ’ L J. I N D U S . O RG . 639 (2005); Francine Lafontaine & Margaret Slade,
Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in Paola Buccirossi ed.
H AND BOO K OF A NTITRUST E CONOM ICS (forthcoming 2005), at
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/slade/wp/ecsept2005.pdf.

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December 12, 2005
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vertical contracts can intensify competition among suppliers,36 which benefits consumers with
lower prices and improved quality.37
3. 	Decreasing the Cost of Terminating a Wholesaler Is Likely to Increase
Wholesalers’ Incentives to Provide Demand-Enhancing Services
As discussed above, by prohibiting a supplier from terminating (or failing to renew) a
contract with a wholesaler except for “just cause,” current Ohio law limits a supplier’s ability to
ensure that wholesalers take actions to increase the demand for the supplier’s products.38 By
eliminating the just cause requirement, HB 306 would decrease the cost – and thus increase the
feasibility – of terminating (or not renewing) a wholesaler. Absent a credible warning of
termination (or non-renewal) by the supplier, wholesalers have less incentive to stimulate
demand as their contracts require.39 An increase in the ability of suppliers to control wholesalers’
activities is likely to provide Ohio consumers with the lower prices, increased output, and better
quality that result from more intense competition among wine brands.
4. 	Easing of Termination Restrictions May Increase Small Suppliers’
Abilities to Compete with Large Suppliers
The current termination requirements in Ohio law may affect smaller suppliers to a
greater extent than larger suppliers because larger suppliers may be in a better position to incur
the legal costs typically associated with a wholesaler termination and thus have a greater ability
to exercise control over wholesalers. Established brands that advertise heavily, moreover, may
not rely as much on wholesaler effort. Consequently, the Proposed Legislation may lead to more
variety as smaller suppliers find it less difficult to market their product than they currently do.40
36 See, e.g., State Oil Co. v. Khan, 522 U.S. 3 (19 97); Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S.
717 (19 88); Mo nsanto C o. v. Spray-Rite Serv. Corp., 465 U .S. 752 (1984 ); Cont’l T.V., Inc. v. GTE Sylvania Inc.,
433 U .S. 36 (1977).
37 See Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679 , 695 (1978) (“ultimately competition will
produce not only lower prices, but also better goods and services”).
38 See James A. B rickley et al., The Economic Effects of Franchise Termination Laws, 34 J.L. & E C O N . 101,
113 (19 91) (analysis of case law supports the premise that termination laws increase the cost of termination and non-
renew al); see also Tra cey A. Nicastro, How the Cookie Crumbles: The Good Cause Requirement for Terminating a
Franchise Agreement, 28 V AL . U. L. R EV . 785, 796-98 (1994) (cataloging several courts’ interpretations of “good
cause” that limit a franchiso r’s ability to terminate franchisees).
39 In an extreme example of wholesaler non-performance, a wholesaler may refuse to supply retailers with the
supp lier’s pro duct at all (i.e., “park” the brand). In these situations, consumers in the wholesaler’s territory are
dep rived of the product altogether.
40 Yet another source of greater variety for Ohio wine consumers is direct shipment of out-of-state (and in
state) wines purchased online. In a 2003 report, the Commission staff found that, among other things, consumers can
purchase many wines on line that are not available in local retail stores, and that, depend ing on the circumstances,

