FTC Staff Comment to the Hon. Michael J. Bragman Concerning New York A.B. 3643 to Reform New Yorks Milk Distribution Licensing System

Federal Trade Commission
Office of the Re~ion.1 Dlredor
2H Federal Plaza, 22nd FI.
New York. New York 10278
(212) 264-1200
May 	19, 	1987
Michael 	J. 	Bragman, 	Chairman
Committee 	on 	~griculture
Assembly 	of 	the 	State 	of 	New 	York
State 	Assembly 	Building
Albany, 	New 	York 	12248
Dear 	Chairman 	Bragman:
ay 	letter 	of 	March 	20, 	a 	copy 	of 	which 	is 	attached, 	the
staff 	of 	the 	Federal 	Trade 	Commission 	commented 	on 	Assembly 	Bill
No. 	3643 	(aA. 	3643-), 	a 	bill 	to 	reform 	New 	York 	State's 	milk
distribution 	licensing 	system. 	We 	since 	have 	reviewed 	other
Assembly 	bills 	that 	would 	modify 	this 	system 	and 	die 	pleased 	to
accept 	your 	invitation 	to 	comment 	on 	them 	as 	well. 	Althou9h
these 	bills 	tend 	to 	support 	competition 	in 	the 	milk 	marketplace,
no 	bill 	or 	combination 	of 	bills 	-- 	apart 	from 	A. 	3643 	--
adequately 	addresses 	the 	several 	anticompetitive 	aspects 	of 	the
current 	regulatory 	scheme.
ASSEMBLY 	BILL 	NO. 	3643
In 	our 	previous 	letter, 	we 	wrote 	that 	Section 	258 	of 	the
Agriculture 	and 	Markets 	Law 	limits 	competition 	in 	New 	York 	State's
milk 	markets 	and 	thereby 	suppresses 	innovation, 	encourages 	the
adoption 	of 	wasteful 	cost-inflating 	practices, 	and 	misallocates
resources. 	As 	a 	result, 	New 	Yo~k 	consumers 	incur 	vast 	overcharges
for 	milk. 	In 	contrast, 	A. 	3643 	would 	permit 	increased 	competition
by 	eliminating 	significant 	barriers 	to 	vigorous 	competition 	by
1 	This 	letter 	presents 	the 	comments 	of 	the 	New 	York 	Regional
Office 	and 	the 	Bureaus 	of 	Competition, 	Economics, 	and 	Consumer
Protection 	of 	the 	Federal 	Trade 	Commission. 	The 	views 	expressed
are 	not 	necessarily 	those 	of 	the 	commission 	or 	of 	any 	individual
Commissioner, 	although 	the 	Commission 	has 	voted 	to 	authorize 	the
presentation 	of 	these 	comments 	to 	you.

Michael 	J. 	Bragman, 	Chairman 	- 	2 	-
current 	and 	potential 	dealers. 	Thes@ 	barriers 	include 	county-by-
county 	licensing 	and 	r@guldtion 	of 	non-predatory 	pricing,2 	and
perhaps 	most 	importantly, 	application 	of 	the 	-destructive
comp@tition" 	and 	"public 	interest- 	standards. 	These 	standards
permit 	the 	Commissioner 	of 	Agriculture 	("Commissioner") 	to 	deny 	a
license 	to 	distribute 	milk 	on 	finding 	that 	entry 	will 	"tend 	to 	a
destructive 	competition 	in 	a 	market 	already 	adequately 	served" 	or
1s 	"not 	1n 	the 	public 	interest."3 	We 	concluded 	that 	passage 	of
A. 	3643, 	by 	eliminating 	these 	barriers, 	would 	result 	in 	widespread
availability 	of 	milk 	at 	reduced 	prices.
Having 	previously 	addressed 	A. 	3643 	and 	its 	public
benefits 	in 	detail, 	we 	now 	discuss 	those 	bills 	that 	might 	usefully
supplement 	A. 	3643. 	Then 	we 	consider 	those 	bills 	that 	are
intended 	as 	alternatives 	to 	it. 4
USEFUL 	SUPPLEMENTS 	TO 	A. 	3643
Several 	of 	the 	bills 	introduced 	might 	be 	useful
supplements 	to 	A. 	3643. 	Standing 	alone, 	however, 	they 	would 	not
be 	adequate 	substitutes.
