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Chapter 10 Oligopolistic Conduct

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Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law

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Abstract

This chapter focuses on natural and contrived oligopolistic conduct in the senses in which I have defined these concepts. To my knowledge, no economist has ever offered an explicit definition of “oligopolistic conduct” or recognized my distinction between “natural” and “contrived” oligopolistic conduct. For this reason, I want to begin by setting out the way in which I define “oligopolistic conduct or interdependence,” by explaining the relationship between my definitions of these concepts and the way in which economists have implicitly defined them in use (e.g., when labeling certain pricing models oligopolistic pricing models), and by specifying my distinction between “natural” and “contrived” oligopolistic conduct.

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Notes

  1. 1.

    The text will also examine the relationship between contrivance that does not involve linguistic communications and the “tacit collusion” to which courts and commentators often refer.

  2. 2.

    The textual explanation that follows borrows heavily from George Stigler, A Theory of Oligopoly, 72 j. pol. econ. 44 (1964).

  3. 3.

    Firms may adopt such a purchasing strategy either to increase their bargaining power or to encourage their inferior suppliers to beat their best-placed suppliers’ contrived oligopolistic offers by making it more difficult for their best-placed suppliers to determine that they have been undercut by a competitive inferior.

  4. 4.

    Large numbers promote certainty through the law of large numbers and the central limit theorem.

  5. 5.

    Recall that the best-placed seller is, by definition, a seller that could make profits by supplying a particular buyer on terms contained in an offer that no rivals can match or better without charging a price below the rival's marginal costs. Of course, rather than incurring such losses, X1 may prefer to deprive X2 of those customers for which X1 is worse-than-second-placed by bribing these buyers to patronize X2’s closest rival or by bribing X2’s closest rival to undercut X2. If X1 ignored the legal cost of such behavior, the necessary bribe (one cent) would be smaller than the losses X1 would have to sustain to capture these customers for itself. However, this approach has three disadvantages that I think would make it unattractive. First, since the bribe-recipients in question would have to run certain legal risks to accept the bribe, a bribe of more than one cent would, in practice, be necessary. Second, since the bribe would be more obviously illegal than the charging of a sub-marginal-cost price, this approach would involve more legal costs for X1 as well. Third, and finally, since this approach would also create the possibility that the relevant buyer (seller) would accept the bribe and then patronize X2 (not cut its price to X2’s customers), it would require the relevant actor to incur certain policing costs as well. Accordingly, in the text that follows, I will assume that a retaliator always will find it cheaper to steal customers for itself than to bribe its undercutting rival’s customers not to patronize the undercutter or its target’s undercutting rival’s rivals to undercut X1’s target.

  6. 6.

    I write “roughly speaking” because the conclusion that X1 will minimize the cost of inflicting any amount of harm on X2 by stealing those of X2’s customers for which the relevant harm-inflicted to loss-incurred ratio is highest implies that, if X2 enjoys an unusually-large OCA in its relations with a particular buyer, X1 may find it cost-effective to steal this customer despite the fact that it is significantly worse-placed than the buyer’s second-placed supplier—i.e., despite the fact that it is not “close to being” this buyer’s second-placed supplier.

  7. 7.

    The combination of this paragraph and its predecessor imply that, ceteris paribus, the harm-inflicted to loss-incurred ratio for the total amount of harm X1 must inflict on X2 by stealing X2’s customers by charging them retaliatory prices to deter X2 and its counterparts from undercutting X1’s future contrived oligopolistic prices will be higher the greater the ratio of (the number of buyers X2 is best-placed to supply that X1 is second-placed or close-to-second-placed to supply) to (the number of buyers X1 is best-placed to supply that X2 is second-placed or close-to-second-placed to supply).

  8. 8.

    Obviously, this implies that the most-cost-effective strategy for a contriver to employ is to vary its “expenditures” on detection of undercutting and identification of undercutters, on retaliation, and on reciprocation until it secures the same deterrent effect from the last penny it spends on each of these activities.

  9. 9.

    “Undeserved” because XU’s undermining prices are not illegal.

  10. 10.

    See Joseph E. Harrington, Jr., Detecting Cartels in handbook of antitrust economics 213 at 213–14 (hereinafter Harrington Detecting Cartels), (Paolo Buccirossi, ed.) (MIT Press, 2008).

  11. 11.

    See id. at 213.

  12. 12.

    I admit that one might be able to render the “straightforward” method of proving contrived oligopolistic pricing somewhat more practicable by appropriate assignments of the burdens of proof and production on the parameters in question. In my judgment, the burdens of production and persuasion on the actual price and NEHNOP issues should be placed on the State or private plaintiff, and the burdens of production and persuasion on the BEM, REM, own-error margin (hereinafter OEM), and NOM issues should be placed on the defendant(s). If it were not for the risk of holdups and the opposite risk that the private transaction cost of suing might deter a private plaintiff or even the State from bringing justified suits, I would place the burden of paying for the production of evidence on any parameter on the party that was best-placed to produce it. I do not know the relevant strengths of the above two risks in the “price-fixing-suit” context.

  13. 13.

    See, e.g., Patrick Bajari and Lixin Ye, Deciding Between Competition and Collusion, 85 rev. of econ. and stat. 971 (2003).

  14. 14.

    See Richard S. Markovits, Proving (Illegal) Oligopolistic Pricing: A Description of the Necessary Evidence and a Critique of the Received Wisdom About Its Character and Cost, 27 stan. l. rev. 307, 310–14 (1975).

  15. 15.

    See Dale R. Funderbunk, Price-Fixing in the Liquid Asphalt Industry: Economic Analysis Versus the “Hot Document,” 7 antitrust law & econ. rev. 61, 69 (1974).

