The Law, Economics, and Law of Collusion

I. Rule of Reason vs. per se treatment: Section 1, 1899-1940

II. The collusion hypothesis

III. Collusion and its organization

IV. Realistic possibilities:

V. Some modern examples

I. Rule of Reason v. per se treatment: Section 1, 1899-1940

A. Recap

1. Rule(s) of Reason

2. Unpopularity of enforced competition

3. Board of Trade v. U. S., 1919

B. Trenton Potteries v. U. S., 1927

1. A cartel with “reasonable” prices

2. Are “reasonable prices” relevant?

3. Per se v. Rule of Reason--or its result.

I. Rule of Reason v. per se treatment: Section 1, 1899-1940

C. Uncertain interlude

1. Cartelization as a depression remedy

2. Appalachian Coals v. U. S., 1932

3. Sugar Institute v. U. S., 1936

4. Continued unpopularity of enforced competition, leading to

I. Rule of Reason v. per se treatment: Section 1, 1899-1940

D. End of the line: Socony-Vacuum Oil Co. v. U. S., 1940

1. “Overcapacity” and “overproduction”-- now and then.

2. The gasoline buying program.

3. Issue: is this enough like price fixing to be price fixing?

4. Issue: and if it is price fixing, what then?

II. The collusion hypothesis

A. Strictly a point of departure: sellers will consciously collude on a price and an output allocation that eliminates uncertainty, making higher prices and profits possible than would occur under continued competition, BUT:

1. Requires a cut in total industry output.

2. How to cut? and whose output?

II. The collusion hypothesis

B. The monopoly limit: joint maximization

1. Requires minimum total cost of output.

2. Requires matching of buyer prefs

3. Must be satisfactory to all participants

C. The basic decision: go along or cheat?

D. What facilitates / hinders collusion?

III. Collusion and organizationA. Recap: the problem of cheating

1. Issue: Profits vs. member retention

2. Issue: Profits vs. stability

3. Issue: Profits vs. simplicity

B. The critical role of market sharing

C. Price leadership: 3 types

D. Non-price competition: “cheating” and commitment.

IV. Realistic possibilities

1. Collective price setting (fixing)

2. Credible price communication

3. Market sharing or division

4. Standardizing methods of price quotation

5. Standardizing products or services

• Justice Douglas on enforced competition and the per se rule

• Antitrust as “regulation without regulation”

V. Some modern examples

A. Simple price fixing

1. “Big business” cases

2. Some things to watch for

3. Bid-rigging forms of collusion

B. Market division

C. Inferring collusion from parallel conduct

VC. Inferring collusion from parallel conduct

1. Price leadership and interdependent behavior: a simple example.

2. Two extremes:

Interstate Circuit v. U. S. (1939)

Theatre Enterprises v. Paramount Film Distributing Co. (1954)

KEY ISSUE: independent action

--or agreement?

VC. Inferring collusion from parallel conduct

3. Where “conscious parallelism” spelled illegality: a. American Tobacco (1946)

b. Basing-point cases, 1948-50

c. Steam turbine generators (? 1970-71)

4. Where “conscious parallelism” was OK:

a. U. S. v. Charles Pfizer (1961)

b. Basing-point cases in lumber and plywood, 1980

VC5. Difficulties with “conscious parallelism”

a. Detection

(1) Not a “smoking gun,” but “plus factors.”

(2) Need to refute the hypothesis of

independent action

b. Providing relief:

(1) The general problem

(2) Airline fares as a specific example.

VD. Cracks in the per se doctrine?

1. The professions: no exceptions

2. Regulated industries: only where the state takes an active interest or grants an exception.

3. Where agreement is necessary

a. NCAA v. ... University of Oklahoma (1984)

b. BMI v. CBS (1979)

4. Joint ventures: considered later