A. 	3158 	would 	require 	the 	Commissioner 	to 	consider 	the
competitive 	consequences 	oC 	any 	proposed 	denial, 	suspension, 	or
revocation 	of 	a 	license 	to 	distribute 	milk. 	Adoption 	of 	A. 	3158
might 	help 	ensure 	that 	the 	benefits 	of 	competition 	fostered 	by
other 	reforms 	-- 	such 	as 	elimination 	of 	the 	"destructive
competition" 	standard 	-- 	are 	fully 	realized.
2 	Section 	258-u 	of 	the 	current 	law 	prohibits, 	but 	does 	not
define, 	below 	cost 	pricing. 	Section 	15 	of 	A. 	3643 	would 	define
"below 	cost" 	to 	mean 	below 	average 	variable 	cost. 	Even 	as 	sO
defined, 	however, 	the 	prohibition 	of 	below 	cost 	pricing 	could
stifle 	honest 	competition. 	Accordingly, 	we 	suggested 	that 	the
Assembly 	repeal 	rather 	than 	revise 	Section 	258-u.
3 	N.Y. 	Agric. 	& Mkts. 	Law 	S 	258-c 	(McKinn@y 	Supp. 	1986).
Section 	9 	of 	A. 	3643 	would 	eliminate 	this 	dIscretion.
4 	We 	discuss 	Assembly 	Bills 	Nos. 	3157 	through 	3159 	and 	3161
through 	3164 	("A. 	3157" 	through 	"A. 	3159" 	and 	"A. 	3161 a 	th(ough
wA. 	3164").

., : "40-1
Michael 	J. 	Br~gman, Chairman
--- --- ~--~
- 	3 	-
A. 	3159 	states 	that 	the 	public 	policy 	of 	the 	State 	of
New 	York 	is 	to 	promote 	"the 	availability 	of 	milk 	to 	consumers 	at
reasonable 	prices 	by 	promoting 	competition 	••.•" 	This 	bill
thus 	could 	provide 	a 	helpful 	interpretive 	guide 	to 	the
Commissioner 	and 	the 	courts.
passage 	of 	A. 	3158 	and 	A. 	3159 	would 	promote 	consumer
interests 	in 	the 	implementation 	or 	New 	York 	state's 	milk
distribution 	laws. 	Enacting 	either 	or 	both 	of 	them, 	however,
without 	also 	eliminating 	county-by-county 	licensure, 	repealing
below 	cost 	pricing 	regulation, 	and, 	most 	importantly, 	eliminating
the 	"destructive 	competition" 	and 	"public 	interest W barriers 	to
entry, 	might 	permit 	continued 	exclusion 	of 	efficient 	would-be
competitors, 	to 	the 	detriment 	of 	the 	consuming 	public.
A third 	bill, 	A. 	3162, 	raises 	slightly 	different
concerns. 	This 	bill 	provides 	that 	the 	Commissioner 	must 	determine
within 	120 	days 	of 	application 	whether 	to 	grant 	a 	license. 	upon 	a
finding 	that 	a 	determination 	within 	this 	period 	cannot 	be 	made,
the 	Commissioner 	may 	extend 	the 	period 	by 	not 	more 	than 	an
additional 	120 	days.S 	A. 	3162 	is 	intended 	to 	prevent 	extremely
lengthy 	licensing 	proceedings 	that 	can 	substantially 	delay 	or 	even
prevent 	competitive 	entry 	into 	the 	state's 	milk 	markets. 	In 	the
event 	the 	Assembly 	retains 	the 	"destructive 	competition" 	and
"public 	interest" 	standards 	of 	the 	current 	law, 	passage 	of 	A. 	3162
might 	prove 	somewhat 	helpful 	because, 	as 	we 	stated 	in 	our 	earlier
letter, 	the 	current 	license 	application 	process 	itself 	increases
entry 	costs 	and 	serves 	as 	a 	deterrent 	to 	potential 	competitors.
The 	process 	enables 	firms 	already 	in 	the 	market 	to 	delay 	the 	entry
of 	competitors 	and 	to 	preserve 	their 	own 	market 	positions. 6
However, 	if 	the 	"destructive 	competition" 	and 	"public 	interest"
standards 	are 	eliminated 	and 	statewide 	licensure 	is 	put 	in 	place,
as 	we 	suggest, 	even 	one 	120-day 	period 	would 	seem 	excessive. 	We
therefore 	urge 	the 	Assembly 	to 	adopt 	a 	substantially 	shorter
period 	in 	conjunction 	with 	the 	other 	reforms 	that 	we 	have
discussed.
