Economic Analysis to FTC on its Decision to Uphold Ruling Against 1-800 Contacts

In November 2018, the five Commissioners of the Federal Trade Commission (FTC) upheld the ruling that agreements between 1-800 Contacts and its competitors harmed competition in The Federal Trade Commission v. 1-800 Contacts Inc., Docket no. 9372. Stanford GSB Professor and Keystone Expert, Dr. Susan Athey, provided analysis on the anticompetitive effects of the agreements, which played a central role in the initial and appeal courts’ decisions. The Commissioners cited that “this case grapples with issues of enormous import. We consider here consumer marketplaces that embody the very basic institutions of 21st century commerce.”

The FTC initially brought the case against 1-800 Contacts in April 2017. 1-800 Contacts had entered into bilateral agreements with competitors that prohibited them from placing advertisements on online searches that included each others’ names. The FTC alleged that 1-800 Contacts, which is both the market and price leader, harmed consumers by entering into these agreements.

Dr. Athey provided the court with her extensive industry and academic expertise with search engines. The FTC asked Dr. Athey to evaluate the impact of the agreements on consumer welfare.

Using a statistical model to predict the agreements’ effects on consumers, Dr. Athey found that removing the agreements between 1-800 Contacts and its competitors would have led consumers to see many more competitor ads when searching for 1-800 Contacts. Further, the absence of the agreements would have diverted clicks from 1-800 Contacts’ site to competitors’ sites. Since 1-800 Contacts’ prices tended to be higher than its competitors, Dr. Athey concluded that absent the agreements, 1-800 Contacts’ prices likely would have fallen and consumers would have been better off.

In April 2017, the Chief Administrative Law Judge who heard the initial 19-day hearing concluded that the agreements were anticompetitive and issued a cease-and-desist order against 1-800 Contacts from enforcing them, citing Dr. Athey’s testimony. Likewise, at 2018 appeal, the Commissioners highlighted the importance of Dr. Athey’s analysis in their judgement, saying “the but-for model… [from Dr. Athey] predict[s] the substantial number of ads that were not displayed….this evidence directly shows the Challenged Agreements cut off advertising in a way that interfered with the operation of competitive forces in the online sale of contact lenses and disrupted consumers’ mechanisms for comparing and selecting between alternative online sources”.

To view the full judgement on the FTC website, click here.