Parallel exclusion.

• Author: Hemphill, C. Scott
• Position: Introduction through III. Stability A. Interdependent Exclusion 1. A Prisoner's Dilemma, p. 1182-1222

ARTICLE CONTENTS INTRODUCTION I. PRELIMINARIES A. Situating Parallel Exclusion B. Paradigmatic Examples C. An Unfinished Debate II. MECHANISMS AND EFFECTS A. Mechanisms of Foreclosure 1. Simple Exclusion 2. Recruiting Agents 3. Overbuying an Input 4. Tying and Bundling 5. Resale Price Maintenance 6. Most Favored Nation Provisions 7. Lessons B. Harms C. Benign and Efficient Parallel Conduct 1. Nonexclusionary Conduct 2. Efficient Exclusion III. STABILITY A. Interdependent Exclusion 1. A Prisoner's Dilemma 2. The Superior Stability of Parallel Exclusion 3. Recidivist Exclusion 4. Oligopoly Size B. Exclusion as a Dominant Strategy IV. DOCTRINE A. Monopolization by Multiple Firms 1. Shared Monopoly 2. Conspiracy To Monopolize 3. FTC Enforcement B. Aggregation of Contracts in Restraint of Trade C. Mergers D. The Insufficiency of Horizontal Agreement CONCLUSION INTRODUCTION

Markets with just a few competitors have long posed daunting problems for antitrust law. Consider the problem in its most familiar form. Two gas stations, the only alternatives on a long stretch of highway, both choose a high price. Each is aware of, and dependent on, the fact that its opponent is making the same choice, but there is no explicit agreement. Must such de facto price-fixing be tolerated? This, the puzzle of "parallel pricing," was the subject of a famous debate between Richard Posner and Donald Turner in the 1960s and has continued to confound courts and scholars for more than forty years. (1)

The classic debate, however, is incomplete, for it is fixated on pricing and thus neglects the importance of parallel exclusion. Parallel exclusion is conduct, engaged in by multiple firms, that blocks or slows would-be market entrants. If Visa and MasterCard together dominate the provision of credit card services and both make it difficult or impossible for American Express to issue a competing card, they are practicing a form of parallel exclusion.

Parallel exclusion deserves much greater attention, for its anticompetitive forms have much greater social consequences than parallel pricing due to their potential to influence not just prices, but also the pace of innovation. After all, setting a high price leaves the field open for new entrants and may even attract them. In contrast, parallel action that excludes new entrants both facilitates price elevation and can slow innovation. As a source of dynamic inefficiency, it has greater long-term significance for the economy. (2)

Parallel exclusion is pervasive in industries that comprise a few major players, as our paper demonstrates. (3) Despite its prevalence, and its potential to do more harm than parallel pricing, the phenomenon too frequently has been neglected. Particular aspects of parallel exclusion have received some attention under various headings, but the phenomenon has seen little systematic or sustained treatment across disparate doctrinal areas and industries. (4) This Article is an effort to fill that gap. We seek to explain the importance of anticompetitive parallel exclusion, characterize its real-world prevalence and harms, and assess various possible solutions.

As is the case with single-firm conduct, we do not insist that all parallel exclusion is anticompetitive, nor do we think that most parallel conduct is exclusionary. Much parallel conduct, such as the tendency of firms to design similar products, has no plausible exclusionary effect. Moreover, some exclusionary conduct is justified and efficiency enhancing and thus should not be subject to antitrust liability, lust as with single-firm monopolization, an evaluation of parallel exclusion requires attention to market structure, conduct, and effects.

Yet we stress that the existence of the bad forms of parallel exclusion is far more than a theoretical phenomenon. Multiple case studies, threaded through the Article, reveal both its mechanisms and the factors that tend to yield stable exclusion. Studies of credit card payment systems, shipping lines, film, telephone services, tobacco, and other industries suggest that lasting exclusionary patterns depend on reliable coordination points for exclusion. A history of exclusion makes it easier to coordinate in the future. Thus, a specific history of monopoly or regulatory exclusion may be a strong predictor of stable exclusion, for the firms involved can simply continue the former monopoly's patterns of exclusion, or find ways to continue the exclusion once provided by now-repealed government regulations.

