Identifying horizontal price fixing in the electronic marketplace

Antitrust Law Journal

Volumn 65, Issue 1, 1996, Pages 41-55

  Baker, Jonathan B ^a  

^a FEDERAL TRADE COMMISSION   (United States)

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EID: 21444447283     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (47)

1. E.g., Council of Economic Advisers, Economic Benefits of the Administration's Legislative Proposals on Telecommunications (June 14, 1994).
2. Robert Gertner, Testimony at FTC Hearings on Global and Innovation-Based Competition, Nov. 20, 1995. Moreover, under some circumstances sellers could use rapid and inexpensive communications technology to make secret discounts to selected buyers. This could discourage coordinated interaction, albeit by limiting or reversing the reduction in buyer search costs that communications advances promise.
3. BILL GATES, THE ROAD AHEAD 157 (1995).
4. Gertner, supra note 2, at Tr. 2771 (corrected version). Gertner emphasizes the "trade-off between the beneficial effects of sharing information about market costs and demands, which can lead firms to make more efficient production and pricing decisions, and the harmful effects of sharing information about prices, quantities, and customers, which can enable firms to charge a price above competitive levels." BILL GATES, THE ROAD AHEAD 157 ( 1995). Id.
5. This type of hypothetical problem is analyzed in Jonathan B. Baker, Two Sherman Act Section 1 Dilemmas: Parallel Pricing, the Oligopoly Problem, and Contemporary Economic Theory, 38 ANTITRUST BULL. 143, 165-68, 186-190 (1993).
6. Sellers of branded consumer products are already eager consumers of supermarket scanner data, which provides them with detailed information about the prices and sales shares of rivals. With the spread of electronic commerce, firms may employ software to compile and analyze similar data obtained from Internet postings and electronic transactions.
7. This article's discussion of when or whether a court should find an agreement puts aside the important legal issue of how an agreement should be reviewed once found: whether it is illegal per se; if reviewed under the rule of reason, whether that review should be truncated or full-blown; and how the "less restrictive alternative" issue should be analyzed. 8 In some cases leader-follower dynamics alone may enable parties to identify and settle on a scheme or set of prices that dampens competition without the kinds of surreptitious communication usually associated with criminal conspiracies.
8. See Joseph Farrell & Matthew Rabin, Cheap Talk, 10 J. ECON. PERSP., Summer 1996, at 103.
9. Firms that must identify the terms of coordination across several different product or geographic markets may find "cheap talk" a useful way to coordinate their strategies. Multimarket contact may also facilitate the disciplining of firms that would be tempted to cheat on the coordinated arrangement. See B. Douglas Bernheim & Michael Whinston, Multimarket Contact and Collusive Behavior, 21 RAND J. ECON. 1 (1990);
10. William N. Evans & Ioannis N. Kessides, Living by the "Golden Rule": Multimarket Contact in the U.S. Airline Industry, 109 Q. J. ECON. 341 (1994).
11. To be sure, certifying agencies may develop to assure buyers that sellers will actually send goods promised and deal with problems that arise. See Gertner, supra note 2. Another marketplace response to the quality assurance problem would be for a firm to post a bond backed by a well-known institution. Still another tactic would be to promote, buy, or extend "brand name" recognition. However, such marketplace responses would often be expensive.
12. See JOHN SUTTON, SUNK COSTS AND MARKET STRUCTURE (1991).
13. See Baker, supra note 5, at 154-56 (discussing antitrust implications of the "folk theorem" for infinitely repeated games with observable actions).
14. Timothy F. Bresnahan, Empirical Studies of Industries with Market Power, in 2 HANDBOOK OF INDUSTRIAL ORGANIZATION 1011, 1052-53 (Richard Schmalensee & Robert D. Willig eds., 1989) (conclusions A and B).
15. MICHAEL PORTER, CASES IN COMPETITIVE STRATEGY 102-18 (1983).
16. United States v. Westinghouse Elec. Corp., 1962 Trade Cas. (CCH) ¶ 70,487 (D. Pa. 1962).
17. See Proposed Modification of Existing Judgments, United States v. General Elec., 42 Fed. Reg. 17,004 (1977). On the ways most-favored-customer protection can facilitate coordination, see Jonathan B. Baker, Vertical Restraints with Horizontal Consequences: Competitive Effects of "Most-Favored-Customer" Clauses, 64 ANTITRUST L.J. 517 (1996).
18. Cf. MICHAEL PORTER, COMPETITIVE STRATEGY 93-95 (1980) (encouraging unilateral signaling announcements, selective advertising to discipline recalcitrant rivals, and price leadership), 106 (advocating standardization to simplify industry decision variables and facilitate identifying a focal point).
19. The oligopoly problem has generated several landmark Supreme Court decisions. E.g., Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939); United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940); Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537 (1954). The most influential precedents from the last two decades have come from the circuit courts. E.g., United States v. Foley, 598 F.2d 1323 (4th Cir. 1979), cert. denied, 444 U.S.1043 (1980); Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478, 484 (1st Cir. 1988) (Breyer, J.), cert. denied, 488 U.S. 1007 (1989); In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 906 F.2d 432 (9th Cir. 1990), cert. denied, 500 U.S. 959 (1991).
