Collaborative Relationships: Legal Limits andAntitrust Considerations

Gregory T. Gundlach and JakJd J. IVlohr

Competitors are increasingly relying on collaborative relationships guided by intermediateforms of governance (i.e., strategic alliances, hybrids, networks) to find and maintaincompetitive advantages. In contrast, antitrust analysis has emphasized cartels and jointventures as the primary modes of collaboration among competitors. This focus overlooksmany intermediate forms of governance. This and other trends in antitrust have resulted inconfusion over proper treatment of collaborative relationships. The authors examine thesetrends with the objective of developing an analytical framework that clarifies current law forhorizontal collaboration. Implications for managerial practice, policy, and research areprovided.

T he use of collaborative relationships as a strategy togain competitive advantage has increased dramati-cally in recent years. Whether called strategic alli-

ances [Kanter 1988], closer trading relationships [Salmondand Spekman 1986], partnerships [Narus and Anderson1987; Sethuraman, Anderson, and Narus 1988], hybrids[Borys and Jemison 1989], networks [Thorelli 1986], relation-ship marketing [Dwyer, Schurr, and Oh 1987; Jackson1985], bilateral exchange [Williamson 1985], domesticatedmarkets [Arndt 1979], or symbiotic arrangements [Adler1966; Varadarajan and Rajaratnam 1986], such relationshipsare used to gain access to markets and/or technology or togain synergies across functional areas [Borys and Jemison1989; Kanter 1988].' In short, collaborative relationships areargued to provide mutual gains that neither party couldachieve singly.

Historically, antitrust law has emphasized collaborationgoverned under the mechanisms of cartels and joint ven-tures [Pitofsky 1986; Roberts 1988]. Cartels have been nar-rowly construed as agreements between competitors to col-laborate on price or some market policy [Scherer 1990].Joint ventures have been viewed as two or more business en-terprises collaborating to achieve some commercial goal[Areeda 1981; Winslow 1985]. These arrangements havebeen defined to involve an entity separate from its parents,a fact that distinguishes them from mergers and contractualarrangements [Brodley 1982].

Because cartels normally involve minimal integration ofresources, they have been assumed to generate few compet-itive benefits and therefore have been declared illegal "perse." Under per se treatment:

GREGORY T GUNDLACH is Assistant Professor of Marketing, Depart-ment of Marketing, College of Business Administration, Univer-sity of Notre Dame. JAKKI J. MOHR is Assistant Professor of Mar-keting, College of Business and Administration, University of Col-orado. The authors gratefully acknowledge the helpful commentsand suggestions of NEIL BECKWITH, PAUL BLOOM, JOSEPH CANNON,

EDWARD GAC, MARY JANE SHEFFET, and three anonymous JPP&Mreviewers.

...certain agreements or practices which because of their perni-cious effect on competition and lack of any redeeming virtueare conclusively presumed to be unreasonable and therefore il-legal without elaborate inquiry as to the precise harm they havecaused or the business excuse for their use [Northern PacificRailroad v. United States 1958, p. 5].

The use of the per se rule provides guidance to the businesscommunity and minimizes the burden on litigants and the ju-dicial system [Continental TV, Inc. v. GTE Sytvania Inc.1976].

Joint ventures, because of their substantial integration ofoperations and reallocation of resources, have been as-sumed to produce competitive benefits that outweigh theircompetitive harms. Traditionally, they have been evaluatedon the basis of the "rule of reason." This approach bal-ances competitive benefits against potential harms. Underthe rule of reason, a court weighs all circumstances of acase, including facts peculiar to the business, its conditionbefore and after collaboration, the nature of the collabora-tion and its effect, the evil believed to exist, the reason foradopting a particular remedy, and the purpose or endsought [Chicago Board of Trade v. United States 1917].

The view that collaboration typically occurs through car-tels or joint ventures has resulted in confusion over thelegal status and proper mode of analysis for evaluating "in-termediate" forms of collaboration (i.e., neither cartel norjoint venture). Recent Supreme Court decisions indicate a ju-dicial system uncertain as to the appropriate method. En-forcement models used by the Justice Department and theFederal Trade Commission reflect divergent views as to col-laboration and political preferences. Uncertainty toward col-laboration has moved antitrust law from the clear standardsof the past ' 'into a gray area where it is possible for a caseto come out one way—or another" [Bock 1989, p. 10; cf.Sullivan 1987]. Confusion increases the costs for busi-nesses contemplating collaboration [Sims 1989] and maydeter competitively beneficial arrangements. Moreover, thefact that different (and often more lenient, e.g., Komiya,Okuno, and Suzumura [1988]) standards are used in othercountries limits the competitiveness of U.S. firms.

Vol. 11 (2)Fall 1992, 101-114 Journal of Public Policy & Marketing 101

102 Collaborative Relationsbips

The objective of our research is to examine antitrust pol-icy toward collaboration. Focus is given to uncertainty un-derlying current judicial interpretation and enforcement prac-tices. We develop an analytical framework that organizesand clarifies current law and aids decisionmakers in theiranalysis and choices concerning collaboration. Implicationsfor managerial practice, policy, and research are provided.

Collaboration and Public Policy

BackgroundPublic policy toward horizontal collaboration is based pri-marily on the Sherman Act (1890),^ the Clayton Act(1914),3 the Federal Trade Commission Act (1914)'* andstate antitrust law.' A variety of legislative exceptions forspecific forms, industries and international cooperation alsoapply. For example, the National Cooperative Research Act[1984] "promotes research and development, ...encour-age(s) innovation...and stimulate(s) trade" (U.S. Depart-ment of Justice 1989, paragraph 50121). The Act applies toR&D activities up to and including the testing of proto-types. The Act declares that R&D collaboration shall bejudged under a rule of reason [Wright 1986].

Both the Department of Justice and the Federal TradeCommission (FTC) are responsible for enforcement of thefederal antitrust laws addressing collaboration. State attor-neys general enforce state antitrust laws. Private partiesmay seek restitution individually through the courts. In-deed, much of today's antitrust enforcement relies on self-policing by the business community.