  16. 16.

    See e.g., john m. connor, global price-fixing 194, 223–24, and 234 (Springer, 2d ed., 2007).

  17. 17.

    See Harrington Detecting Cartels at 220.

  18. 18.

    Michael K. Block, Frederick C. Nold, and Joseph G. Sidak, The Deterrent Effect of Antitrust Enforcement, 89 j. pol. econ. 429 (1981)

  19. 19.

    See Harrington Detecting Cartels at 222.

  20. 20.

    See Richard Posner, Oligopoly and the Antitrust Laws: A Suggested Approach (hereinafter Posner Approach), 21 stan. l. rev. 1562 (1969).

  21. 21.

    See Harrington Detecting Cartels at 213, citing P.A. Grout and A. Sonderegger, Predicting Cartels 15 in Economic Discussion Paper (Office of Fair Trading) (2005): “Cartels are far more likely if the product is fairly homogeneous between companies in the market….”

  22. 22.

    See Paul Joskow and Alvin Klevorick, A Framework for Analyzing Predatory Pricing Policy (hereinafter Joskow and Klevorick), 89 yale l.j. 213 (1979).

  23. 23.

    See Posner Approach at 1578–79.

  24. 24.

    Id. at 1579.

  25. 25.

    Id. at 1585–87.

  26. 26.

    See, e.g., Julio J. Rotemberg and Garth Saloner, A Supergame-Theoretic Model of Price Wars During Booms, 76 am. econ. rev. 390 (1986).

  27. 27.

    My objection to the second premise of the second explanation also applies to the analysis of John Haltiwanger and Joseph E. Harrington, Jr., in The Impact of Cyclical Demand Movements on Collusive Behavior, 22 rand j. of econ. 89 (1991), which assumes that the profitability of undermining depends not on whether demand is lower-than-average or higher-than-average but on whether demand is on the upswing or downswing (a claim that is most salient in ARDEPPSes subject to seasonal or macro-economic-cyclical movements in demand). Haltiwanger and Harrington’s conclusion that collusion is easier in the upswing and more difficult in the downswing regardless of whether current demand is higher-than-average or lower-than-average would be correct if the ratio of the gains from undercutting to the losses the undercutter will suffer from retaliation depended on the relative strengths of near-future versus current demand. However, I see no reason to believe that this is the case.

  28. 28.

    See Posner Approach at 1580–82.

  29. 29.

    Id. at 1580.

  30. 30.

    Id. at 1582.

  31. 31.

    Id.

  32. 32.

    The following example illustrates this possibility. Assume first (probably counterfactually but irrelevantly and expositionally conveniently) that the normal rate-of-return on all the QV investments in the relevant ARDEPPS both in the no-contrived-oligopolistic-pricing equilibrium and in the contrived-oligopolistic-pricing equilibrium is 10 %. (In reality, contrived oligopolistic pricing will probably increase the normal rate-of-return by increasing uncertainty.) Assume second that in the no-contrived-oligopolistic-pricing equilibrium, the ARDEPPS will contain seven QV investments whose rates-of-return (gross of the normal rate-of-return) are 17 %, 16 %, 15 %, 14 %, 13, 12 %, and 11 % so that the average supernormal profit-rate yielded by the QV investments the ARDEPPS would contain in its no-contrived-oligopolistic-pricing equilibrium is (14 %–10 % = 4 %). Assume third that in the contrived oligopolistic-pricing equilibrium the ARDEPPS will contain ten QV investments whose rates-of-return (gross of the normal rate-of-return) are 18 %, 17 %, 16 %, 15 %, 14 %, 13 %, 12 %, 11 %, 10.5 %, and 10 % so that the average supernormal profit-rate yielded by the QV investments the ARDEPPS would contain in its contrived-oligopolistic pricing would be (13.65 %–10 % = 3.65 %). On these facts, the relevant contrived oligopolistic pricing would increase the supernormal profit-rate generated by the ARDEPPS’ most-profitable QV investment in equilibrium (from 7 % to 8 %) while decreasing the average supernormal profit-rate generated by the (changing set of) QV investments in the ARDEPPS (from 4 % to 3.65 %).

  33. 33.

    See Posner Approach, passim.

  34. 34.

    Id. at 1579–80.

  35. 35.

    See Harrington Detecting Cartels at 238, citing Timothy F. Bresnahan, Competition and Collusion in the American Automobile Industry: The 1955 Price War, j. of ind. econ. 457 (1987); Jean-Pierre Benoit and Vijay Krishna, Dynamic Duopoly: Prices and Quantities, 54 rev. of econ. stud. 23 (1987); and Raymond Keneckere, Excess Capacity and Collusion, 31 int. econ. rev. 521 (1990).

  36. 36.

    See Richard S. Markovits, The Allocative Efficiency and Overall Desirability of Oligopolistic Pricing Suits, 28 stan. l. rev. 45 (1976) and THE WELFARE ECONOMICS OF ANTITRUST POLICY AND U.S. AND E.U. ANTITRUST LAW.

  37. 37.

    In particular, natural oligopolistic pricing does not violate the Sherman Act because it does not involve the making of any anticompetitive threats or offers. However, as Chap. 4 also indicated, although the fact that natural oligopolistic pricing does not involve the making of any agreement between undertakings implies that it is not covered as an illegal agreement between undertakings under what is now Article 101 of the 2009 Treaty of Lisbon, such pricing is covered as a concerted practice under now Article 101—indeed, prima facie violates that provision in that its object and effect are to prevent and restrict competition. Moreover, although I do not think that natural oligopolistic pricing would be covered by now Article 102’s prohibition of exclusionary abuses even if the perpetrators were individually dominant or members of a collectively-dominant set of rivals, in some cases such pricing would be prohibited by that Treaty provision as an exploitative abuse of a dominant position.

