Competition Policy and Price Fixing - Hardcover

Kaplow, Louis

Hardcover

ISBN 10: 0691158622 ISBN 13: 9780691158624

Publisher: Princeton University Press, 2013

Synopsis

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.

About this title

About the Author

Louis Kaplow is the Finn M. W. Caspersen and Household International Professor of Law and Economics at Harvard University and a Research Associate at the National Bureau of Economic Research. His books include The Theory of Taxation and Public Economics (Princeton).

From the Back Cover

"Kaplow has produced what is likely to be recognized as the definitive work on price fixing. His analysis is rigorous, comprehensive, lucid, and convincing."--Richard A. Posner, University of Chicago Law School

"Kaplow challenges--with gusto--the very foundations of existing price fixing doctrine. Read this book with an open mind and you will come away questioning basic concepts long taken for granted in antitrust law. Kaplow's analysis is precise and devastating. Prepare to be challenged and rewarded by this brilliant and radical book."--Carl Shapiro, University of California, Berkeley

"This is an ambitious book by a renowned scholar of antitrust law and economics on one of the most important and difficult topics in antitrust. Professor Kaplow demonstrates that current antitrust law for price fixing is fundamentally flawed and provides a fascinating road map for a new approach."--Richard J. Gilbert, professor emeritus, University of California, Berkeley

"This is the most significant book on the law and economics of collusion since Richard Posner's 1976 classic, Antitrust Law. Kaplow offers a well-conceived framework for examining the welfare impact of a price fixing regime and then uses it to produce many important insights. This provocative book will prove invaluable to scholars in economics and the law who work in the area of antitrust/competition policy. It is a must-read."--Joseph E. Harrington, University of Pennsylvania

From the Inside Flap

"Kaplow has produced what is likely to be recognized as the definitive work on price fixing. His analysis is rigorous, comprehensive, lucid, and convincing."--Richard A. Posner, University of Chicago Law School

"Kaplow challenges--with gusto--the very foundations of existing price fixing doctrine. Read this book with an open mind and you will come away questioning basic concepts long taken for granted in antitrust law. Kaplow's analysis is precise and devastating. Prepare to be challenged and rewarded by this brilliant and radical book."--Carl Shapiro, University of California, Berkeley

"This is an ambitious book by a renowned scholar of antitrust law and economics on one of the most important and difficult topics in antitrust. Professor Kaplow demonstrates that current antitrust law for price fixing is fundamentally flawed and provides a fascinating road map for a new approach."--Richard J. Gilbert, professor emeritus, University of California, Berkeley

"This is the most significant book on the law and economics of collusion since Richard Posner's 1976 classic,Antitrust Law. Kaplow offers a well-conceived framework for examining the welfare impact of a price fixing regime and then uses it to produce many important insights. This provocative book will prove invaluable to scholars in economics and the law who work in the area of antitrust/competition policy. It is a must-read."--Joseph E. Harrington, University of Pennsylvania

Excerpt. © Reprinted by permission. All rights reserved.

Competition Policy and Price Fixing

By LOUIS KAPLOW

PRINCETON UNIVERSITY PRESS

Copyright © 2013 Princeton University Press
All rights reserved.

ISBN: 978-0-691-15862-4

Contents

Preface....................................................................
xiii
1. Introduction............................................................
1
PART I: HORIZONTAL AGREEMENTS..............................................
2. Defining the Problem....................................................
21
3. Communications..........................................................
50
4. Statutory Provisions and Higher Court Interpretations...................
69
5. U.S. Lower Court Practice...............................................
101
6. Paradox of Proof........................................................
125
7. Oligopoly Theory and the Agreement Requirement..........................
174
PART II: PRICE-FIXING POLICY...............................................
8. Social Welfare..........................................................
217
9. Framework for Decision-Making...........................................
231
10. Detection: Market-Based evidence.......................................
256
11. Detection: Other Types of evidence.....................................
286
12. Liability Assessment...................................................
307
13. Sanctions..............................................................
322
14. Unilateral Market Power................................................
346
15. Additional Considerations..............................................
368
PART III: COMPARISON OF APPROACHES.........................................
16. Communications-Based Prohibition.......................................
387
17. Detection of Prohibited Communications.................................
398
18. Further Topics.........................................................
420
19. Conclusion.............................................................
443
References.................................................................
455
Index......................................................................
475

CHAPTER 1

Introduction

* * *

The rule against price fixing is the least controversial prohibition incompetition law throughout the world, and the practice is universallysubject to the law's harshest penalties. There is, however, far less consensusthan meets the eye on what constitutes price fixing and on how legalregimes should determine its presence. More surprising, prevalent understandingsare not grounded in oligopoly theory even though moderncompetition policy is widely taken to rest on economic substancerather than legal formalism.

