Back in February 2014, makers of a generic version of Keurig’s K-Cup coffee cartridges sued Keurig for monopolizing the market for k-cup cartridges. Since the initial suit was filed, dozens have filed follow-on suits. The gravamen of the original complaint is that there is a relevant antitrust market that consists of k-cups, the coffee-containing cartridges that one puts in a Keurig machine to make a single-serving cup of coffee. The original plaintiffs make a generic version. They allege that Keurig has engaged in various exclusionary practices that have cost them access to the generic k-cup market. What Keurig does is give away machines and then charge individuals for cartridges. Keurig makes their money off the sales of the replacement cartridges; the machines are loss leaders.
The generic manufacturers have painted themselves as mavericks, introducing competition and price competition into a space that was dominated by a monopolist provider. One could, however, argue that the generic k-cup manufacturers are free riders. Keurig gives away the machines and makes up for the loss through profits on the cartridges. It’s a legitimate pricing model. But that pricing creates an opening for generics. By causing the cost of the machines to be borne by the cartridges, Keurig has to price the cartridges at more than the marginal cost of the cartridge itself. Free of the having to internalize the cost of making the machines, the generic can price at the cartridge’s cost alone and thereby is able to take price sensitive customers away from Keurig. In essence, the generic is exploiting a flaw in Keurig’s pricing scheme. Under this scenario, however, you cannot conclude that the lower prices offered by the generic reflect greater efficiency. Indeed, you could very well conclude that their pricing was nothing more than free riding off Keurig’s investment in the technology, branding and advertising.
More importantly, however, is the relevant antitrust market. By defining it as k-cups, the plaintiffs have in effect drawn the most narrow relevant market they could have in which there might be an effect from Keurig’s “exclusionary” practices. I suspect that the relevant market is larger than just k-cups. The machines aren’t expensive. Just because a purchaser buys a Keurig does not mean that they are locked in to that particular machine in all of their canteens everywhere. And there are many different ways of making a cup of coffee, not just these single serve machines. The plausibility of these narrow markets is fairly weak. Indeed, I’d suggest that the relevant market is for coffee systems, not just k-cups.
But the plaintiffs have written a compelling complaint, certainly compelling enough to induce quite a few follow-ons. It will be interesting to see if the initial motion to dismiss will succeed.