  38. 38.

    See Posner Approach at 1582.

  39. 39.

    Id. at 1583.

  40. 40.

    Id. at 1582.

  41. 41.

    I should admit that Posner’s discussion of the premature-price-announcement, “public discussion of the right price,” and price-leadership tests for (illegal) oligopolistic pricing acknowledges various practical difficulties with these tests. Id. at 1578–93. However, Posner does not anticipate or address the criticisms I have leveled against them.

  42. 42.

    See Interstate Circuit v. United States, 306 U.S. 208 (1939) and American Tobacco Co. v. United States, 321 U.S. 781, 810 (1946).

  43. 43.

    See Theatre Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S. 537, 541 (1954).

  44. 44.

    Thus, in 1993, the Supreme Court described conscious parallelism to be the process “not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing, supra-competitive level by recognizing their shared economic interests.” Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993). The Supreme Court addressed the significance of proof that defendants had engaged in “parallel conduct” or made consciously-interdependent decisions more recently in 2007. In Bell Atlantic Corporation v. Twombley, 550 U.S. 544 (2007), the Supreme Court held that proof that Sherman Act defendants had engaged in parallel conduct does not by itself render the plaintiff’s claim sufficiently plausible to enable it to obtain discovery—i.e., to survive the defendant’s motion to dismiss after pleadings but before discovery. This conclusion extends forward and, if anything, strengthens the Supreme Court’s conclusion in 1986 in Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986) that, to avoid summary judgment, Sherman Act plaintiffs must present evidence that “tends to exclude the possibility of independent action” and that proof that defendants have engaged in conduct that is “as consistent with permissible [activity] as with illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy.” Contemporary lower federal courts have consistently followed these Supreme Court pronouncements by holding that, taken by itself, convincing proof of parallel conduct or conscious interdependent decisionmaking does not suffice to establish a Sherman Act violation. See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Saskatchewan, Inc., 208 F.3d 1038 (8th Cir. 2000) and In re Petroleum Products Antitrust Litigation, 906 F.2d 432 (9th Cir. 1988).

  45. 45.

    See, e.g., the opinion of then-Judge now-Justice Breyer in Clamp-All Corp. v. Cast Iron Soil Pipe Institute, 851 F.2d 478, 484 (1st Cir. 1988). This position is wrong empirically because it would not be unusually difficult for courts to enforce an order that sellers set the price they would find most profitable if their rivals charged prices equal to their respective marginal costs or would not change their initial price in response to the relevant seller’s price. And it is wrong legally for two reasons: (1) it assumes incorrectly that, correctly interpreted, the Sherman Act would be read to prohibit pricing that manifests simple recognized interdependence, and (2) it also assumes (to my mind) incorrectly that U.S. (antitrust) courts are authorized to underenforce U.S. antitrust law if there is a good policy reason to do so—more narrowly, if there is a good judicial-error-related or conventional-transaction-cost-related argument for doing so.

  46. 46.

    See herbert hovenkamp, antitrust 98 (hereinafter hovenkamp antitrust) (Thomson West, 2005).

  47. 47.

    Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993).

  48. 48.

    See, e.g., Donald Turner, The Definition of Agreement Under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 harv. l. rev. 655, 670 (1962).

  49. 49.

    For my reasons for rejecting Turner’s arguments for his conclusion, see Richard S. Markovits, Proving Illegal Oligopolistic Pricing: A Description of the Necessary Evidence and a Critique of the Received Wisdom About Its Character and Cost, 627 stan. l. rev. 307, 315–19 (1975).

  50. 50.

    See E.I du Pont de Nemours & Co. v. FTC, 729 F.2d 128, 139 (2d Cir. 1984).

  51. 51.

    Alternatively, X1 may be well-placed to obtain Y2’s patronage for geographic-location reasons.

  52. 52.

    Maple Flooring Manufacturers Assn. v. United States, 268 U.S. 463 (1925).

  53. 53.

    Cement Manufacturers Protective Assn. v. United States, 268 U.S. 588 (1925).

  54. 54.

    United States v. United States Gypsum Co., 438 U.S. 422 (1978).

  55. 55.

    Id. at 435.

  56. 56.

    For a Supreme Court reference to this doctrine, which it traced to Cement Manufacturers Protective Assn. v. United States, 268 U.S. 588 (1925), see United States v. United States Gypsum Co., 438 U.S. 422, 435 (1978).

  57. 57.

    See Maple Flooring Manufacturers Assn. v. United States, 268 U.S. 563 (1925).

  58. 58.

    See United States v. United States Gypsum Co., 438 U.S. 422 (1978).

  59. 59.

    See, e.g., United States v. Container Corp. of America, 339 U.S. 333 (1969).

  60. 60.

    Maple Flooring Manufacturers Assn. v. United States, 268 U.S. 563 (1925).

  61. 61.

    American Column & Lumber Co. v. United States, 257 U.S. 377 (1921).

  62. 62.

    The four are Sugar Institute v. United States, 297 U.S. 553 (1930), United States v. American Linseed Oil Company, 267 U.S. 371 (1923), American Column & Lumber Dealers’ Association v. United States, 257 U.S. 377 (1921), and Eastern Retail Lumber Association Dealers’ Association v. United States, 234 U.S. 600 (1914). The two are Cement Manufacturers Protective Assn. v. United States, 268 U.S. 588 (1925) and Maple Flooring Manufacturers Assn. v. United States, 268 U.S. 563 (1925).

