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Competition Policy and Price Fixing

Competition Policy and Price Fixing

Copyright Date: 2013
Pages: 424
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  • Book Info
    Competition Policy and Price Fixing
    Book Description:

    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 Fixingprovides 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.

    eISBN: 978-1-4008-4607-8
    Subjects: Economics, Political Science, Business

Table of Contents

  1. Front Matter
    (pp. i-viii)
  2. Table of Contents
    (pp. ix-xii)
  3. Preface
    (pp. xiii-xviii)
  4. 1 Introduction
    (pp. 1-18)

    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...


    • 2 Defining the Problem
      (pp. 21-49)

      To understand the meaning of horizontal agreement, it is necessary to juxtapose abstract categories and concrete situations. Accordingly, this chapter begins by offering two examples that illustrate how difficult it is to define the notion of agreement as it is conventionally understood in the competition policy literature.¹ Next, frequently used terms are defined, which is necessary given the unusually wide variance in usage, including the extreme of employing a single key term to denote opposite conceptions. Once terminology is clarified, it is possible to describe commentators’ views and thereby articulate the core questions that occupy the analysis in the remainder...

    • 3 Communications
      (pp. 50-68)

      In determining what sort of interaction is sufficient to trigger liability under Sherman Act Section 1, EU Article 101, or other such provisions, many focus on the nature of communications among the firms, as mentioned just above.¹ The present chapter examines reliance on communications as a means of articulating a subdivision within interdependent behavior and, relatedly, of attempting to give content to the notion of an express agreement. The reader should keep in mind that, as chapters 4 and 5 will indicate, it is unclear the extent to which such an approach is supported by statutory provisions, higher court interpretations,...

    • 4 Statutory Provisions and Higher Court Interpretations
      (pp. 69-100)

      In examining competition law’s doctrine on horizontal agreements, this chapter begins by addressing the U.S. statute, Sherman Act Section 1.¹ Although such attention may seem conventional because the legal question is one of statutory interpretation, in fact the language of Section 1 is not much discussed. Indeed, as previously mentioned, the core term agreement does not even appear in the provision. Given the difficulty in making sense of the agreement requirement, it seems appropriate to examine the statute for what illumination it may offer.

      The leading Supreme Court precedents on Section 1 are examined next. These are the primary source...

    • 5 U.S. Lower Court Practice
      (pp. 101-124)

      Given the uncertainty about how best to interpret the Supreme Court’s later pronouncements and the more than half a century since its decisions directly on Section 1’s agreement requirement, the lower courts have lacked clear guidance. This chapter examines how these courts confront central legal questions that routinely arise in price-fixing and other horizontal-restraints cases in which the existence of an agreement is in dispute. In light of the discussion in chapters 2–4, it is not surprising that the practice in lower courts is difficult to characterize—although some commentators nevertheless depict a substantially harmonious state of affairs.


    • 6 Paradox of Proof
      (pp. 125-173)

      Chapters 2–5 are primarily concerned with articulation of the horizontal agreement requirement. Defining oligopolistic interdependence is not hard, whereas other categories, even that of an express agreement, prove highly elusive. The challenge is compounded by the fact that most view the law as reaching at least tacit agreements, themselves difficult to define in a manner that distinguishes pure interdependence. As explained, drawing on the examples in section 2.A, it is hard to understand how can one demarcate an intermediate category when it is so difficult to distinguish undoubted express agreements from pure interdependence in a coherent fashion.

      To set...

    • 7 Oligopoly Theory and the Agreement Requirement
      (pp. 174-214)

      Preceding chapters have highlighted the horizontal agreement problem, considered definitions of key terms and the role of communications, examined doctrine, and studied the problem of inferring agreements from circumstantial evidence. This chapter concludes the legal-doctrinal inquiry—and transitions to the remaining parts of the book—by examining the relationship, if any, between various notions of horizontal agreement and the modern economic theory of coordinated oligopoly behavior. Especially because enforcement agencies, courts, and commentators increasingly emphasize the central role of economic analysis in formulating competition law doctrine, it is natural to explore the connection with regard to price fixing under Sherman...


    • 8 Social Welfare
      (pp. 217-230)

      Part I probes competition law’s horizontal agreement requirement from a range of perspectives. It finds that they all readily support the distinction between coordinated oligopolistic price elevation and competitive interaction whereas none provide any substantial basis for making distinctions within the category of coordinated behavior. In particular, attempts to distinguish mere interdependence from express agreement—or from any other formulation that is significantly narrower than interdependence—fail from every angle and for largely the same reasons.

      Despite this convergence of conclusions and rationale, part I does not in itself demonstrate what competition policy toward price fixing is optimal. The coherence...

    • 9 Framework for Decision-Making
      (pp. 231-255)

      The problem of controlling coordinated oligopolistic price elevation is, in general terms, little different from that in any other setting in which legal sanctions are employed to regulate harm-causing behavior. However, because there exists only limited systematic analysis of optimal regulation in situations in which decision-making errors are a central concern and there has been essentially none with regard to coordinated oligopoly pricing, this chapter begins by elaborating the appropriate decision-theoretic framework as it applies in the present context. Next, additional attention is devoted to the cost of false positives, namely, the chilling of desirable behavior, a concern that strongly...