5 	A. 	3162 	also 	would 	increase 	various 	license 	fees. 	These
increases 	do 	not 	appear 	to 	have 	competitive 	significance.
6 	The 	Legislative 	Commission 	on 	Expenditure 	and 	Review, 	in 	April
1985 	Audit, 	State 	Milk 	Dealer 	Licensure 	and 	Regulation, 	noted
that 	"competing 	milk 	dealers 	almost 	always 	oppose 	granting 	[a]
license."

.0- ~~ 	Ii I ~W
Michael 	J. 	Dragman, 	Chairman
ALTERNATIVES 	TO 	A. 	3643 	ARE 	LESS 	ADEQUATE
- 	4 	-
The 	bills 	introduced 	as 	alternatives 	to 	A. 	3643 	do 	not,
in 	our 	view, 	address 	some 	of 	the 	major 	competitive 	concerns 	raised
by 	the 	current 	law. 	As 	a 	consequence, 	these 	bills 	would 	not
provide 	New 	York 	consumers 	the 	benefits 	that 	competition 	could 	be
expected 	to 	bring.
A. 	3161 	provides 	that 	sellers 	and 	buyers 	of 	milk 	may
deal 	with 	whomever 	and 	under 	whatever 	terms 	they 	choose, 	ftle]xcept
where 	expressly 	provided 	otherwise." 	However, 	because 	this 	bill
would 	not 	alter 	the 	current 	system 	of 	county-by-county 	licensing
-- 	which 	is 	otherwise 	ftexpressly 	provided" 	for 	-- 	it 	would
facilitate 	the 	continuat~on of 	collusive 	and 	other 	customer
allocation 	arrangements. 	In 	contrast, 	by 	requiring 	statewide
licensure t 	A. 	3643 	would 	eas~ entry 	barriers 	associated 	with
7 	The 	five 	largest 	processors 	in 	New 	York 	City 	(who 	account 	for
over 	80% 	of 	milk 	sales 	in 	that 	market) 	have 	been 	recidivist
antitrust 	violators. 	In 	1956, 	1966, 	and 	again 	in 	1982, 	these
five 	processors 	were 	found 	to 	have 	conspiratorially 	fixed 	prices
and 	allocated 	markets. 	People 	v. 	Milk 	Handlers 	& Processors
Ass'n, 	Civ. 	No. 	40077/57 	(N.Y. 	Sup. 	Ct. 	Aug. 	13, 	1958); 	State 	v.
Milk 	Handlers 	& Processors 	Ass'n, 	Civ. 	No. 	41396/1966 	(N.Y. 	Sup.
Ct. 	Sept. 	11, 	1975); 	and 	PeoEle 	v. 	Elmhurst 	Milk 	and 	Cream Co.,
Inc., 	116 	Misc. 	2d 	140, 	455 	N.Y.S.2d 	473 	(Sup. 	Ct. 	Kings 	Co.
1982); 	People 	v. 	Dairylea 	coop. 	rnc., 	114 	Misc. 	2d 	421, 	452
N.Y.S.2d 	282 	(Sup. 	Ct. 	Bronx 	Co. 	1982); 	~le v. 	Queensboro 	Farm
Products, 	Inc., 	1982-83 	Trade 	Cas. 	(CCH)~05,o11 (Sup. 	~t. 	Queens
Co. 	1982); 	State 	of 	New 	York 	v. 	Dairylea 	Cooe. 	Inc., 	81 	Civ. 	1891
(S.D.N.Y. 	1982). 	AdditionallYt 	the 	record 	in 	the 	recently
concluded 	Farmland 	Dairies 	hearing 	is 	replete 	with 	evidence 	that
once 	the 	ordinary 	milk 	retailer 	selects 	its 	first 	supplier, 	he
bocom@~ the 	prop8rty 	of 	that 	supplier. 	In 	the 	M~ttp.r of 	the
Application 	of 	Fair 	Lawn 	Dairies, 	Inc. 	For 	an 	Extension 	of 	Its
Milk 	Dealer's 	License, 	Before 	Lyle 	Newcomb, 	HearIng 	OffIcer, 	June
23, 	1986 	at 	1454-59, 	1873-77, 	1920-29 t 	1943, 	1955, 	1969-70, 	and
1985-86.

~12 2b4 0459 	P.0b
Michael 	J. 	Bragman, 	Chairman 	- 	5 	-
geographic 	market 	extension 	by 	firms 	already 	serving 	a 	pact 	of 	thfi
state, 	thereby 	making 	anticompet1tive 	collusion 	less 	practicable.
