Public Policy in Private Markets

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 (4th 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 technologyallowed 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