Plus Factors

8/10/2019 Plus Factors

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PLUS FACTORS AND AGREEMENT IN ANTITRUST LAW

William E. Kovacic,*Robert C. Marshall,**

Leslie M. Marx,***

Halbert L. White****

A pr evi ous ver si on of t hi s paper was t i t l ed Pl us Fact or s.

Acknowl edgment s. The aut hors are gr atef ul t o Char l es Bates, J oe

Har r i ngt on, Kei t h Hyl t on, Paul J ohnson, Mi ke Meur er , Chi p Mi l l er , semi nar

part i ci pant s at Wi l mer Hal e and Bost on Uni ver si t y School of Law, as wel l

as Gr aci el a Mi r al es and par t i ci pant s i n a wor kshop at t he Feder al Tr ade

Commi ssi on, f or many usef ul comment s and suggest i ons. Rober t C. Marshal l

t hanks t he Human Capi t al Foundat i on ( www. hcf oundat i on. r u) , and especi al l y

Andr ey P. Vavi l ov, f or suppor t of t he Cent er f or t he St udy of Auct i ons,

Procur ement s, and Compet i t i on Pol i cy ( CAPCP, ht t p: / / capcp. psu. edu/ ) at

Penn St at e Uni ver si t y where he conduct ed thi s r esear ch. Lesl i e M. Marx

t hanks t he Nat i onal Sci ence Foundat i on f or support under gr ant #SES-

0849349.

* Commi ssi oner , U. S. Federal Trade Commi ssi on; Prof essor , Geor ge

Washi ngt on Uni ver si t y Law School ( on l eave) . The vi ews expr essed i n t hi s

Ar t i cl e ar e the aut hor s al one and not t he vi ews of t he FTC or any of i t s

member s. wkovaci c@f t c. gov.

** Penn St ate Uni ver si t y, r cm10@psu. edu.

*** Duke Uni versi t y, marx@duke. edu.

*** * Uni ver si t y of Cal i f or ni a, San Di ego, hwhi t e@weber . ucsd. edu.


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Pl us f act ors ar e economi c act i ons and out comes, above and

beyond par al l el conduct by ol i gopol i st i c f i r ms, t hat ar e

l ar gel y i nconsi st ent wi t h uni l at er al conduct but l ar gel y

consi st ent wi t h expl i ci t l y coor di nat ed acti on. Possi bl e pl us

f act or s are typi cal l y enumerat ed wi t hout any at t empt t o

di st i ngui sh t hemi n terms of a meani ngf ul economi c

cat egor i zat i on or i n t er ms of t hei r pr obat i ve st r engt h f or

i nf er r i ng col l usi on. I n t hi s paper , we pr ovi de a t axonomy f or

pl us f act or s as wel l as a met hodol ogy f or r anki ng pl us f act or s

i n t er ms of t hei r str engt h f or i nf er r i ng expl i ci t col l usi on,

t he st r ongest of whi ch ar e ref er r ed t o as super pl us

f actor s.

Introduction

Compet i t i on l aw t r eat s agr eement s among r i val f i r ms t o set t he terms

on whi ch t hey t r ade as ext r emel y ser i ous of f enses. 1 Most of t he wor l d s

1. See Or gani zat i on f or Economi c Cooperat i on and Devel opment ,

Car t el s: Sanct i ons Agai nst I ndi vi dual s, 9 J . Compet i t i on L. & Pol y 7, 36

46 ( 2007) ( r evi ewi ng modern enf orcement t r ends) ; Davi d E. Vann & El l en L.

Frye, Over vi ew, i n Car t el Regul at i on 3 ( Wi l l i am Rowl ey & Mar t i n Low eds. ,

Get t i ng t he Deal Thr ough, J an. 2009) ( I n t he past decade, near l y ever y

j ur i sdi ct i on wi t h general compet i t i on l egi sl at i on has ei t her enact ed

speci f i c ant i - car t el statut es, si gni f i cant l y enhanced t he ci vi l penal t i es

f or car t el vi ol at i ons or added cr i mi nal sanct i ons f or cor por at e execut i ves

who commi t car t el vi ol at i ons. I ndeed, i n r ecent year s r egul at or s have been

enf or ci ng ant i - car t el l egi sl at i on wi t h i ncr eased vi gour , and have gr own


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appr oxi matel y 120 syst ems of compet i t i on l aw assi gn t he pr osecut i on of

car t el s a hi gh pr i or i t y. The consequences of detect i on can be severe. The

annual gl obal sum of ci vi l f i nes and t r ebl e damages f or car t el

par t i ci pant s t oday rout i nel y exceed hundr eds of mi l l i onsi ndeed,

bi l l i onsof dol l ar s, and i ndi vi dual s i n a gr owi ng number of count r i es

f ace pot ent cr i mi nal sanct i ons. 2

Cent r al t o t he oper at i on of l aws t hat aggr essi vel y puni sh col l usi on

ar e t he def i ni t i on and pr oof of concer t ed act i on. Powerf ul consequences

f l ow f r om whether pr i ce i ncr eases observed i n the market pl ace emer ge f r om

i ndi vi dual or col l ect i ve i ni t i at i ve. A f i r m act i ng al one or di nar i l y can

set i t s pr i ces as hi gh as i t l i kes. 3 I f t he same f i r m cooper at es wi t h i t s

mor e sophi st i cat ed and savvi er i n t hei r i nvest i gat i ve and anal yt i cal

t echni ques. ) .

2. See Wi l l i amE. Kovaci c, Cr i mi nal Enf or cement Nor ms i n

Compet i t i on Pol i cy, i n Cr i mi nal i zat i on of Compet i t i on Law Of f enses ( Ar i el

Ezrachi & Caron Beat on- Wel l s eds. , Oxf ord, For t hcomi ng) ( di scussi ng modern

t r ends i n sancti ons f or car t el of f enses) .

3. I f i mpl ement ed by a si ngl e f i r m, hi gh pr i ces have been sai d t o

be a si gn of a heal t hy compet i t i ve pr ocess. J ust i ce Ant oni n Scal i a s

opi ni on f or t he Cour t i n Ver i zon Communi cat i ons I nc. v. Law Of f i ces of

Cur t i s V. Tri nko, LLP, 540 U. S. 398, 407 ( 2004) st at es: The mer e

possessi on of monopol y power , and t he concomi t ant char gi ng of monopol y

pr i ces, i s not onl y l awf ul ; i t i s an i mpor t ant el ement of t he f r ee- mar ket

syst em.


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compet i t or s t o achi eve t hi s r esul t , i t s execut i ves may go t o pr i son.

Despi t e the cruci al r ol e of t he concept of concer t ed act i on t o thi s

f r amewor k, f ew el ement s of moder n ant i t r ust anal ysi s i n the Uni t ed St at es

and i n ot her j ur i sdi ct i ons are mor e per pl exi ng t han t he desi gn of

evi dent i ary st andards t o det er mi ne whet her par al l el conduct st ems f r om

col l ecti ve or f r om uni l at er al deci si on maki ng. 4

I n t he case of ol i gopol i es, aut hor i t i es have str uggl ed t o devel op

sui t abl e evi dent i ar y standar ds f or i dent i f yi ng agr eement s. Fi r ms i n an

ol i gopol i st i c i ndust r y recogni ze t hei r mut ual i nt er dependence, under st and

t hat t hey are pl ayers i n a r epeat ed game, and act accor di ngl y.5

I n

ant i t r ust deci si ons about al l egat i ons of col l usi ve pr i ci ng, t hi s pat t er n

of i nt eract i ondescr i bed by cour t s and comment ators as consci ous

4. As Pr of essor Wi l l i am Page has obser ved, t he l ack of sat i sf yi ng

st andar ds i s a remar kabl e ambi gui t y at t he hear t of ant i t r ust l aw.

Wi l l i amH. Page, Communi cat i on and Concer t ed Act i on, 38 Loy. U. Chi . L. J .

405, 417 ( 2007) . The rol e of t he agr eement i ssue i n ant i t r ust pol i cy

out si de t he Uni t ed St at es i s anal yzed i n OECD, Prosecut i ng Cart el s wi t hout

Di r ect Evi dence (2006) , avai l abl e at

ht t p: / / www. oecd. l r g/ dat aoecd/ 19/ 49/ 37391162. pdf ; Al ber t i na Al bor s- Ll or ens,

Hor i zont al Agr eement s and Concert ed Pract i ces i n EC Compet i t i on Law:

Unl awf ul and Legi t i mate Cont act s Between Compet i t or s, 51 Ant i t r ust Bul l .

837 ( Wi nt er 2006) .

5. See J onathan B. Baker, Two Sherman Act Sect i on 1 Di l emmas:

Par al l el Pr i ci ng, t he Ol i gopol y Pr obl em, and Cont emporaneous Economi c

Theor y, 38 Ant i t r ust Bul l . 143 ( 1993) .


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par al l el i smi s vi ewed as i nsuf f i ci ent t o est abl i sh t hat f i r ms ar e

engaged i n concert ed act i on. Thi s i s because such pr i ci ng can emerge f r om

f i r ms act i ng non- col l usi vel y wher e t hey under st and t hei r r ol e as pl ayer s

i n t he repeat ed ol i gopol y game.6

I n ant i t r ust cases, cour t s per mi t t he

f act of agr eement t o be est abl i shed by ci r cumst ant i al evi dence, 7 but t hey

have requi r ed t hat economi c ci r cumst ant i al evi dence go beyond paral l el

movement i n pr i ce to reach a f i ndi ng t hat t he conduct of f i r ms has cr ossed

t he l i ne i nt o t he r eal m of pot ent i al l y vi ol at i ng Sect i on 1 of t he Sher man

Act . 8 The addi t i onal economi c ci r cumst ant i al evi dence ar e r ef er r ed t o

col l ecti vel y as pl us f actor s. 9

6. See Andr ew I . Gavi l et al . , Ant i t r ust Law i n Per spect i ve:

Cases, Concept s and Pr obl ems i n Compet i t i on Pol i cy 26768 ( 2d ed. , Thomson

West , 2008) .

7. I n I n r e Text Messagi ng Ant i t r ust Li t i gat i on, 2010 U. S. App.

LEXI S 26299, *16 ( 7t h Ci r . Dec. 29, 2010) , J udge Ri chard Posner observed:

Di r ect evi dence of conspi r acy i s not a si ne qua non . . . .

Ci r cumst ant i al evi dence can est abl i sh an ant i t r ust conspi r acy.

8. 15 U. S. C. Sec. 1 ( 1994) . See Br ooke Gr oup Lt d. v. Br own &

Wi l l i amson Tobacco Corp. , 509 U. S. 209, 227 ( 1993) ( consci ous

paral l el i sm i s not i n i t sel f i l l egal ); Theat re Ent ers. , I nc. v.

Par amount Fi l m Di st r i b. Cor p. , 346 U. S. 537, 541 ( 1954) ( Ci r cumst ant i al

evi dence of consci ousl y paral l el behavi or may have made heavy i nr oads i nt o

t he tr adi t i onal j udi ci al at t i t ude towar d conspi r acy; but consci ous

par al l el i sm has not r ead conspi r acy out of t he Sher man Act ent i r el y. ) ;

see al so Phi l l i p Ar eeda & Herbert Hovenkamp, Ant i t r ust Law Par a. 1433a, at


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The i nter pret at i on of pl us f act or s i n t he deci si on t o prosecute and

i n t he r esol ut i on of l i t i gat ed cases has pr oven t o be a vexi ng t ask f or

enf orcement of f i ci al s and j udges. Many comment ators have cat al ogued pl us

f act or s and di scussed the cri t i cal mass of ci r cumst ances t hat ought t o

j ust i f y an i nf er ence t hat obser ved behavi or i s t he product of concer t ed

act i on. 10 Numerous j udi ci al deci si ons have wr est l ed wi t h t he eval uat i on of

pl us f act or s i n cases deal i ng wi t h quest i ons of agr eement . 11 For al l thi s

ef f or t , t her e i s per si st ent di ssat i sf acti on wi t h t he anal yt i cal met hods

commonl y used i n ant i t r ust enf or cement and l i t i gat i on t o di st i ngui sh pl us

f act or s i n t er ms of t hei r pr obat i ve val ue.