  63. 63.

    United States v. Container Corp. of American, 393 U.S. 333 (1969).

  64. 64.

    United States v. United States Gypsum Co., 438 U.S. 422, 450 (1978).

  65. 65.

    See FTC v. Cement Institute, 333 U.S. 683 (1948).

  66. 66.

    See Triangle Conduit and Cable Co. v. FTC, 168 F.2d 175 (7th Cir. 1948), aff’d sub. nom. Clayton Mark & Co. v. FTC, 336 U.S. 956 (1949).

  67. 67.

    Boise Cascade Corp. v. FTC, 637 F.2d 573 (9th Cir. 1980).

  68. 68.

    FTC v. Cement Institute, 333 U.S. 683, 713 and 715–16 (1948).

  69. 69.

    United States v. First National Pictures, Inc., 282 U.S. 44 (1930).

  70. 70.

    FTC v. Cement Institute, 333 U.S. 683 (1948).

  71. 71.

    435 U.S. 679 (1978).

  72. 72.

    Id. at 695–96.

  73. 73.

    In fact, many of the members of the relevant trade association had gone bankrupt because the jobs tended to go to the firm that most underestimated the cost of site preparation. The suit was against a deep-pocketed conglomerate that had purchased one of the relocatable-school-building “producers” in question and was liable for any damages or fines for which that company was liable, regardless of whether the relevant conduct antedated its purchase by the conglomerate.

  74. 74.

    The Supreme Court reaffirmed the per se illegality of horizontal market divisions in Palmer v. BRG of Georgia, 49 U.S. 46 (1990).

  75. 75.

    See United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

  76. 76.

    NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 84 (1984).

  77. 77.

    Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979).

  78. 78.

    Appalachian Coals v. United States, 288 U.S. 344 (1933).

  79. 79.

    See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Saskatchewan, 203 F.3d 1028 (8th Cir. 2000), Wallace v. Bank of Bartlett, 55 F.3d 1166 (6th Cir. 1995), Reserve Supply Corp. v. Owens-Corning Fiberglas Corp. 971 F.2d 37 (7th Cir. 1992), Catalono, Inc. v. Target Sales, Inc., 446 U.S. 643 (1980), United States v. General Electric Co., et. al., 197 F.2d 489 (1977), United States v. Container Corp. of American, 393 U.S. 333 (1969), Morton Salt Co. v. United States, 235 F.2d 573 (10th Cir. 1956), and the old information-exchange cases Sugar Institute, Inc. v. U.S., 297 U.S. 553 (1936) (which also involved a trade-association rule prohibiting members from offering secret discounts), Maple Flooring Mfrs. Ass’n v. United States, 268 U.S. 563 (1925), and American Column & Lumber v. United States, 257 U.S. 377 (1921).

  80. 80.

    See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997).

  81. 81.

    273 U.S. 392 (1927).

  82. 82.

    441 U.S. 1 (1979).

  83. 83.

    246 U.S. 231 (1918).

  84. 84.

    288 U.S. 344 (1933).

  85. 85.

    For other purposes, the significant feature of the relevant arrangement was BMI’s use of a tie-in that, according to U.S. judicial doctrine, would be per se illegal in the circumstances in question. See Chap. 14.

  86. 86.

    See Board of Trade of City of Chicago v. United States, 246 U.S. 231 (1918).

  87. 87.

    Id. at 238.

  88. 88.

    Id. at 240.

  89. 89.

    Id. at 241.

  90. 90.

    Id. at 240.

  91. 91.

    See Appalachian Coals v. United States, 288 U.S. 344 (1933).

  92. 92.

    Id. at 373.

  93. 93.

    Id. at 378.

  94. 94.

    See hovenkamp antitrust at 110.

  95. 95.

    See charles j. goetz and fred s. mcchesney, antitrust law: interpretation and implementation 106 (4th ed.) (Foundation Press, 2009).

  96. 96.

    White Motor Co. v. United States, 372 U.S. 253, 263–64 (1963).

  97. 97.

    Obviously, because the immediate effect of a price-raising price-fix is to reduce output and hence employment, the argument for a price-fix’s preserving employment must be that it does so by preventing the producer’s going bankrupt and shutting down, particularly when its re-entry (or anyone else’s entry) may be more difficult than its exit. This possibility cannot be dismissed in the Appalachian Coals context since credit may not have been available even to mineowners whose mines were viable over the long run and since water-seepage may render unviable the reopening of a coal mine whose owners could not afford to keep the pumps running when they were shut down. Still, if coal mines should be subsidized for this reason, it would be preferable for the subsidy to come from the government after a government study of the issue rather than from coal consumers after a private price-fix.

  98. 98.

    468 U.S. 85 (1984).

  99. 99.

    The reference is to George A. Akerlof, The Market for “Lemons”: Quality Uncertainty and the Market Mechanism, 84 quart. j. of econ. 488 (1970). In this article, Akerlof argues that, because used-car buyers cannot evaluate the quality of the used cars they are considering buying and therefore tend to undervalue good used cars, dealers tend to market only low-quality used cars and keep the good ones for themselves or friends.

  100. 100.

    421 U.S. 773 (1975).

  101. 101.

    435 U.S. 679 (1978).

  102. 102.

    Id. at 696.

  103. 103.

    Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982). I should point out that, although the explanation that I have just given fits the case of sellers that supply medical services, dental services, physical-therapy and rehabilitation services, prescription or non-prescription drugs, and various other sorts of medical supplies, it is not limited to suppliers of such services and products—e.g., it applies equally well to sellers that supply car-repair services and products to insured motorists.

  104. 104.

    United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967).

