Public Policy in Private Markets Collusion. Announcements HW: HW 2, due 2/28 (posted); HW 3 due 3/6...

Public Policy in Private Markets

Collusion

Announcements

HW: HW 2, due 2/28 (posted); HW 3 due 3/6

Spark: iclicker grades now uploaded Reading assignments:

K&W 10 & 11 for this week K&W 9 (4th edition) for next week - posted

3/6: first debate + review for midterm (time permitting)

3/8: midterm #1

Overview of Antitrust Laws

Collusive Restraints of Trade

Practices covered by Section 1: Direct Agreements

To fix price To Allocate markets

Geographically By type of customer

Other Collusive restraints Gray area (circumstantial evidence) Conscious parallelism, trade associations, non-

profit organizations



To fix price (explicitly) To Allocate markets (implicitly fixing prices)




Direct Agreements: price fixing

Conspirators agree on price (explicitly) PER SE illegal since Trenton Potteries But price fixing can also be achieved indirectly

(through direct agreements)

Example 1: Socony-Vacuum case: large firms had agreement with small refiners to buy excess supply

Example 2: Coupon case (1984), 4 supermarkets in CT and MA conspiring to drop double coupons

Direct Agreements

Market allocation Geographic allocation is rare (easier to detect) Bidders agree on who takes what:

Subcontract bid-rigging: unsuccessful bidders subcontract with successful one

Bid suppression: some conspirators agree not to submit a bid so that another conspirator can successfully win the contract.

Complementary bidding: some of the bidders bid an amount knowing that it is too high

Bid rotation: bidders take turns being the designated successful bidder

Direct Agreements

Market allocation Types of bidding are not mutually exclusive

Example 1: Electrical equipment industry (1950’s) Combination of bid rotation and complementary bidding

and geographic allocation Based on the phases of the moon and regions: who

occupies low bid (and where) during which weeks or phase of the moon

Government case first (criminal case), $2 mill. in fines, 7 executives in jail (30 days)

Private cases followed: $400 mill. in total treble damages

Direct Agreements

Market allocation

Example 2: Insurance (Late 2004) Insurers: AIG, ACE, Hartford Broker: Marsh & McLennan Companies give insurance needs to broker Broker gets bids but asks insurers for special

commission (kick backs) to secure business Broker asks for artificial bids to certain insurers so as to

award bid to targeted insurer Broker makes sure he gets largest kick back (not

necessarily lowest price for customer)



To fix price To Allocate markets




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


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


Conscious Parallelism: Tacit or indirect collusion (?) Parallel conduct:

Market where firms are charging same (or very similar) prices

Ambiguous: perfect collusion or perfect competition?

Not a decision rule: not illegal in and of itself

Illegality: conscious parallelism + facts

Conscious Parallelism

American Tobacco Case (1946) 3 companies dominated mkt: 1923-1941 Parallelism evidence:

8 price changes, 6 increases led by Reynolds, 2 decreases led by American

Facts: 2 coordinated price increases in face of slack

demand (i.e. when prices should have dropped)

“10 cent” cigarettes gain 25% of market: big cos. dropped prices until 10 cent cigarettes had 6%

Supplies were bought up by 3 firms, leaving competitors w/o supplies


American Tobacco Case (1946) Court found set of actions constituted

conspiracy “No formal agreement is necessary to

constitute an unlawful conspiracy”


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


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


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


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


Non-profit organizations: Justification: Restrictions necessary to protect

mission of the institutions Supreme Court: applies rule of reason Example: NCAA (1984)

Limits TV appearances by football teams (to increase attendance)

Courts: illegal, collusive restraint on “live college football TV”

What about now? players only get a scholarship (price fixing), while earning millions of $ for the university

Example: Ivy League Overlap Group (1984) – MIT case Agreed on financial aid packages (next week)

ADM and Milk: Textbook Cases?

Recall factors that facilitate collusion: Identical costs Homogeneous product Small number of firms High concentration Slow rate of technological advancement Steady rate of demand Low elasticity of demand (no substitutes) Low frequency of sales

ADM Case Important: civil case before criminal case

Guilty pleas from criminal case can not be used in civil cases Size of criminal fine could not be used as guide in civil cases Good for opt-outs (benefited from waiting)

There was irrefutable evidence in this case: the question was how much? “Overcharge” Timing:

Conspiracy period? “Normal” period?

But-for-price? Cournot price? Cost-based pricing? Historical?

Methodology: Forecasting? Before and after?

ADM Case

Other consequences: Damage to reputation Damaged relation with stockholders

ADM also price fixing in other markets: Citric acid High fructose corn syrup:

2/03: $4 bill. Private suit by buyers

Watch the movie “The Informant” for a mocked version of this case

Public Policy in Private Markets Collusion. Announcements HW: HW 2, due 2/28 (posted); HW 3 due 3/6...

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Transcript of Public Policy in Private Markets Collusion. Announcements HW: HW 2, due 2/28 (posted); HW 3 due 3/6...