1. Class 5 Antitrust, Winter, 2018 Finding the Agreement
11/11/2018
Class 5 Antitrust, Winter, Finding the Agreement
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. 11/11/2018
Sherman Act Sec. 1
Every
contract, combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce
among the several States, or with foreign nations,
is declared to be illegal.
November 11, 2018

3. 11/11/2018
Sherman Act Sec. 1
Every
contract, combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce
among the several States, or with foreign nations,
is declared to be illegal.
November 11, 2018

4. P Q Demand Curve 10 PM PC TC Marginal Cost QM QC Marginal Revenue
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What would happen if the monopolist could have more than one price? P Q
Demand Curve 10 CS PM
Profits
DWL PC TC
Marginal Cost QM QC
Marginal Revenue
November 11, 2018

5. P Q Demand Curve 10 PC Marginal Cost QC
11/11/2018
Perfect Price Discrimination (1st Degree PD): Set different prices for each consumer P Q
Demand Curve 10
No deadweight loss: monopolist sells exactly the Q that would be sold in competition
Profits
Big distribution impact PC
Total Cost
Marginal Cost QC
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6. Production of Property: The Great American Novel
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Production of Property: The Great American Novel
Supply
Novelist-wannabe contemplates writing book. It will cost her $12 to do so
Once written, each copy of the book can be produced for $1
Demand
Two consumers: One would value the book at 10, the second at 5
November 11, 2018

7. What happens? Possibilities with Single Price Private Values
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What happens?
Possibilities with Single Price
Private Values
Price of 10, sells one copy at total cost of 13
Price of 5, sells two copies, for revenues of 10 and costs of 14
The book will not be produced
FC = 12, MC = 1
VC1 = 10, VC2 = 5
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8. What happens? Price Discrimination Would Solve Social Values
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What happens?
Social Values
One copy: Cost of 13, value of 10, net loss of 3
Two copies: cost of 14, value of 15, social gain of 1
Two copies should be produced, but won’t be
Price Discrimination Would Solve
November 11, 2018

9. November 11, 2018
Chicago Tribune, July 12, 1934

10. Movie Theater (100 seats) Assume:
Filling the Movie Theater
Movie Theater
(100 seats)
Assume:
Fixed Costs = 500, Marginal costs = 0
Two types of consumers
Type Y: 80 consumers, VY = 10
Type S: 20 consumers, VS = 4
Different types are readily identifiable
November 11, 2018

11. Movie Theater (100 seats) 80 Ys, VY = 10 20 Ss, VS = 4 F = 500
Filling the Movie Theater
Movie Theater
(100 seats)
80 Ys, VY = 10
20 Ss, VS = 4
F = 500
First try: Set ticket price at $4
What happens?
All 100 consumers attend the movie
Total revenues = 100*4 = 400
The firm doesn’t cover costs, so we shouldn’t think of that as a sustainable competitive outcome
Social Welfare (SWF) = 80* * = 380
November 11, 2018

12. Movie Theater (100 seats) 80 Ys, VY = 10 20 Ss, VS = 4 F = 500
Filling the Movie Theater
80 Ys, VY = 10
20 Ss, VS = 4
F = 500
Second try: Set ticket price at $5
What happens?
80 Type Y consumers attend the movie
Total revenues = 80*5 = 400
The firm doesn’t cover costs, so we shouldn’t think of that as a sustainable competitive outcome
S types who we want to attend the movie don’t
SWF = 80*10 – 500 = 300
November 11, 2018

13. Movie Theater (100 seats) 80 Ys, VY = 10 20 Ss, VS = 4 F = 500
Filling the Movie Theater
80 Ys, VY = 10
20 Ss, VS = 4
F = 500
Third try: Set ticket price at $6.25
What happens?
80 Type Y consumers attend the movie
Total revenues = 80*6.25 = 500
The firm just cover costs but makes no “profit”, and these are the features of a competitive outcome
S types who we want to attend the movie still don’t
SWF = 80*10 – 500 = 300 = 3.75*80
November 11, 2018

14. Movie Theater (100 seats) 80 Ys, VY = 10 20 Ss, VS = 4 F = 500
Filling the Movie Theater
Movie Theater
(100 seats)
80 Ys, VY = 10
20 Ss, VS = 4
F = 500
Fourth try: Set different prices for different groups:
Drop price on Y Types to $6.
Set price on S Type at $1
How do the Y Types experience this?
What happens?
November 11, 2018