  105. 105.

    Continental T.V., Inc. v. GTE Sylvania, Inc. 433 U.S. 36 (1977).

  106. 106.

    See State Oil v. Khan, 522 U.S. 3 (1997).

  107. 107.

    See Albrecht v. Herald Co., 390 U.S. 145 (1968).

  108. 108.

    See Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007).

  109. 109.

    Mandeville Island Farms v. American Crystal Sugar, 334 U.S. 219, 236 (1948).

  110. 110.

    See, e.g., United States v. Topco Associates, Inc., 405 U.S. 596 (1972).

  111. 111.

    Smith v. Pro Football, Inc., 593 F.2d 1173 (D.C. Cir. 1978).

  112. 112.

    Philadelphia World Hockey Club, Inc. v. Philadelphia Club, 351 F. Supp. 462 (E.D. Pa. 1972).

  113. 113.

    Mackey v. NFL, 543 F.2d 606 (8th Cir. 1976).

  114. 114.

    See in general Francois Arbault and Ewoud Sakkers, Cartels (Chap. 7) in the ec law of competition 745–1128 (ed. by Jonathan Faull and Ali Nikpay) (Oxford Univ. Press, 2007). I have relied on this chapter extensively when writing this section. See also eleanor fox, the competition law of the european union in comparative perspective: cases and materials 71 (West Pub. Co., 2009). For decisions declaring agreements to set “target prices” illegal even when the prices diverge from actual prices, see Polypropylene, OJ L230/1 (1986); Food Flavour Enhancers, OJ L75/1, p. 94 (2004); Industrial Tubes, OJ L75/1, p. 94 (2004); and Vereiniging von Cementhandelaren, OJ L13/34 (1971). For decisions declaring agreements on “recommended prices” illegal regardless of whether actual prices diverge from the recommended prices, see Welded Steel Mesh, OJ L260/1 (1989). SCK/FNK (Dutch Cranes), OJ L312/79, p. 20 (1995); Joined Cases SCK and FNK v. Commission, T-213/95 and T-18/96, ECR II-1739 (1997); and Fenex, OJ L181/28, p. 61 (1996). I should add that, from the beginning, U.S. courts also declared horizontal price-fixing agreements illegal even when actual prices diverged from the agreed-upon prices. See, e.g., United States v. Trans-Missouri Freight Assn., 166 U.S. 290 (1897) and United States v. Trenton Potteries Co., 273 U.S. 392 (1927).

  115. 115.

    See Greek Ferries, OJ L109/24 (1999); Roofing Felt, OJ L232/15 (1986); and Agreements Between Manufacturers of Glass Containers, OJ L160/1 (1974). The formulas in question were analogous to but obviously different from basing-point-pricing formulas.

  116. 116.

    See Building and Construction Industry in the Netherlands, OJ L92/1 (1992); SPO and Others v. Commission, Case T-29/92, ECR II-289, p. 146 (1995); Eurocheque/Helsinki Agreement, OJ L95/50, pp. 46–49 (1992); Industrial Tubes, OJ L125/50 (2004); Ferry Operators-Currency Surcharge, OJ L26/23 (1997); Steel Beams, OJ L1165/1, pp. 244–49 (1994); Alloy Surcharge, OJ L100/55 (1998); Electrical and Mechanical Carbon and Graphite Products, OJ L125/45 (2004); and Krupp Thyssen Stainless and Acciai Speciali Terni v. Commission, Joined Cases T-45/98 and T-47/98, ECR II-3757, p. 15 (2001).

  117. 117.

    See Agreements Between Manufacturers of Glass Containers, OJ L160/1, p. 36 (1974); Fedetab, OJ L224/29 (1978); Roofing Felt, OJ L232/15 (1986); Quinine, OJ L192/5 (1964); Citric Acid, OJ L239/18 (2002); and Fine Art Auction Houses, OJ L200/92 (2005).

  118. 118.

    See Quinine, OJ L129/5 (1969); Dyestuff, OJ L195/11 (1969); and ICI v. Commission, Case 48–69, ECR 619, p. 115 (1972).

  119. 119.

    See Quinine, OJ L192/5 (1969); European Sugar Industry, OJ L140/17 (1973); Vegetable Parchment, OJ L35/1 (1985); Peroxygen Products, OJ L35/1 (1985); Graphite Electrodes, OJ L100/1 (2002); Cement, OJ L343/1 (1994); CEWAL, OJ L34/20 (1993); SAS Maersk Air, OJ L265/15 (2001); Seamless Steel Tubes, OJ L140/1 (2003); and Belgian Beer, OJ L200/1 (2003).

  120. 120.

    See Polypropylene, OJ L230/1 (1986); Roofing Felt, OJ L232/15, p. 51 (1986); Pre-Insulated Pipes, OJ L24/1 (1999); Luxembourg Brewers, L253/21 (2002); Methylglucamine, OJ L38/18 (2004); and Food Flavour Enhancers, OJ L75/1 (2004).

  121. 121.

    See Polypropylene, OJ L230/1 (1986).

  122. 122.

    See Uniform Eurocheques, OJ L35/43 (1985).

  123. 123.

    Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979).

  124. 124.

    On price announcements, see Wood Pulp II, OJ L85/1 (1985); see also Suiker Unie and Others v. Commission, Joined Cases 40–48, 50, 54–56, 111 and 113–14173, ECR 1663, pp. 173–74 (1975) and Imperial Chemical Indus. v. Commission (Dyestuffs), 1972 ECR 619 (1972). On discontinuance of supply, see Compagnie Royale Asturienne des Mines SA and Rheinzink GmbH v. Commission, Joined Cases 29/83 and 30/83, 1984 ECR 1676 (1984).

