Lysine is a feed additive used by farmers in livestock feeds – a worldwide $600 million industry.
Members of the lysine cartel reached agreements to carve up the world market by allocating sales volumes among themselves and agreeing on what prices would be charged to customers worldwide. As a result, prices went up about 70 percent in the first three months of the conspiracy.
Impermissible naked price fixing – resulted in multi-million dollar fines for cartel members and criminal convictions.
Naked Versus Ancillary Horizontal Agreements on Price
Not all are illegal per se
Distinguish between “naked” price fixing agreements and “ancillary” price fixing agreements
Naked price fixing: the agreement on price is the principal agreement.
Look for evidence of behavior that makes sense only if there is an agreement
Evidence that tends to exclude the possibility of independent conduct
Evidence that is against an actor’s economic interest absent an agreement
Example: Parallel Pricing Behavior
All competitors in a market announce at the same time that their prices will increase by the same amount.
Suspicious behavior? Yes
Conclusive evidence of an agreement? No
Further investigation needed to eliminate other non-cartel explanations for the price increase
sudden increase in costs that affect all competitors at the same time
sudden change in the demand for the product
sudden change in the price of a substitute product
Facilitating Practices Agreements
Agreements that make it easier for competitors to collectively exercise market power and to avoid competing with each other
May include agreements to share information, adopt a product standard, or adopt a particular contracting or pricing practice
These practices may not directly restrain competition, their use makes it easier for industry participants to reach or maintain tacit or explicit agreements on price or output
Difficulty with facilitating practices agreements is that they are not always anticompetitive
Example: Facilitating Practices Agreement
Price protection clauses: Seller agrees to either meet any price the buyer is able to obtain from another supplier or release the buyer to purchase from the other seller
Looks pro-competitive in that they can offer customers lower prices
But can serve as a “policing” mechanism to detect cheating on cartels and reduces the incentives of sellers to offer lower prices
Quiet Life Agreements
Agreements that restrict competition by freeing competitors from some significant aspect of competition that does not directly involve price or output
Example: Agreements not to advertise
Example: Agreements to limit business hours
A large group of auto dealers agreed to restrict their showroom hours, including closing on Saturdays. The agreement reduced a service that dealers normally provide – convenient hours – and made it difficult for consumers to comparison shop. (Detroit Auto Dealers)
Quiet Life Agreements, con’t
Things to consider in analyzing “quiet life” agreements:
What competition is being eliminated?
How important is that competition to consumers?
Does the agreement accomplish anything other than the elimination of competition? (Any benefits?)
Could the same benefits be achieved without eliminating this competition?
Agreements among competitors not to deal with other competitors, suppliers, or customers
Some agreements that look like group boycotts can create efficiencies and make a market more competitive.
Example: A group of small competitors form a joint purchasing arrangement for the purchasing and warehousing of product, enabling them to compete more effectively with larger companies
Group Boycotts, con’t
Other agreements may harm competition.
Example: A new retailer enters offering very low prices compared to others. The incumbent retailers collectively threaten to refuse to deal with any supplier that does business with the new low-price retailer. The boycott could prevent the new entrant from obtaining sufficient supplies needed to compete, thereby protecting existing retailers from the low-price competition and harming consumers.
Evaluating Group Boycotts
What portion of the companies in the market are part of the agreement?
To what extent is a competitor excluded or disadvantaged? Are alternatives available?
If the excluded competitor has alternative ways of obtaining the same or similar benefits, the exclusion will not likely be harmful
What is the purpose of the agreement, and what are the purported benefits?
If the parties claim a purpose other than to exclude or disadvantage competition, determine whether the facts support the stated purpose
Could the same benefits be achieved without excluding or disadvantaging a competitor?
Are less anticompetitive but reasonable alternatives available for achieving the same benefits?
Joint Venture Agreements
Cooperation may produce a better competitor (a more efficient and effective competitor)
Joint ventures may include terms that unreasonably restrict competition among the venture’s participants
Is the purpose to make the participants more efficient/effective?
Is the agreement necessary to achieve the asserted competitive benefits?
Is sufficient competition left to compete with the newly formed venture?