20. Moreover, antitrust's leading commentators have written important articles on the subject. E.g., Donald Turner, The Definition of Agreement Under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 HARV. L. REV. 655 (1962);
21. Richard Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 STAN. L. REV. 1562, 1576 (1969).
22. For recent commentary, see generally Symposium on Tacit Collusion, 38 ANTITRUST BULL. 1 (1993).
23. See Posner, supra note 19, at 1576; see also Baker, supra note 5, at 178; cf. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 n.9 (1984) (to show "a meeting of the minds" or "a common scheme" in a dealer-termination case "evidence must be presented both that the distributor communicated its acquiescence or agreement, and that this was sought by the manufacturer.").
24. See Turner, supra note 19.
25. Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954).
26. See, e.g., Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478, 484 (1st Cir. 1988) (Breyer, J.), cert. denied, 488 U.S. 1007 (1989).
27. 6 PHILLIP E. AREEDA, ANTITRUST LAW ¶ 1434a (1986);
28. see William E. Kovacic, The Identification and Proof of Horizontal Agreements Under the Antitrust Laws, 38 ANTITRUST BULL. 5, 31-55 (1993).
29. Baker, supra note 5, at 175-77.
30. See id. at 179.
31. For an example of a court asking the latter question and finding a conspiracy in a setting not involving electronic commerce, see United States v. Foley, 598 F.2d 1323, 1331-35 (4th Cir. 1979), cert. denied, 444 U.S. 1043 (1980).
32. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 596, 598 (1986); accord, Eastman Kodak Co. v. Image Tech. Serv's., Inc., 540 U.S. 451, 467-70 (1992). Though neither case involved the issue of inferring an agreement on price from parallel pricing among oligopolists, there is no reason to think that the Supreme Court intends to consider whether some classes of conspiracy allegations make economic sense but not others.
33. See, e.g., Montana v. SuperAmerica, 559 F. Supp. 298 (D. Mont. 1983) (declining to infer an agreement to fix price for retail gasoline in the absence of direct evidence in a market with competitive characteristics; decision predates Matsushita). This argument will be most persuasive in circumstantial evidence cases. If a court has reliable direct evidence of conspiracy, it may reasonably find an agreement notwithstanding arguments that such behavior would be irrational given market structure.
34. Baker, supra note 5, at 185 (with the Matsushita requirement, "the analytical stage has been set for courts to conclude that in an industry with an environment not conducive to coordination, an agreement among competitors to fix price is not plausible and should not be inferred from circumstantial evidence.").
35. Rapid identification and response to rival price cutting may discourage price reductions by competitors. Firms that raise their own costs of lowering price, as by adopting "most-favored-nations" clauses, can also create an industry environment inhospitable to price reductions.
36. Baker, supra note 5, at 190-91; see also Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37, 49-55 (7th Cir. 1992) (no inference of conspiracy where plaintiffs presented no direct evidence in highly concentrated market for a standardized product with inelastic demand); cf. United States v. Alex, Brown & Sons, Inc., Competitive Impact Statement, 61 Fed. Reg. 40,433, 40,441 (Aug. 2, 1996) (mere adherence by securities firms to quoting convention insufficient to infer an agreement; DOJ alleged that this practice "distilled or hardened over time" into an unlawful conspiracy).
37. E.g., In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 906 F.2d 432 (9th Cir. 1990), cert. denied, 500 U.S. 959 (1991) (agreement in a parallel pricing case could be demonstrated by evidence of direct contacts among defendants, advance price announcements, posting of prices in unusual detail, the absence of a business justification for advance price announcements, and the intention of the parties to use the practices to achieve higher prices); see also Petruzzi's IGA Supermarkets Inc. v. Darling-Delaware Co., Inc., 998 F.2d 1224 (3d Cir. 1993) (market division agreement could be inferred from a pattern of refraining from competing on existing accounts, economic plausibility of the defendant's incentive to collude, and some evidence of direct communications); see generally Baker, supra note 5, at 191-92.
38. See Baker, supra note 5, at 162-69.
39. United States v. Airline Tariff Publishing Co., 1994-2 Trade Cas. (CCH) ¶ 70,687, (D.D.C 1994) (final consent decree); United States v. Airline Tariff Publishing Co., 1993-2 Trade Cas. (CCH) ¶ 70,410 (D.D.C 1993) (consent decree); see also United States v. Airline Tariff Publishing Co., 58 Fed. Reg. 3,971 (Jan. 12, 1993) (competitive impact statement); United States' Response to Public Comments, Civ. No. 92-2854 (D.D.C. filed Apr. 8, 1993); United States' Response to Questions in Appendix A of the Court's Order Dated May 24, 1993, Exhibit 1, Declaration of Jonathan B. Baker, Civ. No. 92-2854 (D.D.C. filed June 28, 1993); United States v. Airline Tariff Publishing Co., 59 Fed. Reg. 15,225 (Mar. 31, 1994) (competitive impact statement); William Gillespie, Cheap Talk, Price Announcements, and Collusive Coordination (Economic Analysis Group Discussion Paper, EAG 95-3) (Sept. 25, 1995).
40. That is, the DOJ alleged that the communications involving fares could be read by one who knew or had broken the code, as memorializing, as well as negotiating, the terms of an agreement.
