FTC Testifies on Internet Competition

The Federal Trade Commission today told the House Committee on Energy and Commerce that it will hold a public workshop on October 8-10 to examine whether certain state laws and business arrangements may be hampering commerce on the Internet. In FTC testimony before the Committee's Subcommittee on Commerce, Trade, and Consumer Protection, Ted Cruz, Director of the FTC's Office of Policy Planning, said while many think of the Internet as an unfettered free marketplace, that perception may not be entirely accurate. Cruz said the purpose of the public workshop is to determine whether and to what extent pre-existing state regulations that have been extended to the Internet "are pro-competitive and pro-consumer, or whether they eliminate cost savings or convenience without sufficient benefits to justify those losses."

The testimony notes that the FTC has been proactive in its attempts to foster online competition and, in August 2001, formed an Internet Task Force to examine possible impediments to e-commerce. In the last year, the Task Force has met with e-tailers, trade associations, and academics to review regulations that may have been enacted for consumer protection or other public policy purposes, but that "may have the effect of aiding existing bricks-and-mortar businesses at the expense of new Internet competitors." The Task Force also is reviewing whether and to what extent business practices, such as collectively pressuring manufacturers or dealers to limit sales over the Internet, may be diminishing competition. The workshop will advance these inquiries and will include the participation of consumer advocates, industry representatives, academics, and state government representatives. "The FTC is actively seeking perspectives and data from both supporters and critics of these possible restrictions, to understand better their full impact," the testimony says.

The public workshop will examine competition issues in ten industries: retailing, contact lenses, real estate/mortgages/financial services, casket sales, automobile sales, wine sales, healthcare/pharmaceuticals/telemedicine, cyber-charter schools, auctions, and online legal services.

Noting that e-commerce retail sales are rising dramatically - up 24.2 percent in the second quarter of 2002 compared to the second quarter of 2001 - the testimony states that the FTC has seen attempts to limit e-retailing through conduct that raises antitrust issues. It cites the example of one FTC settlement in which a group of Chrysler dealers threatened to refuse to sell certain Chrysler models and to limit warranty service unless Chrysler limited its supply of cars to an Internet seller. At the workshop, the FTC intends "to examine whether, and in what circumstances, similar conduct may raise antitrust issues, or may address legitimate concerns about free riding and channel conflict. We hope to develop a better understanding of the conduct, and reasons for or against, limiting retail sales over the Internet," the testimony states.

The testimony also addressed competition issues in the contact lens industry and the development of stand-alone sellers of replacement contact lenses on the Internet. These sellers do not fabricate lenses or fit them; they sell only replacement lenses for which the customer already has been fitted by an eye-care professional. Some states are considering new restrictions on Internet sales. Some studies suggest that Internet sellers may provide consumers with substantial cost savings and greater convenience, while some commentators suggest that online sales may threaten consumer health by reducing the number of times a consumer visits an eye doctor. In March 2002, the FTC filed a staff comment before the Connecticut Board of Examiners for Opticians stating that the requirement under consideration that stand-alone sellers obtain Connecticut optician and optical establishment licenses "would likely increase consumer costs while producing no offsetting health benefits," and that the requirement "could harm public health by raising the cost of replacement contact lenses, inducing consumers to replace the lenses less frequently than doctors recommend."

Pointing to state laws that require mortgage brokers and providers of financial services to maintain in-state offices or in-state licenses, the testimony notes that since the regulations are often designed to protect consumers from unscrupulous practices, they may be of benefit to consumers. "They may also, however, have the secondary effect of insulating local businesses from wider competition, or of allowing only national firms that already have physical offices in all states to sell online in all states."

Similar state laws may restrict Internet casket sales, automobile sales, wine sales, healthcare, pharmaceuticals and telemedicine, cyber-charter schools, auctions, and online legal services, according to the testimony. At the workshop, the Commission expects to learn more about the existence of and relative costs and benefits of any restraints on online competition in these and other industries, the testimony states.

Copies of the testimony are available at www.ftc.gov. More information about the workshop is available at http://www.ftc.gov/opp/ecommerce/anticompetitive/index.htm.

The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. P859900)