At the federal level, the Department of Justice may seekinjunctions, fines, and criminal sanctions in court for viola-tions of the Sherman and Clayton Acts. The FTC, throughSection 5 of the Federal Trade Commission Act, may alsoseek injunctions or issue cease and desist orders for viola-tions of these acts. Additionally, the Commission may chal-lenge collaboration directly through Section 5—its organicstatute designed to challenge anticompetitive practices thatgo beyond the "spirit of the law."

Antitrust's Evaluative GoalsConfusion over the legality of collaboration has been com-pounded by vacillation about antitrust policy as enforce-ment agencies and courts move toward economic efficiencyas the sole goal of antitrust. This shift represents a limitingof previously held policy goals, which included fairness, di-versity of choice, innovation, decentralized decisionmak-ing, and the economic independence of small businesses [Pi-raino 1991]. Proponents of efficiency-driven policy arguethat competitive markets should be given a free rein be-cause of the natural tendency of firms to be efficient. Theyadvocate a minimalist approach in which competitive con-duct should not be deemed illegal unless a plaintiff canprove, by rule of reason, an adverse impact on competition.Judicial adoption of this narrower goal has not been com-plete; some courts have been unwilling to discard tradi-tional goals [Lande 1988]. Enforcement agency interpreta-tions of this new goal have also varied. Resistance and the

incomplete nature of this transition have contributed to un-certainty over the law.

Confusion in the CourtsConfusion over antitrust's goals is apparent in recent Su-preme Court decisions that address collaboration. Table 1provides an overview of key cases. Review of these cases in-dicates that use of the per se approach has been both criti-cized and endorsed. The Court has favored a rule of reasonin some cases, condemning per se treatment as overly sim-plistic and too broad. In other cases, the Court has rejectedthe rule of reason, opting for the per se rule.

Cases Favoring Rule of Reason AnalysisIn National Society of Professional Engineers v. UnitedStates [1978], the Court considered an engineering soci-ety's rules against competitive bidding. Instead of summa-rily condemning the arrangement under the per se rule, theCourt considered justifications for the ban. This approachrepresented a rule of reason inquiry. The arrangement wasthen found to be illegal. In Broadcast Music, Inc. v. Colum-bia Broadcasting Systems, Inc. [1979], the Court concededthat a licensing agreement among copyright owners, BMI,and licensees constituted a price-fixing scheme "in the lit-eral sense" [pp. 19-20]. However, it refused to apply theper se standard. Rather, the Court engaged in a lengthy in-quiry of the conduct's effect and purpose resembling a ruleof reason analysis.

Similarly, in NCAA v. Board of Regents [1984], theCourt admitted that horizontal price and output limitationstraditionally would be found per se illegal. However, theCourt refused to apply the per se precedent, choosing ratherto allow NCAA to justify its conduct. Upon analysis, theCourt found the alleged conduct to be unlawful. A similarapproach was utilized in Northwest Wholesale Stationers,Inc. V. Pacific Stationary & Printing Co. [1985]. Here, in-stead of summarily condemning the plaintiff's expulsionfrom a cooperative as a per se boycott, the Court consid-ered justifications for the conduct. The Court concludedthat the plaintiff did not make a threshold showing of anti-competitive effect to justify per se analysis. Finally, in Fed-eral Trade Commission v. Indiana Federation of Dentists[1986], another boycott case, the Court refused to "resolve[the] case by forcing the Federation's policy into the 'boy-cott' pigeonhole and invoking the per se rule" [p. 458].The Court applied a rule of reason analysis, finding illegalconduct.

Cases Favoring Per Se AnalysisIn Catalano Inc. v. Target Sales, Inc. [1980], the Courtfound that beer wholesalers that had agreed to stop extend-ing credit to retailers committed a per se violation. TheCourt concluded, "[S]ince price-fixing...lack[s] any 'redeem-ing virtue' it is conclusively presumed illegal without fur-ther examination under the rule of reason" [p. 650]. In an-other case, Arizona v. Maricopa Medical Society [1982], amaximum-price-setting agreement among physicians (i.e., aclassic price-fixing agreement) was considered. In defend-ing their actions, the physicians argued the per se ruleshould not be applied because of the likely beneficial ef-

Journal of Public Policy & Marketing 103

Table 1. Horizontal Collaboration Supreme Court Cases

Case DescriptionCollaborative

Issue

Methodof

Analysis Held

Goldfarb v. Virgina State Bar[1975]

National Society of ProfessionalEngineers v.U.S. [1978]

Broadcast Music, Inc. v.Columbia Broadcast Systems[1979]

The state and county bar associations together Pricepublished a minimum fee schedule settingforth what a lawyer should charge a client toperform a real property title search.

The National Society of Professional PriceEngineers promulgated rules that prohibitedcompetitive bidding by member engineeringcontractors.

Broadcast Music, Inc., an association that Pricerepresented music copyright owners andprovided licenses to those who wanted to playthe copyright owners' works, received anddistributed fees from licensees to copyright

Per se

Rule ofreason

Rule ofreason

Illegal

Illegal

Legal

Catalano Inc. v. Target Sales,Inc. [1980]

Arizona v. Maricopa CountyMedical Society [1982]

NCAiA V. Board of Regents[1984]

Northwest Wholesale Stationers,Inc. V. Pacific Stationary &Printing Co. [1985]

FTC V. Indiana Federation ofDentists [1986]

Palmer v. BRG of Georgia, Inc.[1990]

Superior Court Trial LawyersAssociation v. FTC [1990]

Beer wholesalers together agreed to refuse to Pricesell to beer retailers unless a retailer agreed toprovide payment in cash in advance or ondelivery of products.

The Maricopa County Medical Society Priceorganized foundations to provide fee-for-service medicine and a competitive alternativeto typical health insurance programs. Thefoundation established a maximum feeschedule that doctors agreed to receive aspayment for services.

The NCAA sought to reverse the ill effects of Price/Outputtelevision on football game attendance bylimiting the number of games a memberschool could have televised and required thatno school could engage in a televisioncontract except pursuant to a specific plan.

Northwest Wholesale Stationers, acooperative of office supply retailers acting asa wholesale purchasing and warehousingagent for its members, expelled one of itsmembers—Pacific Stationary & Printing.

Indiana Federation of Dentists, an associationof dentists, refused to supply patient X-rays toinsurance companies seeking to evaluatebenefit claims.