The f r ai l t i es of t he exi st i ng anal yt i cal t est s f or assessi ng pl us

f act or s have at l east t wo i mpl i cat i ons. Fi r st , t hey i mpede t he

economi cal l y sensi bl e r esol ut i on of many hi gh- st akes ant i t r ust cases wher e

236 (3d ed. , Aspen 2003) ( The cour t s ar e near l y unani mous i n sayi ng that

mer e i nt er dependent par al l el i sm does not est abl i sh t he cont r act ,

combi nat i on or conspi r acy r equi r ed f or appl i cat i on of Sect i on 1 of t he

U. S. Sherman Act ) .

9. ABA Sect i on of Ant i t r ust Law, Ant i t r ust Law Devel opment s 1116

( 6t h ed. 2007) .

10. See Ri chard A Posner , Ant i t r ust Law 5593 ( 2d ed. , Chi cago,

2001) ( col l ect i ng and anal yzi ng pl us f actor s) .

11. See Ant i t r ust Law Devel opment s, supr a note 4, at 1116

( col l ecti ng aut hor i t i es) ; Amer i can Bar Associ at i on, Secti on of Ant i t r ust

Law, Proof of Conspi r acy under Federal Ant i t r ust Laws ( 2010)


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deci si ons made on t he i ssue of conspi r acy ar e deci si ve. Second, t he

i nadequaci es of t he exi st i ng anal yt i cal f r amework may wel l be magni f i ed i n

t he f ut ur e. The expanded use of powerf ul means of detect i oni ncl udi ng

amnest y pr ogr ams t hat gi ve cer t ai n i nf or mant s f ul l di spensat i on f r om

cri mi nal penal t i esand ever st r onger r emedi es wi l l encour age f i r ms t o

achi eve consensus t hr ough more subt l e t echni ques t hat f al l shor t of an

expr ess exchange of assur ances i n a cover t meet i ng. I f woul d- be car t el

member s t ake t hi s path, i n a number of cases government prosecut or s and

pr i vat e pl ai nt i f f s may f i nd t hemsel ves r el yi ng mor e extensi vel y on

ci r cumst ant i al pr oof t o est abl i sh t he f act of coor di nat i on. Such a

devel opment woul d pl ace st i l l heavi er wei ght upon a pr oper underst andi ng

of pl us f act or s i n t he t r eat ment of conspi r acy quest i ons.

Thi s paper of f er s a way t o r ai se underst andi ng of pl us f act or s and

t o i mprove t he manner i n whi ch enf orcement agenci es and cour t s i nt erpr et

t hem i n i ndi vi dual cases. We advocat e t he use of basi c pr obabi l i t y t heor y

t o r ank i ndi vi dual pl us f act or s, and gr oups of pl us f act or s, i n t er ms of

t hei r pr obat i ve val ue. 12 We r ef er t o pl us f act or s, or gr oups of pl us

f actors, t hat l ead t o a st r ong i nf er ence of expl i ci t col l usi on as super

pl us f actor s. 13 The t axonomy as wel l as t he f r amework we pr ovi de f or

12. For an i nt r oduct ory di scussi on of Bayes Theor em see, Bernar d

W. Li ngr en, St at i st i cal Theor y, 3r d ed, New Yor k: MacMi l l an Publ i shi ng Co,

1976, p. 4142.

13. We use t he t erm expl i ci t col l usi on t o mean an agr eement among

compet i t or s t hat r el i es on expl i ci t communi cat i on and/ or t r ansf er s t o

suppr ess r i val r y.


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assessi ng t he pr obabi l i t y of expl i ci t col l usi on gi ven a pl us f actor, or

gi ven a gr oup of pl us f act or s, pr ovi des an i mpr oved f oundat i on f r omwhi ch

enf orcement aut hor i t i es and cour t s can anal yze conduct .

I n t hi s Ar t i cl e, we pr ovi de a f oundat i on f or cour t s and agenci es t o

adj ust t he f r amework t hey now use t o determi ne the exi st ence of an

agr eement when t he pl ai nt i f f l acks di r ect t est i mony or document s pr ovi ng

concer t ed act i on and i nst ead r el i es on ci r cumst ant i al evi dence t hat t he

def endant s conspi r ed t o f i x pr i ces or r est r i ct out put . 14 Such an approach

f ocuses on modern economi c underst andi ngs of what cart el part i ci pant s do

t o coor di nat e t hei r behavi or .

A key i ssue t hat i s at t he hear t of assessi ng whet her f i r m conduct

i s r oot ed i n an agr eement t o suppr ess i nt er f i r m r i val r y i s t he r eact i on of

buyer s t o t he act i ons of sel l er s i n a mar ket pl ace. 15 Each

pr oduct / i ndust r y/ mar ket t hat i s t he subj ect of scruti ny f or a pot ent i al

14. Di r ect evi dence woul d i ncl ude a r ecord of meet i ngs or

communi cat i on t o di scuss and agr ee upon t he component s of car t el act i vi t y,

whi ch may i ncl ude any of t he f ol l owi ng: pr i ci ng, al l ocat i ons of t he

col l usi ve gai n, moni t or i ng, or enf orcement of t he agr eement s.

15. Busi ness l ogi si t i cs and suppl y chai n management ar e t aught i n

many busi ness school s t hr oughout t he wor l d, i ncl udi ng cour ses i n

compet i t i ve procurement . For exampl e, a Mast er s i n Suppl y Chai n Management

i s of f er ed t hr ough t he Smeal School of Busi ness at Penn St ate Uni ver si t y

wher e SCM820 i s a cour se i n St r ategi c Pr ocur ement

ht t p: / / www. smeal . psu. edu/ mps/ cur r i cul um/ f year . ht ml


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vi ol at i on of Sect i on 1 of t he Sherman Act 16 i nvol ves a di st i nct set of

par t i ci pant s, act i ons, and payof f s. The r ol e of buyer s, and t hei r

pot ent i al r esi st ance t o acti ons by sel l er s t hat i ncrease sel l er payof f s at

t he expense of buyer s, appear s t o be si gni f i cant i n t he i mpl i ci t t hi nki ng

of many pol i cy deci si on- maker s and cour t s when consi der i ng whet her an

obser ved conduct or out come i n the marketpl ace i s t he consequence of

expl i c i t col l us i on. 17 Yet t hi s under pi nni ng f or assessi ng pl us f act or s has

16 15 U. S. C. 1 ( 2006) ( Ever y cont r act , combi nat i on i n t he f or m of

t r ust or ot her wi se, or conspi r acy, i n r est r ai nt of t r ade or commer ce among

t he sever al St at es, or wi t h f or ei gn nat i ons, i s decl ar ed t o be i l l egal . ) .

17. Ol i gopol i st s behavi ng i n a l egal and consci ousl y par al l el

f ashi on coul d achi eve hi gh and r i si ng pr i ces, even as costs r emai n st abl e,

by engagi ng i n pr i ce l eader shi p. The odds t hat t hey coul d achi eve a pr i ce

and pr of i t i ncr ease and mai nt ai n i ncr edi bl y hi gh i ncumbency rat esthat

i s, mai nt ai n t he ver y same di st r i but i on of muni ci pal cont r act s year af t er

yearare mi ni scul e, however , unl ess t he ol i gopol i st s wer e communi cat i ng

wi t h one anot her . Ci t y of Tuscal oosa v. Har cr os Chem. , I nc, 158 F. 3d 548,

565; ( 11t h Ci r . 1998) . The cl ear pr esumpt i on of t he cour t i n t hi s case was

t hat buyer s, t he muni ci pal i t i es i n Al abama, woul d conduct compet i t i ve

pr ocur ement s and push back agai nst pr i ce i ncr eases by t he sel l er s t o t he

ef f ect t hat i ncumbency rates woul d be vol at i l e. I t was not t he pr esumpt i on

of t he cour t t hat t he buyer s wer e passi ve. Rather , t he cour t pr esumed t hat

t he buyer s were pl ayers i n t he game, and t hus much di f f erent f r om t he

cust omer s of t he gas st at i ons i n Car l t on, Ger t ner , and Rosenf i el d (1997)


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not been expl i ci t l y recogni zed. We bel i eve t hat ever y pr oducer sel l i ng a

pr oduct i n an i ndust r y condi t i ons t hei r at t empt s t o r ai se pr i ces on t he

extent and nat ur e of buyer r eact i ons, whet her t he act i ons of sel l er s are

par t of coor di nat ed car t el conduct or not .18

Communi cat i ons Among Compet i t or s: Game Theory and Ant i t r ust , 5 Geo. Mason

L. Rev. 423 ( 1997) .

18. As descr i bed i n Mar shal l , Mar x, and Rai f f ( 2008) , t he not i on

of pr i ce accept ance and r esi st ance has recei ved at t ent i on i n Eur opean

Commi ssi on ( EC) deci si ons i n car t el cases. I n t he EC deci si on i n Vi t ami ns,

r esi st ance to pr i ce i ncr eases i s descr i bed as f ol l ows: When BASF s

cust omer s r esi st ed t he i ncr ease, Roche support ed t he r i se by al so

announci ng an i ncr ease t o DEM 46/ kg . . . . Accor di ng t o Dai i chi , t he

concer t ed i ncr ease was unsuccessf ul because of cust omer r esi st ance and the

huge di f f er ent i al bet ween D- cal pan and t he equi val ent i n DL- cal pan. ( EC

deci si on i n Vi t ami ns 2001, Case COMP/ E- 1/ 37. 512at 325) . I n t he EC

deci si on i n Cart onboar d, cart onboar d pr oducers somet i mes f aced r esi st ance

f r om conver t er s t o whom t hey sol d t hei r pr oduct s: Ther e i s on t he ot her

hand an upper l i mi t i n pr act i cal t erms on t he amount of any pr i ce i ncr ease

t hat coul d be i mposed uni l at er al l y by t he car t onboar d pr oducer s on the

conver t ers. The conver t ers have on some occasi ons r esi st ed a pr oposed

pr i ce i ncr ease f or car t onboar d on t he gr ound t hat t hei r own cust omers

woul d i n t hei r t ur n r ef use t o accept a pr i ce i ncr ease f or

packagi ng. . . . ( EC deci si on i n Car t onboar d 1994, CaseIV/C/33.833, a t

19) . The not i on of accept ance of pr i ce i ncr eases by buyer s appears i n t he

EC deci si on i n Ami no Aci ds: The f i ve compani es . . . exchanged


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The paper proceeds as f ol l ows. Par t I descr i bes t he exi st i ng l egal

st andards t hat cour t s and ant i t r ust enf orcement agenci es use t o def i ne

concer t ed act i on and r evi ew t he exi st i ng l i t er at ur e r egar di ng pl us

f act or s. Par t I I di scusses sel l er agr eement s as wel l as buyer r esponses t o

acti ons of ol i gopol i st i c sel l er s and t he i mpl i cat i ons of each f or pl us

f act or s. Par t I I I pr esent s a t axonomy f or pl us f actor s and i dent i f y

sever al super pl us f act or s. Par t I V of f er s a met hodol ogy, gr ounded i n

basi c pr obabi l i t y theor y, f or r anki ng pl us f actors i n t er ms of t hei r

pr obat i ve val ue.

