Competition Policy and Price Fixing

Louis Kaplow

• Publisher: Princeton University Press
• Year: 2013
• ISBN:
  9781400846078
• Topic: Economía
• Subtopic: Teoría económica

Throughout the world, the rule against price fixing is competition law's most important and least controversial prohibition. Yet there is far less consensus than meets the eye on what constitutes price fixing, and prevalent understandings conflict with the teachings of oligopoly theory that supposedly underlie modern competition policy. Competition Policy and Price Fixing provides the needed analytical foundation. It offers a fresh, in-depth exploration of competition law's horizontal agreement requirement, presents a systematic analysis of how best to address the problem of coordinated oligopolistic price elevation, and compares the resulting direct approach to the orthodox prohibition.
In doing so, Louis Kaplow elaborates the relevant benefits and costs of potential solutions, investigates how coordinated price elevation is best detected in light of the error costs associated with different types of proof, and examines appropriate sanctions. Existing literature devotes remarkably little attention to these key subjects and instead concerns itself with limiting penalties to certain sorts of interfirm communications. Challenging conventional wisdom, Kaplow shows how this circumscribed view is less well grounded in the statutes, principles, and precedents of competition law than is a more direct, functional proscription. More important, by comparison to the communications-based prohibition, he explains how the direct approach targets situations that involve both greater social harm and less risk of chilling desirable behavior--and is also easier to apply.

1

Introduction

The rule against price fixing is the least controversial prohibition in competition law throughout the world, and the practice is universally subject to the law’s harshest penalties. There is, however, far less consensus than meets the eye on what constitutes price fixing and on how legal regimes should determine its presence. More surprising, prevalent understandings are not grounded in oligopoly theory even though modern competition policy is widely taken to rest on economic substance rather than legal formalism.

This book’s central aim is to provide an analytical foundation for designing policy toward coordinated price elevation in oligopolistic industries. In rough terms, the proper methodology is straightforward. First, one articulates the problem and undertakes welfare-based analysis to specify the benefits and costs of attempts to control it. Next, one examines how coordinated price elevation is best detected, attending to the error costs associated with different types of proof. Finally, one sets appropriate sanctions.

These elements of a direct approach have received remarkably little attention in the literature. Instead, commentators, government agencies, and courts display some tendency to focus on penalizing certain sorts of interfirm communications that facilitate coordinated oligopoly pricing. Although such punishment has great value for unmasked cartels, systematic comparison with a more direct, functional approach reveals conventional means to be inferior and in important respects counterproductive in cases without smoking-gun evidence. In those settings, a direct approach dominates the conventionally favored communications-based prohibition in that the former targets situations that involve both greater social harm and less risk of chilling desirable behavior than those most likely to generate liability under the latter. The direct approach is also less difficult to administer, contrary to conventional wisdom.

On reflection, these conclusions are hardly unexpected. Direct approaches tend to be superior to indirect, circumscribed ones. Analysts, enforcers, and adjudicators usually do best by asking the right question—the one of direct social concern—rather than by attempting to answer a different one. Sometimes indirect tactics turn out to be superior, but this can be ascertained only after sustained analysis that articulates the competing methods and explicitly assesses their differences. It is therefore striking that many of the topics investigated here have been so neglected.

This book proceeds in three parts. Part I offers a fresh, in-depth exploration of competition law’s horizontal agreement requirement. Many commentators and, to a degree, courts see this command as imposing a constraint on the inquiry and largely dictating the use of a communications-based prohibition rather than a direct approach to the problem of coordinated oligopolistic price elevation. This conventional view is shown to be incoherent, with the key statutory terms and underlying concepts actually being more in accord with a direct approach. Furthermore, much doctrine as well as practice, both in court and outside, is more consistent with a broader view of the law’s prohibition. Finally, it is explained that the narrower interpretation of the agreement requirement has no analogue in modern oligopoly theory, so any attempt to maintain such a legal rule really has to be highly formalistic, divorced from economic precepts.

With much underbrush having been removed, part II analyzes the problem of coordinated oligopolistic price elevation, starting from first principles. The initial step is to assess—more explicitly, carefully, and completely than is usually done—the nature of the social problem, including the possible costs of regulation in terms of chilling desirable behavior through the risk of false positives. The second step is detection, which, it is emphasized, can be done in a number of ways that vary across contexts in their availability and accuracy. Third, one must apply sanctions, another topic that has suffered from too little attention. Contrary to much existing commentary, emphasis here is placed on the deterrent role of remedies, rather than on their ex post ability to restore competition, because a well-functioning system will discourage most violations and prospective compliance is best achieved through the threat of sanctions, not legal injunctions that are more akin to command-and-control regulation.