BRG, a competing provider of bar reviewcourses in Georgia, agreed with anothercompetitor to withdraw from the Georgiamarket in return for exclusive access to thebroader U.S. market.

The Superior Court Trial Lawyer's PriceAssociation organized a strike by attorneysacting as court-appointed counsel for indigentcriminal defendants.

Perse

Per se

Illegal

Illegal

Boycott

Boycott

Marketallocation

Rule ofreason

Rule ofreason

Per se

Rule of Illegalreason

Legal

Illegal

Illegal

IllegalPer se

fects of lower premiums and more complete insurance. How-ever, the Court concluded that their argument illustrated ' 'amisunderstanding of the per se concept" [p. 351], stating

that "the anticompetitive potential inherent in all price-fixing agreements justifies their facial invalidation" [p.351].

104 Collaborative Relationships

In two more recent cases, the per se rule has been ap-plied to invalidate collaboration. In Superior Court TrialLawyers v. FTC [1990], the per se concept was usedagainst a stdke by court-appointed attorneys representing in-digent defendants. Conduct involving both price fixing anda group boycott were involved. Similarly, in Palmer v.BRG of Georgia, Inc. (1990), the per se rule was used tostrike down collaboration that divided territories betweentwo competitors offering bar review courses. The Court char-acterized the arrangement as a per se violation.

The inability of the Court to chart a consistent course hasevinced considerable uncertainty among practitioners of an-titrust law and competitors contemplating collaboration.This confusion has not, however, been limited strictly tothe courts.

Agency Enforcement ModelsIn addition to judicial confusion, enforcement practices anddiffering interpretations of antitrust's goals by the Justice De-partment (JD) and the FTC have elevated uncertainty aboutthe legality of collaboration. Though practices by these agen-cies recognize the benefits and harms that can result, eachagency employs its own approach for evaluating collabora-tion.

Justice Department's Market Power ScreenThe approach used by the Justice Department is outlined inthe Antitrust Enforcement Guidelines for International Op-erations [U.S. Department of Justice 1988a] and MergerGuidelines [U.S. Department of Justice 1988b]. Collabora-tive arrangements ("joint ventures" in their terminology)are defined as "...essentially any collaborative effort amongfirms, short of a merger, with respect to R&D, production,distribution, and/or the marketing of products or services"[U.S. Department of Justice 1988a, paragraph 3.4]. In eval-uating a collaborative arrangement, a series of analyses isconducted. Figure 1 is an overview of this process and afuller explanation follows.

• Step I. Inquiry is first made (a) as to whether an arrangementis a "naked agreement" in restraint of trade—an agreement de-signed to restrict output or raise price with no resultant efficien-cies (e.g., price fixing). "Naked agreements" are deemed il-legal; other arrangements are examined for their potential ben-efits (b).

This examination (b) focuses on competition in the affectedmarket. If restrictions on competitors' independent decision-making with respect to price and output are found, a marketpower screen (discussed shortly) is conducted; if competitionis not restricted. Step 2 is conducted.

• Step 2. Spillover effects in other markets are assessed at thisstage (a), and may include information exchanges and other in-teractions in an arrangement that might promote anticompeti-tive collusion in other markets. The likelihood of "spillover ef-fects' ' is judged (b) from procedural and operational safe-guards. For example, safeguards against the trading of sensi-tive business information are examined to ascertain their useand effectiveness.

Where safeguards are adequate, the inquiry moves to Step3; if safeguards are inadequate, a market power screen is con-ducted.

A market power screen assesses the degree to which an ar-rangement creates, enhances, or facilitates a firm's ability to

raise price (i). Market definition criteria set forth in theMerger Guidelines [U.S. Department of Justice 1988b] are em-ployed (see also discussion under Competitive Market Struc-ture). The impact on current and prospective concentration lev-els in an affected market is examined. If low, the inquiry con-tinues to Step 3.

If concentration levels will be affected, other factors are ex-amined (ii); these include the ease of market entry and charac-teristics of the product or service. After this consideration ofadditional factors, the inquiry continues on to Step 3.

• Step 3. Here, the JD examines vertical implications of an ar-rangement by investigating the exclusionary and collusive po-tential in affected market channels. For example, an arrange-ment may be accompanied by exclusive dealing terms and re-strictions on territories. Where significant anticompetitive ef-fects are likely, each is examined more fully and the analysisis weighed at Step 4.

• Step 4. At this stage, a rule of reason approach is employed toweigh the cumulative evidence:

(a) Arrangements that do not have significant anticompetitiveeffects are not challenged.

(b) Arrangements having significant anticompetitive harmsthat are not outweighed by procompetitive efficiencies arechallenged.

(c) Even if procompetitive benefits outweigh anticompetitiveharms, further inquiry into less anticompetitive alterna-tives is made. If no alternatives exist, an arrangement isnot challenged.

Where less restrictive alternatives do exist, the JD mayeither challenge the arrangement outright or require thatthe other alternatives be used.

Federal Trade Commission's "Inherently Suspect"TestThe enforcement model used by the FTC is outlined in Fed-eral Trade Commission v. Massachusetts Board of Registra-tion in Optometry [1988]. The case involves a challenge toregulations that prohibit advertising of discounts by Massa-chusetts optometrists. Insight is also provided by Muris[1989], Director of the Commission's Bureau of Competi-tion from 1983 to 1985, who describes MassachusettsBoard. Figure 2 illustrates the FTC model.

• Step 1. Inquiry is first made as to whether an arrangement ap-pears likely, without justification, to restrict competition,raise prices, and decrease output (i.e., is "inherently sus-pect' ) . Classic examples of inherently suspect arrangementsinclude price fixing and division of markets. If an arrange-ment is not inherently suspect, a rule of reason analysis is fol-lowed. If the arrangement is suspect, the inquiry moves toStep 2.

• Step 2. Plausible efficiencies are evaluated at this stage. Here"plausible" means that the validity of a justification for an ar-rangement cannot be rejected (i.e., can be accepted) without ex-tensive factual inquiry. Plausible efficiencies include a reduc-tion in production or marketing costs, creation of a new prod-uct, or improvement of the operation of a market, among oth-ers. If no plausible justifications are offered, an arrangementis condemned.