I. Definition of Concerted Action in Antitrust Law

Moder n compet i t i on l aw t r eats t he det ect i on, pr osecut i on, and

puni shment of concer t ed hor i zont al pr i ce and out put r est r ai nt s t o be t he

chi ef pr i or i t y of ant i t r ust pol i cy maki ng. 19 Comment ators gener al l y r egard

t he enf or cement of st r i ngent r ul es agai nst such agr eement s as ant i t r ust s

i nf or mat i on on t he accept ance of t he pr i ce i ncr eases i n t he di f f er ent

r egi ons. ( EC deci si on i n Ami no Aci ds 2000, Case COMP/ 36. 545/ F3 at 81) .

19. See Scot t Hammond & Ann O Br i en, The Evol ut i on of Car t el

Enf orcement Over t he Last Two Decades: The U. S. Per spect i ve, i n Changes i n

Compet i t i on Pol i cy Over t he Last Two Decades 11 (Mal gorzat a Kr asnodebska-

Tomki el ed. , Pol i sh Of f i ce of Compet i t i on and Consumer Pr ot ect i on, 2010)

( descr i bi ng U. S. and i nt er nat i onal exper i ence) ; Wi l l i am E. Kovaci c, An

I nt egr at ed Compet i t i on Pol i cy to Det er and Def eat Car t el s, 51 Ant i t r ust

Bul l . 813, 81315 ( Wi nt er 2006) ( di scussi ng modern enf orcement t r ends) .


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most i mport ant posi t i ve cont r i but i on t o economi c perf ormance. 20 Wi t h

i ncreasi ng i nt ensi t y, ant i t r ust aut hor i t i es ar ound t he wor l d pr osecut e

bi d- r i ggi ng, pr i ce- f i xi ng, and mar ket al l ocat i on schemes. 21 Si nce t he mi d-

1990s, a gr owi ng number of other j ur i sdi ct i ons have amended t hei r l aws t o

per mi t t he pr osecut i on of car t el of f enses as cr i mi nal of f enses. 22 Pr i vat e

sui t s i n U. S. cour t s t o recover damages on behal f of car t el vi ct i ms have

20. See, e. g. , Rober t H. Bor k, The Ant i t r ust Par adox 263 ( 1978)

( pr ai si ng t he per se ban agai nst hor i zont al pr i ce- f i xi ng and mar ket

di vi si ons and concl udi ng t hat [ i ] t s cont r i but i ons t o consumer wel f ar e

over t he decades have been enormous) .

21. On t he i nt ensi f i cat i on of ef f or t s by compet i t i on aut hor i t i es

out si de t he Uni t ed St at es t o pr osecut e car t el s, see: I nt er nat i onal

Compet i t i on Pol i cy Advi sory Commi t t ee t o t he Assi st ant At t orney General

f or Ant i t r ust , Fi nal Report 164 ( 2000) , whi ch not es a hei ght ened degr ee

of i nt er nat i onal consensus among enf orcer s t hat car t el s shoul d be detect ed

and pr osecut ed) ; Car t el Enf or cement Goes Gl obal : J ai l , Fi nes, &

Vi deot ape, Ant i t r ust , vol . 14, no. 3, at 645 ( Summer 2000) , whi ch i s a

col l ect i on of ar t i cl es di scussi ng expansi on of ef f or t s by compet i t i on

enf or cement bodi es t o at t ack car t el s; Har r y Fi r st , The Vi t ami ns Case:

Car t el Prosecut i ons and the Comi ng of I nt ernat i onal Compet i t i on Law, 68

Ant i t r ust L. J . 711 ( 2001) , whi ch suggest s t hat pr osecut i on of vi t ami ns

car t el i l l ust r at es br oader i nt er nat i onal accept ance of an ant i - car t el

norm.

22. Kovaci c, supr a note 8; Hammond & O Br i en, supr a not e 17.


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gener at ed subst ant i al r ecover i es, 23 and a number of j ur i sdi ct i ons out si de

t he Uni t ed St at es ar e cont empl at i ng an expansi on of pr i vat e r i ght s t o

f aci l i t at e t he compensat i on of vi ct i ms of car t el of f enses.

The l i t i gat i on of agreement i ssues has i nspi r ed j udi ci al compl ai nt s

about concept ual uncer t ai nt y and doct r i nal conf usi on concer ni ng t he

boundar y t hat separ at es l awf ul uni l at er al conduct f r om i l l egal col l ecti ve

behavi or. 24 Despi t e extensi ve j udi ci al exper i ence wi t h t he i ssue and

despi t e maj or cont r i but i ons by economi st s and l awyer s concer ni ng possi bl e

adj ust ment s i n the exi st i ng anal yt i cal f r amewor k, 25 t he def i ni t i on and

23. Har r y Fi r st , The Vi t ami ns Case: Car t el Pr osecut i ons and t he

Comi ng of I nt er nat i onal Compet i t i on Law, 68 Ant i t r ust L. J . 711 ( 2001)

( descr i bi ng r emedi es obt ai ned i n pr i vat e cases chal l engi ng t he vi t ami ns

car t el ) .

24. See, e. g. , Hol i day Whol esal e Gr ocer y Co. v. Phi l i p Mor r i s,

I nc. , 231 F. Supp. 2d 1253, 1270 ( N. D. Ga. 2002) , af f d sub nom.

Wi l l i amson Oi l Co. v. Phi l i p Mor r i s USA, 346 F. 3d 1287 ( 11t h Ci r . 2003)

( l aw gover ni ng exi st ence of agr eement pr ovi des l i t t l e gui dance t o

determi ne when i nf er ence of concer t ed act i on i s appr opr i at e; l egal

st andar d set s l i ne t hat i s ephemer al ) .

25. Moder n cont r i but i ons t hat cont ai n extensi ve di scussi ons of t he

economi c and l egal l i t erat ur e i ncl ude Phi l l i p Ar eeda & Her ber t Hovenkamp,

Ant i t r ust Law 68101 ( Aspen 2003) ; Ri char d Whi sh, Ol i gopol y Theory and

Economi c Evi dence, i n Eur opean Compet i t i on Law Annual 105 ( Oxf ord 2006) ;

Mark Ar mst r ong & Stef f en Huck, Behavi oral Economi cs as Appl i ed t o Fi r ms: A

Pr i mer , 6 Compet i t i on Pol y I nt l 3 ( 2010) ; Geor ge A. Hay, Hor i zont al


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pr oof of concer t ed act i on r emai n l i t i gat ed i ssues i n hor i zont al r est r ai nt s

cases under Sect i on 1 of t he Sherman Act . 26 Cour t s cont i nue to st r uggl e to

devel op a sat i sf act or y cal cul us f or det er mi ni ng whet her , wi t hout di r ect

pr oof of agr eement , t he pl ai nt i f f has shown t hat t he def endant s conspi r ed

t o r estr ai n t r ade.

A.Doctrine Governing the Use of Circumstantial Evidence to Prove an Agreement

Ant i t r ust l i t i gant s devot e much ef f or t t o det er mi ni ng whet her

conduct st ems f r oman agr eement and t heref ore i mpl i cates Sect i on 1 s ban

agai nst col l ect i ve t r ade rest r ai nt s. A l aw whose reach hi nges on t he

exi st ence of an agr eement r equi r es cour t s t o deci de when chal l enged

conduct const i t utes an agreement and how such an agreement may be pr oven

i n a t r i al .

Agr eement s: Concept and Proof , 51 Ant i t r ust Bul l . 877 ( Wi nt er 2006) ;

Chr i st opher R. Lesl i e, Tr ust , Di st r ust , and Ant i t r ust , 82 Tex. L. Rev. 515

( 2004) ; Wi l l i amH. Page, Communi cat i on and Concer t ed Act i on, 38 Loy. U.

Chi . L. J . 405 ( 2007) ; Wi l l i am H. Page, Twombl y and Communi cat i on: The

Emergi ng Def i ni t i on of Concert ed Act i on Under t he New Pl eadi ng St andards,

5 J . Compet i t i on L. & Econ. 439 ( 2009) ; Wi l l i am H. Page, A Neo- Chi cago

Appr oach t o Concer t ed Act i on ( 2011) , avai l abl e at

ht t p: / / ssr n. com/ abst r act =1782896; Gr egory J . Werden, Economi c Evi dence on

t he Exi st ence of Col l usi on: Reconci l i ng Ant i t r ust Law wi t h Ol i gopol y

Theor y, 71 Ant i t r ust L. J . 719 ( 2004) .

26. 15 U. S. C. Sect i on 1 ( 1994) .
http://ssrn.com/abstract=1782896http://ssrn.com/abstract=1782896


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Moder n j udi ci al ef f or t s i n t he Uni t ed St at es t o def i ne concer t ed

act i on or i gi nat e i n f our Supr eme Cour t deci si ons, begi nni ng wi t h

I nt er state Ci r cui t , I nc. v. Uni t ed St at es 27 i n 1939 and endi ng wi t h

Theat r e Ent er pr i ses v. Paramount Fi l m Di st r i but i ng Cor p.28

i n 1954. I n

sust ai ni ng t he convi ct i on of movi e exhi bi t or s f or f i xi ng t he pr i ces t o be

char ged f or f i r st - r un f i l ms, t he I nt er st at e Ci r cui t Cour t def i ned t he

concer t ed act i on requi r ement i n t hese t erms:

Whi l e the Di st r i ct Cour t s f i ndi ng of an agr eement of t he

di st r i but ors among t hemsel ves i s support ed by t he evi dence, we

t hi nk t hat i n the ci r cumst ances of t hi s case such agr eement

f or t he i mposi t i on of t he r est r i ct i ons upon subsequent - r un

exhi bi t or s was not a pr er equi si t e t o an unl awf ul conspi r acy.

I t was enough that , knowi ng that concer t ed act i on was

cont empl at ed or i nvi t ed, t he di st r i but or s gave t hei r adher ence

t o t he scheme and part i ci pated i n i t . 29

The Cour t expl ai ned t hat [ a] cceptance by compet i t or s, wi t hout

pr evi ous agr eement , of an i nvi t at i on t o par t i ci pat e i n a pl an, t he

necessar y consequence of whi ch, i f car r i ed out , i s r est r ai nt of i nt er st at e

27. 306 U. S. 208 ( 1939) .

28. 346 U. S. 537 ( 1954) .

29. 306 U. S. at 226.


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commer ce, i s suf f i ci ent t o est abl i sh an unl awf ul conspi r acy under t he

Sher man Act . 30

Seven year s l at er , i n Amer i can Tobacco Co. v. Uni t ed St at es, 31 t he

Cour t addr essed t he agr eement i ssue i n revi ewi ng conspi r acy to monopol i ze

charges under Sect i on 2 of t he Sherman Act . The Cour t st ated t hat [ n] o

f or mal agr eement i s necessary t o const i t ut e an unl awf ul conspi r acy. 32 The

Cour t expl ai ned t hat a f i ndi ng of conspi r acy i s j ust i f i ed [ w] her e t he

ci r cumst ances ar e such as t o war r ant a j ur y i n f i ndi ng t hat t he

conspi r ators had a uni t y of purpose or a common desi gn and underst andi ng,

or a meet i ng of mi nds i n an unl awf ul arr angement . 33

I n 1948 i n Uni t ed St at es v. Par amount Pi ct ur es, I nc. , 34 t he Cour t

r ei t er at ed I nt er st at e Ci r cui t s agr eement f or mul a. I n consi der i ng Sect i on

1 and Sect i on 2 conspi r acy cl ai ms, t he Cour t sai d [ i ] t i s not necessar y

t o f i nd an expr ess agr eement i n order t o f i nd a conspi r acy. I t i s enough

t hat a concer t of act i on i s cont empl ated and t hat t he def endant s conf ormed

t o t he arr angement . 35

30. I d. at 227.

31. 328 U. S. 781 ( 1946) .

32. I d. at 809.

33. I d. at 810.

34. 334 U. S. 131 ( 1948) .