  125. 125.

    Suiker Unie and Others v. Commission, Joined Cases 40–48, 50, 54–56, 111 and 113–14173, ECR 1663, pp. 173–74 (1975).

  126. 126.

    See Belgian Beer, OJ L200/1 (2003); Electrical and Mechanical Carbon Producers, OJ L125/45 (2004); and Roofing Felt, OJ L232-15 (1986).

  127. 127.

    See the cases cited at note 488 supra.

  128. 128.

    See the cases cited at note 489 supra.

  129. 129.

    See Agreements Between Manufacturers of Glass Containers, OJ L160/1 (1974); Building and Construction Industry in the Netherlands, OJ L92/1 (1992); and Austrian Banks OJ L56/1 (2004).

  130. 130.

    See Cartonboard, OJ L243/1 (1994); Cement, OJ L343/1 (1994); and Fine Art Auction Houses, OJ L140/1 (2003).

  131. 131.

    See Quinine, OJ L192/5 (1969); French-West African Shipowners’ Committees, OJ L134/1 (1992); Flat Glass Benelux, OJ L212/13 (1984); Cartonboard, OJ L243/1 (1994); Graphite Electrodes, OJ L100/1 (2002); Citric Acid, OJ L239/18 9 (2002); and Zinc Phosphate, OJ L153/1 (2003).

  132. 132.

    See Cement, OJ L343/1 (1994) and Pre-Insulated Pipes, OJ L24/1, pp. 98–107 (1999).

  133. 133.

    Quinine, OJ L192/5, p. 30 (1969).

  134. 134.

    Roofing Felt, OJ L232/15 (1986).

  135. 135.

    See Cement, OJ L343/1, p. 25(4) (1991) and Pre-Insulated Pipe Cartel, 99/60 OJ L24/1 (1999).

  136. 136.

    See Cement, OJ L343/1 (1994).

  137. 137.

    See Pronuptia GmbH v. Pronuptia de Paris Irmgard Schillgallis, ECR 53 (1986) and Commission Regulation (EC) 2790/1999 of 22 December 1999 on the Application of Art. 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices at point 47, OJ L336 (1999).

  138. 138.

    See Mario Filipponi, Luc Peeperkorn, and Donnecadh Woods, Vertical Agreements (Chap. 7) in the ec law of competition 1129, 1195–97 (Jonathan Faull and Ali Nikpay, eds.) (Oxford Univ. Press, 2d ed., 2007).

  139. 139.

    446 U.S. 643 (1980).

  140. 140.

    468 U.S. 85 (1984).

  141. 141.

    Radiant Burners, Inc. v. Peoples Gas & Coke Co., 364 U.S. 656 (1961).

  142. 142.

    American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982).

  143. 143.

    Vereiniging von Cementhandelaren, OJ L13/34 (1971).

  144. 144.

    Agreements Between Manufacturers of Glass Containers, OJ L160/1 (1974)

  145. 145.

    Vimpoltu, OJ L200/44 (1983).

  146. 146.

    Fine Arts Auction Houses, OJ L200/9 (2005).

  147. 147.

    Specialty Graphites, Decision of 17 December 2002.

  148. 148.

    Electrical and Mechanical Carbon and Graphite Producers, OJ L125/145 (2004).

  149. 149.

    Id. at OJ L125/150 (2004).

  150. 150.

    See Belgian Beers, OJ L200/1 (2003); Electrical and Mechanical Carbon and Graphite Products, OJ L125/145 (2004); Vimpoltu, OJ L200/44 (1983); and Roofing Felt, OJ L232/14 (1986).

  151. 151.

    See Roofing Felt, OJ L232/15 (1986) and Belasco and Others v. Commission, Case 246186, ECR 2117, p. 313 (1989).

  152. 152.

    Chapter 11 will consider the efforts of firms to deter or induce the relocation of a new QV investment by threatening retaliation to its execution since such efforts are on my definition predatory as well as contrived oligopolistic.

  153. 153.

    Before proceeding, I should note that my assumption that the offer and payment of these bribes can be characterized as involving contrived oligopolistic conduct is contestable. In this case, the initiating move may involve nothing more than the communication of a promise to pay a bribe if the offeree makes the choice the offeror wants the offeree to make (which, in practice, may be backed up with a threat of retaliation if the offeree does not “cooperate”). The offeree then accepts or rejects the offer, taking into account the fact that the profitability of these responses will be affected by the offeror’s reaction to them. In most other sequences of conduct I described as contrived oligopolistic, the initial move involved not just the communication of an anticompetitive offer and/or threat but an actual business move—e.g., the charging of a POP. I want to assure any reader who, unlike me, thinks this difference critically affects the contrived-oligopolistic status of the bribery on which we are now focusing that my characterization of this conduct has no bearing on any related legal or policy issue.

  154. 154.

    This issue will be discussed in detail in the welfare economics of antitrust policy and U.S. and E.C./E.U. Antitrust Law. For citations to other articles that focus on this possibility, see richard s. markovits, truth or economics: on the definition, prediction, and relevance of economic efficiency 451–52 at n. 12 (Yale Univ. Press, 2008).

  155. 155.

    The most recent Supreme Court case reaffirming this rule is Palmer v. BRG of Georgia, 498 U.S. 46 (1990). I should add that the text is generous to the Court by implying that the rule in question has always covered only horizontal territorial divisions. In fact, the actual rule originally covered vertical as well as horizontal territorial divisions—a fact that is manifest by the Palmer Court’s citing a vertical-territorial-division case—United States v. Topco Associates, Inc. 405 U.S. 596 (1972)—to support its claim that the rule in question is longstanding. I should say that the Court’s citation of this case is somewhat puzzling, given the fact that, in 1977, it overruled decisions holding vertical territorial restraints per se illegal under the Sherman Act and declared that, in the future, the legality of such restraints would be determined through a Rule of Reason analysis. See Continental T.V. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

  156. 156.

