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Public Policy in Private Markets
Collusion
Announcements
HW: HW 2, due 2/28 (posted); HW 3 due 3/6
Spark: iclicker grades now uploaded Reading assignments:
K&W 10 & 11 for this week K&W 9 (4th edition) for next week - posted
3/6: first debate + review for midterm (time permitting)
3/8: midterm #1
Overview of Antitrust Laws
Collusive Restraints of Trade
Practices covered by Section 1: Direct Agreements
To fix price To Allocate markets
Geographically By type of customer
Other Collusive restraints Gray area (circumstantial evidence) Conscious parallelism, trade associations, non-
profit organizations
Collusive Restraints of Trade
Practices covered by Section 1: Direct Agreements
To fix price (explicitly) To Allocate markets (implicitly fixing prices)
Geographically By type of customer
Other Collusive restraints Gray area (circumstantial evidence) Conscious parallelism, trade associations, non-
profit organizations
Direct Agreements: price fixing
Conspirators agree on price (explicitly) PER SE illegal since Trenton Potteries But price fixing can also be achieved indirectly
(through direct agreements)
Example 1: Socony-Vacuum case: large firms had agreement with small refiners to buy excess supply
Example 2: Coupon case (1984), 4 supermarkets in CT and MA conspiring to drop double coupons
Direct Agreements
Market allocation Geographic allocation is rare (easier to detect) Bidders agree on who takes what:
Subcontract bid-rigging: unsuccessful bidders subcontract with successful one
Bid suppression: some conspirators agree not to submit a bid so that another conspirator can successfully win the contract.
Complementary bidding: some of the bidders bid an amount knowing that it is too high
Bid rotation: bidders take turns being the designated successful bidder
Direct Agreements
Market allocation Types of bidding are not mutually exclusive
Example 1: Electrical equipment industry (1950’s) Combination of bid rotation and complementary bidding
and geographic allocation Based on the phases of the moon and regions: who
occupies low bid (and where) during which weeks or phase of the moon
Government case first (criminal case), $2 mill. in fines, 7 executives in jail (30 days)
Private cases followed: $400 mill. in total treble damages
Direct Agreements
Market allocation
Example 2: Insurance (Late 2004) Insurers: AIG, ACE, Hartford Broker: Marsh & McLennan Companies give insurance needs to broker Broker gets bids but asks insurers for special
commission (kick backs) to secure business Broker asks for artificial bids to certain insurers so as to
award bid to targeted insurer Broker makes sure he gets largest kick back (not
necessarily lowest price for customer)
Collusive Restraints of Trade
Practices covered by Section 1: Direct Agreements
To fix price To Allocate markets
Geographically By type of customer
Other Collusive restraints Gray area (circumstantial evidence) Conscious parallelism, trade associations, non-
profit organizations
Other Collusive restraints
Price exchange agreements: Agreement to exchange price info (nothing else) Could be anticompetitive if it allows price
stabilization or price increases Could be pro-competitive if it allows better
information (i.e. faster reaction by rivals) Generally not ok: depends on market
circumstances (Airlines case on Thursday) ATPCO (airline tariff publishing company) disseminated price
change information to airlines and travel agents Firms never met to collude, but DOJ argued that technology
allowed collusion with no meeting
Other Collusive restraints
Trade Associations: Information exchange may hurt or help
competition Early cases: Supreme Court found
elaborate exchanges of price, production, sales, together with discussions to control production Hardwood flooring, sinks, sugar
Trade associations subject to scrutiny; must be really careful
Other Collusive restraints
Conscious Parallelism: Tacit or indirect collusion (?) Parallel conduct:
Market where firms are charging same (or very similar) prices
Ambiguous: perfect collusion or perfect competition?
Not a decision rule: not illegal in and of itself
Illegality: conscious parallelism + facts
Conscious Parallelism
American Tobacco Case (1946) 3 companies dominated mkt: 1923-1941 Parallelism evidence:
8 price changes, 6 increases led by Reynolds, 2 decreases led by American
Facts: 2 coordinated price increases in face of slack
demand (i.e. when prices should have dropped)
“10 cent” cigarettes gain 25% of market: big cos. dropped prices until 10 cent cigarettes had 6%
Supplies were bought up by 3 firms, leaving competitors w/o supplies
Conscious Parallelism
American Tobacco Case (1946) Court found set of actions constituted
conspiracy “No formal agreement is necessary to
constitute an unlawful conspiracy”
Conscious Parallelism
Coke-Pepsi case (1980’s) Parallelism: Identical/similar prices and
promotional activities Factors:
Coordination for display space (who has bigger presence in which supermarkets)
Divided the year into exclusive promotional periods (e.g. Coke first 10 weeks, Pepsi next 10 weeks)
Respected each other’s promotional periods
Conscious Parallelism
Coke-Pepsi case Civil suit in Charlotte, NC (1986)
Federal jury: local coke bottler conspired with Pepsi bottler to control prices and advertising promotions
Pepsi settled out of court Coke paid $2.7 mill
Conscious Parallelism
RTE cereal industry Parallel pricing moves:
1991: Quaker announces 5% increase, Kellogg and General Mills follow suit with 3.7% and 4%
Suspicious, but no other factors in this case
In practice: Conscious parallelism cases are very difficult Antitrust laws are usually not effective against
price leadership situations
Other Collusive restraints
The professions: Before 1970’s: professional associations had
provisions to restrict competition through advertising and price
Examples: “Suggested” fee schedule by Bar Association Ban on advertising, lawyers who advertise in Phoenix
disciplined by Bar Association (suspension) Others: dentists, optometrists, doctors
Justification: Restrictions needed to ensure quality, deception
Supreme Court: rule of reason
Other Collusive restraints
Non-profit organizations: Justification: Restrictions necessary to protect
mission of the institutions Supreme Court: applies rule of reason Example: NCAA (1984)
Limits TV appearances by football teams (to increase attendance)
Courts: illegal, collusive restraint on “live college football TV”
What about now? players only get a scholarship (price fixing), while earning millions of $ for the university
Example: Ivy League Overlap Group (1984) – MIT case Agreed on financial aid packages (next week)
ADM and Milk: Textbook Cases?
Recall factors that facilitate collusion: Identical costs Homogeneous product Small number of firms High concentration Slow rate of technological advancement Steady rate of demand Low elasticity of demand (no substitutes) Low frequency of sales
ADM Case Important: civil case before criminal case
Guilty pleas from criminal case can not be used in civil cases Size of criminal fine could not be used as guide in civil cases Good for opt-outs (benefited from waiting)
There was irrefutable evidence in this case: the question was how much? “Overcharge” Timing:
Conspiracy period? “Normal” period?
But-for-price? Cournot price? Cost-based pricing? Historical?
Methodology: Forecasting? Before and after?
ADM Case
Other consequences: Damage to reputation Damaged relation with stockholders
ADM also price fixing in other markets: Citric acid High fructose corn syrup:
2/03: $4 bill. Private suit by buyers
Watch the movie “The Informant” for a mocked version of this case
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