15. Movie Theater (100 seats) 80 Ys, VY = 10 20 Ss, VS = 4 F = 500
Filling the Movie Theater
Movie Theater
(100 seats)
80 Ys, VY = 10
20 Ss, VS = 4
F = 500
Fourth try: PY = 6, PS = 1
What happens?
All 100 consumers attend the movie
Total revenues = 80*6 + 20*1 = 500
The firm just covers costs
SWF = 10*80 + 4*20 – 500 = 380
We have maximized SWF while covering costs of operation
November 11, 2018

16. Movie Theater (100 seats) Fourth try: PY = 6, PS = 1
Filling the Movie Theater
Movie Theater
(100 seats)
Fourth try: PY = 6, PS = 1
But we have done this by charging different prices to different consumers (price discrimination).
Each Y type effectively pays $6 of the fixed costs, while each S type pays $1 of the fixed costs
November 11, 2018

17. Fixed Costs = 500, Marginal costs = 0 Two types of consumers
Filling the Movie Theater
Movie Theater
(100 seats)
Assume:
Fixed Costs = 500, Marginal costs = 0
Two types of consumers
Type Y: 80 consumers, VY = 10
Type S: 20 consumers, VS = 4
Different types are readily identifiable
How should the theater segment consumers if the types aren’t identifiable?
November 11, 2018

18. Things that Won’t Work:
Filling the Movie Theater
Movie Theater
(100 seats)
Things that Won’t Work:
Sell two types of tickets, Y-tickets for $6 and S-tickets for $1 and ask customers to select the tickets that match their type
Have two theaters right next to each other, one selling $6 tickets and the second $1 tickets
November 11, 2018

19. Movie Theater New Movie Movie Theater 6-month old movie
Filling the Movie Theater
Movie Theater
New Movie
Movie Theater
6-month old movie
Could this work?
Have two theaters next to each other: the first plays a new movie (the first-run theater) while the second plays a six-month old movie (the second run theater)
November 11, 2018

20. Movie Theater New Movie Movie Theater 6-month old movie
Filling the Movie Theater
Movie Theater
New Movie
Movie Theater
6-month old movie
Note the investments that need to be made in market segmentation:
We are making some viewers wait to see the movie when we could have them seeing it now (have two 1st run theaters instead of one 1st run and one 2nd run), but we need the delay to separate the customers
November 11, 2018

21. Is the hypo Interstate Circuit?
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Is the hypo Interstate Circuit?
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22. Interstate Circuit (1939) Motion Picture Distributors Paramount 2 8
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Interstate Circuit (1939)
Motion
Picture
Distributors
Paramount 2 8
O’Donnell GM
Hoblitzelle Pres
Texas
Consolidated
Theatres
Interstate
Circuit
Exhibitors
Texas
43 Theatres
1st and 2nd Run
66 Theatres
1st and 2nd Run
November 11, 2018

23. The Letter Format Letter sent on Interstate Circuit letterhead
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The Letter
Format
Letter sent on Interstate Circuit letterhead
Addressed to 8 distributors
November 11, 2018

24. 11/11/2018
The Letter
Key Content
On April 25th, the writer notified you that in purchasing product for the coming season , it would be necessary for all distributors to take into consideration in the sale of subsequent runs that Interstate Circuit, Inc., will not agree to purchase produce to be exhibited in its 'A' theatres at a price of 40 cents or more for night admission,
November 11, 2018

25. 11/11/2018
The Letter
Key Content
unless distributors agree that in selling their product to subsequent runs, that this 'A' product will never be exhibited at any time or in any theatre at a smaller admission price than 25 cents for adults in the evening.”
“The writer will appreciate your acknowledging your complete understanding of this letter”
November 11, 2018

26. Evaluating the Evidence
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Evaluating the Evidence
What does the evidentiary record look like to an outsider?
If you were a second-run theatre, what would you think?
What evidence would be available to you?
If you were going to bring a private antitrust action, how would you frame the complaint?
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27. Finding the Conspiracy
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Finding the Conspiracy
Paramount 8 2
Interstate
Circuit 7 3 6 4 5
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28. 11/11/2018
Result
Says the Court
“While the District Court’s finding of an agreement of the distributors among themselves is supported by the evidence, we think that in the circumstances of this case such agreement for the imposition of the restrictions upon subsequent-run exhibitors was not a prerequisite to an unlawful conspiracy.”
November 11, 2018