Part III explicitly compares a direct approach to the orthodox one, a communications-based prohibition. There is an important sense in which this part is not logically necessary, for part II undertakes a ground-up analysis of the problem and a communications-based prohibition is not what emerges. However, given the nearly exclusive focus on this method by commentators as well as the belief that it reflects existing law, a systematic, side-by-side comparison seems valuable and proves instructive. Setting aside cases with sharp, conclusive evidence—in which the two approaches would both assign liability—the communications-based prohibition is seen to be defective in ways that are an immediate consequence of its design: aiming at a subset of symptoms rather than at the problem itself. Specifically, this indirect method requires addressing the same detection question as under the direct approach—identifying whether oligopolistic coordination has taken place—as well as tackling the further question of whether such was accomplished by particular means, prohibited communications. This explains why decision-making is rendered more rather than less complicated. Worse, if one accepts conventional views about aspects of this analysis (which views will be questioned), the consequence is to focus liability on situations involving less social danger and a greater risk of chilling costs.

Because the exposition of all three parts is extensive, it is helpful at the outset to provide a more detailed overview of the analysis, beginning with part I, on the law of horizontal agreements. To set the stage, suppose that firms in a concentrated industry are able to charge the monopoly price and maintain it at this level because those that contemplate cheating (cutting price to enhance market share) fear sufficiently swift and substantial retaliation to render deviation unprofitable. The firms’ actions and inactions are interdependent in that each firm’s strategic assessment is notably influenced by how it expects the other firms to react.

A central question for competition law is whether such oligopolistic interdependence that produces supracompetitive prices should in itself be deemed a violation or whether something additional—perhaps secret negotiations producing a signed cartel agreement, perhaps less formal arrangements—should be a prerequisite to liability. Most contemporary writers believe that the law does and should require more than interdependence. It is obscure, however, just what supplement is necessary. Moreover, as many appreciate, this bounded view of the law is in tension with a rejection of formalism and an embrace of economically based competition regulation because coordinated price elevation leads to essentially the same economic consequences regardless of the particular manner of interactions that generates this outcome.

Chapter 2 begins the investigation of the horizontal agreement question by presenting scenarios that illustrate the difficulty of defining agreement in a coherent fashion that successfully distinguishes pure interdependence (firms refrain from price cutting because of an expectation of retaliation derived from a shared appreciation of their circumstances)—deemed to be insufficient for liability—from classic cartels (firms meet secretly in hotel rooms to discuss prices and the consequences of cheating)—widely accepted to be more than sufficient. Of course, most legal categories give rise to line-drawing problems; it is notoriously difficult to distinguish similar shades of gray. The examples presented, however, are more corrosive because they demonstrate how hard it is to distinguish what many regard to be polar-opposite cases, analogous to black and white.

This chapter also scrutinizes the concepts used in discussing horizontal agreements. Initial examination suggests that the standard meaning of terms like agreement, concerted practice, and conspiracy—each of which contemplates a mutual understanding or meeting of the minds—readily encompasses interdependence, although under some alternative definitions this is not the case. There is widespread use of a number of terms having potentially different meanings, which generates substantial confusion. Even more dysfunctional, certain words associated with one category of behavior are sometimes used to denote the opposite category. Interpreting both court opinions and commentary can be almost impossible, and there is room for interpreters to depict key passages, including important canonical statements of the doctrine, as having whatever meaning is desired, especially when these pronouncements are taken out of context. More broadly, intelligent dialogue about the agreement requirement is undermined, perhaps without the participants recognizing the extent of misunderstanding that their statements may cause or their readings may involve. To some degree, this state of affairs reflects inattention. But it also is symptomatic of underlying substantive challenges; after all, it never is easy to state with precision ideas that themselves are foggy, inconsistent, or incoherent.

Chapter 3 examines interfirm communications that many, sometimes implicitly, take to be central in defining the law’s concept of agreement. The core problem with making the existence of communications determinative is that communication is ubiquitous, among other reasons because most actions, certainly including the sale of a good at a price, themselves communicate pertinent information. If the use of communications constitutes agreement, then pure interdependence (indeed, less) would trigger liability. Therefore, if agreement is to depend on communications and yet be more restrictive, it is necessary to specify some subcategory of communications, perhaps based on the mode of communication or its content, the use of which is necessary and sufficient to constitute agreement. It is explained that this approach is tantamount to declaring the result of price fixing to be per se legal while designating as illegal only the use of certain means—and, moreover, suspending the agreement requirement with respect to the decision to use such means, despite the fact that the same agreement requirement is what exonerates price coordination when such means are not employed. Furthermore, if regulation is to be restricted to a particular subcategory of communications, it is necessary to decide whether firms’ use of functional equivalents also gives rise to liability. If it does not, circumvention is invited. But if it does—which one might expect under a modern, nonformalistic view of the law—one returns to a prohibition on all successful interdependent coordination, for the function that is meant to be served by the communications in question is to succeed at coordination.