35. I d. at 142.


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The f or mat i ve per i od of agreement deci si ons ended i n 1954 i n Theat r e

Ent er pr i ses. Ther e t he Cour t sai d [ c] i r cumst ant i al evi dence of

consci ousl y paral l el behavi or may have made heavy i nr oads i nt o t he

t r adi t i onal j udi ci al at t i t ude t owar d conspi r acy; but consci ous

par al l el i sm has not r ead conspi r acy out of t he Sher man Act ent i r el y. 36

As a gr oup, t he f our cases est abl i shed t hr ee concept ual poi nt s of

r ef er ence. Fi r st , cour t s woul d char acteri ze as concer t ed acti on i nt er f i r m

coor di nat i on r eal i zed by means other t han a di r ect exchange of assur ances.

Second, cour t s woul d al l ow agr eement s t o be i nf er r ed by ci r cumst ant i al

pr oof suggest i ng t hat t he chal l enged conduct more l i kel y t han not r esul t ed

f r om concer t ed act i on. Thi r d, cour t s woul d not f i nd an agr eement where t he

pl ai nt i f f showed onl y that t he def endant s r ecogni zed t hei r i nt er dependence

and si mpl y mi mi cked t hei r r i val s pr i ci ng moves.

Subsequent Supr eme Cour t deci si ons have t r i ed t o capt ur e t hese

pr i nci pl es i n a new f or mul a. I n 1984, whi l e addr essi ng mi ni mum r esal e

pr i ce mai nt enance (RPM) conspi r acy al l egat i ons i n Monsant o Co. v. Spr ay-

Ri t e Ser vi ce Cor p, 37 t he Cour t observed:

The cor r ect st andar d i s t hat t here must be evi dence t hat t ends

t o excl ude t he possi bi l i t y of i ndependent act i on by t he

[ par t i es] . That i s, t her e must be di r ect or ci r cumst ant i al

evi dence t hat r easonabl y tends t o pr ove t hat [ t he par t i es] had

36. 346 U. S. at 541.

37. 465 U. S. 752 ( 1984) .


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a consci ous commi t ment t o a common scheme desi gned to achi eve

an unl awf ul obj ect i ve. 38

Nei t her Monsant o nor ear l i er cases provi des a usef ul basi s f or

i dent i f yi ng concer t ed act i on. 39 These t est s show t hat t he concept of

agr eement encompasses more t han a di r ect exchange of assurances, yet t hey

of f er no usef ul operat i onal means f or determi ni ng when t he def endant s have

engaged i n somethi ng more than consci ousl y paral l el conduct .

For exampl e, under t he Monsanto f ormul a, one coul d deem

i nt erdependent consci ous par al l el i sm t o be a consci ous commi t ment t o a

common scheme. Each f i r m i n an ol i gopol y knows t hat t he ef f ect of i t s

act s depends on t he r eact i ons of i t s r i val s. Al l pr oducer s per cei ve t hat

pr i ce i ncreases wi l l be accept ed onl y i f al l f i r ms rai se pr i ces. Real i zi ng

t hei r i nt er dependence, each f i r m deci des, wi t hout consul t i ng i t s r i val s,

t o mat ch compet i t or pr i ce i ncr eases. Repeat ed ef f or t s t o mat ch r i val s

pr i ce moves ar guabl y i ndi cate the f i r m s consci ous commi t ment t o achi eve

hi gher pr i ces. The sol e i nt er f i r m communi cat i on consi st s of each f i r m s

obser vat i on of i t s r i val s pr i ce changes. By cal i br at i ng i t s own moves t o

conf or m wi t h t he deci si ons of i t s r i val s, each f i r m can be sai d t o have

consci ousl y commi t t ed i t sel f t o part i ci pate i n a common scheme. As we

di scuss bel ow, i t i s possi bl e to i mpr ove upon t hi s f or mul a by f ocusi ng

38. I d. at 768.

39 Page, Communi cat i on and Concer t ed Act i on, supra not e XX, at 410-

23.


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more pr eci sel y on f orms of behavi or t hat f i r ms use t o communi cate thei r

i nt ent i ons and execut e t he t asks needed t o achi eve coor di nat i on on

pr i ci ng, out put , and ot her di mensi ons of ef f ect i ve col l usi on.

B.Plaintiffs Burden of Proof

Pl ai nt i f f s i n Sect i on 1 cases bear t he bur den of est abl i shi ng t he

f act of an agr eement . The consci ous commi t ment t o a common scheme can be

shown wi t h di r ect or ci r cumst ant i al evi dence. 40 As el abor at ed i n l at er

deci si ons, Monsant o s ar t i cul at i on of t he bur den of pr oof has consi der abl e

i mport ance where the def endant f i l es a mot i on t o di smi ss or a mot i on f or

summary j udgment on conspi r acy i ssues.

The f ear t hat mi st aken i nf er ences f r om ambi guous evi dence mi ght

deter pr ocompet i t i ve or beni gn conduct l ed t he Supr eme Cour t i n Matsushi t a

El ectr i cal I ndust r i al Co. v. Zeni t h Radi o Cor p. 41 t o ext end and appl y

40. See, e. g. , ES Dev. , I nc. v. RWM Ent er s. , 939 F. 2d 547, 554

( 8t h Ci r . 1991) ( ant i t r ust pl ai nt i f f may pr ove exi st ence of combi nat i on or

conspi r acy by pr ovi di ng ei t her di r ect or ci r cumst ant i al evi dence

suf f i ci ent t o `war r ant a . . . f i ndi ng t hat t he conspi r at or s had a uni t y of

pur pose or common desi gn and underst andi ng, or a meet i ng of t he mi nds i n

an unl awf ul ar r angement . ) ( quot i ng Ameri can Tobacco Co. v. Uni t ed

St at es, 328 U. S. 781, 810 ( 1946) ) .

41. 475 U. S. 574 ( 1986) . Mat sushi t a s si gni f i cance i s anal yzed i n

Conf erence on Mat sushi t a at 20: Proof of Conspi r acy, Summary J udgment , and

t he Rol e of t he Economi st i n Pr i ce Fi xi ng Li t i gat i on, 38 Loy. U. Chi . L. J .

399 ( 2007) .


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As i n Monsant o, t he Cour t i n Matsushi t a sought t o reduce er r or cost s

associ at ed wi t h excessi vel y br oad appl i cat i on of l i abi l i t y st andar ds. 44 I n

Mat sushi t a, J apanese suppl i er s of el ect r oni cs equi pment al l egedl y

conspi r ed t o pr i ce bel ow cost i n t he Uni t ed St ates, dr i ve Ameri can f i r ms

f r om t he mar ket , and l at er r ai se pr i ces t o monopol y l evel s. I n such a

case, t he Cour t emphasi zed t hat mi st aken i nf erences of conspi r acy coul d

i nj ur e consumer s by det er r i ng f i r ms f r om of f er i ng l ow pr i ces. 45

Mat sushi t a had a deep i mpact on t he l i t i gat i on of cases i n whi ch t he

pl ai nt i f f r el i ed on ci r cumst ant i al evi dence t o pr ove t he f act of concer t ed

act i on. Among ot her ef f ect s, Mat sushi t a expanded t he abi l i t y of def endant s

t o obt ai n summar y j udgment by i nvi t i ng l ower cour t s t o scrut i ni ze t he

economi c pl ausi bi l i t y of t he pl ai nt i f f s evi dence of conspi r acy. As i t had

done i n Monsant o, t he Cour t i n Matsushi t a emphasi zed t he cost s t hat coul d

f l ow f r om a f ai l ur e t o appl y the agr eement st andar d wi t h suf f i ci ent r i gor .

Monsant o had ment i oned t he avai l abi l i t y of t r ebl e damages i n pr i vat e cases

and noted t hat r esal e pr i ce mai nt enance ar r angement sl i ke al l other

44. Monsant o emphasi zed t he dangers of di scour agi ng l egi t i mate

di scussi ons bet ween pr oducer s and t hei r deal er s. 465 U. S. at 763.

45. 475 U. S. at 587. Mat sushi t a s pol i cy r at i onal e shoul d have

l ess si gni f i cance f or hor i zont al conspi r acy cases t hat do not i nvol ve

cl ai ms of col l ect i ve bel ow- cost pr i ci ng. Hor i zont al agr eement s t o rai se

pr i ces or cut out put pose gr eater compet i t i ve danger s t han the concer t ed

l ow pr i ci ng chal l enged i n Mat sushi t a and t heref or e mi ght be subj ect t o

mor e l i ber al st andar ds of pr oof .


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conduct f orbi dden by t he Sher man Actcoul d be pr osecut ed as a cr i me. 46 As

noted above, Matsushi t a warned t hat caref ul exami nat i on of t he economi c

pl ausi bi l i t y of t he pl ai nt i f f s evi dence was necessar y t o ensur e t hat

mi st aken i nf erences of agr eement di d not l ead t o t r ebl e damage awards

whi ch woul d det er f i r ms f r om of f er i ng l ow pr i ces.

I n 2007, t he Supr eme Cour t extended Matsushi t a s pl ausi bi l i t y scr een

back t o t he pl eadi ng st age of ant i t r ust l i t i gat i on. I n Bel l At l ant i c Cor p.

v. Twombl y, 47 t he Cour t consi der ed al l egat i ons t hat Bel l At l ant i c and

other i ncumbent l ocal exchange carr i ers ( I LECs) had conspi r ed t o i mpede

ent r y by compet i t i ve l ocal exchange car r i ers ( CLECs) and had agr eed among

t hemsel ves not t o ent er each ot her s t r adi t i onal ser vi ce t er r i t or i es. The

Cour t r ei t er at ed t he pr i nci pl e t hat pr oof of consci ous par al l el i sm al one

i s i nadequate t o establ i sh conspi r acy and endor sed t he appl i cat i on of t he

Mat sushi t a pl ausi bi l i t y st andar d t o eval uat e mot i ons t o di smi ss. I n t hat

cont ext , an al l egat i on of par al l el conduct and a bar e asser t i on of

conspi r acy wi l l not suf f i ce. 48 For pur poses of pl eadi ng an ant i t r ust

46. Monsant o, 465 U. S. at 763. The J ust i ce Depart ment sel dom

pr osecut es r esal e pr i ce mai ntenance as a cr i me. Yet , when t he Supr eme

Cour t i ssued t he Monsant o deci si on i n 1984, i t had been barel y thr ee years

si nce DOJ s most r ecent use of cr i mi nal pr ocess t o chal l enge an RPM

agr eement . Uni t ed St ates v. Cui si nart s, I nc. , 1981 WL 2062 (D. Conn.

1981) .

47. 550 U. S. 544 ( 2007) .

48. I d. at 556.


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cl ai m, t he pl ai nt i f f must pr esent enough f acts t o st at e a cl ai m t o r el i ef

t hat i s pl ausi bl e on i t s f ace. 49 The Cour t obser ved t hat a more r i gorous

exami nat i on of t he pl ai nt i f f s pl eadi ngs was necessar y l est t he pl ai nt i f f

( and cl asses of pl ai nt i f f s) be per mi t t ed t o set i n mot i on t he cost l y

pr ocess of ci vi l di scover y and extr act unj ust i f i ed set t l ement s f r om

def endant s. 50

As a gr oup, t he Cour t s ant i t r ust conspi r acy cases hi ghl i ght t he

i nterdependence among the si x key el ement s of a compet i t i on l aw syst em:

t he subst ant i ve scope of t he l egal command, t he vol ume and qual i t y of

evi dence r equi r ed t o pr ove a vi ol at i on, t he means f or det ect i ng

vi ol at i ons, t he pr osecut i on of vi ol at i ons, t he adj udi cat i on pr ocess t hat

determi nes i nnocence or gui l t , and the sanct i ons i mposed f or

i nf r i ngement s. The Cour t s deci si ons about t he evi dent i ar y st andar d - -

here, t he ci r cumst ant i al evi dence needed to est abl i sh an agr eement f or

Sherman Act pur poses - - are i nf l uenced by ot her el ement s of t he syst em.