29. 11/11/2018
Result
“It was enough that, knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it.”
“Each distributor was advised that the others were asked to participate; each knew the cooperation was essential to successful operation of the plan.”
November 11, 2018

30. 11/11/2018
Result
“Acceptance by competitors, without previous agreement, of an invitation to participate in a plan, the necessary consequence of which, if carried out, is restraint of interstate commerce, is sufficient to establish an unlawful conspiracy under the Sherman Act.”
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31. Theatre Enterprises (1954)
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Theatre Enterprises (1954)
Rejects “conscious parallelism” standing alone as sufficient for finding of violation:
“The crucial question is whether respondents’ conduct toward petitioner stemmed from independent decision or from an agreement, tacit or express.
November 11, 2018

32. Theatre Enterprises (1954)
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Theatre Enterprises (1954)
“To be sure, business behavior is admissible circumstantial evidence from which the fact finder may infer agreement. Interstate Circuit, Inc. v. United States, 1939, 306 U.S. 208.”
November 11, 2018

33. Theater Enterprises (1954)
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Theater Enterprises (1954)
“But this Court has never held that proof of parallel business behavior conclusively establishes agreement or, phrased differently, that such behavior itself constitutes a Sherman Act offense. Circumstantial evidence of consciously parallel behavior may have made heavy inroads into the traditional judicial attitude toward conspiracy; but ‘conscious parallelism’ has not yet read conspiracy out of the Sherman Act entirely.”
November 11, 2018

34. Making Sense of the Cases
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Making Sense of the Cases
Theater Enterprises (1954)
Knowing parallel behavior alone insufficient
Seems to contemplate mere “tacit” agreement
Interstate Circuit (1939)
Direct evidence of offer (the letter) and inference of conspiracy from parallel behavior coupled with failure to rebut same
November 11, 2018

35. Text Messaging II The Core Situation
Costs are flat or dropping and yet prices are going up for people who buy text messages one by one (price-per-use (PPU))
What accounts for this?
November 11, 2018

36. Tacit Collusion Doesn’t Violate SA1
“… the plaintiffs’ counsel demonstrate a failure to understand the fundamental distinction between express and tacit collusion. Express collusion violates antitrust law; tacit collusion does not.”
November 11, 2018
Text Messaging II (CA7 2015)

37. No Duty To Compete
“The point that they have particular difficulty accepting is that the Sherman Act imposes no duty on firms to compete vigorously, or for that matter at all, in price.”
November 11, 2018
Text Messaging II (CA7 2015)

38. Sorry Louis
“This troubles some antitrust experts, such as Harvard Law School Professor Louis Kaplow, whose book Competition Policy and Price Fixing (2013) argues that tacit collusion should be deemed a violation of the Sherman Act. That of course is not the law, and probably shouldn’t be.”
November 11, 2018
Text Messaging II (CA7 2015)

39. Tacit Collusion Not a Violation
“We hope this opinion will help lawyers understand the risks of invoking ‘collusion’ without being precise about what they mean. Tacit collusion, also known as conscious parallelism, does not violate section 1 of the Sherman Act. Collusion is illegal only when based on agreement.”
November 11, 2018
Text Messaging II (CA7 2015)

40. Express Collusion Required
“Agreement can be proved by circumstantial evidence, and the plaintiffs were permitted to conduct and did conduct full pretrial discovery of such evidence. Yet their search failed to find sufficient evidence of express collusion to make a prima facie case. The district court had therefore no alternative to granting summary judgment in favor of the defendants.”
November 11, 2018
Text Messaging II (CA7 2015)

41. Five Situations Try Five 1. Independent behavior 2. Parallel behavior
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Five Situations
Try Five
1. Independent behavior
2. Parallel behavior
3. Consciously parallel behavior
4. Tacit agreement
5. Express agreement or conspiracy
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42. Five Situations The Cases
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Five Situations
The Cases
Theatre Enterprises rejects conscious parallelism as sufficing for agreement but seems to contemplate that agreement can be “tacit or express”
Text Messaging II is consistent with that in that it says that tacit collusion—meaning conscious parallelism—is not enough
November 11, 2018