If justifications are plausible, a rule of reason analysis is

Journal of Public Policy & Marketing 105

Figure 1. Justiee Department Market Power Sereen

step 1: (") Is the arrangement a "naked agreement"in restraint of trade? Yes

I Wo) Does(b) Does the arrangement restrict competition

in the market in which it operates? Yes

Step 2: (a) Does the arrangement possess "spi(/over effects"in other markets? ffiS .

(b) Are adequate safeguardspresent?jves

Step 3: Does the arrangement possess^vertical effects? ^S?

Wo

I Weigh inat Slep 4

Step 4: Rule of Reason analysis tisinganswers to Steps 1. 2. and 3:

(a) Is ihc arrangement likely to have anysignificant anticompetitive effects?

\Yes

(b) Do the procompctitive benefits outweighthe anticompetitive harms? Wo

Wes

(c) Do alternative arrangements that areless restrictive exist?

Ves

Challenge - or - Require Change

MARKET POWER SCREEN(i) Would the arrangement

create, enhance, or facilitatethe exercise of market power? Yes

Wo

(Continueto Step 3)

I Consider additionalfactors.

(Then continueon to Step 3)

-> Not Charieneed.

Wo

conducted, and the offsetting procompetitive and anticompeti-tive outcomes of an arrangement examined.

Comparison of Enforcement ModelsA comparison of the two models reveals differences acrosstheir processes and evidentiary standards. According to onecommentator, each model:

ask[s] essentially the same questions..., but asks them in differ-ent order...this is by no means a trivial difference...the legalityof a restraint (collaborative arrangement) may depend on theorder in which these issues are addressed [Wall 1990, p. 36].

The JD inquires into the presence of market power prior tofinding an arrangement unlawful. In contrast, the FTC askswhether an arrangement is "inherently suspect" on thebasis of restricted competition and decreased output. If it isinherently suspect, procompetitive justifications are evalu-ated and market power considered only when these justifi-cations are validly plausible. Thus, the Jl) considers the pres-ence of market power early on, whereas the FTC considersit only in the latter stages of evaluation.

In comparison, the FTC adopts a stricter standard be-cause little evidence is required for showing anticompeti-tive effects, whereas procompetitive benefits must beproven. The title adopted for their test—the ' 'inherently sus-pect approach"—reflects this standard. Alternatively, theJD requires that both anticompetitive harms and procompe-titive benefits be proven. In this sense, the FTC minimizesType I errors (i.e., not challenging anticompetitive arrange-ments), while largely ignoring Type II errors (i.e., challeng-ing procompetitive arrangements) [Coates 1989].

The different approaches of the JD and FTC have causedconfusion as to how antitrust enforcement agencies willview collaboration. According to one commentator.

Expert agencies such as the FTC and the Antitrust Division areheld to a high standard of clarity, and hopefully consistency.Given the unclear meaning of Mass. Board [reflecting the FTCmodel] and the...Justice Department's views on this subject, nei-ther clarity nor consistency is evident at this time [Wall 1990,p. 37].

106 Collaborative Relationships

Figure 2. Federal Trade Commission's "Inherently Suspect" Test

Step 1:

Step 2:

Is the collaborative arrangementinherently suspect? Afo

Yes

Are plausible efficienciespresent? Yes

••Rule of ReasonLnalvsis

No

A Framework for Legal AnalysisAn analytical framework that identifies and characterizeskey dimensions underlying the current law on collaborationis illustrated in Figure 3. For firms contemplating collabora-tion, this framework may help reduce uncertainty over theirlegal standing and facilitate the efficient planning of suchventures. The framework first examines the threshold levelof joint action between participants that is necessary for col-laboration to be found. Structural aspects of these arrange-ments are then examined as they relate to the law. For exam-ple, differential status has been given collaboration on thebasis of its structure (i.e., horizontal vs. vertical), nature(i.e., presence of "spillover" effects, collateral terms, scopeand multiplexity), and specific yMncfJona/ area (i.e., price,product, place, etc.). Competitive concentration in an af-fected market (i.e., market power) is also examined.^

Collaboration as Joint ActionCollaborative arrangements require a threshold level ofjoint action between at least two separate entities [Fisher v.City of Berkeley 1986]. Evidence of joint conduct varies, de-pending on the type of collaboration. For the majority of ar-rangements, this evidence is provided directly. The charac-ter of joint ventures, strategic alliances, and forms that in-volve substantial integration provide ample documentation.These arrangements are developed and guided through use

of contracts and other written documents. Interfirm corre-spondence and meetings reflect collaborative intensity.

Many collaborative arrangements, especially those nearerto the "market" archetype [Williamson 1975], provide littledirect evidence of their existence. Proof of collaborative con-duct may be found even where firms have not agreed to co-operate. For example, the FTC investigation of the airlines[Nomani 1989] found evidence of price-signaling activity intheir reservation system. Though such conduct was not col-laboration per se, the FTC argued that "signaling" consti-tuted a form of collaboration.

In the absence of direct proof, courts look at other typesof evidence that suggests collaborative conduct. Evidencethat tends to "exclude the possibility" of unilateral actionis required [Matsushita Electric Industry Co. v. ZenithRadio Corporation 1986]. Parallel or similar business behav-ior alone does not conclusively establish the presence of anarrangement [Theater Enterprise, Inc. v. Paramount FilmDistribution Corporation 1954]. Courts require a showingof "conscious parallelism" plus other circumstantial evi-dence. Conscious parallelism refers to some form of corre-sponding behavior suggestive of a "meeting of the minds"of the participants [The Jeanery, Inc. v. James Jeans, Inc.1988]. This often entails complex conduct difficult to envi-sion without some accord between the parties [Sullivan1983; e.g.. Interstate Circuit, Inc. v. United States 1939]. Acommon course of conduct sufficient to warrant a findingof "unity of purpose or a common design" is required

Journal of Public Policy & Marketing 107

Figure 3. Framework for Collaboration: Antitrust Analysis

Dimensions

Threshold Level of Joint Action• Type of Collaboration

Nature of Collaboration• Spillover Effects• Collateral Terms• Scope and Multiplexity

Collaborative Structure• Vertical• Horizontal•"Hybrid"

Competitive Market Structure• Market Power

Functional Area/Purpose• Exchange of Infonnation• Product Development and

Standardization•Price• Market Division/Customer

Allocation• Exclusion of Competitors

[American Tobacco Co. v. United States 1936, p. 810].Such cooperation may be established by either direct or cir-cumstantial evidence [Norfolk Monument Co. v. WoodlawnMemorial Gardens, Inc. 1969].