The discussion of communications also considers a range of theories and bodies of evidence about language that seem pertinent but have not previously been applied to the present context. Human language is extremely flexible and adaptable, resisting efforts at regulation. It also can be difficult for outsiders to understand what is being communicated. These and other points are sharply highlighted by sign language—the very existence of which is deeply problematic for those who implicitly seek to prohibit communication that uses language and yet freely permit the use of signs (like price signaling). It is also observed that standard approaches to defining agreement, which require the presence of particular, purely symbolic communications while excluding tangible behavior that communicates, have as their underlying logic the notion that “words speak louder than actions.” Of course, the more familiar, opposite maxim is better rooted in common sense and, not surprisingly, in the teaching of scholars of strategy, including business strategy with regard to the interaction of firms in an oligopoly.

Chapters 4 and 5 examine how the agreement requirement is reflected in existing doctrine. The provision of U.S. Sherman Act Section 1, which is rarely elaborated directly, does suggest some guidance, particularly through its use of the word “conspiracy.” This term had and continues to have an established legal meaning that is rather expansive. In fact, some of the earlier Supreme Court cases that provide seminal interpretations of Section 1 are also regarded as leading pronouncements on the more general law of conspiracy, and precisely for some of its broader features. More recent Supreme Court opinions contain more restrictive interpretations, although the agreement question was not formally before the Court in these cases and the statements themselves are difficult to give meaning. Practice in the lower courts is quite mixed. In spite of some direct pronouncements that are ambiguous or to the contrary, actual practice is often as if the law regarded successful interdependence to be illegal. Notable in this regard are the “plus factors” deemed sufficient to establish agreement, jury instructions on what must be found to establish an agreement, and damages rules that necessarily reflect a standard of liability due to the requisite causal nexus between liability and compensable injury. Interpretation of EU Article 101 (formerly 81) is also briefly considered. Although the details differ, it is not surprising that similar difficulties arise because the underlying economic problem is identical and the structure of the legal prohibition is almost the same.

Chapter 6 explores what is referred to here as the paradox of proof, a phenomenon that some have previously noted but none have analyzed in depth. This paradox grows out of the interplay of two starting points: (1) deeming agreement to require more than demonstration of successful interdependence—such as by also using certain sorts of communications—and (2) needing to infer the existence of agreement from circumstantial evidence, out of a recognition that parties hide their actions from legal scrutiny. Think about the demand that these factors jointly impose. It is assumed that, in adjudication, it frequently will be impossible to observe the communications that the defendant firms employed. Nevertheless, the factfinder must infer whether or not certain means of communication were used, based on what can be observed about market conditions, notably, how conducive they are to successful oligopolistic coordination and whether such successful coordination appears to have occurred. Because the outcome, interdependent oligopoly pricing, might have come about in any number of ways, the process of making inferences about whether the unobserved communications employed by the defendants were of one type rather than another is challenging, to say the least.

There is also a particular feature of the inference process that seems paradoxical: Evidence indicating that the conditions are more conducive to successful coordination—which makes successful price elevation more likely—may reduce the likelihood of the existence of an agreement, defined for present purposes as the use of specified means of communication rather than others. Conventional wisdom suggests that, beyond some point, the greater the danger of coordinated oligopoly pricing, the stronger will be defendants’ claim that they were able to accomplish it without using any prohibited means. Chapter 6—with later elaboration in chapter 17—explores this logic and a number of important variations in detail. The conclusion is that the information, about both oligopoly behavior in general and the particular nature of the industry and its firms, that is necessary to assess the likelihood of the use of prohibited communications is highly complex and subtle, posing a serious obstacle to factfinding. Moreover, the implications for parties’ litigation strategies are jarring. It will be highly case-dependent which party should be on which side of many factual disputes, and whichever side does make sense for each party could readily flip midstream, such as if some witness proves to be more or less powerful than the parties had anticipated. In all, careful analysis of the paradox of proof has a whimsical feel, seemingly far removed from what appears to be the standard practices of firms, their lawyers, and adjudicators. It is thus difficult to reconcile, on one hand, the reasoned implications of what many claim that the law on agreement is and should be with, on the other hand, what the law in action is in fact or with what one might ever imagine it could be.

Chapter 7 closes part I by assessing the relationship between modern oligopoly theory and the meaning of the agreement requirement. Because competition law seeks to regulate oligopoly behavior and, moreover, to ground such regulation in modern economic understandings, it would seem to follow that, if the law’s notion of agreement reflects economic substance, the agreement requirement would correspond to a core distinction drawn in oligopoly theory. As it turns out, that theory, which is an application of game theory (particularly, that of repeated games), does have an explicit notion of agreement. But this notion refers to binding agreements and thus is irrelevant for present purposes because competition law renders horizontal price-fixing agreements void ab initio. When agreements are not taken to be automatically enforced by an outside authority, another branch of game theory is applicable. But the pertinent theory, models, and analysis are applicable equally to successful oligopolistic coordination accomplished through pure interdependence and to that effectuated in the form of a classic cartel. That is, the distinction that many would have the law make central is, as a first ...