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

These elements of a direct approach have received remarkably littleattention in the literature. Instead, commentators, government agencies,and courts display some tendency to focus on penalizing certainsorts of interfirm communications that facilitate coordinated oligopolypricing. Although such punishment has great value for unmaskedcartels, systematic comparison with a more direct, functional approachreveals conventional means to be inferior and in important respectscounterproductive in cases without smoking-gun evidence. In thosesettings, a direct approach dominates the conventionally favoredcommunications-based prohibition in that the former targets situationsthat involve both greater social harm and less risk of chillingdesirable behavior than those most likely to generate liability under thelatter. The direct approach is also less difficult to administer, contraryto conventional wisdom.

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

This book proceeds in three parts. Part I offers a fresh, in-depthexploration of competition law's horizontal agreement requirement.Many commentators and, to a degree, courts see this command as imposinga constraint on the inquiry and largely dictating the use of acommunications-based prohibition rather than a direct approach to theproblem of coordinated oligopolistic price elevation. This conventionalview is shown to be incoherent, with the key statutory terms and underlyingconcepts 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 agreementrequirement has no analogue in modern oligopoly theory, so any attemptto maintain such a legal rule really has to be highly formalistic,divorced from economic precepts.

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

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

Because the exposition of all three parts is extensive, it is helpful atthe outset to provide a more detailed overview of the analysis, beginningwith part I, on the law of horizontal agreements. To set the stage,suppose that firms in a concentrated industry are able to charge the monopolyprice and maintain it at this level because those that contemplatecheating (cutting price to enhance market share) fear sufficientlyswift and substantial retaliation to render deviation unprofitable. Thefirms' actions and inactions are interdependent in that each firm's strategicassessment is notably influenced by how it expects the other firmsto react.

A central question for competition law is whether such oligopolisticinterdependence that produces supracompetitive prices should in itselfbe deemed a violation or whether something additional—perhaps secretnegotiations producing a signed cartel agreement, perhaps lessformal arrangements—should be a prerequisite to liability. Most contemporarywriters believe that the law does and should require morethan interdependence. It is obscure, however, just what supplement isnecessary. Moreover, as many appreciate, this bounded view of the lawis in tension with a rejection of formalism and an embrace of economicallybased competition regulation because coordinated price elevationleads to essentially the same economic consequences regardless of theparticular manner of interactions that generates this outcome.

Chapter 2 begins the investigation of the horizontal agreement questionby presenting scenarios that illustrate the difficulty of definingagreement in a coherent fashion that successfully distinguishes pureinterdependence (firms refrain from price cutting because of an expectationof retaliation derived from a shared appreciation of their circumstances)—deemedto be insufficient for liability—from classic cartels(firms meet secretly in hotel rooms to discuss prices and the consequencesof cheating)—widely accepted to be more than sufficient. Ofcourse, most legal categories give rise to line-drawing problems; it is notoriouslydifficult to distinguish similar shades of gray. The examplespresented, however, are more corrosive because they demonstrate howhard 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 horizontalagreements. Initial examination suggests that the standardmeaning of terms like agreement, concerted practice, and conspiracy—eachof which contemplates a mutual understanding or meeting of theminds—readily encompasses interdependence, although under somealternative definitions this is not the case. There is widespread use of anumber of terms having potentially different meanings, which generatessubstantial confusion. Even more dysfunctional, certain words associatedwith one category of behavior are sometimes used to denotethe opposite category. Interpreting both court opinions and commentarycan be almost impossible, and there is room for interpreters todepict key passages, including important canonical statements of thedoctrine, as having whatever meaning is desired, especially when thesepronouncements are taken out of context. More broadly, intelligent dialogueabout the agreement requirement is undermined, perhaps withoutthe participants recognizing the extent of misunderstanding thattheir statements may cause or their readings may involve. To somedegree, this state of affairs reflects inattention. But it also is symptomaticof underlying substantive challenges; after all, it never is easy tostate with precision ideas that themselves are foggy, inconsistent, orincoherent.

Chapter 3 examines interfirm communications that many, sometimesimplicitly, take to be central in defining the law's concept of agreement.The core problem with making the existence of communications determinativeis that communication is ubiquitous, among other reasons becausemost actions, certainly including the sale of a good at a price,themselves communicate pertinent information. If the use of communicationsconstitutes agreement, then pure interdependence (indeed, less)would trigger liability. Therefore, if agreement is to depend on communicationsand yet be more restrictive, it is necessary to specify some subcategoryof communications, perhaps based on the mode of communicationor its content, the use of which is necessary and sufficient toconstitute agreement. It is explained that this approach is tantamount todeclaring the result of price fixing to be per se legal while designating asillegal only the use of certain means—and, moreover, suspending theagreement requirement with respect to the decision to use such means,despite the fact that the same agreement requirement is what exoneratesprice coordination when such means are not employed. Furthermore, ifregulation is to be restricted to a particular subcategory of communications,it is necessary to decide whether firms' use of functional equivalentsalso gives rise to liability. If it does not, circumvention is invited. Butif it does—which one might expect under a modern, nonformalistic viewof the law—one returns to a prohibition on all successful interdependentcoordination, for the function that is meant to be served by the communicationsin question is to succeed at coordination.