    • 10 Detection: Market-Based Evidence
      (pp. 256-285)

      The central challenge in addressing coordinated oligopolistic price elevation is detection.¹ Because firms have incentives to hide their behavior to the extent that it may be illegal, it will often be difficult to identify instances of successful oligopolistic coordination. Relatedly, because an aggressive approach may well be necessary, sometimes false positives will occur, resulting in undesirable chilling effects. As a consequence, it is important to consider all pertinent means of inference and figure out how to employ them in complementary ways.

      This chapter, as elaborated momentarily, focuses on evidence derived from the observation of market conditions and behavior that bears...

    • 11 Detection: Other Types of Evidence
      (pp. 286-306)

      An assessment of the degree to which industry conditions in a particular setting are conducive to successful oligopolistic coordination can sharpen the accuracy of inferences on the ultimate question of whether such coordination is occurring. This section begins by elaborating on this idea because of its importance and because the relevance of conduciveness under the commonly advocated communications-based prohibition may be radically different—arguably the opposite in many settings, as explored in chapters 6 and 17.¹ Then attention turns to factors bearing on the conduciveness to coordination. Last, the section reflects on the weight that should be given to these...

    • 12 Liability Assessment
      (pp. 307-321)

      Few simple lessons can be drawn from the foregoing examination of the many types of evidence that may be used to support or negate inferences of successful oligopolistic coordination, particularly in light of the nature of the optimal decision-making framework discussed in chapter 9 with its emphasis on ex ante effects on deterrence and the chilling of desirable behavior¹ This section nevertheless offers some observations on the relationship between avenues of proof and the social problem at hand.²

      First, it is useful to reflect on why the probability of coordinated oligopolistic price elevation is important. In some basic models of...

    • 13 Sanctions
      (pp. 322-345)

      Detection must be combined with sanctions in order to reduce the extent of coordinated oligopolistic price elevation in the economy. Section A explores fines and damages, section B adds imprisonment, and section C discusses injunctions.

      Although there is a substantial literature on the economics of law enforcement addressed to the choice among types of sanctions and their optimal magnitude, work on competition policy has devoted only modest attention to these questions.¹ Much existing analysis is incomplete or misleading as a consequence of this omission. For example, literature on rules of liability for price fixing is often significantly guided by the...

    • 14 Unilateral Market Power
      (pp. 346-367)

      The analysis thus far focuses on distinguishing two categories of behavior: purely independent behavior—taken to be synonymous with competition, where firms take prices as given—and interdependent behavior—where firms take rivals’ reactions into account and thereby are able to elevate price.¹ Analysis may further divide the category of interdependent behavior based, say, on whether particular types of explicit interfirm communication occurred, a distinction that is not under examination in this part but is the focus of parts I and III.

      This chapter examines a further distinction within the category of independent behavior: between competitive behavior—where rivals select...

    • 15 Additional Considerations
      (pp. 368-384)

      The analysis throughout this part largely abstracts from the administration of competition law. Enforcement institutions vary widely across jurisdictions and sometimes within them—especially in the United States, which has public and private suits, state and national enforcement, and two distinct systems at the national level. These differences may influence what rule is optimal and vice versa, which is to say, if certain rules are notably better in principle, it may accordingly be desirable to make institutional choices that best facilitate their implementation.

      This section is confined largely to identifying issues rather than resolving them, both because there exist independent...


    • 16 Communications-Based Prohibition
      (pp. 387-397)

      As this book’s introduction suggests, the need for this third part is not immediately apparent in light of what has come before. To motivate and guide the present inquiry, it is helpful to expand on this proposition before proceeding.

      Part II analyzes how to construct a regime to address coordinated oligopolistic price elevation. The problem is a challenging one because it is difficult to detect successful coordination with sufficient frequency to achieve substantial deterrence while limiting false positives so as to contain the cost of chilling desirable behavior. There are a variety of techniques available, some focused on market conditions...

    • 17 Detection of Prohibited Communications
      (pp. 398-419)

      Detection of prohibited communications—determining whether firms used any acts in X or confined themselves solely to acts in X’—is considered at length in chapter 6, on the paradox of proof. The focus there, within part I, which analyzes the law of horizontal agreements, is on the sharp disjunction between the implications of the paradox and current practices in adjudication. This chapter revisits the paradox in some detail because it bears even more importantly on the policy comparison that is the focus of this part of the book. Some key background conditions and features will be reviewed, but the...

    • 18 Further Topics
      (pp. 420-442)

      The subject of optimal sanctions is considered in chapter 13. Discussion here focuses on differences that arise when employing a communications-based prohibition rather than when basing liability on the presence of successful oligopolistic coordination.

      First, as discussed before, many (but not all) of the methods of demonstrating successful oligopolistic coordination also indicate the magnitude of price elevation and thus provide a basis for setting fines and damages. When liability is triggered by the use of some prohibited act rather than proven price elevation, additional inquiry for purposes of calibrating sanctions will often be necessary. One implication of this point is...

    • 19 Conclusion
      (pp. 443-454)

      A direct approach toward the problem of coordinated oligopolistic price elevation involves articulation of the social benefits and costs, assessment of methods of detection with attention to the deterrence gains and chilling effects of different techniques, and analysis of sanctions. This direct method is superior to commentators’ preferred alternative that focuses on the presence of particular means of coordination rather than on the ends to be achieved. Regarding outcomes, the direct approach dominates the more circumscribed one, concentrating liability on situations involving both greater deterrence benefits and lower chilling costs. In addition, it is more administrable because the conventional prohibition...

  8. References
    (pp. 455-474)
  9. Index
    (pp. 475-490)