Antitrust: Horizontal Price Fixing

1
Antitrust Horizontal Price Fixing

• By
• Michael Betts

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What is Collusion Among Competitors?

• Competitor collusion comprises a set of one or
  more agreements between or among competitors
• Collusion involves one or more business
  activities such as
• research and development (RD)
• production
• marketing
• distribution
• sales or purchasing
• Information sharing
• various trade association activities also may
  take place through competitor collaborations

3
Why Would Firms Collude?

• Prisoners Dilemma

Firm B
Raise Price
Lower Price
Raise Price
Firm A
Lower Price
4
Explanation of why Firms Collude

• Analyzing the prisoners dilemma can bring
  insight as to why firms will collude
• Each seller would be better off cutting price
• (5,0) and (0,5)
• Equilibrium (1,1) due to price competition
• However, both benefit if they could illegally
  agree to raise price
• (3,3) versus (1,1)
• Collusion leads to a Pareto Optimal situation

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Implications of Illegal Collusion

• The prisoners dilemma is not bad for all
• Induces price competition
• Both firms reduce price
• This benefits consumers
• Collusion, however, is harmful
• Benefits firms at the expense of consumers
• Antitrust policy is designed to prevent this
  cooperation
• Leads to horizontal price fixing agreements

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Horizontal Price Fixing

• Competing firms joining together to artificially
  raise their prices
• Viewed as anti-competitive behavior
• Bad from an economic standpoint
• May lead to a monopoly
• Market inefficiency
• Violates the golden rule
• Efficiency rule 2
• MPBMSBMSCMPC
• U.S. government may have a role to play

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Why Should there be Intervention?

• Current U.S. government justification for
  intervention 1
• Anti-competitive (price fixing) behavior stifles
  innovation
• Reduces GDP growth
• Economists justification
• Anti-competitive (price fixing) practices may
  result in increased market power
• May artificially raise prices or restrict output
• May lead to monopoly
• Creates inefficiency 2
• In a monopoly, the MPBltMSB 2
• Deadweight loss a.k.a. inefficiency
• Overall to correct the market inefficiency 2

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Price Fixing Reduced Innovation
Production Possibilities Curve
Other Goods
Unattainable
A
B
Inefficient
Goods produced in anti-competitive market
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Explanation of Reduced Innovation

• Economic growth is the increase in the real GDP
  per capita over a period of time
• Can be shown by outward shift in the PPC
• However, price fixing, an anti-competitive
  measure, stifles this growth
• As seen by backward movement of the PPC in the
  tainted market
• Once producing at point A, the curve has shifted
  back to produce at point B
• This point (B) is worse off than the economys
  original position (A)
• Point A is Pareto Superior to point B
• Without anti-competitive effects, point B would
  be considered inefficient
• Hence, the digression to point B is bad from an
  economic standpoint

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Price Fixing Resulting in a Monopoly
Monopoly Market Structure
P
MC
Dead weight loss
a
b
c
DMSB
Q
MRMPB
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Implications of Newly Formed Monopoly

• The monopolists marginal private benefit is less
  than the marginal social benefit
• MPBltMSB
• Monopolist will reduce output and increase price
• Dead weight loss (triangle abc)

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Governments Response Antitrust Regulation

• Purpose 1
• Protect competition
• Designed to benefit 1
• Consumers
• Maximize welfare
• Business community
• Opens markets
• Provides new opportunities
• Contributes to economic well-being
• U.S. government passed the Sherman Act
• Sherman Act has two parts
• Sub-section 1
• Sub-section 2

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Sherman Sub-Section 1

• Must be more than one party involved
• Must be a restraint of trade
• Horizontal Price fixing

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Sub-Section 1 Price Fixing

• Restraint of trade
• Determine naked agreements
• Determine ancillary agreements
• Naked agreement 4
• Sole purpose is to price fix
• Inherently anti-competitive
• Per se illegal
• Ancillary agreement 4
• Secondary to a legitimate purpose
• Example a joint venture that can only work if
  firms agree on a price (network industries)
• Use the rule of reason
• Weighing benefits versus the anti-competitive
  effects

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Sherman Sub-Section 2

• Firm must have monopoly power
• Maintain a current monopoly
• OR
• Pursue conduct aimed at gaining a monopoly
• General intent

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Sherman Sub-Section 2 Price Fixing that Leads to
Monopoly

• Must check market share 5
• lt70
• No violation of sub-section 2
• 70-89
• Tried for attempt of monopolizing
• 90
• Deemed a monopoly
• Monopoly is not illegal in and of itself
• Conduct matters
• Examples
• Firm with 90 market share and horizontal price
  fixing
• Violates Sherman sub-section 1 and sub-section 2
• Therefore, illegal
• Firm with 70-89 market share and horizontal
  price fixing
• Ask if there is a dangerous probability of
  achieving a monopoly and if the violator had
  specific intent to monopolize
• If yes, guilty under attempt of monopolizing
• Violates Sherman sub-section 1 and Sub-section 2

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Sherman Sub-Section 2 Good Features of Monopolies

• We do not want to condemn some monopoly features
• Again, not all monopolies are illegal
• Good features
• Aggressive non-predatory pricing
• Higher output
• Increased quality
• Successful research and development
• Cost reducing innovation

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Fixing the Inefficiency

• Use coercive powers to eliminate 2 market power
• Breaks up the cartel or monopoly
• Subsidize the sellers output 2
• Artificially raises MPB equal to MSB
• Modify seller behavior with economic regulation 3
• Price restrictions
• Rate of return restrictions
• However, antitrust regulation is not always
  effective (justice is not served)
• Effectiveness depends on the context of the
  situation
• Example Microsoft not being destroyed

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Graphical Representation
New Competitive Market
P
MSCMPC
A
MSBMPB
Q
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Explanation of new market

• By fixing the inefficiency, most notably through
  coercive actions, the market power has been
  eroded
• A new market structure exists
• Deadweight loss has disappeared
• Price has decreased
• Quantity has increased
• MSBMPB
• The market is in a Pareto equilibrium (A)
• There now exists allocative and productive
  efficiencies

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Conclusion

• There is a role for government
• To fix the inefficiency
• In certain cases, there must be intervention
• When participants are competitors
• Horizontal price fixing
• When participants have market power
• Unnatural monopolies
• When the agreement affects price or quantity
• The problem without a solution
• Peoples beliefs and ideas change over time
• Certain time periods are simply more conducive to
  regulation than others (Microsoft)

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Works Cited

• Antitrust Guidelines for Collaborations among
  Competitors. 29 December 2003. Federal Trade
  Commission. 8 March 2004 http//www.ftc.gov/os/20
  00/04/ftcdojguidelines.pdf 1
• Mrozek, Janus R. Market Failures and Efficiency
  in the Principles course. Journal of Economic
  Education, Fall 1999, v. 30, iss. 4, pp. 411-19 2
• Regulation of Access to Vertically-Integrated
  Natural Monopolies. August 1995. Ministry of
  Economic Development. 9 March 2004
  http//www.med.govt.nz/pbt/telecom/vertical/dispap
  6ccn.html 3
• U.S. v. Addyston Pipe. U.S. Supreme Ct. 1898 4
• U.S. v. ALCOA. U.S. Supreme Ct. 1945 5