Public Policy in Private
Markets
Collusion
Announcements
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HW:
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HW 1, still being graded
HW 2, due 2/28 (posted); HW 3 due 3/6
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3/6: first debate
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3/8: midterm #1
Questions from last time
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Price fixing fines
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Whistleblower treatment – Leniency
programs
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Leniency programs
Collusive Restraints of Trade
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Practices covered by Section 1:
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Direct Agreements
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To fix price
To Allocate markets
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Geographically
By type of customer
Other Collusive restraints
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Gray area (circumstantial evidence)
Conscious parallelism, trade associations,
non-profit organizations
Overcharges and the “but-for” price
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Difficulties with calculation
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Timing of conspiracy
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Conspiracy period v. Normal period?
Methodology for the but-for-price
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Cournot equilibrium price
Cost-based pricing (Bertrand equilibrium?)
Historical
Forecasting
Collusive Restraints of Trade
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Practices covered by Section 1:
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Direct Agreements
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To fix price
To Allocate markets
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Geographically
By type of customer
Other Collusive restraints
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Gray area (circumstantial evidence)
Conscious parallelism, trade associations,
non-profit organizations
Other Collusive restraints
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Price exchange agreements:
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Agreement to exchange price info (nothing else)
Generally not ok: depends on market
circumstances (ATPCO case later today)
Trade Associations:
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Trade associations subject to scrutiny;
must be really careful
Other Collusive restraints
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Conscious Parallelism:
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Tacit or indirect collusion (?)
Parallel conduct:
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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
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American Tobacco Case (1946)
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3 companies dominated mkt: 1923-1941
Parallelism evidence:
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8 price changes, 6 increases led by Reynolds,
2 decreases led by American
Facts:
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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% market share
Supplies were bought up by 3 firms, leaving
competitors w/o supplies
Conscious Parallelism
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American Tobacco Case (1946)
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Court found set of actions constituted
conspiracy
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“No formal agreement is necessary to
constitute an unlawful conspiracy”
Conscious Parallelism
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Coke-Pepsi case (1980’s)
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Parallelism: Identical/similar prices and
promotional activities
Factors:
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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 Parallelism
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Coke-Pepsi case
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Civil suit in Charlotte, NC (1986)
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Federal case: local coke bottler
conspired with Pepsi bottler to control
prices and advertising promotions
Pepsi settled out of court
Coke paid $2.7 mill
Conscious Parallelism
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RTE cereal industry
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Parallel pricing moves:
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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:
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Conscious parallelism cases are very difficult
Antitrust laws are usually not effective against
price leadership situations
Other Collusive restraints
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The professions:
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Before 1970’s: professional associations had
provisions to restrict competition through
advertising and price
Examples:
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“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, avoid deception
Supreme Court: rule of reason
Other Collusive restraints
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Non-profit organizations:
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Justification: Restrictions necessary to protect
mission of the institutions
Supreme Court: applies rule of reason
Example: NCAA (1984)
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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
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Agreed on financial aid packages (next week)
Industrial Organization
Weak Evidence of Price Fixing:
ATPCO
What is ATPCO?
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Airline Tariff Publishing Company
(ATPCO)
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Owned by the airlines—sends price
change information to airlines and travel
agents
At least once a day, ATPCO produces
a compilation of all industry prices and
sends it to the appropriate airlines and
travel agents
How does ATPCO work?
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ATPCO transmits a fare basis code (a
“name” of the fare), the origin and
destination airports, the price, the first
and last ticket dates, the first and last
travel dates, and any restrictions on
the fare.
It grants almost perfect information to
all firms in the market
Airline Tariff Case
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Posting fares:
 Start and End sales date (future sales
date allows for “costless posting”)
 Fare codes (as footnotes)
 Start and End travel dates
 City-pair
 Restrictions (blackout dates, nonrefundable, etc.)
It grants almost perfect information to all
firms in the market - monitoring is immediate
and perfect
Airline Tariff Case
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DOJ:
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System used as a signal mechanism:
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Pre-announcement and communication:
posting future price for future sale date.
Iteration to an “agreed price” and exact
dates
Coordination to protect more important
markets (direct routes): fare codes used to
send messages
Scheme might have cost $2B to
consumers
Airline Tariff Case
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DOJ: Airlines’ internal memos:
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“we are waiting to see if [carrier] is going
to go along with our proposed increase”
“we are abandoning our increase on [city
1-city 2] because [carrier] has not
matched”
“[carrier] is now on board for the [date]
increase to [fare] on [city 1-city 2]”
Protecting direct routes
EWR-DET, AA: $50 (code
ABC - from Mon till Wed)
AA: I am undercutting you because you have a low
price in DFW-ATL.I want you to increase your price to
$250
EWR-DET, AA: $250 (start
sale next Wednesday)
DFW-ATL, CO: $100 (code ABC)
EWR
ATL
$$ for CO
$$ for AA
DET
DFW
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AA has hub in DFW
Continental has hub in EWR
DFW-ATL, AA: $200
Airline Tariff Case
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DOJ:
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“The airlines used the ATP … system to
carry on conversations just as direct and
detailed as those traditionally conducted
by conspirators over the telephone or in
hotel rooms. Although their method was
novel, their conduct amounted to price
fixing, plain and simple”
Airline Tariff Case
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Why was this case difficult but
important?
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No direct evidence of price fixing (price
exchange + conscious parallelism)
Case appears as rule of reason
approach
Outcome: Consent decree
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Can not be used as precedent, BUT DOJ’s
willingness to pursue difficult case sent a
message
Industrial Organization
Weak Case of Price Fixing: School
Mil
Ohio v. Trauth
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Schools: Bid solicitation for annual
supply of milk (sealed bid auction)
> 600 school districts
Solicitation: menu of milk types,
sometimes with other requirements
such as napkins, coolers.
Local diaries supplied milk
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Costs similar across diaries
Distance is the key factor
Market concentration
Ohio v. Trauth
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Homogeneous product
Similar technology across processors
Costly transportation (competition is localized)
High barrier to entry (no one builds a plant solely
for selling milk to schools)
Inelastic demand
Infrequent demand
Information available (schools posted info)
Easy allocation of markets
Ohio v. Trauth
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Methods involved complementary bidding:
artificially raised the price for schools
Case where direct evidence was not enough:
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Additional economic (statistical) evidence was
needed
Would a “control” group behave the way
defendants behaved? (i.e. probability and level of
bids)
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Closeness should increase probability and size of bid
Are bids correlated? (complementary bidding)
Ohio v. Trauth
Control group behavior
Accused firms behavior
Ohio v. Trauth
Accused firms behavior
Ohio v. Trauth
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Collusion is frequent in school milk
auctions
130+ criminal cases filed