Per cei ved excesses wi t h pr i vat e r i ght s of act i on ( t he pr osecut i on el ement )

and t he mandat or y t r ebl i ng of damages f or vi ct or i ous pl ai nt i f f s ( t he

r emedy component ) have caused the Cour t t o engage i n equi l i brat i on 51t he

adj ust ment of one el ement of t he ant i t r ust syst em ( namel y, t he evi dent i ar y

49. I d. at 570.

50. I d. at 559560.

51. Thi s concept or i gi nated i n St ephen Cal ki ns, Summary J udgment ,

Mot i ons t o Di smi ss, and Ot her Exampl es of Equi l i br at i ng Tendenci es i n t he

Ant i t r ust System, 74 Geo. L. J . 1065 ( 1986) .


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st andar d) t o of f set i mper f ect i ons i n ot her el ement s. The i ncl i nat i on t o

demand a more power f ul evi dent i ary showi ngt o i ncr ease conf i dence t hat

obser ved behavi or t r ul y r esul t s f r om concer t ed act i oni s r ei nf or ced by

t he J ust i ce Depar t ment s r out i ne appl i cat i on of cr i mi nal sanct i ons t o

car t el s and t he avai l abi l i t y of a per se r ul e of condemnat i on f or car t el s,

where the onl y i ssue i s whether an i l l i ci t agr eement was f ormed and

consi der at i ons of actual ef f ects ar e i r r el evant .

To exami ne t he l i nks among l i abi l i t y r ul es, evi dent i ar y st andar ds,

t he i dent i t y of t he pr osecut or i al agent , and r emedi es i s t o see sever al

possi bl e paths f or f ut ur e adj ust ment s t o t he t r eatment of conspi r acy

i ssues. One appr oach i s t o adj ust t he evi dent i ary st andards t o account f or

t he i nsti t ut i onal cont ext i n whi ch t he l i t i gat i on of ant i t r ust cl ai ms

t akes pl ace. Speci f i cal l y, one mi ght l i ght en t he evi dent i ar y demands t hat

t he pl ai nt i f f must bear when t he i nst i t ut i onal set t i ng suggest s t hat t he

case does not pose sever e err or cost s. For exampl e, t he concern f or over-

det er r ence shoul d di mi ni sh when t he pl ai nt i f f i s a publ i c pr osecut or

pr oceedi ng i n a ci vi l sui t i n whi ch t he r emedy sought consi st s ent i r el y of

f or war d- l ooki ng i nj uncti ve r el i ef . Gi ven t he cruci al r ol e t hat

i nst i t ut i onal f actors pl ay i n shapi ng t he evi dent i ar y test, t her e shoul d

be a di f f erence i n the pr oof r equi r ed when t he Federal Trade Commi ssi on

uses i t s admi ni st r at i ve adj udi cat i on pr ocess and seeks i nj unct i ve r el i ef

compar ed t o a pr i vat e cl ass act i on t hat wi l l be t r i ed bef or e a j ur y and

wi l l r esul t i n an aut omat i c t r ebl i ng of any damages awar ded.

Another path, di scussed i n more detai l bel ow, i s t o devel op a bet t er

anal yt i cal appr oach t o eval uat i ng t he pr obat i ve val ue of var i ous pl us

f act or s and, as t hi s paper suggest s, t o appl y economi c t heory and past


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enf or cement exper i ence t o i dent i f y f act or s or cl ust er s of f act or s whose

pr esence t ypi cal l y reveal s t he exi st ence of concer t ed act i on. I f

enf orcement agenci es, cour t s, and j ur i es have more conf i dence i n t he

pr obat i ve val ue of cer t ai n f act or s, t her e pr esumabl y wi l l be l ess

hesi t at i on t o i mpose sever e sanct i ons - - e. g. , t r ebl e damages or cr i mi nal

puni shment - - when those f act ors suggest t he def endant s have engaged i n

per ni ci ous mi sconduct .

C.Interdependence and the Role of Plus Factors

As not ed i n t he i nt r oduct i on t o t hi s Ar t i cl e, i n mar ket s

char act er i zed by i nt er dependence, each f i r m r eal i zes t hat t he ef f ect of

i t s act i ons depends upon t he response of i t s r i val s. I n hi ghl y

concent r ated mar ket s, t he recogni t i on of i nt er dependence can l ead f i r ms t o

coor di nat e t hei r conduct si mpl y by observi ng and r eact i ng t o t hei r

compet i t or s moves. I n some i nst ances, such ol i gopol i st i c coor di nat i on

yi el ds par al l el behavi or ( e. g. , par al l el pr i ce movement s) t hat appr oaches

t he resul t s t hat one mi ght associ at e wi t h a t r adi t i onal agr eement t o set

pr i ces, out put l evel s, or ot her condi t i ons of t r ade.

The l i ne t hat di st i ngui shes t aci t agr eements ( whi ch ar e subj ect t o

Sect i on 1 scr ut i ny) f r om mer e t aci t coor di nat i on st emmi ng f r om

ol i gopol i st i c i nt er dependence ( whi ch el udes Sect i on 1 s reach) i s

i ndi st i nct . The si ze of t he saf e har bor r ecogni zed by Theat r e Ent er pr i ses

depends on what conduct cour t s r egard as t he ext r a i ngr edi ent of

cent r al i zed or chest r at i on of pol i cy whi ch wi l l car r y par al l el acti on over


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t he l i ne i nt o t he f or bi dden zone of i mpl i ed cont r act and combi nat i on. 52

Cour t s enj oy br oad di scr et i on t o est abl i sh t he reach of Sect i on 1 by

def i ni ng t hi s ext r a i ngr edi ent br oadl y or nar r owl y.

Legal schol ar s have r ecogni zed t hat cer t ai n i ndust r y st r uct ur es,

f i r m hi st or i es, and mar ket envi r onment s ar e conduci ve t o and/ or f aci l i t at e

col l usi on. 53 However , cour t s have r el i ed on operat i onal cr i t eri a known as

pl us f act or s t o det er mi ne whet her a pat t er n of par al l el conduct r esul t s

f r om an agr eement . The chi ef pl us f act or s have i ncl uded: 54

Act i ons cont r ar y t o each def endant s sel f - i nt er est unl ess pur sued as

par t of a col l ecti ve pl an.

Phenomena t hat can be expl ai ned r ati onal l y onl y as t he r esul t of

concer t ed act i on.

Evi dence t hat def endant s creat ed t he opport uni t y f or r egul ar

communi cat i on.

I ndust r y perf ormance data, such as ext r aor di nary pr of i t s, t hat suggest

successf ul coor di nat i on.

The absence of a pl ausi bl e, l egi t i mat e busi ness rat i onal e f or suspi ci ous

conduct ( such as cert ai n communi cat i ons wi t h r i val s) , or t he

pr esent at i on of cont r i ved r at i onal es f or cer t ai n conduct.

52. Loui s Schwar t z et al . , Free Ent er pr i se and Economi c

Or gani zat i on: Ant i t r ust 439 ( 6t h ed. 1983) .

53. See Ri char d A. Posner ( 2001) , Ant i t r ust Law, 2nd ed.

Uni ver si t y of Chi cago Pr ess, p. 6979.

54. See Gavi l et al . , supr a not e 6, at 31011.


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Two basi c probl ems have at t ended j udi ci al ef f or t s t o i dent i f y and

eval uate pl us f actors. One pr obl em i nvol ves t he absence of a methodol ogy

f or r anki ng pl us f act or s accor di ng t o t hei r l i kel y pr obat i ve val ue. The

second pr obl em ar i ses f r om t he suggest i on i n t he economi cs l i t er at ur e

i nvol vi ng r epeat ed games t hat market out comes associ ated wi t h col l usi ve

schemes can r esul t f r om i nt er dependent , consci ousl y par al l el conduct i n

some i ndust r i es. We l ook at each of t hese i n t ur n.

Fi r st , cour t s have f ai l ed t o est abl i sh an anal yt i cal f r amewor k that

expl ai ns why speci f i c pl us f act or s have st r onger or weaker evi dent i ar y

val ue or t o pr esent a hi er ar chy of such f act or s. Ant i t r ust agr eement

deci si ons r ar el y rank pl us f act or s accor di ng t o t hei r pr obat i ve mer i t or

speci f y t he mi ni mum cr i t i cal mass of pl us f act or s t hat must be est abl i shed

t o sust ai n an i nf er ence t hat conduct r esul t ed f r om concer t ed act s r at her

t han f r om consci ous par al l el i sm. Nor do cour t s ordi nar i l y devot e gr eat

ef f or t t o eval uat i ng t he economi c si gni f i cance of each f act or . Thi s ad hoc

appr oach makes j udgment s about t he resol ut i on of f ut ur e cases probl emat i c

and gi ves an i mpr essi oni st i c qual i t y to j udi ci al deci si on maki ng i n

agr eement - r el at ed di sput es.

The f ai l ure i n moder n cases t o provi de a hi er ar chy of pl us f act or s

and expl ai n t he compet i t i ve si gni f i cance of each mi ght be at t r i but ed t o

one of t he l east di scussed but most i mport ant Supr eme Cour t deci si ons of

t he 1960s. I n Cont i nent al Or e Co. v. Uni on Carbi de & Carbon Co. , 55 t he

Cour t st at ed t hat pl ai nt i f f s shoul d be gi ven t he f ul l benef i t of t hei r

pr oof wi t hout t i ght l y compar t ment al i zi ng t he vari ous f act ual component s

55. 370 U. S. 690 ( 1962) .


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and wi pi ng t he sl at e cl ean af t er scruti ny of each. . . . [ T] he dut y of t he

j ury was t o l ook at t he whol e pi ct ure and not mer el y at t he i ndi vi dual

f i gures i n i t . 56 At f i r st gl ance, t hi s passage mi ght be cri t i ci zed as an

i nvi t at i on t o r el ax what shoul d be a r i gor ous exami nat i on of evi dencea

suggest i on t hat l ower cour t s are f r ee to di spense wi t h a car ef ul

assessment of t he i mpor t ance of each el ement of pr oof and f ul f i l l t hei r

r esponsi bi l i t i es by dr oppi ng di f f i cul t concept ual i ssues i nt o t he l ap of

t he j ur y. Ther e i s anot her , mor e sympat het i c i nt er pr et at i on. Cont i nent al

Or e i s consi st ent wi t h t he possi bi l i t y, whi ch we di scuss bel ow, t hat

cer t ai n cl ust er s of f act or s war r ant especi al l y cl ose at t ent i on, and t hat

some const el l at i ons of f actor s have compet i t i ve si gni f i cance t hat wi l l not

be under st ood by l ooki ng at each f act or i n i sol at i on.

The var i at i on i n j udi ci al anal ysi s of pl us f act or s al so suggest s

t hat t he outcome i n many agreement cases depends upon the Cour t s

unar t i cul at ed i nt ui t i on about t he l i kel y cause of obser ved par al l el

behavi or . J udges appear t o var y i n t hei r accept ance of t he pr oposi t i on i n

Theat r e Ent er pr i ses t hat consci ous paral l el i sm, st andi ng al one, does not

demonst r ate concer t ed behavi or . Some j udges may regard pr i ci ng uni f ormi t y

as a si gn of l i kel y col l abor at i on. Af t er not i ng Theat r e Ent er pr i ses,

t hese j udges wi l l expand t he range and r educe the quant um of conduct t hat ,

when added t o paral l el behavi or , can support a f i ndi ng of agr eement . Ot her

j udges may vi ew see paral l el i sm as a desi r abl e, natural mani f est at i on of

r i val r y. They wi l l be mor e r el uct ant t o gi ve wei ght t o asser t ed pl us

f act or s and wi l l be mor e sympathet i c t o t he def endant s expl anat i ons about

56. I d. at 699.


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why such pl us f act or s i mpl i cat e conduct t hat i s ei t her pr ocompet i t i ve or

essent i al l y beni gn.