Our project sits at the intersection of two lines of thinking developed by industrial organization economists and legal scholars: analyses of exclusionary conduct and examinations of cartel stability. As for the latter, a major difference from single-firm conduct is the interaction among the excluders, and the prospect that one might have a unilateral incentive to deviate and cause the scheme to collapse. The incentive to deviate is a key predicate question for any regime of parallel activity. A basic game-theoretic analysis suggests that parallel exclusion regimes may in fact be more stable than parallel price-elevation regimes. That is because the factors that leave price elevation vulnerable to breakdown do not apply as strongly to parallel exclusion. Moreover, in some instances, maintaining an exclusion scheme can simply be a win-win or "dominant" strategy for each of the excluders. In such cases, the likelihood of collapse is even lower, yielding a potentially indefinite system of parallel exclusion.

We conclude that U.S. antitrust doctrine should be adjusted to address anticompetitive parallel exclusion more effectively. At present, form is sometimes exalted over substance, with the effect that horizontal agreement among the excluders is treated as either necessary or sufficient for liability. Properly understood, it is neither. It is the anticompetitive effect of the conduct that should matter, rather than the presence or absence of agreement. We therefore outline several doctrinal proposals to reduce the significance of horizontal agreement.

In particular, we propose that antitrust doctrine recognize parallel exclusion as a form of monopolization, (5) Antitrust liability for monopolization is normally associated with the conduct of a single, dominant firm. We would extend its application to exclusion by multiple firms, subject to the strict limits already present in case law, including monopoly power, anticompetitive effect, and an absence of sufficient procompetitive justification. Second, we support a more robust appreciation of "aggregation," a doctrine recognized by the Supreme Court and applicable to parallel exclusion that is accomplished through contracts between the excluders and other firms, whereby the contracts are evaluated by reference to their cumulative effects. (6) We also spell out why parallel exclusion is a proper concern for merger policy and why we need not automatically condemn those horizontal agreements that lack an anticompetitive exclusionary effect.

Beyond the scholarly debate, this Article has important implications for antitrust enforcers. Our experience suggests that enforcement agencies may decline to even consider the investigation of exclusionary conduct if practiced by multiple firms. The reluctance stems in part from the mistaken view that Turner, in his debate with Posner, demonstrated that the law should never target "mere" parallel conduct, whatever the form. In fact, Turner, while reluctant to pursue parallel pricing, strongly believed that enforcers should pursue cases of oligopoly exclusion-indeed, he believed that "the law on shared monopoly may be brought virtually in line with the law on individual monopoly." (7) Beyond Turner, we believe that if enforcers are excessively reluctant to investigate parallel exclusion, the result may be too much tolerance of anticompetitive conduct.

This Article proceeds in four parts. Part I defines parallel exclusion and its connection to the well-developed debate about parallel pricing. Part II examines the mechanisms and effects of parallel exclusion. Part III evaluates the stability of parallel exclusion schemes, despite individual incentives to deviate from parallel conduct. Part IV explicates our doctrinal recommendations.

1. PRELIMINARIES

   1. Situating Parallel Exclusion

      A traditional dichotomy in antitrust analysis tends to obscure the concept of parallel exclusion. The dichotomy is between "exclusion" and "collusion," the two basic categories of anticompetitive conduct. (8) Exclusion refers to the improper preservation of incumbency through self-entrenching conduct. (9) That term is broad enough to embrace exclusion by multiple incumbents, (10) but in practice it has often been limited to exclusion by a single, dominant firm. (11) Collusion refers to cooperation that reduces competition. Arguably that term embraces a variety of strategies, including exclusionary strategies. But its primary meaning within the dichotomy is cooperation that does not entail exclusion: price elevation and other forms of reduced competition among members, such as advertisement or product quality, that tend to attract rather than restrict entry. (12)

      Parallel exclusion does not fit the dichotomy as it is commonly understood. As we use the term, parallel exclusion is self-entrenching conduct, engaged in by multiple firms, that harms competition by limiting the competitive prospects of an existing or potential rival to the excluding firms. This definition excludes some forms of parallel conduct of antitrust interest, including so-called facilitating practices that may reduce competition among firms but without impeding entry, (13) and refusals by multiple firms that, even if exclusionary, are not self-entrenching. (14)

      Fitting within neither category neatly, parallel exclusion is often overlooked or discussed from some unusual angle. For example, some examinations of parallel exclusion come under the...