The discussion of communications also considers a range of theoriesand bodies of evidence about language that seem pertinent but have notpreviously been applied to the present context. Human language is extremelyflexible and adaptable, resisting efforts at regulation. It also canbe difficult for outsiders to understand what is being communicated.These and other points are sharply highlighted by sign language—thevery existence of which is deeply problematic for those who implicitlyseek to prohibit communication that uses language and yet freely permitthe use of signs (like price signaling). It is also observed that standardapproaches to defining agreement, which require the presence ofparticular, purely symbolic communications while excluding tangiblebehavior that communicates, have as their underlying logic the notionthat "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 withregard to the interaction of firms in an oligopoly.

Chapters 4 and 5 examine how the agreement requirement is reflectedin existing doctrine. The provision of U.S. Sherman Act Section 1,which is rarely elaborated directly, does suggest some guidance, particularlythrough its use of the word "conspiracy." This term had andcontinues to have an established legal meaning that is rather expansive.In fact, some of the earlier Supreme Court cases that provide seminalinterpretations of Section 1 are also regarded as leading pronouncementson the more general law of conspiracy, and precisely for some ofits broader features. More recent Supreme Court opinions contain morerestrictive interpretations, although the agreement question was notformally before the Court in these cases and the statements themselvesare difficult to give meaning. Practice in the lower courts is quite mixed.In spite of some direct pronouncements that are ambiguous or to thecontrary, actual practice is often as if the law regarded successful interdependenceto be illegal. Notable in this regard are the "plus factors"deemed sufficient to establish agreement, jury instructions on whatmust be found to establish an agreement, and damages rules that necessarilyreflect a standard of liability due to the requisite causal nexus betweenliability and compensable injury. Interpretation of EU Article 101(formerly 81) is also briefly considered. Although the details differ, it isnot surprising that similar difficulties arise because the underlying economicproblem is identical and the structure of the legal prohibition isalmost the same.

Chapter 6 explores what is referred to here as the paradox of proof, aphenomenon that some have previously noted but none have analyzedin depth. This paradox grows out of the interplay of two starting points:(1) deeming agreement to require more than demonstration of successfulinterdependence—such as by also using certain sorts of communications—and(2) needing to infer the existence of agreement from circumstantialevidence, out of a recognition that parties hide their actionsfrom legal scrutiny. Think about the demand that these factors jointlyimpose. It is assumed that, in adjudication, it frequently will be impossibleto observe the communications that the defendant firms employed.Nevertheless, the factfinder must infer whether or not certainmeans of communication were used, based on what can be observedabout market conditions, notably, how conducive they are to successfuloligopolistic coordination and whether such successful coordinationappears to have occurred. Because the outcome, interdependent oligopolypricing, might have come about in any number of ways, the processof making inferences about whether the unobserved communicationsemployed by the defendants were of one type rather than another ischallenging, to say the least.

There is also a particular feature of the inference process that seemsparadoxical: evidence indicating that the conditions are more conduciveto successful coordination—which makes successful price elevationmore likely—may reduce the likelihood of the existence of anagreement, defined for present purposes as the use of specified meansof communication rather than others. Conventional wisdom suggeststhat, beyond some point, the greater the danger of coordinated oligopolypricing, the stronger will be defendants' claim that they were able toaccomplish it without using any prohibited means. Chapter 6—withlater elaboration in chapter 17—explores this logic and a number of importantvariations in detail. The conclusion is that the information,about both oligopoly behavior in general and the particular nature ofthe industry and its firms, that is necessary to assess the likelihood ofthe use of prohibited communications is highly complex and subtle,posing a serious obstacle to factfinding. Moreover, the implications forparties' litigation strategies are jarring. It will be highly case-dependentwhich party should be on which side of many factual disputes, andwhichever side does make sense for each party could readily flip midstream,such as if some witness proves to be more or less powerful thanthe parties had anticipated. In all, careful analysis of the paradox ofproof has a whimsical feel, seemingly far removed from what appears tobe the standard practices of firms, their lawyers, and adjudicators. It isthus difficult to reconcile, on one hand, the reasoned implications ofwhat many claim that the law on agreement is and should be with, onthe other hand, what the law in action is in fact or with what one mightever imagine it could be.

(Continues...)

Excerpted from Competition Policy and Price Fixing by LOUIS KAPLOW. Copyright © 2013 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Edition details

• Publisher: Princeton University Press
• Publication date: 2013
• ISBN 10: 0691158622
• ISBN 13: 9780691158624
• Binding: Hardcover
• Language: English
• Number of pages: 512