A wide variety of "plus" factors provide circumstantialevidence of collaboration [Vaska 1985]. For example, evi-dence of meetings or other exchanges of information is suf-ficient, especially in concentrated industries [United StatesV. Container Corp. 1969]. Conduct in contrast to reasona-ble self-interest-driven behavior is also adequate [Supermar-ket of Homes, Inc. v. San Fernando Valley Board of Real-tors 1986]. An unusual pattern of parallel conduct that can-not be explained in the absence of some form of joint ac-tion may imply collaboration [Cackling Acres, Inc. v. OlsonFarms, Inc. 1977].

A lack of reasonable motive for collaborative conductbears on the permissible conclusions that can be drawn [Mat-sushita Electric Industry Co. v. Zenith Radio Corporation1986]. If the conduct is consistent with noncooperative andequally plausible explanations, an inference of collabora-tion cannot be drawn. For example, justification that busi-ness practices are independently determined will not resultin collaboration being inferred [Apex Oil Co. v. DiMauro1987]. An argument can also be made for independent busi-ness justification of behavior in cases in which a firm in anindustry matches a rival's previously announced price[Wilcox V. First National Bank of Oregon 1987].

Collaborative StructureCollaborative arrangements can be made between competi-tors (i.e., horizontal arrangements), channel members (i.e.,vertical arrangements), and through intermediate or "hy-brid" arrangements. Our emphasis is on horizontal cooper-ation, or joint arrangements between competing firms, butthese arrangements can have implications for vertical com-petition. For example, several manufacturers may undertakea joint venture for distribution of their products. They mayagree to distribute exclusively through the venture to the ex-

clusion of other systems. Such an arrangement can raiseproblems if, as a result, restricted access to the manufactur-ers effectively impairs competition [United States v. Colum-bia Pictures, Inc. 1980]. Collaborative research and develop-ment may also result in vertical consequences.

It is notable that the antitrust climate has recently be-come much more receptive to vertical collaboration. Boththe courts and enforcement agencies have all but aban-doned per se classification of these arrangements [BusinessElectronics Corporation v. Sharp Electronic Corporation1988], with the exception of those involving price [Mon-santo Corporation v. Spray-Rite Service Company 1984].(For reviews, see Garfield [1983], and Sheffet and Scam-mon [1985]).

In addition to horizontal collaboration affecting verticalcompetition, vertical collaboration may have implicationsfor horizontal competition. If such arrangements are anticom-petitive in a horizontal sense, they may run afoul of the law.For example, a manufacturer, in order to compete rigor-ously with its rivals, may persuade a supplier to restrict itssales to those rivals. If the supplier's refusal to supply the ri-vals is a direct result of collaboration, the arrangementbears upon the horizontal relationships of the manufac-turer's competitors and may be anticompetitive. Thus, evenvertical collaboration, which may be examined leniently onits own merits, can cause antitrust concem if horizontal im-plications arise.

Nature of CollaborationA variety of factors associated with the structure of a collab-orative arrangement bear upon its evaluation under the law.As shown in Figure 3, these factors include (1) "spillover"effects, (2) collateral terms, and (3) the scope and "multi-plexity" of an arrangement.

Spillover EffectsCollaboration may facilitate unlawful collusion through"spillover" effects. These effects stem from the prospect

108 Collaborative Relationsbips

that collaboration in one area increases the chance of collu-sion in another. Arrangements that are most suspect relateto current marketing and pricing of products [Silberman1989]. Decisions relating to the marketing of one productmay amount to collaboration in the pricing and marketingof other products. Mere sharing of data (e.g., sales, demand,forecasts, etc.) may be viewed as having an effect on inde-pendent decisionmaking across noncollaborative areas.Least suspect are arrangements related to research and devel-opment of future products, promotion, and/or specificphases of production [Kitch 1985].

Collateral TbrmsCollateral terms are obligations not based on the legitimategoals of a collaborative arrangement. Some terms areplainly ancillary to an arrangement—for example, an agree-ment to contribute future technological developments result-ing from an R&D arrangement. These terms pose little riskand are legitimate in relation to an arrangement's goals.Other terms are less central and viewed with suspicion. Forexample, collateral cross-licensing and pooling arrange-ments have been held illegal [United States v. Singer Man-ufacturing Co. 1963].

Judging the ancillary nature of collateral terms is diffi-cult. In a hypothetical sense, price-fixing and territorial-division terms, often judged anticompetitive, can be neces-sary to an arrangement. Consider the situation in which sev-eral small, regional manufacturers collaborate for nationalpromotion of a product based on economies of scale. Eachwants to derive its fair share of contribution from the effort.Some method is necessary to accomplish this result. One ap-proach is to allocate benefits through granting the partici-pants the right to exploit whatever benefits occur in their ter-ritories (e.g., territorial division). Alternatively, or in con-junction with the territorial division, the firms may agree toa specified price. It is not clear that these terms would beconsidered ancillary to the original arrangement. In general,a rule of thumb is that the presence of collateral terms notbased on legitimate needs, and that affect competitive behav-ior in areas not covered by an arrangement, are illegal[Yamaha Motor Co., Ltd. v. Federal Trade Commission1981].

Scope and MultiplexityScope of collaboration refers to the boundaries of an arrange-ment, or the number of areas across which collaboration oc-curs (one or many). Multiplexity characterizes the nature ofcontacts between firms and can range from shallow (i.e., be-tween boundary-role personnel) to in-depth interaction (i.e.,between multiple contact points in both organizations). Nar-rowly construed and shallow arrangements, even those in-volving larger competitors, are viewed more favorably thanones that are encompassing and multiplex. For example,when General Motors engaged in a joint venture with Toy-ota, the FTC, in order to grant approval, required that the ar-rangement be narrowly tailored in scope and duration [Gen-eral Motors-Toyota v. Federal Trade Commission 1984].