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Further, to the extent that larger suppliers have brands that compete with small suppliers’ brands,
if the Proposed Legislation lowers small suppliers’ distribution costs relatively more than it
lowers large suppliers’ distribution costs, it may have the effect of increasing the aggressiveness
of large suppliers’ pricing for those brands that compete with small suppliers’ brands, thus
lowering the price that Ohio consumers pay for those brands of wine.
5. 	Elimination of Mandatory Exclusive Territories Is Likely to Decrease
Suppliers’ Distribution Costs
The currently mandated exclusive territories for wine sales in Ohio, coupled with the
overly restrictive termination provisions, likely have served to increase a supplier’s cost of
distribution. For the reasons discussed above, the current termination requirements make it
difficult to terminate a wholesaler that fails to exert sufficient effort to promote a supplier’s
brand. At the same time, the exclusive territory requirement prevents a supplier from simply
hiring another wholesaler in the same territory to distribute the supplier’s brand in competition
with the non-performing incumbent wholesaler. Further, the exclusive territory requirement
limits suppliers’ freedom to respond to changes in market conditions. For example, the
requirement prevents a supplier from combining territories to achieve scale efficiencies or
dividing between two wholesalers an existing territory in which demand is growing.
As discussed above, although a supplier may choose to maintain exclusive territories
upon enactment of HB 306 because it makes economic sense for that supplier to do so, it is better
to let private parties determine whether it is in their interests to enter into contracts that contain
exclusive territory provisions than to mandate such terms. Elimination of mandatory exclusive
territories is likely to reduce the cost of distribution for suppliers as a group, and thus is likely to
increase competition among that group.
C. 	Decrease in Transaction Costs for Wholesalers and Retailers
Ohio law currently requires that wholesalers and retailers pay by cash or check
immediately upon receipt of any wine shipment.41 HB 306 would permit wine suppliers and
wholesalers to extend up to thirty days of trade credit to wholesalers and retailers, respectively. It
is well established that the use of trade credit can decrease the costs associated with the exchange
consumers can sa ve mo ney by p urchasing wine online. See P OSSIBLE A NTICOMPETITVE B A R R IE R S T O E-C OMM ERCE :
As a result of the
settlement reached in Stah l v. Taft, No. 2:03cv00597 (S.D. Ohio), Ohio consumers currently may purchase wines by
direct shipment from outside Ohio. See Ohio Divisio n of Liq uor C ontro l Web site, at
http://www .liquorcontrol.ohio.gov/DirectShipping.htm (providing relevant inform ation and tax form). Proposed
legislation that would permanently allow such shipments has been introduced in the Ohio Senate. See S.B. 179,
126th Gen. Assem., Reg. Sess. (Ohio 2005 ).
O H IO R EV . C O D E § 4301.24.
.	http://www.ftc.gov/os/2003/07/winereport2.pdf	at	,	18-22 (2003)	EPORT	R	TAFF	, FTC S	INE	W
41

Representative Seitz
December 12, 2005
Page 12 of 13
of goods.42 HB 306 is thus likely to decrease the transaction costs for wholesalers and retailers of
wine in Ohio. This reduction may be especially beneficial to smaller wholesalers and retailers,
who may have more difficulty than their larger rivals in meeting the currently mandated cash
requirement. Any reductions in transaction costs at the wholesale and retail levels, in turn, are
likely to lead to reductions in the final prices paid by consumers.
Conclusion
HB 306 is likely to increase wholesalers’ incentives to become more efficient, and to
lower their prices and provide important demand-enhancing services for their suppliers’ brands.
HB 306 is therefore likely to decrease the costs of wine distribution and to increase competition
among both wholesalers and suppliers. Further, HB 306 may disproportionately lower the
distribution costs of smaller suppliers, potentially increasing competition among certain wine
brands. Consequently, if the Proposed Legislation were enacted, Ohio consumers would likely
pay lower prices for wine and may enjoy more variety. We urge the Ohio Legislature to take into
account these likely effects on consumers when considering HB 306.
See, e.g., Mitchell A. P etersen & R aghuram G . Rajan, Trade Credit: Theories and Evidence, 10 R EV . F IN .
S TUDIES 661 , 665 (1997) (“Trade credit may red uce the transaction co sts of paying bills. Rather tha n paying bills
every time goo ds are delivered, a buyer might want to cumulate obligations and pay them only monthly or quarterly.
This will also enable an organization to separate the payment cycle from the delivery schedule.”) (citation omitted);
J. Step hen Ferris, A Transaction s Theory of Trad e Credit Use, 96 Q.J. E C O N . 243, 244 (1981) (“[T]rade credit may
arise as a way of lowering the exchange costs by separating the exchange of goods from the exchange of money.”).
42

Representative Seitz
December 12, 2005
Page 13 of 13
Respectfully submitted,
Maureen K. Ohlhausen, Director
Office of Policy Planning
Susan A. Creighton, Director
Bureau of Competition
Michael A. Salinger, Director
Bureau of Economics