ANALYSIS OF PROPOSED CONSENT ORDERS
TO AID PUBLIC COMMENT

The Federal Trade Commission has accepted agreements to proposed consent orders from The Associated Octel Company Ltd. ("Octel") and its parent corporation, Great Lakes Chemical Corporation ("Great Lakes"), and from Ethyl Corporation ("Ethyl"). Octel has its principal place of business in Ellsemere Port, England. Great Lakes has its principal place of business in West Lafayette, Indiana. Ethyl has its principal place of business in Richmond, Virginia.

The proposed consent orders have been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will again review the agreements and the comments received, and decide whether it should withdraw from the agreements or make final the agreements' proposed orders.

The complaint alleges that Octel, Great Lakes, and Ethyl (collectively referred to as "respondents") have engaged in acts and practices that have unreasonably restrained competition in the manufacture and sale of lead antiknock compounds in violation of Section 5 of the Federal Trade Commission Act. Lead antiknock compounds are gasoline additives that contain tetraethyl or tetramethyl lead, and that increase the octane rating of gasoline.

The complaint alleges that until 1994, Octel and Ethyl were the two largest manufacturers of lead antiknock compounds in the world. Between October 1993 and March 1994, respondents entered into a series of contracts, agreements, and understandings -- written and unwritten -- regarding the manufacture, distribution, and sale of lead antiknock compounds. According to the complaint, among the important undertakings are the following:

(a) Ethyl agreed to cease manufacturing lead antiknock compounds.

(b) Octel agreed to supply to Ethyl each year, for re-sale, a limited volume of lead antiknock compounds at a discount price.

(c) Octel and Ethyl agreed that the maximum volume of lead antiknock compounds supplied to Ethyl each year would be a fixed portion of Octel’s annual capacity to manufacture compounds, but left Octel free to reduce that capacity unilaterally.

(d) Octel and Ethyl agreed that the price of lead antiknock compounds purchased by Ethyl for re-sale to customers in the United States and certain other countries would be adjusted each year, depending upon the change in the average sale price charged by Octel to retail customers located in the United States and certain other countries, thus giving Octel the means to influence Ethyl’s costs (and therefore its price) by raising its own price.

(e) Octel agreed to notify Ethyl each year of the change in the average sale price charged by Octel to retail customers located in the United States and certain other countries.

(f) Octel agreed to cease the bulk shipping of lead antiknock compounds, and to transfer to Ethyl certain ocean going vessels dedicated to transporting lead antiknock compounds.

(g) Ethyl agreed to provide to Octel all bulk shipping services required by Octel for the distribution of lead antiknock compounds.

The complaint further alleges that in March 1994, Ethyl closed its manufacturing operation in Sarnia, Canada -- the company’s only facility for the production of lead antiknock compounds.

Finally, the complaint alleges that the effect of respondents’ concerted decision to close the Sarnia manufacturing facility, together with certain terms of respondents’ supply agreement, is to increase the likelihood of coordinated interaction among sellers of lead antiknock compounds, to increase prices, and to injure consumers.

The quantity and price terms of the supply agreement are of serious concern to the Commission. As Ethyl has closed its facility for manufacturing lead antiknock compounds, the company’s potential sales volume is artificially capped by the supply agreement, and is subject to manipulation by Octel. Given this arrangement, Ethyl’s ability to expand its output is diminished. And if Ethyl cannot expand its output, then it has no incentive to reduce its prices.

The wholesale price term adopted by the parties (tying the Octel-to-Ethyl transfer price to changes in Octel’s retail price) enhances Octel’s incentive to increase its own retail prices. The reason is that Ethyl increases its payments to Octel as and to the extent that Octel increases its prices to refiners.(1)

Finally, in order to implement the price term, Octel discloses to Ethyl any changes in its average retail price. This disclosure of information may reduce uncertainty in an oligopolistic market and thus facilitate coordinated interaction.

Octel, Great Lakes, and Ethyl have signed consent agreements containing the proposed consent orders. The proposed consent orders require respondents to modify the contract under which Octel supplies lead antiknock compounds to Ethyl.(2) Octel would be obligated to provide Ethyl with whatever volumes Ethyl requires for resale to U.S. customers. The elimination of the artificial cap on Ethyl’s output should enhance Ethyl’s incentives to price aggressively.(3)

The proposed consent orders also require respondents to modify the price term of the supply agreement so that (i) the price of product available to Ethyl for resale in the United States is not tied to changes in Octel’s retail price, and (ii) the price of product available to Ethyl for resale outside of the United States is not tied to changes in Octel’s retail price in the United States. The transfer price is thus de-coupled from Octel’s retail price, thereby eliminating the anticompetitive incentives discussed above.

Octel and Ethyl will negotiate a new transfer price for lead antiknock additives. If the transfer price is too high (relative to the price at which Ethyl could self-manufacture product), then prices to consumers may likewise be supra-competitive. The proposed remedy relies upon Ethyl’s incentive to negotiate the lowest possible price.(4)

The proposed consent orders provide that the new transfer price adopted by the parties may not be structured such that the unit price increases if Ethyl purchases greater volumes of lead antiknock additives from Octel. The prohibited pricing mechanism, a "volume penalty," would deter output expansion by Ethyl and thus restrain competition. Indeed, a volume penalty could have the same effect upon Ethyl as an artificial cap on the quantity of product available to Ethyl.(5)

The proposed consent orders also would prohibit Octel and Ethyl from disclosing to one another information regarding historical, current, or future prices for lead antiknock compounds sold to customers located in the United States.

In addition, the proposed consent orders would require respondents to provide the Commission with notice in advance of acquiring the assets or securities of any firm engaged in the distribution of lead antiknock compounds in the United States, or the manufacture of lead antiknock compounds anywhere in the world. The prior notice obligation would also apply to the sale of lead antiknock compounds to a competing manufacturer, as such a transaction may be used to induce the rival to exit from manufacturing.

The purpose of this analysis is to facilitate public comment on the proposed orders, and it is not intended to constitute an official interpretation of the agreements and proposed orders or to modify in any way their terms.

Endnotes

(1) In American Cyanamid, Docket No. C-3739 (May 12, 1997), the Commission determined that an incentive payment tied to higher retail prices was anticompetitive where the parties were in a purely vertical relationship: American Cyanamid made rebate payments to dealers that charged higher prices. An incentive payment between horizontal competitors, as here, is even more dangerous to competition.

(2) The Commission has determined that it is not practicable to order Ethyl to re-open its Sarnia facility.

(3) This order provision would not diminish the volume of lead antiknock compounds available to Ethyl from Octel for resale outside of the United States.

(4) Ethyl’s incentive to seek a low transfer price would be compromised if the company could recoup high payments by receiving a side payment from Octel, perhaps by means of a separate transaction. In theory, the bulk transportation agreement between Octel and Ethyl offers an opportunity for such recoupment. However, as long as the fee that Octel will pay Ethyl for transportation services is regulated by the parties’ contract dated March 25, 1994, there is no danger of side payments through this mechanism.

The alternative to permitting the parties to negotiate a new transfer price is to have the Commission set the transfer price. Generally, the Commission does not regulate prices.

(5) As noted above, the proposed consent orders would require respondents to eliminate the artificial cap that is included in the original Octel-Ethyl supply agreement.