The second probl em r esul t s f r om t he devel opment of new argument s,

r oot ed i n t he modern economi cs l i t eratur e deal i ng wi t h r epeat ed games,

t hat mar ket per f or mance associ at ed wi t h col l usi ve schemes can resul t f r om

i nt er dependent , consci ousl y par al l el conduct i n some i ndust r y set t i ngs.

Fi r ms i n a number of i ndust r y set t i ngs may be abl e to achi eve col l usi ve

out comes wi t hout r esor t i ng t o conduct t hat mi ght be character i zed as an

agreement . 57 Under Matsushi t a, def endant s mi ght ar gue successf ul l y t hat

obser ved par al l el i sm i s as consi st ent wi t h what agr eement doct r i ne has

r ecogni zed as i ndependent act i onnamel y, t he recogni t i on and r esponse t o

i nt erdependenceas wi t h an i nf er ence of col l usi ve behavi or . Mor eover ,

under Mat sushi t a s i mpl ausi bi l i t y t est , f i r ms coul d asser t t hat i t makes

no economi c sense f or t hem t o use tact i cs t hat vi ol at e Sect i on 1 of t he

Sherman Act when t he r ecogni t i on of i nt erdependence can yi el d t he same

market r esul t s. Where t he r ecogni t i on of i nt erdependence al one account s

f or t he mar ket out come, t he di f f i cul t i es i n i dent i f yi ng and pr escr i bi ng

avoi dabl e conduct ar e l i kel y t o pr ecl ude ef f ecti ve ant i t r ust i nt er vent i on.

The r ef i nement of f eder al mer ger enf or cement pol i cy i n t he past

t went y year s has i ncr easi ngl y rel i ed on economi c t heor i es t hat i l l umi nat e

t he condi t i ons i n whi ch consol i dat i on l i kel y has net ant i compet i t i ve

ef f ect s. Among ot her f eat ur es, t he ver si ons of t he DOJ / FTC Hor i zont al

57. The f or mat i ve t r eat ment of t hi s poi nt i s Baker, supr a note 5

See al so Car l t on et al . , supr a not e 14.


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Merger Gui del i nes i ssued i n 199258 and i n 201059 f ocus on how a t r ansact i on

mi ght i ncrease t he abi l i t y of f i r ms t o coor di nat e t hei r acti vi t y. The

economi c underst andi ng of t he pr ocess by whi ch f i r ms cooperate

successf ul l y gui des t he anal ysi s of coor di nat ed ant i compet i t i ve ef f ect s.

A si mi l ar , economi cal l y- or i ent ed ref or mul at i on of agr eement

j ur i spr udence i n ci r cumst ant i al evi dence cases woul d f ocus on t he

component s of successf ul cooper at i on by r i val s. As a gener al r ul e, f i r ms

t hat successf ul l y col l ude: ( i ) r each a consensus on pr i ci ng, out put , or

ot her t er ms of t r ade; ( i i ) desi gn al l ocat i on mechani sms t hat di vi de t he

col l usi ve gai n; and ( i i i ) moni t or compl i ance and stand pr epar ed to puni sh

noncont r i t e devi ant behavi or .

A r ef ormul ated st andard i n ci r cumst ant i al evi dence cases woul d seek

t o f ul f i l l t hese condi t i ons. Wher e t he evi dence of col l abor at i on i s whol l y

ci r cumst ant i al , t he pl ai nt i f f s pr i ma f aci e case woul d consi st of

i nt r oduci ng pr oof t hat demonst r ates how t he def endant s achi eve consensus,

di vi de t he col l usi ve gai n, and moni t or compl i ance. To sur vi ve a mot i on f or

summary j udgment or a mot i on t o di smi ss, t he pl ai nt i f f woul d need to

pr ovi de a pl ausi bl e expl anat i on f or how def endant s have execut ed t hese

t asks. The def endant s coul d rebut t hi s pr i ma f aci e case by advanci ng

beni gn or pr ocompet i t i ve r at i onal es f or speci f i c chal l enged act s, or by

58. The 1992 Hor i zont al Merger Gui del i nes ar e r epr i nt ed i n 4 Tr ade

Reg. Rep. ( CCH) & 13, 104.

59. The 2010 Hor i zont al Merger Gui del i nes were i ssued on August

18, 2010 and ar e avai l abl e at ht t p: / / www. f t c. gov.


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demonst r at i ng t hat t he observed market out comes l i kel y as not r esul t ed

f r om t he r ecogni t i on of i nt er dependence al one.

The most i mport ant t hreshol d el ement of proof i n t hi s f r amework

woul d consi st of evi dence showi ng how t he def endant s communi cat e t hei r

i nt ent i ons and conf i r m t hei r commi t ment t o a pr oposed cour se of act i on.

Per haps t he most pr obat i ve pr oof of t he mechani sm f or achi evi ng consensus

woul d consi st of evi dence demonst r at i ng t hat a pat t ern of ext ensi ve

communi cat i on among t he def endants preceded a compl ex, par al l el adj ust ment

i n behavi or t hat coul d not r eadi l y be expl ai ned as t he pr oduct of t he

def endant s i ndependent ef f or t s t o i dent i f y and adher e t o f ocal poi nt s f or

organi zi ng t hei r conduct . The exi st ence of a means f or di vi di ng t he

col l usi ve gai n mi ght be reveal ed by est abl i shi ng t he exi st ence of

t r ansact i ons among the f i r ms at non- mar ket pr i ces, swaps, or pat ent cr oss-

l i censi ng agr eement s. The exi st ence of a means f or moni t or i ng compl i ance

mi ght be r eveal ed by est abl i shi ng a pat t er n of bi l at er al exchanges of

pr i ci ng i nf ormat i on among compet i t ors or of exchanges of data t hr ough

t r ade associ at i ons.

II. Agreements to Suppress Rivalry Assessed Through the Reactions of Buyers

Fi r ms i n ol i gopol i st i c i ndust r i es r ecogni ze t hei r mut ual

i nt erdependence and act upon t hat r ecogni t i on. I t woul d be unr easonabl e to

expect f i r ms not t o do so. As not ed above, t he assessment of what i s and

what i s not an agr eement when f i r ms ar e gi ven the r i ght t o recogni ze and

act upon thei r mut ual i nt erdependence remai ns uncl ear f r omcour t

deci si ons.


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Consi der t he f ol l owi ng exampl e of a r epeat ed game. Suppose a duopol y

pr oduces a commodi t y. The pr oduct i s not di f f er ent i ated except f or t he

i dent i t y of t he pr oduci ng f i r m, and t her e ar e hi gh ent r y bar r i er s. Each

f i r m can pr oduce as much of t he pr oduct as i t want s f or a mar gi nal cost of

$10. Each f i r m r ecogni zes t hat t he j oi nt - pr of i t - maxi mi zi ng pr i ce f or t he

pr oduct i s $25. I n each and ever y per i od, t he f i r ms si mul t aneousl y and

publ i cl y announce pr i ces t o al l pot ent i al cust omer s. Ther e i s no ot her

i nt er act i on of any f or m t hat occur s bet ween t he t wo f i r mst hey onl y

i nt er act as ri val s i n t he mar ket pl ace. I f we st ar t wi t h each f i r m

announci ng $10, t here i s no one who woul d character i ze t hat pr i ci ng as

bei ng an agr eementf r om an economi st s vi ewpoi nt , pr i ci ng at mar gi nal

cost yi el ds t he l ar gest sur pl us t o consumer s and zer o pr of i t s f or each of

t he t wo f i r ms. However , suppose i n one per i od, f i r m A cal l s out a pr i ce of

$10 but f i r m B cal l s out $25. Fi r m A get s al l t he demand t hat per i od.

Suppose i n t he next per i od t he same pr i ces ar e cal l ed outsame out come.

I n t he next per i od f i r m A cal l s out $15 whi l e f i r m B cal l s out $25now

f i r m A gets al l demand but ear ns a pr of i t of $5 per uni t . Suppose we get

t o a per i od wher e f i r m A cal l s out $25 and f i r m B cal l s out $25now each

f i r m spl i t s mar ket demand and ear ns pr of i t of $15 per uni t . Suppose f i r m B

devi ates one per i od and cal l s out $24. 50 and capt ur es al l demand. But , t he

f ol l owi ng per i od f i r m A cal l s out $10 and cont i nues t o cal l out $10 f or a

l ar ge number of per i ods unt i l i t f i nal l y cal l s out $25 agai n. Suppose

af t er a l ar ge number of per i ods each f i r m i s cal l i ng out $25, di vi di ng t he

demand equal l y, and each ear ni ng a pr of i t of $15 per uni t .

Consi der t he quest i on of whet her t he pr i ce of $25 per uni t , whi ch

each f i r m i s now char gi ng, has emer ged f r om an agr eement . I t i s cl ear t hat


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t he pr i ce of $25 emer ged f r om a subst ant i al amount of i nt er f i r m

communi cat i on t hrough a sequence of publ i c pr i ce announcement s by each

f i r m t o pot ent i al cust omer s. But i t i s al so cl ear t hat t he pr i ci ng out come

emer ged f r omt hei r r ecogni zed mut ual i nt er dependence. Addi t i onal l y, gi ven

t he nat ur e of t hi s duopol y i ndust r y, i t i s per f ect l y reasonabl e t hat each

f i r m woul d l ear n of t he ot her s pr i ci ng f or t he cur r ent per i od at t he end

of t he per i od. Yet , t he $25 pr i ce out come i s hi ghl y pr of i t abl e and hi ghl y

damagi ng t o consumer surpl us. Were cour t s t o deci de t he i ssue wi t hout

r egard t o r emedi es, t hey woul d l i kel y deem such conduct t o be an agr eement

i n vi ol at i on of Sect i on 1 of t he Sher man Act . As di scussed i n Par t I ,

cour t s and enf orcement agenci es cannot address t he agr eement quest i on

wi t hout bei ng aware of r emedi al i ssues t hat st and i n t he backgr ound.

Cour t s are l ef t wi t h a subst ant i al conundr um because t hey cannot

meani ngf ul l y i nstr uct f i r ms t o not r eact t o t hei r r i val s pr i ci ng.

St ayi ng wi t h our exampl e, t here has been an unart i cul ated assumpt i on

t hat t he buyer s ar e passi ve i n t hi s mar ket , accept i ng pr i ces as cal l ed out

by t he two f i r ms. 60 But suppose t hat buyer s are not passi ve i n our case.

Rat her , suppose t hat buyer s st r ongl y r esi st pr i ce i ncreases. Speci f i cal l y,

when each f i r m cal l s out a pr i ce of $25, each buyer i s doi ng what ever i t

can t o get a speci al deal wi t h one sel l er or t he ot her . For exampl e, one

buyer may of f er t o cont r act at $22. 50 wi t h a par t i cul ar sel l er f or many

t i me peri ods as opposed t o j ust t he cur r ent per i od. At t he same t i me a

60. I n f act , t he wel l known exampl e i n Car l t on et al . , supr a not e

14, of t wo gas st at i ons i n a t own cal l i ng out t he monopol y pr i ce al so

pr esumes t hat buyer s ar e passi ve.


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buyer may f al sel y repr esent a secr et of f er made by one of t he sel l er s as

t hey t r y to gener at e a l ower pr i ce of f er f r om anot her sel l er . Or , a buyer

may thr eat en t o use a f or ei gn suppl i er or al t er nat i ve i nput i f pr i ces ar e

not decr eased.