Functional Area/PurposeDepending on the specific functional area or purpose, some

collaborative arrangements are considered more suspectthan others. Limits on marketing-related collaboration in-clude exchange of infomiation, product development andstandardization, price, market division and customer alloca-tion, and strategic collaboration to exclude competitors (seeFigure 3).

Exchange of InfonnationAll collaborative arrangements necessitate exchange of infor-mation. Information exchange between competitors is notper se illegal [United States v. United States Gypsum Co.1978]. However, information exchanges relating to priceare considered highly suspect [United States v. Citizens ofSouthern National Bank 1985; Wilcox v. First NationalBank of Oregon 1987]. The identification of parties andprices in sales transactions has been held illegal [AmericanColumn & Lumber Co. v. United States 1921]. Exchange ofcurrent or future price data has also been found illegal. How-ever, exchange of past prices has been held legal [MapleFlooring Manufacturing Association v. United States1925].

Where exchange of information involves nonprice data,its legality is determined through examination of its compet-itive effect. Where competitive efficiencies are enhanced, itmay be legal. For example, the exchange of credit informa-tion for the purpose of assisting association members in ex-ercising their independent judgement in granting credit islegal [Michelman v. Clark-Schwebel Fiberglass Corp.1976]. However, where an exchange tends to limit or re-strain competition, it is illegal. For example, exchange ofcredit information constitutes an agreement to uniformcredit terms, and is illegal [Catalano Inc. v. Target Sales,Inc. 1980; United States v. Philadelphia Produce Credit &Collection Bureau 1983]. Exchanges of production [Hart-ford Empire Co. v. United States 1945; United States v.United Fruit Co. 1958] and confidential business informa-tion [American Column and Lumber Co. v. United States1921; United States v. Philadelphia Savings Fund Society1979] also have been held unlawful.

Product Development and StandardizationCollaborative research funded by competitors is testedunder the rule of reason. The National Cooperative Re-search Act of 1984 dictates that research and developmentactivities up to and including the testing of prototypes bejudged under a rule of reason. Recently, the U.S. Senatepassed an extension of this Act, which provides similar pro-tection for joint production ventures [BNA 1992]. The billis intended to "eliminate the antitrust uncertainty" surround-ing joint production ventures [BNA 1992, p. 277]. Cur-rently, agreements to standardize products are analyzedunder a rule of reason [Gunter Harz Sports, Inc. v. U.S. Ten-nis Association, Inc. 1981; United States v. National Malle-able Steel Casting Co. 1957]. (See also UnitedStates v. Na-tional Association of Broadcasters [1982] for an exception;cf. Grossman and Shapiro [1986]; and Shapiro and Willig[1990].)

PriceCollaboration for the purpose of raising, depressing, fixing.

Journal of Public Policy & Marketing 109

pegging, or stabilizing price is illegal per se, and includescollaboration that sets a minimum [Goldfarb v. VirginiaState Bar 1975; cf. Barrett 1991], maximum [Arizona v.Maricopa County Medical Society 1982], or particular price[Mandeville Island Farms v. American Crystal Sugar1948].

Agreements between competitors that indirectly affectprice are also illegal. They include collaboration in compet-itive bidding [National Society of Professional Engineers v.United States 1978], arrangements to limit production or sup-ply of products [United States v. Socony-Vacuum Oil Co.1940], purchases [National Macaroni Manufacturers Asso-ciation V. Federal Trade Commission 1971], and the availa-bility of short-term credit [Catalano Inc. v. Target Sales,Inc. 1980]. However, a recent Supreme Court decision indi-cates that a rule of reason may be applied to arrangementsthat limit production or supply (and therefore affect price)in industries where collaboration is necessary to make prod-ucts available [NCAA v. Board of Regents 1984]. Thoughthe limitation was found illegal, the importance of the casestems from its application of a rule of reason approach.

Market Division and Customer AllocationCollaboration to divide markets or allocate customers is perse illegal [United States v. Sealy, Inc. 1967; United States v.Topco Associates 1972]. A trend in recent Supreme Courtcases, however, indicates that per se analysis may not be ap-propriate for all market allocation agreements [NCAA v.Board of Regents 1984]. If substantial efficiency justifica-tions are offered, circumstances (e.g., free-riding problemsor product availability) within an industry may indicate theneed for a rule of reason analysis [cf. Ashley MeadowsFarm, Inc. v. American Horse Shows Association 1985;NCAA V. Board of Regents 1984]. Application of the rule ofreason is also advanced in Rothery Storage & Van Co. v.Atlas Van Lines, Inc. [1987], where the Court indicated theaforementioned decisions in Sealy and Topco have beenoverruled by more recent cases.

Exclusion of CompetitorsArrangements among competitors to exclude rivals aretreated as per se illegal [Fashion Originators' Guild v. Fed-eral Trade Commission 1941]. They include "classic" boy-cott arrangements whereby competitors combine to excludea rival [Larry Muko, Inc. v. Southwestern Pa. Building &Construction Trades Council 1982; Superior Court TrialLawyers Association v. Federal Trade Commission 1990]as well as arrangements between competitors at different dis-tribution levels to exclude rivals at one or both levels[United States v. General Motors Corp. 1966]. In addition,where two or more firms agree to provide a service or facil-ity that is "essential" to participation in a market, it is ille-gal not to provide all competitors with equal access [Fish-man V. Estate of Wirtz 1986].

Recent cases suggest a shift away from per se treatmentof all arrangements that result in competitor exclusion. Rec-ognition of procompetitive benefits has resulted in a rule ofreason analysis being applied in some decisions. For exam-ple, in Northwest Wholesale Stationers, Inc. v. Pacific Sta-tionery & Printing Co. [1985, p. 297], the Court noted that

"... [A] plaintiff seeking application of the per se rule mustpresent a threshold case that the challenged activity fallsinto a category likely to have predominantly anticompeti-tive effects." Similar dictum appears in a more recent caseinvolving a group boycott by dentists [Federal Trade Com-mission V. Indiana Federation of Dentists 1986]. Finally, inRothery Storage & Van Co. v. Atlas Van Lines, Inc. [1987],the Court held that arrangements between competitors notto compete may be appropriate to prevent "free riding." InRothery, Atlas Van lines required agent-carriers, who usedthe Atlas reputation, equipment, facilities and servicing, notto compete directly with them.