Two 	other 	bills, 	A. 	3163 	and 	A. 	3164, 	appear 	to
eliminate 	county-by-county 	licensure 	(although 	A. 	3163 	would
permit 	the 	Commissioner 	to 	continue 	to 	designate 	marketing 	ar~as
as 	small 	as 	a 	county). 	Unlike 	A. 	3643, 	however, 	these 	bills 	opt
foc 	a 	regional 	approach. 9 	We 	are 	concerned 	that 	adoption 	of
regional 	licensure 	may 	not 	reduce 	entry 	barriers 	enough 	to
stimulate 	entry 	and 	thereby 	drive 	milk 	prices 	down 	to 	competitive
levels. IO
All 	three 	of 	the 	above 	bills 	fail 	to 	advance 	consumer
interests 	as 	effectively 	as 	A. 	3643 	for 	an 	additional 	reason. 	The
current 	law 	restricts 	competition 	by 	permitting 	the 	Commissioner
to 	classify 	lic~nse8 to 	authorize 	"milk 	dealers 	to 	carryon 	a
certain 	kind 	of 	business 	only 	•••• " 	we 	understand 	that 	this.
classification 	provision 	permits 	the 	Commissioner 	to 	limit 	a
licensee 	functionally, 	i.e., 	to 	the 	processing 	of 	milk, 	or 	to 	its
wholesale 	distribution, 	or 	to 	its 	sale 	at 	retail. 	Continuation 	of
the 	Commissioner's 	authority 	to 	issue 	limited 	licenses 	may
8 	To 	the 	extent 	that 	A. 	3161 	is 	intended 	to 	condemn 	collusive
customer 	allocation 	arrangements, 	it 	1s 	unnecessary 	because
federal 	and 	state 	antitrust 	laws 	clearly 	proscribe 	such
arrangements.
9 	A. 	3163 	would 	provia~ that 	"market" 	means 	"a 	territory
designated 	by 	the 	commissioner 	as 	a 	natural 	marketing 	area.-
A. 	3164 	would 	provide 	that 	"market" 	means 	a 	"contiguous 	territory
designated 	by 	the 	commissioner 	as 	a 	natural 	marketing 	area 	which
either 	(a) 	contains 	a 	population 	of 	one 	million 	or 	more 	as
determined 	by 	the 	last 	available 	federal 	census, 	or 	(b) 	includes
fifteen 	or 	more 	counties."
10 	Although 	statewide 	licensure 	is 	preferable 	to 	regional
licensure, 	licensure 	requirements 	invariably 	are 	barriers 	to
entry. 	Therefore, 	licensing 	schemes 	ought 	not 	to 	be 	adopted 	(or
continued) 	unless 	two 	conditions 	are 	satisfied. 	The 	first
condition 	is 	that 	the 	benefits 	of 	licensure 	must 	exceed 	its
costs, 	including 	those 	costs 	attributable 	to 	reduced
competition. 	The 	second 	is 	that 	licensure 	must 	be 	the 	least
restrictive 	meanS 	of 	achieving 	a 	substantial 	public 	purpose,
e.g., 	protecting 	the 	health 	and 	safety 	of 	consumers. 	We 	have 	not
undertaken 	an 	analysis 	of 	~hether licensure 	of 	milk 	sellers
satisfies 	either 	of 	these 	conditions.

Michael 	J. 	Bragman, 	Chairman 	- 	6 	-
discourage 	oc 	prevent 	firms 	from 	assuming 	additional 	functions 	in
the 	milk 	distribution 	system 	in 	order 	to 	aChieve 	cost-savings.
For 	example, 	supermarkets 	may 	be 	denied 	the 	opportunity 	to
integrate 	backward 	into 	milk 	processing. 	As 	a 	consequence,
savings 	that 	could 	result 	in 	price 	reductions 	to 	consumers 	may 	be
forestalled. 	A. 	3643 	alone 	expressly 	limits 	the 	classification 	of
licenses 	and 	thereby 	facilitates 	efficient 	vertical 	integration
and 	resultant 	consumer 	savings. 11
The 	final 	bill, 	A. 	3157, 	like 	A. 	3643, 	would 	eliminate
the 	Commissioner's 	discretion 	to 	deny 	a 	license 	on 	finding 	that
issuance 	of 	the 	license 	would 	"tend 	to 	a 	destructive 	competition"
or 	would 	not 	be 	"in 	the 	publi~ 	interest." 	In 	this 	cespect,
A. 	3157 	would 	permit 	increased 	competition 	and 	related 	consumer
gains. 	However, 	it 	too 	fails 	to 	address 	several 	important
competitive 	issues 	that 	are 	addressed 	by 	A. 	3643, 	such 	as 	reform
of 	below 	cost 	pricing 	regulation 	and 	statewide 	licensure.