Wi t hout any ki nd of addi t i onal i nt er f i r m communi cat i on bet ween t he

sel l er s beyond t he cal l i ng out of pr i ces, or assur ances bet ween sel l er s

t hat any devi ant conduct wi l l be r ect i f i ed wi t h t he damaged sel l er t hr ough

an i nt er f i r m t r ansf er , i t seems unl i kel y t hat t he pr i ce of $25 can sur vi ve

as a st abl e out come i n t he mar ket . Ther e i s an i mpor t ant i mpl i cat i on of

t hi s obser vat i oni f t he buyer s are act i ve pl ayer s i n t he ol i gopol y game,

t hen i f t he pr i ce of $25 per si st s by the sel l er s t hey must be

communi cat i ng beyond the si mpl e announcement of pr i ces and potent i al l y

al so t r ansf er r i ng r esour ces among one anot her s i nce wi t hout such sel l er

conduct t he pr i ce woul d t umbl e toward $10 gi ven t he st r engt h of t he buyer

r esi st ance.

I n t hi s ci r cumst ance, t here woul d al so be an agr eement i n vi ol at i on

of Sect i on 1 of t he Sher man Act but , unl i ke t he ear l i er scenar i o, t he

cour t s woul d be more l i kel y t o deny t he def endant s mot i on f or summary

j udgment . I n t he background i s an expect at i on of an aggr essi ve buyer

r eact i on. I n ot her words, al t hough i n each case t her e woul d be an

agr eement , t he cr i t i cal i ssue f or f i ndi ng whet her an agr eement was a

vi ol at i on of t he ant i t r ust l aws woul d be t he assumpt i on r egar di ng t he

r eact i on of a t hi r d par t y, t he buyer s, t o t he el evat ed pr i ces. 61 The exact

same pr i ci ng out come by sel l ers woul d be vi ewed by t he cour t s i n a

61. See supr a notes 1415 and accompanyi ng t ext .


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compl etel y di f f erent way dependi ng on whether t he buyer s were passi ve, as

i n t he f i r st scenar i o, or aggr essi ve, as i n t he second scenar i o.

The t wo scenar i os above presume t hat t he cour t s have an

unders t andi ng of t he f i r ms cost s and of t he demand f or t hei r pr oduct . I n

t he absence of such i nf ormat i on t he cour t woul d not know i f $10 was a l ow

pr i ce, i f $25 was a hi gh pr i ce, and i f some ot her pr i ce, say $100, wasn t

t he j oi nt - pr of i t - maxi mi zi ng pr i ce. I f $100 was conj ect ur ed as a possi bl e

j oi nt prof i t maxi mi zi ng pr i ce, t hen $25 mi ght be vi ewed as t he consequence

of act i ve buyer r esi st ance. Then t he cour t may f i nd i t sel f unabl e t o r ul e

agai nst t he duopol y as bei ng i n vi ol at i on of Sect i on 1.

Over al l , f i r ms i n an ol i gopol y are pl ayer s i n a r epeated game. The

game has i ncompl ete i nf ormat i on and subst ant i al i nf ormat i on asymmetr i es.

The f i r ms know many t hi ngs t hat buyer s do not know. Each f i r m has

i nf ormat i on t hat other f i r ms do not have. Cour t s can at t empt t o resol ve

i nf ormat i on asymmetr i es t hr ough di scover y, but t hat pr ocess i s onl y a

part i al sol ut i on.

When t he f i r ms i n an i ndust r y are pl ayers i n a r epeat ed game wi t h

subst ant i al i ncompl ete and asymmetr i c i nf ormat i on, t he Cour t can exami ne

buyer act i ons t o at t empt t o di st i ngui sh between conduct t hat i s an

agr eement i n vi ol at i on of Sect i on 1 of t he Sherman Act and conduct t hat i s

not . To see t hi s, not e that t he way i ndi vi dual consumer s ordi nar i l y buy

pr oduct s and ser vi ces i s not t he way i ndust r i al buyer s t ypi cal l y buy

pr oduct s and ser vi ces. I ndi vi dual consumer s ar e accust omed to t r ansact i ng

i n a post ed- pr i ce envi r onment . None of us conduct s a compet i t i ve

procur ement f or t he t oot hpast e we want t hi s mont hwe go t o a pharmacy or

gr ocer y st ore and pur chase t oot hpast e at t he post ed pr i ce. We ar e not


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pl ayers i n an ol i gopol y game when we buy t oot hpast e or br ead or gasol i ne.

Rather , our conduct , i n aggr egate, can be model ed t hr ough an i ndust r y- wi de

demand cur ve as wel l as f i r m- speci f i c demands where cross- pr i ce

el ast i ci t i es of demand can be speci f i ed. I n such cases, t he onl y act i ve or

st r at egi c pl ayer s ar e t he ol i gopol i st i c pr oducer s.

I n cont r ast , even r el at i vel y smal l f i r ms have pr ocur ement di vi si ons

or at l east subst ant i al r esour ces devot ed t o pr ocur ement . Such buyer s

t ypi cal l y use compet i t i ve pr ocur ement pr ocesses, where f i r ms who are

qual i f i ed pot ent i al suppl i er s ar e i nvi t ed t o submi t bi ds. Buyer s use t he

compet i t i ve bi ddi ng as a way t o pol i ce t he mar ket . Because suppl i ers ar e

aware t hat others are bi ddi ng, t hey must account f or t hat as t hey seek t he

hi ghest expect ed pr of i t . Expect ed pr of i t equal s t he pr of i t i n t he event a

gi ven f i r m wi ns t i mes t he pr obabi l i t y that t he f i r m wi ns. These t wo ar e

i nver sel y rel ated, and a bi dder seeks t he opt i mal bal ance between t hem.

Buyer s r el y on compet i t i ve bi ddi ng pr ocesses t o pol i ce t he market i n t hat

t hey reveal i nf ormat i on t hat buyers may not have known about t he

suppl i er s, t hei r pr oduct s, and pr i ci ng. When buyer s are engaged i n

compet i t i ve pr ocur ement s t o buy f r omsuppl i ers , and the buyer s can

undert ake a number of act i ons i n t hat cont ext t o enhance thei r sur pl us,

t hey ar e act i ve pl ayer s i n t he ol i gopol y game.

Suppl i er s r ecogni ze t hi s pol i ci ng f unct i on and, consi st ent wi t h

pl ayi ng i n a r epeated game, may at t empt t o mi t i gate t he pol i ci ng f unct i on

of t he compet i t i on. I f t he sel l er s bi ds yi el d t o pr essur e f r om buyer s,

t hen i t may have been t he case t hat t he sel l ers, who are pl ayers i n a

r epeat ed game wi t h subst ant i al i ncompl ete and asymmetr i c i nf ormat i on, were

not doi ng anyt hi ng addi t i onal t o suppr ess compet i t i on among themsel ves


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ot her t han r ecogni zi ng t hei r l ong- r un i nt er act i on i n a game set t i ng.

However , i f t he sel l er s do not yi el d and hol d t o t hei r i ni t i al bi ds, whi ch

were seemi ngl y at hi gh pr i ces, t hen each buyer must consi der whether t he

pr i ce i ncr ease i s a l egi t i mate response t o some underl yi ng market

condi t i ons or t he resul t of an agr eement bet ween sel l ers t o suppr ess

compet i t i on.

Buyer s desi gn t he pr ocur ement mechani sm t hat t hey use. Obvi ousl y,

t hey ar e sel f - i nt er est ed desi gner s. 62 I f t he mechani sm i s produci ng

r esul t s t hat ar e i nconsi st ent wi t h t hei r expect at i ons f or sur pl us, t hen

t he buyer s wi l l change the pr ocur ement desi gn, i n r eal t i me, i n an at t empt

t o secur e gr eat er sur pl us. Thi s r edesi gn can be cost l y. But , af t er seei ng

an i ni t i al r ound of bi ds, i t can become qui t e cl ear t o a buyer t hat t he

expect ed payof f f r om r esi st ance mor e than of f set s t he i ncreased cost s. For

exampl e, qual i f yi ng a new sel l er mi ght have such a l ow ex ant e expect ed

62. Concer ns r egardi ng agency probl ems have somet i mes l ed t o an

emphasi s on t r anspar ency i n bi ddi ng, par t i cul ar l y wi t h r espect t o

f ederal government pr ocur ement s. As shown by Marshal l and Marx ( 2009) ,

pr e- auct i on t r anspar ency i n t he f or m of t r anspar ent r egi st r at i on, and

r eal - t i me t r anspar ency i n t he f or m of r evel at i on of t he i dent i t i es of some

or al l acti ve bi dder s i ncrease suscept i bi l i t y to col l usi on. I f t he pr i mar y

mot i vat i on f or t r anspar ency i n bi ddi ng i s concer n about t he possi bi l i t y

of cor r upt i on by t he auct i oneer, t hen post - auct i on t r anspar ency, where

auct i on r esul t s ar e made publ i c af t er t he concl usi on of t he auct i on, may

pr ovi de suf f i ci ent i nf or mat i on t o moni t or t he auct i on pr ocess wi t hout

bei ng as pr o- col l usi ve as pr e- auct i on or r eal - t i me tr anspar ency.


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r et ur n t hat a buyer does not do i t and t hus i ni t i al l y excl udes t he new

ent r ant , but af t er seei ng an except i onal l y hi gh l owest bi d f r om t he

pr ocur ement , a buyer may voi d t he i ni t i al bi ddi ng and i ncur t he expense of

qual i f yi ng t he new ent r ant so as t o generate an ext r a bi dder at a new

procur ement .

I n a nut shel l , buyer s can behave as f ol l ows: be whol l y passi ve and

t hus not be pl ayer s i n t he ol i gopol y game; be vi gor ous i n t hei r pur sui t of

i ncr ement al sur pl us f r omsel l ers ; or be anythi ng i n between, dependi ng on

t he speci f i c nat ur e of t he pr oduct / i ndust r y/ mar ket under consi der at i on. I n

our vi ew, cour t s need t o underst and the ol i gopol y game of a gi ven

pr oduct / i ndust r y/ mar ket bef ore eval uat i ng any economi c ci r cumst ant i al

evi dence wi t h r egar d t o i t s pr obat i ve val ue. The Car l t on, Ger t ner , and

Rosenf i el d (1997) exampl e of t wo gasol i ne st at i ons i n a smal l t own

achi evi ng monopol y pr i ce wi t hout communi cat i on seems qui t e compel l i ng, 63

63. The gas st at i on exampl e of Car l t on et al . , supr a not e 14, f i t s

wel l wi t hi n t he st andard Fol k Theor emenvi r onmentt wo f i r ms compete by

set t i ng pr i ces, wher e t hose pr i ces ar e per f ect l y observabl e and can be

adj ust ed i nst ant aneousl y, and pr of i t of each f i r m i s det er mi ned by t he t wo

pr i ces and a f i xed demand cur ve. As Car l t on et al . not e, i n t hi s

envi r onment , one woul d not be sur pr i sed t o f i nd t hat t aci t col l usi on can

suppor t t he monopol y outcome. Any devi at i ons f r om monopol y pr i ci ng woul d

be i mmedi atel y obser ved and met by a response f r om t he ot her f i r m. The

buyers i n t hi s envi r onment are not pl ayers i n t he game and so have no

abi l i t y t o t ake act i ons t hat mi ght di sr upt t he abi l i t y of t he t wo f i r ms t o

mai nt ai n t hei r t aci t agr eement .


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but i t qui ckl y wi l t s when cont r ast ed wi t h the mar ket f or vi t ami n A500 USP

whi ch was produced by onl y t wo f i r ms t hr oughout t he 1990s. Despi t e bei ng

r epeat car t el of f enders ( Roche and BASF) , t hese f i r ms needed an expl i ci t

agr eement ( communi cat i on and t r ansf ers) t o el evate pr i ces t o monopol y

l evel s. When duopol i st i c f i r ms l i ke Roche and BASF need an expl i ci t

agr eement t o get t o a monopol y pr i ce, i t becomes i ncr easi ngl y cl ear t hat

t he Car l t on, et al . ( 1997) exampl e i s onl y a pedagogi cal devi ce t o

i l l ust r at e the i mpor t ance of under st andi ng t he speci f i cs of t he

pr oduct / i ndust r y/ market posed by each case and the ext ent t o whi ch t he

buyer s are pl ayer s i n t he ol i gopol y game.