Competitive Market StructureSome enforcement agencies and courts advocate analysis ofthe competitive structure in a collaborative arrangement'smarket to determine its legality. This approach involves as-sessment of each firm's "market power," or their ability,when acting in concert, to charge more than a competitiveprice [Easterbrook 1984]. Evaluation is also made of theease with which firms already in the market can expandtheir production, as well as the ease with which new firmscan enter [Landes and Posner 1981].

Proxy measures of market power are employed. Meas-ures of market concentration such as the Herfindahl-Hirsch-man Index (HHI) from the Department of Justice MergerGuidelines are used [U.S. Department of Justice 1988b].The HHI is calculated by summing the squared marketshares of firms within a relevant market. For example, in amarket consisting of four firms with market shares of 30%,30%, 20%, and 20%, HHI would be 2600 (30^ + 30^ + 20^+ 20^ = 2600). HHI ranges from 10,000 in the case of apure monopoly (i.e., 100^ = 10,000) to a number approach-ing zero in atomistic markets. Though desirable, it is not nec-essary to include market shares of smaller competitors be-cause they do not add appreciably to the HHI.

In reflecting on the use of HHI, commentators havenoted its deficiencies in the context of collaboration. Someargue that arrangements relating to research and develop-ment pose less competitive risk than those for marketingand sales [Kitch 1985]; a higher threshold "cutoff is advo-cated for these arrangements. Others [Markovits 1984], andat least one Court [Superior Court Trial Lawyers v. FederalTrade Commission 1990], suggest that reliance on marketpower for assessing competitive hazards fails to recognizeall risks. For reasons of market inertia and information fail-ures, even small firms may, in concert, pose anticompeti-tive risks within a market. Some have argued that firms con-templating anticompetitive conduct would not enter into acollaborative arrangement unless they knew it couldachieve their anticompetitive objectives [cf. Bork 1978].Therefore, an arrangement itself suggests a level of contem-plated "market power" [Wall 1990]. These issues cloudthe use of market power as an effective ' 'screen'' for assess-ing collaboration.

Implications and DiscussionThe lack of clarity in judicial interpretation and enforce-ment practices has brought about considerable uncertaintyamong prospective collaborators and has inhibited develop-

no Collaborative Relationships

ment of cooperative efforts. According to one leading exec-utive:

The lack of cooperation...is the widespread fear of inadvertentlyviolating our antitrust laws.... Many companies are deeply con-cemed that the Justice Department or the courts will interpret"cooperation" to mean "conspiracy."...very little official guid-ance exists as to what constitutes a lawfully structured [collab-orative] venture [Lacey 1983, comments].

Current treatment of horizontal collaboration can be de-scribed as varied and uncertain. Court decisions reflect a ju-diciary unsure as to the proper approach for their assess-ment. Different evaluation procedures are employed by thetwo primary enforcement agencies (FTC and JD). Recentlegislative initiatives indicate a more receptive attitude to-ward collaboration [BNA 1990a, b, 1992; Taylor 1984] de-spite an environment of growing concem for anticompeti-tive business practices [Business Week 1990]. Together,these trends portend a climate of considerable uncertaintyfor firms contemplating collaboration.

Uncertainty about treatment of collaboration raises thecost of such ventures, creates difficulties for planning, andmay encourage suboptimal decisions. Costs are raised be-cause of the legal complexities of collaboration. Planning isdifficult because of the uncertain prospect of legal scrutiny.Suboptimal decisions may occur as firms attempting toavoid uncertainty opt for collaborative forms under whichlegal standards are more certain. It can be argued that the re-cent wave of merger activity may have been infiuenced byconfusion in the law about less integrated forms of collabo-ration. Greater certainty as to legal standards and require-ments for mergers versus other forms of collaboration mayhave prompted some firms to merge that might otherwisehave engaged in collaboration while remaining independ-ent.

Uncertainty about antitrust policy toward collaborationcan be attributed, in part, to its lack of recognition of inter-mediate forms of collaboration. Historical focus on highlyintegrative (i.e., joint ventures) and minimally integrative(i.e., "cartels") forms of collaboration, and the develop-ment of separate analytical methods for each, has resultedin confusion over intermediate forms of collaboration. Thisconfusion has been compounded by a shift to economic ef-ficiency as the primary goal of antitrust policy. Evidence ofthis confusion is provided in recent Supreme Court cases.Application of both per se and rule of reason analyses re-flects judicial frustration with these methods and thecourts' view of a "correct" decision under current policydicta.

We attempt to clarify recent decisions and current law oncollaboration by distinguishing between FTC and JD en-forcement policies and presenting an analytical frameworkthat identifies dimensions underlying current law. Ratherthan focusing on the organizational form of collaboration(i.e., cartel or joint venture), we emphasize current law andthe dimensions underlying different collaborative forms.

Marketing ManagementFor organizations contemplating collaboration, the frame-work provides a useful tool for assessing the attendant risksof such ventures within the current legal climate. Market-

ing's increasing use of collaborative relationships makessuch assessment paramount. Extending from informal ar-rangements, involving trust and social interdependence, tomore formal interorganizational and transorganizational sys-tems [Achrol, Scheer, and Stern 1990], to joint ventures,the use of collaboration has increased dramatically in recentyears. Understanding the legal terrain and pitfalls prior to en-gaging in such ventures should prove useful.

Review of the framework indicates a variety of criticalpoints. First, firms should be aware that collaboration maybe found in the absence of a formal agreement. Evidence of"conscious parallelism" plus other circumstantial evidenceis all that is required. Second, the current distinction be-tween vertical and horizontal collaboration becomesblurred when their indirect implications are considered (i.e.,vertical collaboration with horizontal effects). Firms shouldbe alert to these complexities and indirect results. Third,"spillover" effects, collateral terms, and the scope and mul-tiplexity of an arrangement bear on its assessment. Eachshould be viewed carefully. Fourth, the specific functionalarea(s) in which collaboration occurs is important. Collabo-ration on price and customer/market allocation arrange-ments are considered highly suspect, if not per se illegal.Fifth, some courts and enforcement agencies find it usefulto assess the competitive structure (i.e., market share) of themarket in which collaboration occurs for determining its le-gality. This approach bears implications for firms having dis-proportionate market shares. Finally, firms should be awareof the different enforcement policies of the FTC and JD.Comparison indicates the FTC employs a stricter standardwhen assessing collaboration.

