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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 (4 th edition) for next week - posted

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Presentation Transcript
announcements
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
collusive restraints of trade
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
collusive restraints of trade1
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
direct agreements price fixing
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
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 agreements1
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 agreements2
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)
collusive restraints of trade2
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
other collusive restraints
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
other collusive restraints1
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
other collusive restraints2
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
conscious parallelism
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
conscious parallelism1
Conscious Parallelism
  • American Tobacco Case (1946)
    • Court found set of actions constituted conspiracy
      • “No formal agreement is necessary to constitute an unlawful conspiracy”
conscious parallelism2
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
conscious parallelism3
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
conscious parallelism4
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
other collusive restraints3
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
other collusive restraints4
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)
adm and milk textbook cases
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
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 case1
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