Symposium: Vertical Restraints and Collusion

How do cartels use vertical restraints? Horizontal and vertical working in tandem

The role of vertical relationships in facilitating collusion is often obscured because both economic and legal frameworks encourage us to characterize inter-firm relationships as either horizontal or vertical. A review of European Commission horizontal cartel cases found that a large share make use of vertical relationships to sustain, and sometimes to disguise, their collusive behavior. This paper provides a typology for classifying and understanding how vertical relationships can support horizontal collusion. Vertical relationships can do this both by changing the incentives and the information of market participants and by changing what is visible to competition authorities. In some cases, multiple vertical relationships simply mask explicit collusion. In other cases, vertical relationships make collusion more stable than would be the case absent the active role of upstream and downstream firms.

Maximum Resale Price Maintenance and Retailer Cartle Profits: Evidence from the Indian Pharmaceutical Industry

In jurisdictions where maximum resale price maintenance (MRPM) is per se legal, manufacturers can compete for a retailer cartel’s patronage by selectively increasing the maximum resale price consumers pay but not the price the retailer cartel pays. The retailer cartel can effectively collude on maximum resale price, which serves as a focal point, allocate market shares among manufacturers based on the retail margins they receive, and, as a punishment, boycott manufacturers offering low margins. In such a setup, MRPM raises retailer profits and undermines consumer welfare by promoting the growth of manufacturers with relatively higher margins. Using data on the pricing of pharmaceuticals in India, we test these predictions and find consistent evidence. Overall, our results indicate that vertical price restraints such as MRPM, although considered welfare enhancing and per se not illegal under US jurisprudence, can sometimes facilitate horizontal collusion among manufacturers and/or retailers.

Vertical Restraints Imposed by Buyers: The Secrétan Copper Cartel, 1887-1889

The Secrétan Syndicate controlled 80% of world copper production in the late 1880s. The downstream firms imposed both price and output restrictions on the producers. Despite those restraints, the Syndicate was short lived. This paper describes the cartel and the role of the restraints in disciplining the upstream firms. It also analyzes what the members might have expected in hindsight and why the cartel failed. Finally, it takes a broader look at commodity market corners — why they are attempted and why they often fail — and their implications for antitrust policy.

A Study of Exclusionary Coalitions: The Canadian Sugar Combination, 1887–1889

In this article we examine exclusionary coalitions: groups of suppliers and customers that work collectively to keep out rivals and share in the resulting benefits. We offer a typology of horizontal and vertical coalitions, which we connect to economic theories about how exclusion is accomplished. Our exploration of these theories is embedded within an extended study of the Canadian sugar industry in the 1880s, which was controlled by an exclusionary coalition of refiners and wholesalers. Drawing upon this historical example, we assess several doctrinal approaches to establishing antitrust liability for anticompetitive exclusionary coalitions.

Articles

Inferring Agreement in Hub-and-Spoke Conspiracies

This article shows that the circumstantial evidence a court may properly use to infer the presence of a horizontal agreement among the spokes in a hub-and-spoke conspiracy is substantially more limited than the circumstantial evidence used in a standard horizontal conspiracy case. In determining whether parallel spoke behavior is contrary to individual interests, and hence evidence of an agreement, one must consider the ability of the hub to unilaterally enforce the parallel behavior. If such an ability exists, all that may be inferred from parallel spoke behavior is a series of purely vertical agreements. Distinguishing between these alternatives requires an empirical examination of the economic sanction a hub can impose on the spokes for noncompliance. This framework is used to analyze a number of hub-and-spoke conspiracies, including the classic case upon which inference of agreement is fundamentally based, Interstate Circuit.

The Antitrust Challenge To Covenants Not To Compete In Employment Contracts

Employee covenants not to compete, which bar workers who leave their jobs from working for a competing employer for a period of time, should be subject to heightened antitrust enforcement. Some commentators and judges defend noncompetes as a method for protecting employers’ investments in trade secrets and workers’ human capital. But noncompetes may also create entry barriers and reduce labor market competition. The threat to competition has been highlighted by new research, which suggests that employers overuse noncompetes and that noncompetes reduce labor market competition. A likely explanation is the inadequacy of the existing legal regime. The common law offers minimal sanctions for abusive noncompetes, and is poorly suited for understanding the effects of noncompetes on markets. Antitrust law nominally applies to noncompetes but courts have eviscerated it by imposing an excessive burden of proof on plaintiffs who challenge noncompetes. In light of antitrust theory, evidence, and the failure of existing legal approaches, courts should strengthen the antitrust regime. An appropriate doctrinal framework for evaluating noncompetes under antitrust law would shift the burden of proof to employers. Employers would be permitted to rebut challenges to their noncompetes only by showing that the noncompetes raise wages for their own workers and workers in the broader labor market.

Common Ownership and Coordinated Effects

With the growth of common ownership and investor engagement with portfolio firms, the possibility of adverse competitive effects of common ownership has become an important issue. To date, most of the focus has been on “unilateral” effects. In this Article, we shift the focus to the potential “coordinated” effects of common ownership and the appropriate antitrust treatment. After examining the ways in which a common owner could be a particularly effective cartel facilitator, we identify four scenarios, based on antitrust case law and enforcement experience, in which common ownership could plausibly increase the potential for coordinated conduct in concentrated markets. For each, we provide an economic analysis of the potential anticompetitive coordinated effects and we consider the appropriate legal treatment under Section 1 of the Sherman Act. The four scenarios are: Common Owners as Cartel Initiators; Common Owners as Trustworthy Conduits; a Common Compensation Structure as a Facilitating Practice; and Common Owners as “Vectors of Infection.” We then turn to whether and how the anticompetitive potential for coordinated effects of common ownership might affect merger analysis under Section 7 of the Clayton Act or the EU Merger Regulation.

Essays

The New Crisis in Antitrust (?)

This essay, written for a symposium on several recent books lamenting the inadequate state of antitrust enforcement, situates the current proclamations of an antitrust crisis in light of the similar claims of crisis made by Chicago School scholars in the 1960s. Just as in the 1960s Chicago’s claims of a crisis of excessive antitrust may have been overstated, so too contemporary claims of the inverse problem may also be overstated. This essay considers the “new crisis” claims from the perspective of antitrust enforcement, market dynamism, and the crucial relationship between democracy and market power.