PROOF OF AN AGREEMENT

Transcription

1 PROOF OF AN AGREEMENT Circumstantial Evidence Relevant to the Existence of an Agreement in Violation of Section 1 Presented by: Mark Glueck Richard Higgins Presented to: Date: July 12 th, 2012 Location: Washington, DC, and Houston and Dallas, TX 1

2 Overview Types of coordination - Express agreement o Direct evidence Per se illegality o Indirect (circumstantial) evidence Rule of reason - Tacit collusion Theory of collusion: self-enforcing agreements Circumstantial economic evidence Class actions 2

3 Collusion Lessening of competition through coordination among competitors to fix competitively sensitive variables (price, output, capacity, advertising, etc.) - Explicit collusion - Tacit collusion o Parallel accommodating conduct 3

4 Explicit Collusion Mutual understanding and acceptance of an agreement reached through communication to fix price above competitive levels Evidence of express agreement can be direct or indirect - Circumstantial vs. concrete When direct evidence is available, Per se illegality is appropriate - Expected cost of Type I >> expected cost of Type 2 - Costly adjudication - Guidance: clear and easily provided 4

5 Tacit Collusion Parallel accommodating conduct ( conscious parallelism ) - Mutual understanding reached without communication beyond rivals pricing decisions - Consistent with independent decisions in oligopolistic market - No Section 1 violation, but see Horizontal Merger Guidelines and - Posner: High Fructose Corn Syrup 5

6 Explicit collusion An explicit agreement may be inferred in the absence of direct evidence of coordination Four steps (summary judgment, trial on the merits): - Evidence of parallel conduct - Plausible theory of coordination that causes antitrust harm - Circumstantial evidence: plus factor(s) that tend to exclude the possibility that the alleged conspirators acted independently - Conduct against self-interest but for agreement 6

7 Competition vs. Coordination Prisoner s dilemma: output choice - Payoff Matrix The joint-profit maximum (merger outcome) may be self-enforcing subject to specific strategies - Indefinite repeated interaction - Chain-store paradox 7

8 Economic Theory of Collusion Agreement-Detection-Punishment paradigm (Stigler) - Agreement on punishment scheme also required - Must be self-enforcing: no incentives to cheat (a SPNE) 8

9 Fundamental Relation Profit for Firm j ($) PV[C] < PV[P] C P Collusion Competition T T+d Time 9.a

10 Theory cont. A self-enforcing relation applies to punishment phase also - We ll let him go this time! Fundamental relation depends on: - Time preference - Target agreement, time to detection and severity of punishment o Influenced by more basic factors 10

11 Indirect Proof of Explicit Collusion Parallel conduct Plausible anticompetitive scheme Plus factors - Economic evidence o o Structural evidence Behavioral evidence - Non-economic evidence 11

12 Evidence of Parallel Conduct Not sufficient - Firms in oligopolistic market recognize interdependence and as a result: o o Correlated pricing Correlated responses to changes in costs and demand - Dissent (Posner, High Fructose Corn Syrup): an alternative approach: o o Econometrics used to estimate demand and costs, and competitive market price simulated Comparison of competitive price and actual price - But, are effective remedies available? Posner (JTC Petroleum): monetary fines to deter tacit collusion 12

13 Plausibility Would collusion be profitable for participants? Gains from collusion greater than the gains from deviating from the agreement? Likelihood of detection? Transparency? Efficacy of retaliation? 13

14 Plus Factors Critical to have evidence that tends to exclude the possibility that the alleged conspirators acted independently: one or more plus factors - PROBLEM: plus factors cannot distinguish between tacit and explicit collusion Most critical plus factor: - Evidence that the alleged conspirators acted against self-interest but for anticompetitive coordination o Disinvestment during period of rising prices o Foregoing profitable market expansion 14

15 Economic Evidence of Plus Factors Structural evidence - Market characteristics conducive to concerted action Behavioral evidence: market performance - Market outcomes and firm conduct that are inconsistent with competition Non-economic evidence - Circumstantial evidence of meetings between high-level officials - Econometric evidence of anticompetitive effects of meetings 15