41. The "offers" typically proposed quid pro quo conduct: "if you do X, then, and only then, I will do Y." When the carriers had reached a consistent set of proposals through "negotiations," all offers were "accepted" and allowed to take effect.
42. The most attractive agreements for the carriers were probably those in which carrier A offered to increase fares on a route into carrier B's hub in exchange for carrier B's assent to increase fares on a route into carrier A's hub. See Baker, supra note 35.
43. Id. One recent Brookings study concludes that anticompetitive prices resulting from price leadership cost ticket buyers $356 million per year during the 1980s. STEVEN A. MORRISON & CLIFFORD WINSTON, THE EVOLUTION OF THE AIRLINE INDUSTRY 77 (1995). Although the analysis was partly motivated by the DOJ's price-fixing complaint, the study was not designed to capture many of the harmful effects alleged and may have underestimated the annual customer injury resulting from the airlines' exercise of market power. In particular, the Brookings study identified routes in which price leadership occurred by examining the impact of changes in each carrier's average fares during one quarter of the year on the average fares of rival carriers during the following quarter. This approach adapts the common econometric practice for testing "causality" to the available data, but data limitations likely led the researchers to omit most of the routes affected by the alleged price fixing for two reasons. First, most of the negotiations identified by the DOJ employed fares that were unavailable to ticket buyers until consensus was reached, or else were available only for short periods and not widely purchased. In either case, price leadership would not be observed in the fare data regardless of the duration of the supracompetitive prices: fare negotiations would have little or no effect on average fares, and successful negotiations would appear as simultaneous fare increases by all carriers serving a route. Second, most of the negotiations took place within quarters, while the study only includes routes where a carrier's fare changes typically preceded a rival's fare changes across quarters. Because the study mainly involved routes that would have been deemed unaffected by price leadership, its comparison of price-cost margins between leadership and non-leadership routes would be expected to understate the price elevation resulting from the interfirm fare coordination alleged by the DOJ. To the extent the study includes routes affected by the alleged conspiracy, the data employed by the Brookings researchers is imperfectly suited for isolating the effects of the alleged fare agreements because it dates fares by travel date rather than ticket purchase date.
44. This generalization will not always hold. For example, if firms negotiate a price-fixing agreement publicly by giving advance notice of anticompetitive price increases that rivals modify or match before a consensus is reached, then the price-fixing firms should not be allowed to evade prosecution by claiming that buyers want the advance notice in order to accelerate some purchases before the new, high price takes effect. Buyers would do even better if price fixing was no longer facilitated because advance notice was prohibited. See United States' Response to Public Comments, United States v. Airline Tariff Publishing Co., supra note 35, at 29.
45. From one perspective it may seem remarkable that a defendant's business justification plays any role in determining whether an agreement was reached. Firms can engage in the forbidden process of negotiation and exchange of assurances for good or ill and their purpose seems logically unrelated to their means. Moreover, efficiencies are already taken into account both in determining whether an agreement that nakedly restrains trade should be reviewed under the rule of reason and when an agreement's reasonableness is assessed. Yet, the law has evolved this way to ensure that when a court deems conduct to constitute an anticompetitive agreement, the court can frame an adequate remedy. The absence of a business justification for the suspect conduct (as with other factors, like communication and the complexity of the conduct relative to what leader-follower behavior might reasonably yield) suggests that the firms could and would behave differently if enjoined, and therefore that a judicial remedy short of price regulation is indeed available.
46. In some cases enforcers will have direct evidence of an agreement that does not depend upon interpreting communications in the electronic marketplace. Even if the agreement is not memorialized, for example, a remorseful executive may testify to its terms. Another approach is to prevent structural conditions conducive to coordination through merger enforcement or through challenges to the "facilitating practices" by which firms commit themselves to high prices or to rapidly detect and respond to discounting by rivals. If facilitating practices are adopted by agreement, then the agreement may violate Sherman Act § 1. If they are adopted unilaterally, they cannot be reached under the Sherman Act, however, unless monopolization is threatened or achieved (thus permitting challenge under Sherman Act § 2). Moreover, the Second Circuit, in resolving the Ethyl litigation, E.I. du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir. 1984), discouraged the Commission from attacking unilateral facilitating practices under FTC Act § 5. For an argument that the Second Circuit was likely wrong, and that in any event the FTC retains the power to address such problems through informal competition rulemaking, see Baker, supra note 5, at 207-19.
47. Baker, supra note 5, at 147.