In a typical H&S conspiracy, such as the one presented in the diagram, the hub is a powerful intermediary (e.g., a retailer or distributor) and the spokes are upstream suppliers. Alternatively, the hub might be a powerful supplier while the spokes are downstream intermediaries (e.g., dealers or distributors). The conspiracy allows the downstream parties—the hub or the spokes—to raise prices and share the anticompetitive gains with the upstream parties. This outcome is sometimes facilitated through the exclusion of competition from rivals, when the spokes change the terms of dealing with the hub’s rivals or the hub changes the terms of dealing with the spokes’ rivals.
A defining feature of H&S conspiracies is that some aspects of the collusive coordination are embedded and concealed in legitimate business communication channels. “In the canonical hub-and-spoke cartel,” GH&O write, the spokes’ “agreement to restrain competition” (namely, the rim) “arises not from direct communications between the spokes but rather from bilateral communications between the hub and each spoke.” In other words, “the central communication protocol involves a spoke communicating with the hub.”
The intriguing question that H&S conspiracies present is why colluding rivals would ever rely on a third party. The common wisdom is that the hub is some sort of a coordinator that reduces the costs of forming, operating, and enforcing unlawful market arrangements. Under this approach, the hub might be an agent of the conspiracy who provides coordination services. In such settings, the agency relations are a source of vulnerability because of an anticipated misalignment of interests between agents and principals.
GH&O draw a sharp distinction between cartels facilitated by a common trading partner, which is an upstream supplier or a downstream intermediary, and cartels facilitated by other third parties, such as an accountant or a trade association. They emphasize that H&S cartels are “distinguished from cartels encompassing a third party that, while assisting in the restraint of competition, neither supplies nor buys from the cartel’s members.”
From the legal perspective, any party that knowingly aided and abetted a conspiracy might be treated as a co-conspirator. There are, however, good reasons to distinguish between facilitators that have independent vertical relations with the colluding rivals and those that do not have any such relations. When rivals have bilateral relationships with the same trading partner, there is nothing inherently suspicious in communication concerning sensitive information between each rival and the trading partner. In contrast, communication concerning sensitive information with parties that are not trading parties could be suspicious.
GH&O’s characterization of the hub as a common trading partner of the spokes is reasonable but is not necessarily productive. The label “H&S conspiracy” proved useful for situations in which a third-party facilitates a conspiracy agreement among rivals. It is far from clear that courts and antitrust practitioners are about to recognize that H&S conspiracies exist only when the hub is a common trading partner of the spokes.
As portrayed by economists, the words “cartel” and “collusion” are synonyms that refer to unstable and unlawful market arrangements among competitors intending to mitigate competitive pressures. For example, GH&O treat the words “collusion” and “cartel” as synonymous and write that collusion is “a particular mode of conduct designed to constrain competition in order to yield a supracompetitive (or collusive) outcome that delivers higher profits for firms.” They further emphasize that collusion is “the adoption of collusive strategies and the collusive or supracompetitive outcome observed in the market is the manifestation of using those collusive strategies.”
Jurists regularly use the words “cartel” and “collusion” in antitrust contexts, but in a very casual fashion. In contrast, the word “conspiracy” in antitrust contexts typically refers to an agreement that forms unreasonable horizontal restraints of trade. Competition laws do not expressly prohibit cartels and collusions. They prohibit unreasonable restraints of trade, proof of which requires evidence of an agreement. Specifically, interdependent conduct, without more, does not constitute an antitrust violation. Alleged H&S conspiracies typically raise the question of whether the bilateral interactions of rivals with a common trading partner form a conspiracy agreement. Accordingly, GH&O’s extensive use of the label “hub and spoke cartels” rather than “hub and spoke conspiracies” is somewhat regrettable.
