1. Public Policy in Private Markets Collusion

2. 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 (4 th edition) for next week - posted 3/6: first debate + review for midterm (time permitting) 3/8: midterm #1

3. Overview of Antitrust Laws

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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)

10. 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

11. 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

12. 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

13. 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

14. 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

15. Conscious Parallelism American Tobacco Case (1946)  Court found set of actions constituted conspiracy “No formal agreement is necessary to constitute an unlawful conspiracy”

16. 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

17. 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

18. 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

19. 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

20. 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)

21. 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

22. 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?

23. 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