Therefore, 	A. 	3157 	alone 	would 	not 	increase 	consumer 	welfare 	to 	as
great 	an 	extent 	as 	A. 	3643.
CONCLUSION
We 	believe 	that 	effective 	reform 	of 	New 	York 	State 	milk
regulation 	depends 	upon 	the 	elimination 	of 	barriers 	to 	vigorous
competition 	by 	current 	and 	potential 	dealers. 	As 	we 	noted 	in 	our
March 	20 	letter, 	A. 	3643, 	particularly 	as 	we 	would 	modify 	it,
addresses 	the 	most 	significant 	barriers. 	Passage 	of 	A. 	3643 	might
well 	be 	enhanced 	by 	other 	measures 	that 	reinforce 	competition 	in
the 	milk 	marketplace, 	as 	discussed 	in 	this 	letter. 	To 	the 	extent
that 	anothcr 	bill 	or 	combination 	of 	bills 	that 	fails 	to 	address
these 	entry 	barriers 	is 	enacted, 	however, 	competition 	may 	not 	be
sufficiently 	stimulated 	to 	produce 	redueed 	prices 	and 	oeher
consumer 	benefits.
11 	under 	A. 	3643 	the 	Commissioner 	could 	clasaify 	licenses 	only
"for 	the 	purpose 	of 	establishing 	the 	rate 	of 	license 	fees 	and
otherwise 	carrying 	out 	the 	duties 	of 	the 	commissioner 	under 	this
chapter 	.••." 	A. 	3643 	S 	5. 	'

05/19/1987 	16:24 	NYRO 	2:2 264 0459 	P.08
Michael 	J. 	Bragman, 	Chairman 	- 	7 	-
Assembly.
questions.
We 	hope 	that 	these 	remarks 	are 	helpful 	to 	the
Please 	do 	not 	hesitate 	to 	contact 	me 	if 	you 	have 	any
Very 	truly 	yours,
:!~~1.[~~Acting 	Regional 	Director

UNITED STATES OF AMERICA
1 	FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Of'''ICE OF PUBLIC AFFAIRS
(202) 32&-2180
POR YOUR INPORMATION_ •••••••May 20, 1981
The Federal Trade Commission Staff has told the New York State Assembly that
it should not adopt several bills that have recently been proposed to change the state's
milk licensing law. 	Instead it should pass a pending bill (Assembly Bill 3643) that the
FTC endorsed in a March 20 letter. 	The staff said the additional bills "fall short of A.
3643 	in addressing the 	major competitive concerns of the present system," although
several contain provisions that would be useful supplements to that bill.
In 	its 	earlier 	letter, 	the 	staff 	had 	said 	that 	present 	N.Y. 	regulations 	are
anticompetitive and should be changed. 	At that time it endorsed A. 3643, saying it would
"eliminate vast overcharges for milk" sold to N.Y. consumers. 	The staff said the bill
would 	permit 	increased 	competition 	by 	eliminating 	several 	significant 	barriers 	to
vigorous competition by current and potential dealers. 	These barriers .include county-by-
county licensing, regulation of non-predatory pricing, and a provision that empowers the
Commissioner of Agriculture to deny a license on the grounds that entry by a new dealer
would "tend to a destructive competition."
The staff said that passage of appropriate legislation "would result in widespread
availability of milk at reduced prices."
The letter represents the views of the FTC's New York Regional Office and the
Bureaus of Competition, Consumer Protection, and Economics, and does not n~cessarily
reflect the views of the Commission or of any individual Commissioner.
Copies of the letter are available from 	the FTC's New York Regional Office,
2243-EB Federal Building, 26 Federal Plaza, New York, N.Y. 10278; 212-264-1207; and
from the FTC's Public Reference Branch, Room 130, 6th St. and Pennsylvania Ave. N.W.,
Washington, D.C. 20580; 202-326-2222; TTY 202-326-2502.
MEDIA CONTACT:
STAFF CONTACT:
(NYMilk2)
Barbara Rosenfeld, Office of Public Affairs, 202-326-2181
Shirley Sarna, New York Regional Office, 212-264-1211
...