Agreements to Improve the Functioning of the Market
Standard setting agreements among competitors generally are beneficial to competition.
Example: an agreement among plumbing pipe manufacturers to standardize the sizes, shapes, and material composition so that builders and consumers can use pipes interchangeably no matter which manufacturer made them.
Although adoption of standards may exclude nonconforming products and thus harm the company (competitor) that makes them, this alone is rarely a sufficient basis for condemning the practice as anticompetitive.
Before standard setting can harm competition, one factor must be present: control over market access.
Trade associations carry out many legitimate, positive functions:
Educating members about technology and other advances in the industry
Identifying potential problems with products
Facilitating training on legal & other administrative issues
Acting as an advocate or lobbyist before the government
Trade associations also can serve as a forum for cartel activities, and trade associations can be used as vehicles for cartels to engage in “facilitating practices” and “quiet life” agreements
Example: farm equipment trade association and its members agreed not to advertise prices for new farm equipment and to boycott a trade publication in furtherance of the agreement
Example: chiropractic trade association and its members conspired to fix prices and to boycott third-party payers to obtain higher reimbursement levels
Which agreements should be illegal?
An agreement between two competitors setting the price to be charged for their goods/services
An agreement between competitors to limit production in order to save scarce resources
An agreement setting the price to be charged for goods competitors jointly develop, produce, and sell as part of a business venture between them
An agreement between competitors to close their stores on Saturdays and Sundays in order to spend time with their families
An agreement between competitors not to do business with a supplier that has been supplying a new entrant
Overview of Vertical Restraints
VRs involve restrictive agreements between firms that are not direct competitors. They are very different in kind from restrictions among competing sellers, such as price fixing.
VRs, which involve complements in production, may have both procompetitive and anticompetitive features
Possible VR Structure
Types of Vertical Restraints
Vertical Price Restraints
Resale price maintenance – Agreement between manufacturer and distributor not to sell manufacturer’s product at or above a price floor, or at or below a price ceiling.
Vertical Non-Price Restraints
Vertical Territorial Division
Vertical Customer Division
Why Vertical Restraints?
Could be profitable for 2 reasons:
1)Because they increase efficiency of the distribution system and thus help lower supplier costs;
2)Because they increase the supplier’s market power and enable it to earn monopoly profits.
Competition policy that attempts to maximize the welfare of consumers would try to approve restrictions that have the first effect, and condemn those that had the second effect.
Procompetitive Features of VRs
Higher retail margins induce more service by retailers.
Prevents “free riding” by discount houses.
Stimulates interbrand competition by reducing intrabrand competition.
May induce distributors of products to provide optimal level of promotional display or advertising services, increasing demand and benefitting consumers.
Anticompetitive Features of VRs
RPM – Keeps prices higher than they might otherwise be.
Territorial division may facilitate tacit or explicit collusion by suppliers, particularly if engaged in horizontal territorial division.
May foreclose competition, as exclusive supply agreements may cut off key inputs to competitive suppliers.
Raising Barriers to Entry – May require entry at two levels in chain of production, or raise the cost of new entry.
Toys ‘R’ Us case (2000) – Chain toy store used VRs under which toy manufacturers agreed not to supply popular toys to retail discount clubs. Court held VR facilitated collusion among manufacturers.
U.S. Legal Analysis of VRs
Non-price VRs analyzed under a rule of reason analysis.
RPM – For nearly 100 years, minimum resale price maintenance was per se illegal in the United States.
In 2007, U.S. Supreme Court in Leegin case held minimum RPM subject to rule of reason analysis rather than per se prohibition – essentially permitting it in the United States (but may violate State law).
Assessing “Market Power” is important: Market power is the ability of a company (or companies) to raise prices above competitive levels without losing sales so rapidly as to make the price increase unprofitable.
The risk of an anticompetitive outcome is greater when the firm or firms using VRs have market power Dominant firm may exclude rivals
Non-dominant firms with market power may use VRs to facilitate collusion.
Degree of market power may be important.
When VRs are used by firms that lack market power, efficiency explanations, such as inducing promotional activities, likely to hold sway.