Thursday, April 17, 2008
Posted by D. Daniel Sokol
My soon to be colleague at UF Bill Page (we move next month to Gainesville) has posted a new working paper, Facilitating Practices and Concerted Action Under Section 1 of the Sherman Act.
ABSTRACT: Successful collusion requires that
rivals reach consensus on the key terms and deploy some means of
detecting and penalizing cheaters, usually by tracking rivals'
transaction prices. Economists have shown that firms in an oligopoly
can, in certain conditions, achieve noncompetitive prices and outputs
without an express agreement by making choices that anticipate each
others' likely responses. "Facilitating practices" are mechanisms that
enhance rival firms' ability to police such an arrangement. If firms
expressly agree to adopt one of these facilitating practices, for
example as a trade association rule, and the effect of the practice is
to reduce competition, then that agreement may be independently illegal
under Section 1 of the Sherman Act. Moreover, the Sherman Act may
preempt a state law that requires rivals to use a facilitating
practice. A more difficult question arises, however, where the firms
each adopt the same facilitating practice without any express
agreement: does parallel pricing together with parallel adoption of
facilitating practices allow a court to infer the requisite agreement?
Both Donald Turner and Richard Posner believed that, unlike simple
parallel pricing, the parallel adoption of a facilitating practice that
permits noncompetitive pricing should be unlawful, because the problem
of remedy is mitigated.
But conduct is not evidence of an anticompetitive agreement simply because it can be enjoined. Facilitating practices may do more than simply facilitate rivals' efforts to achieve an inefficient oligopoly price. They also may provide certain immediate benefits to consumers by, among other things, reducing search or transaction costs. In these circumstances, the firms' adoption of the practice might well be for the benign reason rather than the collusive reason. Courts will not easily infer an agreement from the parallel adoption of facilitating practices where the practices have beneficial functions apart from facilitating price coordination.
Unfortunately, the stated legal definitions of agreement under which courts evaluate circumstantial evidence, including facilitating practices, are inadequate. In this article, I review the deficiencies of the present law governing the definition and proof of agreement under Section 1 and propose that the law should recognize that communication among rivals is necessary for concerted action. I then examine cases involving facilitating practices in a variety of Section 1 contexts, and suggest that the courts have come to recognize the importance of communications among rivals in evaluating whether the evidence warrants an inference of agreement.