How do Cartels use Vertical Restraints? Horizontal and Vertical Working in Tandem

• Author: Margaret C. Levenstein and Valerie Y. Suslow
• Position: Research Professor, University of Michigan/Professor, Johns Hopkins University
• Pages: 15-40

HOW DO CARTELS USE VERTICAL RESTRAINTS?

HORIZONTAL AND VERTICAL

WORKING IN TANDEM

M

ARGARET

C. L

EVENSTEIN

V

ALERIE

Y. S

USLOW

*

This symposium was motivated by a concern that vertical restraints dampen

competition in a world with otherwise reasonably effective anti-cartel policies

because cartels make more frequent use of vertical restraints than has gener-

ally been recognized. Our examination of explicit horizontal European Com-

mission cartel cases from the 1990s found that a surprisingly large fraction

(one quarter) of cartels were making use of vertical relationships to sustain,

and sometimes to disguise, their collusive behavior.

1

The European Commis-

sion was not specifically searching for evidence of vertical restraints, as docu-

menting such behavior was not necessary to make the legal case of a violation

of competition rules against horizontal price fixing or market allocation.

Rather, in the process of describing the organization and functioning of each

cartel, the European Commission documented the use of vertical restraints.

It is impossible to know how common these cases are because there has

been no systematic collection of information on these kinds of activities, even

where illegal horizontal collusion has been discovered. European competition

authorities are increasingly reluctant to share details of investigations, in part

* Margaret C. Levenstein, Research Professor, University of Michigan, and Valerie Y. Sus-

low, Professor, Johns Hopkins University. Many thanks to research assistants Alex Klein,

Tommy La Voy, Aidan McCarthy, and Michael Presley. The authors are co-editors for the

symposium, Vertical Restraints and Collusion, published in this issue.

1

We found that in a quarter of 81 international cartels, determined by the European Commis-

sion or the U.S. Department of Justice to have engaged in horizontal price fixing between 1990

and 2007, vertical relationships were a feature of the collusive arrangement. Margaret C. Leven-

stein & Valerie Y. Suslow, How Do Cartels Use Vertical Restraints? Reflections on Bork’s The

Antitrust Paradox, 57 J.L. & E

CON

. S33, S41–42 (2014). Note that in some but not all cases these

vertical relationships include classic vertical restraints. Our argument is thus similar to the claim

by Elizabeth Granitz and Benjamin Klein that “a vertical relationship can facilitate the creation

of monopoly power.” Elizabeth Granitz & Benjamin Klein, Monopolization by “Raising Rivals’

Costs”: The Standard Oil Case, 39 J.L. & E

CON

. 1, 3 (1996).

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[Vol. 83

because of the increased risk of individual, personal liability for anticompeti-

tive practices, the increased risk of civil liability for firms, and sequential or

differential implementation of leniency across jurisdictions. These risks may

create incentives to reduce horizontal collusion, but an unintended conse-

quence of the European competition authorities’ lack of transparency is to

make the organization and mechanisms of anticompetitive behavior arising

from other kinds of behavior, such as vertical restraints, more obscure.

Does the finding—that one-quarter of a sample of international cartels in

the 1990s and early 2000s showed evidence of vertical relationships that sup-

port collusion—suggest that this occurs in different countries and across legal

regimes? Unfortunately, the information required to establish this is not clear.

We examined the records of horizontal collusion cases from six different (En-

glish-speaking) jurisdictions: Australia, Canada, Ireland, South Africa, United

Kingdom, and United States. The descriptions of the cases were too limited to

discern whether vertical restraints were used by cartel members to support

horizontal collusion. There were suggestions of vertical restraints in a few

cases, which we discuss below, but publicly available evidence was largely

non-existent.

Observers often miss the role of vertical relationships because both the eco-

nomic and legal frameworks encourage us to characterize interfirm relation-

ships as either horizontal or vertical. In this article we note that horizontal and

vertical relationships often work in tandem to enable anticompetitive behavior

and reduce efficiency. Downstream firms may help to prevent cheating and

entry or assist firms in coordinating their behavior on a collusive outcome.

Downstream firms receive a share of collusive rents in return for these activi-

ties. Robert Bork famously and influentially argued that vertical restraints

should be per se legal, because, as mutually agreed upon, voluntary contracts,

they could not harm consumers or competition.

2

A number of writers, includ-

ing some of the contributors to this volume, have demonstrated that this is not

the case theoretically or empirically. Vertical restraints are not always innocu-

ous; sometimes they are being used to facilitate collusion.

This article focuses, through discussion of a series of cartel case studies, on

the ways that distributors may facilitate collusion. We choose this focus not

because we think that distributors are more likely to facilitate than undermine

collusion, but rather because antitrust policy does not need to change to ad-

dress cases where distributors undermine collusion. When distributors make it

easier for firms to cheat on collusive arrangement or play upstream firms

against one another, consumers benefit; competition policy’s laissez-faire atti-

2

R

OBERT

H. B

ORK

, T

HE

A

NTITRUST

P

ARADOX

: A P

OLICY AT

W

AR WITH

I

TSELF

288–91 (The

Free Press 1993) (1978).