Antitrust PolicyFor policymakers, development of an analytical methodthat embraces the complexities of intermediate forms of col-laboration is needed. Per se treatment, though providing clar-ity and judicial efficiency, is inappropriate for more compli-cated arrangements. Its strict characterization ignores themultidimensional nature of such arrangements. Still, judi-cial sentiment, as evidenced in recent Supreme Court deci-sions, suggests that the approach provides a useful standardand will be employed by the courts.

Use of the rule of reason as a basis for assessing collabo-rative arrangements enables socially beneficial arrange-ments that might be deemed anticompetitive under per setreatment to survive. The nature of its full-blown inquiry,however, is costly and biased against plaintiffs, who mustprove anticompetitive effects in order to prevail. Judicial sen-timent and prevailing antitrust goals also suggest continuedapplication of rule of reason analysis.

Some form of middle-ground inquiry is needed to supple-ment present per se and rule of reason approaches. Such anapproach must be capable of carefully assessing the rele-vant dimensions of an arrangement in order to properly"characterize" it. This involves determining the elementsthat must be established before knowing that the per se ruleor rule of reason (or other) should be applied. Characteriza-tion of collaborative arrangements has received little atten-tion in the law, despite the fact that it must be considered inevery case involving collaboration [Denis 1991]. As noted

Journal of Public Policy & Marketing 111

in our review, courts and enforcement agencies have devel-oped their own frameworks. Application of the frameworkdeveloped here may provide some guidance for structuringantitrust inquiry. Acting as a "characterization" frame-work, it could aid policymakers in the identification and clas-sification of different collaborative forms.

ResearchersResearchers in marketing can help in the development of anappropriate legal methodology for assessing collaborationthrough continued examination of the motivations and di-mensions underlying collaborative ventures. Such inquiry re-quires that the current focus on dyadic exchange in market-ing be expanded to embrace the broader network of stake-holders involved [cf. Iacobucci and Hopkins 1992]. Find-ings from such research could provide direction for policyformulation and aid in promoting efficient cooperationwhile restricting inefficient forms of collaboration.

Examination of the effects of these collaborative arrange-ments on performance would be beneficial. Though Noor-dewier, John, and Nevin [1990] assess performance implica-tions of buyer-seller collaboration, the marketing literaturehas tended not to emphasize performance outcomes. Whereperformance has been addressed, the unit of analysis hasbeen at the individual-firm level and not at the marketplacelevel. Marketing researchers operating at this broader levelof analysis could include a more expansive set of depend-ent variables, including efficiency, faimess, diversity ofchoice, decentralized decisionmaking, and economic inde-pendence. Research of this kind would aid policymakers intheir assessments of the legality of collaborative arrange-ments. A crucial assumption of current policy toward collab-oration is that such arrangements will produce efficiencies;however, this assumption warrants empirical testing. In ad-dition, differences in efficiencies are likely to be presentacross collaborative forms.

An important question still remaining is the relationshipof the recent wave of merger activity to current uncertaintyover alternate forms of collaboration. Did many firmschoose to merge rather than face uncertain legal scrutiny forless-integrated forms of collaboration? Will a restrictive pol-icy in this area lead to more mergers in the future?

Deregulation at both the federal and state levels, coupledwith an increasingly permissive attitude toward collabora-tion, indicates that collaborative efforts will continue, if notincrease. Infusion of foreign firms into the U.S. and global-ization of U.S. businesses through foreign ventures point toan increase in collaboration both inside and outside the U.S.Though collaboration is viewed with uncertainty and hesi-tancy here in the U.S., in many foreign countries (i.e., inJapan) such ventures have been a way of business customand law for some time. Uncertainty in U.S. policy as it re-lates to collaboration adds complexity to already compli-cated intemationai undertakings.

The future holds the prospect of more complicated collab-orative efforts as firms gain more knowledge and experi-ence in the benefits and costs of such efforts. Services andprofessions along with nonprofit organizations will increasetheir use of collaborative relationships. Greater understand-

ing of these arrangements will benefit both antitrust policyand organizations contemplating their use.

Notes1. We use the terms "collaborative relationships, "strategic alli-

ances," "cooperative arrangements," and "partnerships" inter-changeably.

2. Section 1 of the Sherman Act [1890] provides:

Every contract, combination in the form of trust or otherwise,or conspiracy, in restraint of trade or commerce among the sev-eral States, or with foreign nations, is declared to be illegal....

Section 2 provides:

[E]very person who shall monopolize, or attempt to monopo-lize, or combine or conspire witfi any other person or persons,to monopolize any part of the trade of commerce among the sev-eral States, or with foreign nations, shall be deemed guilty of afelony....

3. Section 7 of the Clayton Act [1914], the principal antimergerstatute, provides:

[No] person engaged in commerce or in any activity affectingcommerce shall acquire, directly or indirectly, the whole orany part of the stock or other share capital...where in any lineof commerce in any section of the country, the effect of such ac-quisition may be substantially to lessen competition, or to tendto create a monopoly.

4. Section 5(a) (1) of the Federal Trade Commission Act [1914] de-clares to be unlawful "unfair methods of competition in com-merce, and unfair or deceptive acts or practices in commerce."

5. Virtually every state has antitrust laws, in most cases resem-bling the Sherman Act. Collaboration with particular intrastateimpact may offend these laws.

6. An additional dimension, intra- versus interfirm collaboration,is also important, though not covered here. Recently the Su-preme Court held that an arrangement between a corporationand its unincorporated divisions or wholly owned subsidiariesis unilateral action and therefore not collaboration between com-petitors [Copperweld Corp. v. Independence Tube Corp. 1984].Moreover, some courts have suggested that collaborative ar-rangements between a parent corporation and a non-whoWyowned affiliate is not collaboration [Computer Identics Corp. v.Southern Pacific Co. 1985]. Other courts, however, disagree,reasoning that the unity of purpose and interest often foundunder single ownership may not be present in such situations[Aspen Title & Escrow, Inc. v. Jeld-Wen, Inc. 1987].

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