Abuses of Procompetitive Vertical Relations
GH&O’s book concludes with the observation that “the default for when two competitors communicate in private is that it is anticompetitive, while the default for when an upstream supplier and downstream customer communicate in private is that it is procompetitive.” The book illuminates that this approach warrants reconsideration.
GH&O’s case studies illustrate that, stripped to their essentials, H&S conspiracies embed collusive activities in vertical relationships of rivals with a common trading partner. In other words, GH&O show that anticompetitive abuses of procompetitive vertical relations are an old and familiar phenomenon. This insight should lead to a clear and unequivocal conclusion that the per se illegality rule that applies to certain categories of horizontal restraints of trade should also apply to any scheme in which vertical relations are used to advance such horizontal restraints. Although courts have yet to articulate this standard expressly, federal courts have persistently applied it since the 1940s. Nonetheless, in the Apple eBook case, the dissenting judge erroneously insisted that a “vertical relationship that facilitates a horizontal price conspiracy does not amount to a per se violation.” The majority, however, observed that the dissent’s approach was “based on a misreading of Supreme Court precedent, which establishes precisely the opposite.”
Simply stated, when the available evidence shows that vertical relations are used to advance price fixing, horizontal market division, or group boycott, the per se illegality rule should apply to the challenged conduct. GH&O’s book demonstrates that such schemes are not uncommon.
Alternatives to Purely Horizontal Collusions
As noted, collusions are unstable market arrangements that competitors sometimes devise to mitigate competitive pressures. They are unstable because their members have incentives to steal business from each other by breaching their commitments not to compete. The commitments themselves are unlawful and, hence, their formation, maintenance, and enforcement tend to be costly. Cartel members must conceal their collusive activities and cannot use the legal system to prevent cheating by co-conspirators. Additionally, strategic enforcement strategies—such as leniency programs—further undermine the ability of cartel members to trust each other.
GH&O observe that H&S conspiracies might be less stable than purely horizontal collusions. They conjecture that the reliance on a third party—the hub—and the misalignment of interests between the hub and the spokes make H&S conspiracies vulnerable. This insight contributes to the understanding of H&S conspiracies.
H&S conspiracies are sometimes described as intuitive solutions to the cartel problems: the centralization of collusive functions—such information exchange, monitoring, and enforcement—in the hands of a third party is expected to facilitate a collusion that is more stable than a purely horizontal one. But, as noted, the recruitment of a cartel coordinator is not free of costs. It requires the conspirators to pay the coordinator and expose them to agency costs. Common trading partners are arguably better positioned than other parties to serve as hubs that coordinate collusive activities. They already have established communication channels with each spoke and, hence, can embed and conceal collusive activities in routine interactions.
GH&O’s observation that H&S conspiracies are less stable than purely horizontal collusions indicates that H&S conspiracies form when a purely horizontal conspiracy is not a viable option or when the hub orchestrates the scheme.
Collusions to Exclude Rivals
Several landmark H&S cases involved a powerful hub that orchestrated a collusion among upstream suppliers, which raised the costs of the hub’s rivals.
GH&O observe that it is difficult to identify similar cases in which the hub is an upstream supplier. Their explanation is that the harm from H&S conspiracies is typically experienced by downstream firms. When the hub is a downstream intermediary, the conspiracy is designed to harm its rivals to allow the hub to avoid competitive pressures. When the hub is an upstream supplier, the conspiracy is designed principally to reduce the competition among its dealers. In both instances, the conspiracy is expected to harm consumers.
Every scholar hopes to be recognized as the author of the leading work on a meaningful topic. Garrod, Harrington, and Olczak can check this box on their bucket lists. Hub-and-Spoke Cartels is the most comprehensive and most important study of an anticompetitive scheme that has fascinated antitrust thinkers since the early days of competition laws. Even better, their book is highly accessible and nontechnical. It is free of quantitative technicalities that most lawyers are uncomfortable with and free of legal subtleties that most economists resent. Instead, the book delivers insightful clarifications and lessons through fascinating case studies.