    See Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) and American Can Co. v. United States, 230 F. 859 (D. Md. 1916), appeal dismissed, 256 U.S. 706 (1921).

  157. 157.

    See, e.g., Belgian Beer, OJ L200/1 (2003); Electrical and Mechanical Carbon Producers, OJ L/25/45 (2004); and Roofing Felt, OJ L232/15 (1986).

  158. 158.

    See, e.g., Peroxygen Products, OJ L 34/1 (1985).

  159. 159.

    See, e.g., Welded Steel Mesh, OJ L 260/1, p. 172 (1989).

  160. 160.

    See, e.g., Philips/Osram, OJ L 378/37 (1994); Ford/Volkswagen, OJ L 20/14 (1992); and Exxon/Still, OJ L 144/20 (1994).

  161. 161.

    See Commission Notice on Restrictions Directly Related and Necessary to Concentrations, OJ C/56, 24–31/131 (3/5/05).

  162. 162.

    One might wonder why the preceding subsection on QV-investment-focused oligopolistic conduct did not include an analogous discussion of the natural oligopolistic interdependence and contrivance that could enable rival sellers whose tort liability was governed by a negligence standard to increase their collective profits by not doing research designed to discover product variants or (buyer-valued) locations whose use would reduce production and consumption external costs by more than they would increase the sum of other production costs and any positive difference between the value to their buyers of the more-externality-prone and less-externality-prone products or locations in question. The answer is that common-law courts do not assess for negligence the refusal of sellers to shift to producing a “safer” product variant or to shift to operating from a “safer” location and that neither products-liability law nor the doctrine of nuisance uses a negligence standard. I hasten to admit, however, that this subsection’s discussion would have a QV-investment-related analogue to the extent that the discovery of the safer product variant might lead U.S. legislatures or health-and-safety regulatory bodies to tax or ban the production of the less-safe products.

  163. 163.

    Although the policy relevance of this difference is more appropriately considered in the policy-focused companion to this law-study, I do want to make two policy-points here. First, it will almost certainly be more economically efficient to respond to the tendency of developed economies to devote, from the perspective of economic efficiency, too many resources to QV-investment creation and not enough to PPR execution and UO production (1) by decreasing the length and breadth of the IP protection given to patentable product-discoveries and increasing the length and breadth of the IP protection given to production-process discoveries and (2) by raising the effective tax-rate applied to the profits yielded by QV investments of all sorts and lowering the effective tax-rates applied respectively to the profits yielded by PPR projects and the profits yielded by the production of existing products. Second, if the tendency of our economy to generate total-UO/total-QV/total-PPR misallocation of the above kind is not eliminated by the passage and implementation of these or other sorts of policies, there will be a sound economic-efficiency argument both (1) for devoting fewer or no resources to enforcing laws that prohibit contrived-oligopolistic or any other type of conduct that reduces total QV investment in the ARDEPPS in which it occurs and, derivatively, in the economy and (2) for devoting more resources than it would otherwise be economically efficient to devote to enforcing laws that prohibit contrived-oligopolistic or any other type of conduct that reduces total PPR in the PPR ARDEPPS in which it occurs and, derivatively, in the economy.

  164. 164.

    The text will ignore the possibility that a best-placed buyer (the buyer that would break even by paying the relevant supplier a price for the good in question that no other buyer could match without sustaining a loss on the transaction) may be able to obtain the product for a price that one or more of its buyer rivals could profit by beating if the best-placed buyer could not react to their response because its buyer rivals know that (1) the relevant supplier will give its best-placed buyer an opportunity to beat any superior offer the supplier receives from an inferior buyer and (2) the best-placed buyer will find it inherently profitable to beat any superior offer an inferior buyer makes (because the buyer surplus the best-placed buyer would have obtained had it made the improved offer originally and had that offer been accepted exceed the special additional cost it would have to incur to change its initial bid).

  165. 165.

    When I discussed the ability of a seller to reciprocate to its cooperators and to retaliate against its undercutters/underminers, I ignored its ability to reciprocate by not beating their contrived oligopolistic buying-bids and to retaliate by beating their buying-bids. A full analysis of the determinants of the profitability of contrived oligopolistic pricing would take these options into account.

  166. 166.

    Firms can also execute horizontal and conglomerate mergers or participate in horizontal and conglomerate joint ventures to reduce the competition they give each other as buyers. The fact that horizontal mergers, conglomerate mergers, and horizontal and conglomerate joint ventures reduce the competition their participants give each other as buyers is relevant to their legality under the Clayton Act as well as under the Sherman Act. However, the Clayton Act’s applicability will not be explored in this chapter, which is concerned with price-fixing by still-independent buyers. Clayton Act issues will, of course, be analyzed in Chaps. 12 and 13, which focus respectively on horizontal and conglomerate mergers. The Clayton Act does not cover joint ventures.

  167. 167.

    The example has some more pull for me than I suspect it will have for most others: I spend a considerable amount of time in antique markets and auction houses. Indeed, I have been heard to admit that “I believe in flea markets, not in free markets.”

  168. 168.