16 Structural Evidence Demand elasticity - Inelasticity makes price fixing more profitable Market concentration - Small numbers in dominant group makes agreement easier; makes detection easier Opportunities to communicate - Promotes agreement both for target and punishment scheme - But, facilitates re-negotiation during punishment phase - McCutcheon: Section 1 prohibition on communication makes renegotiation less likely: Section 1 enforcement promotes price fixing Price transparency - Facilitates detection 16

17 Structural Evidence cont. Product homogeneity - Makes agreement and detection of noncompliance easier - Exception: tit-for-tat pricing scheme unworkable with homogeneous products Demand volatility - Volatility makes detecting cheating more difficult Symmetry - Promotes agreement: target and punishment schemes easier to devise 17

18 Structural Evidence cont. Supply elasticity - Greater elasticity requires more inclusive conspiracy - High fixed-to-variable cost ratio makes competition more risky Facilitating practices: basing point pricing, MFNs, e.g. - An agreement among competitors about business practices that make coordination more likely or more effective, either by making coordination easier or making it easier to sustain a collusive agreement. - An agreement among competitors to adopt a facilitating practice may be prosecuted either as an anti-competitive agreement in and of itself or as circumstantial evidence of price fixing. - Successful defense: offsetting procompetitive benefits 18

19 Behavioral Evidence Uniformity of conduct Coincidence of conduct Uniform market shares Departure from established business practices Actions against self-interest: plants shut down during period of rising prices 19

20 Behavioral Evidence cont. Evidence that price/cost margin increased significantly after: - Start of alleged conspiracy (see graphs) - Formation of trade association or industry meetings - Substantial period of price decline Evidence that a collectively determined rule lessens competition (see bar chart) 20

21 Dollars Per Unit Behavioral Evidence (example 1) 21 Evidence of Structural Break (Based on Average Price Before Conspiracy) Average Overcharge = $ Period Price But-for Price 21

22 Dollars Per Unit Behavioral Evidence (example 1) 21 Evidence of Structural Break (Based on Cost-Adjused Price) Average Overcharge = $ Period Price But-for Price 22

23 ($) Behavioral Evidence (example 2) Effect of Blue Laws on Automobile Sales 18,000 16,000 Cities With Blue Laws $15,634 Cities Without Blue Laws $14,897 14,000 12,000 10,786 12,345 10,000 8,000 6,000 4,000 2,000 0 Avg New Car Price N=20 Volume (per month) Avg New Car Price N=26 Volume (per month) Note: Differences are statistically significant. 23

24 Behavioral Evidence in Specific Markets Bid market Regression model designed to explain individuals historical bids in terms of common cost and demand factors Residuals: bid variation not explained by differences in market fundamentals (e.g., energy costs) and observable bidder characteristics (e.g., distance of bidders plants from worksite) 24

25 Bid Market Analysis cont. Evidence from regression model: Are the bidders residuals independent? Do bidders in the same situation bid the same? Are competitive bids affected in the same way by fundamentals? Affirmative answers suggest conspiracy but they are not dispositive 25

26 Defending Against a Section 1 Charge vs. Government - Reverse government process of screening and verification Screening: (1) Does industry have traits conducive to collusion? (2) Evidence of structural breaks in price/cost margins, share volatility, bid patterns during alleged conspiracy period, etc.? 26

27 Defending... cont. Verification: (1) Compare conduct of alleged conspirators with conduct of non-conspirators or with their own behavior at a different time or place; (2) Which model explains outcomes best? Collusion or competition? 27

28 Implications for Class Certification Class-wide treatment appropriate where common impact can be demonstrated Orientation shifts from supply- to demand-side evidence of homogeneity Class identified from analysis of evidence rather than articulated scope of agreement Plausibility is coordination plausible on structural and behavioral terms for the entire purported class? 28

29 Implications for Class Cert. cont. Was the agreement avoidable for members of the class? Does analysis of structural and behavioral plus factors constitute a testable method of demonstrating common impact? 29

30 Finance Scholars Group 2101 L Street, NW Washington, DC (202) Finance Scholars Group California. Illinois. New York. Texas. Washington DC 30