However , one need onl y make smal l changes t o t he envi r onment of

Car l t on, et al . ( 1997) i n or der t o reach an envi r onment wher e taci t

agr eement i s i nsuf f i ci ent t o achi eve t he monopol y pr i ce. For exampl e, i f

pr i ces are not obser vabl e and demand has at l east a smal l r andom

component , 64 t hen one enters t he envi r onment of Gr een and Por t er ( 1984) . 65

64. Thi s i s consi st ent wi t h St i gl er s ( 1964) assumpt i on t hat f i r ms

do not obser ve t hei r r i val s pr i ces but r at her i nf er t hem i mper f ectl y f r om

t hei r own demand. George J . St i gl er ( 1964) , "A Theor y of Ol i gopol y, "

J ournal of Pol i t i cal Economy 72, 44- 61.

65. Edward J . Gr een and Robert H. Por t er ( 1984) , Noncooperat i ve

Col l usi on under I mper f ect Pr i ce I nf or mat i on, Economet r i ca 52( 1) , 87100.

The model of Gr een and Por t er ( 1984) i s st at ed i n t er ms of quant i t y

compet i t i on. See Ti r ol e ( 1988, Sect i on 6. 7. 1. 1, p. 262f ) f or a pr i ce

compet i t i on model i n t he same spi r i t . J ean Ti r ol e ( 1988) , The Theor y of

I ndust r i al Or gani zat i on, Cambr i dge, MA: The MI T Press.


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Gr een and Por t er show t hat i n t hei r envi r onment equi l i br i a exi st t hat

al l ow t he f i r ms t o obt ai n supr a- compet i t i ve pr of i t s, but t hey ar gue t hat

such equi l i br i a woul d be expected t o requi r e an expl i ci t agr eement among

t he f i r ms.66

Ot her changes i n t he envi r onment r ei nf orce t he need f or an expl i ci t

agr eement , i ncl udi ng movi ng away f r om posted pr i ces t o, f or exampl e,

compet i t i ve pr ocur ement s and al l owi ng buyer s t o be t r ue pl ayers i n t he

game. When buyer s ar e pl ayers, t hey have an i ncent i ve to pur sue st r ategi es

t hat di sr upt equi l i br i a t hat al l ow t he sel l er s t o capt ur e supr a-

compet i t i ve pr of i t s. Buyer r esi st ance l i mi t s t he abi l i t y of f i r ms t o

mai nt ai n col l usi ve pr i ces t hr ough onl y t aci t agr eement because buyer

r esi st ance expl oi t s t he l ack of communi cat i on, moni t or i ng, and enf or cement

char act er i zi ng a t aci t agr eement .

III. Taxonomy of Cartel Conduct

I f an ef f ect i ve car t el uses a mar ket shar e al l ocat i on scheme, t hen

we wi l l observe f i xed r el at i ve market shar es among t hose f i r ms. Thi s

st at ement i s not l ogi cal l y equi val ent t o, i f we obser ve f i xed r el at i ve

market shar es among a subset of f i r ms t hen t he f i r ms exhi bi t i ng t hose

66. Gr een and Por t er obser ve i n t hei r f oot not e 5 t hat I t i s

l ogi cal l y possi bl e f or t hi s agr eement t o be a t aci t one whi ch ar i ses

spont aneousl y. Never t hel ess, i n vi ew of t he r el at i ve compl exi t y of t he

conduct t o be speci f i ed by thi s par t i cul ar equi l i br i um and of t he need f or

cl ose coordi nat i on among i t s par t i ci pant s, i t seems natur al t o assume her e

t hat t he equi l i br i um ar i ses f r om an expl i ci t agr eement .


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r el at i vel y f i xed shar es ar e ef f ect i vel y col l udi ng t hr ough t he use a mar ket

shar e al l ocat i on scheme. But , si nce A i mpl i es B does not l ogi cal l y

yi el d B i mpl i es A, what t hen i s a pl us f act or ?

One i ssue wi t h t he cur r ent char act er i zat i on of pl us f act or s i s t hat

t her e i s no t axonomy f or t hem. Rel atedl y, t her e i s no r anki ng of pl us

f act or s, even wi t hi n br oad gr oupi ngs, of t hei r r el at i ve pr obat i ve val ue.

I t i s common t o note that much depends on t he nat ur e of a speci f i c

pr oduct , i ndust r y, and mar ket pl ace i n consi der i ng a gi ven pl us f act or ;

however , at t he cur r ent t i me, al l pl us f act or s t end t o resi de i n t he same

f i ve- gal l on bucket , essent i al l y wi t hout di st i ncti on.

As an exampl e, we can cont r ast t wo pl us f act or s. Consi der f i xed

r el at i ve market shar es among a subset of f i r ms i n an i ndust r y to be one.

Ther e are numerous non- col l usi ve expl anat i ons t hat can exi st f or f i xed

r el at i ve mar ket shar es among f i r ms i n an i ndust r y. I n cont r ast , consi der

ver t i cal f or ecl osur e conduct s by a subset of f i r ms i n an i ndust r y,

t ar get ed at one or a f ew smal l f i r ms i n t he i ndust r y, wher e no si ngl e f i r m

i n t he subset has suf f i ci ent mar ket power t o act uni l at er al l y as a

domi nant f i r m. The f ormer pl us f actor appear s t o be qui t e weak whi l e the

l at t er i s st r ong and compel l i ng. I f a ranki ng i s t hat easy bet ween t wo

pl us f act or s, wi t hout descri bi ng any f eat ur es of t he pr oduct , i ndust r y, or

mar ket pl ace, t hen i t i s cl ear t hat at l east a br oad r anki ng of pl us

f act or s i s possi bl e. As wi l l be cl ear f r om our exampl es, and as we

f or mal l y est abl i sh bel ow, t he st r engt h of any pl us f act or i s cr uci al l y

det ermi ned by t he cont r ast bet ween t he l i kel i hood of an act i on i n t he

pr esence of an agr eement and i t s l i kel i hood ot her wi se.


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Accor di ngl y, consi der t he act i ons, br oadl y const r ued, of an expl i ci t

car t el .

A. Rai se pr i ces above what t hey woul d have been wi t hout t he conspi r acy. 67

B. Reduce total i ndust r y- wi de quant i t y bel ow what i t woul d have been

wi t hout t he conspi r acy. 68

C. Change wi t hi n- f i r m i ncent i ves so as to i nhi bi t i nt er f i r m compet i t i on and

f oster hi gher pr i ces.

D. Al l ocat e t he col l usi ve gai ns among members.

E. Redi st r i but e gai ns and l osses among member s so as t o mai ntai n compl i ance

wi t h t he agr eement .

F. Moni t or compl i ance wi t h the agr eement and communi cat e regul ar l y

r egar di ng al l r el evant f eat ur es of t he conspi r acy t hat r equi r e

di sci pl i ne.

67. St i gl er ( 1964) emphasi zes pr i ci ng st r uct ur es as opposed t o

t he more narr ow concept of el evat i ng pr i ces. A car t el may f i nd pr i ce

di scr i mi nat i on t o be qui t e pr of i t abl e. I f so, t hen some buyer s may

act ual l y exper i ence pr i ce decr eases as a consequence of pr of i t enhanci ng

conduct by the car t el . I n pr act i ce, however , t hi s woul d be hi ghl y

unt ypi cal . Al so, t hi s caveat woul d creat e an ongoi ng di f f i cul t y f or

exposi t i on. Ther ef or e, we si mpl y di scuss pr i ce i ncreases by a car t el .

68. Rel at ed t o t he pr evi ous f oot not e, i t i s wel l known t hat

extensi ve pr i ce di scri mi nat i on can act ual l y i ncrease quant i t i es br ought t o

t he market ( whi l e ext r act i ng l ar ge amount s of consumer sur pl us) . Agai n,

t hi s woul d be hi ghl y unt ypi cal and, i n addi t i on, woul d cr eat e ongoi ng

exposi t i on di f f i cul t i es, so we si mpl y di scuss the r est r i cti on of quant i t y

by a car t el .


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G. Stand r eady t o abandon col l usi ve conduct i f some car t el member s

cont i nual l y engage i n subst ant i al non- compl i ant conduct .

H. Once i nt er f i r m r i val r y has been suppr essed successf ul l y, seek addi t i onal

pr of i t s t hr ough acti vi t i es such as domi nant - f i r m conduct.

I f t hese are t he ei ght component s of car t el conduct , t hen any pl us

f actor has t o be consi st ent wi t h one or more of t hese. So, at a mi ni mum,

pl us f act or s can be cl assi f i ed by these ei ght . Consi der t he l i st of 14

pl us f act or s f r om Posner ( 2001) : 69

1. Fi xed r el at i ve mar ket shar es

2. Mar ket wi de pr i ce di scr i mi nat i on

3. Exchanges of pr i ce i nf ormati on

4. Regi onal pr i ce var i at i ons

5. I dent i cal bi ds f or non- st andar d pr oduct s

6. Pri ce, out put , and capaci t y changes at t he f or mat i on of t he car t el

7. I ndust r y- wi de r esal e pr i ce mai nt enance

8. Decl i ni ng market shar es of l eaders

9. Ampl i t ude and f l uct uati on of pr i ce changes

10. Demand el ast i c at t he market pr i ce

11. Level and pat t er n of pr of i t s

12. Mar ket pr i ce i nver sel y cor r el at ed wi t h number of f i r ms or el ast i ci t y of

demand

13. Basi ng- poi nt pr i ci ng

14. Excl usi onar y pr act i ces

Di r ectl y or i ndi r ectl y, ni ne of t hese concer n acti on A, car t el

pr i ci ng ( 2, 4- 7, 9- 10, 12- 13) . Onl y 3 concer ns act i on F

69 Ri char d A. Posner ( 2001) , Ant i t r ust Law, second edi t i on, Chi cago:

Uni ver si t y of Chi cago Pr ess.


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i nt er f i r m communi cat i on and moni t or i ngand t hat onl y addr esses t he

exchange of pr i ce i nf or mat i on. None of t hese pl us f act or s concer ns act i on

Et he redi st r i but i on of gai ns and l osses among car t el member s so as t o

mai nt ai n compl i ance wi t h the agr eement . Onl y 6 i s r el ated t o act i on G

t he t hr eat of abandoni ng col l usi ve conduct i f t her e i s subst ant i al non-

compl i ant conduct and t hat r el at i on i s qui t e i ndi r ect . Onl y 1 concer ns

act i on Dt he al l ocat i on of t he col l usi ve gai n among member sand 1 onl y

concerns one t ype of al l ocat i on mechani sm. Fact ors 7 and 14 addr ess

act i on H, a car t el under t aki ng domi nant - f i r m conduct , but agai n i n a

r estr i ct i ve sense.

None of t he Posner pl us f act ors addr esses act i on C, changi ng wi t hi n-

f i r m i ncent i ves. Nor do they addr ess act i on Br educi ng i ndust r y- wi de

quant i t yeven though i n cer t ai n cases, ef f ect i ve car t el management may

r equi r e agr eement s i n t hi s di mensi on.

The st r engt h of an i nf erence of col l usi on t hat can be drawn f r om

i ndi vi dual Posner ( 2001) pl us f act ors i s a mi xed bag. On t he one hand, i f

we observe a subset of f i r ms i n an i ndust r y engagi ng i n domi nant f i r m

conduct , and none of t he f i r ms i s l arge enough on i t s own

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