    The doctrines and cases I have in mind include (1) the doctrine of promissory estoppel (which U.S. courts have developed to legally entitle gift promisees that have reasonably relied on gift promises and sellers that have reasonably relied on statements by buyers that they would enter into contracts with the seller if the seller did certain things or certain conditions were fulfilled to recover their reliance expenditures from the gift promissor or buyer in question [the civil-law counterpart to this doctrine is the doctrine culpa in contrahendo]), (2) cases in which buyers who willingly paid a particular price for a good or service have been allowed to recover that portion of the price they paid that the seller charged them because the seller had to incur costs to bribe government officials or buyer agents, (3) the common-law doctrine of payment by mistake, under which buyers who willingly paid a price that was higher than the price the seller would otherwise have charged because the seller or the seller’s input-supplier (say, a subcontractor) had mistakenly duplicated an accounting cost-entry, (4) the doctrine of “interference with contractual relations” (which might be stretched to cover buyer price-fixing by arguing that each buyer who willingly participated in such a price-fix was attempting to interfere with the seller’s attempt to enter into a contractual relationship with the other buyers whose bidding the contrivers were attempting to control), and (5) the doctrine of promissory fraud (which might be construed to apply on the ground that each buyer is taking advantage of the seller’s incorrect assumption that the buyers have not engaged in a price-fix—a mistaken assumption that each price-fix participant could have prevented the seller from making). (In one case, the California Supreme Court allowed a buyer who was purchasing a mink coat for his mistress to rescind the purchase on the ground that it was “fraudulently induced” in circumstances in which he wanted to pay no more than $4000 for the coat but the sale was consummated at the seller’s reserve price of $5,000 when the mistress arranged for the seller to “accept” a price of $4,000 in exchange for her making up the $1,000 difference despite the facts that, as Judge Raynor pointed out in dissent, the buyer had “received what he bargained for,” “the fair value of the coat was $5,000,” and “the coat was of sound quality and came up to…[the mistress’] expectations.” See Earl v. Sales & Co., 226 P.2d 340 (Cal. 1951).) I want to emphasize that I realize that none of these doctrines is completely on point and that some of the cases in question may have been wrongly decided. I reference them because they do provide some precedential support for a private-law conclusion that seller-victims of buyer price-fixes are legally entitled to recover from the buyer price-fixers the losses the buyer price-fix imposed on the sellers in question—a conclusion that I think is correct as a matter of law in liberal, rights-based societies such as the U.S. and the countries of the E.C./E.U. in that it is favored by an argument of moral principle. For an account of my positions on legitimate and valid legal argument, which underlie this conclusion, see richard s. markovits, matters of principle: legitimate legal argument and constitutional interpretation (NYU Press, 1998) and Liberalism and Tort Law: On the Content of the Corrective-Justice-Securing Tort Law of a Liberal, Rights-Based Society, 2006 ill. l. rev. 243 (2006).

  169. 169.

    See Judge Richard Posner, writing in Khan v. State Oil Co., 93 F.3d 1358, 1361 (7th Cir. 1966).

  170. 170.

    See robert blair and jeffrey harrison, monopsony (Princeton Univ. Press, 1993).

  171. 171.

    334. U.S. 219 (1948).

  172. 172.

    Id. at 236

  173. 173.

    See 1992 Horizontal Merger Guidelines at Section 1.0 at p. 5. The DOJ and FTC have never addressed the implications of their use of this functional justification for their conclusion that the Sherman Act prohibits buyer price-fixing for the legality under the Sherman Act of price-fixes executed by final consumers.

  174. 174.

    United States v. Topco Associates, Inc., 405 U.S. 596 (1972).

  175. 175.

    Smith v. Pro Football, Inc. 593 F.2d 1173 (D.C. Cir. 1978).

  176. 176.

    Philadelphia World Hockey Club, Inc. v. Philadelphia Club, 351 F. Supp. 462 (E.D. Pa. 1972)

  177. 177.

    Mackey v. NFL, 543 F.2d 606 (8th Cir. 1976).

  178. 178.

    Commission Guidelines on the Applicability of Article 101 of the 1957 E.C./E.U. Treaty to Horizontal Cooperation Agreements, OJ C3/2 (2001).

  179. 179.

    Id. at p. 127.

  180. 180.

    Id. at p. 131.

  181. 181.

    Thus, in Socemas, OJ L201/4 (1968), the EC grounded its conclusion that the members of a buyer coop created to buy food products from other E.C. countries for resale in France did not have sufficient power to reduce competition on the ground that the participants in the coop had a market share of 9 percent of the French food market and that the products they imported through the coop accounted for less than 0.1 percent of their turnover. Similarly, in Intergroup, OJ L212/23 (1975), the EC grounded its conclusion that the SPAR food-wholesaler-and-retailer chains that joined the import-buying buyer-coop Intergroup imported through Intergroup goods that accounted for between 0.06 and 0.89 percent of their turnover and that the retail participants in the coop accounted for less than 4 percent of the total E.C. retail-food turnover (facts that are related to the percentage of the relevant import purchases that Intergroup made).

  182. 182.

    See Commission Guidelines on the Applicability of Article 101 of the 1957 E.C./E.U. Treaty to Horizontal Cooperation Agreements, OJ C3/2, p. 131 (2001).

  183. 183.

    National Sulphuric Acid Association, Commission Decision 80/917, OJ L260/24 (1980).

  184. 184.

    In the case, small wholesalers of pharmaceuticals and pharmaceutical products created a coop to purchase the products in question and create a trademark under which they would resell them. See Orphe, EE1G Orphe, XX Report on Competition Policy 80, point 102 (1990).

  185. 185.

    M6 and Others v. Commission, Joined Cases T-185/00, T-216/00, and T-300/00, ECR II-3805 (2002).

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Markovits, R.S. (2014). Chapter 10 Oligopolistic Conduct. In: Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-24307-3_10

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