Plus factors and agreement in antitrust law.

• Author: Kovacic, William E.

Plus factors are economic actions and outcomes, above and beyond parallel conduct by oligopolistic firms, that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action. Possible plus factors are typically enumerated without any, attempt to distinguish them in terms of a meaningful economic categorization or in terms of their probative strength for inferring collusion. In this Article, we provide a taxonomy for plus factors as well as a methodology for ranking plus factors in terms of their strength for inferring explicit collusion, the strongest of which are referred to as "super plus factors."

TABLE OF CONTENTS INTRODUCTION I. DEFINITION OF CONCERTED ACTION IN ANTITRUST LAW A. Doctrine Governing the Use of Circumstantial Evidence to Prove an Agreement B. Plaintiff's Burden of Proof C. Interdependence and the Role of Plus Factors II. AGREEMENTS TO SUPPRESS RIVALRY ASSESSED THROUGH THE REACTIONS OF BUYERS III. TAXONOMY OF CARTEL CONDUCT A. Price Elevation B. Quantity Restrictions C. Internal Incentive Shifts D. Allocation of Collusive Gains E. Redistribution of Gains and Losses F. Communication and Monitoring G. Enforcement H. Dominant-Firm Conduct by Cartels I. Cartel Response to Factors Identified as Super Plus IV. INFERENCES BASED ON PLUS FACTORS A. Plus Factor Categorization B. Estimating Probabilities C. Harms from Decisions and Types of Errors CONCLUSION INTRODUCTION

Competition law treats agreements among rival firms to set the terms on which they trade as extremely serious offenses. (1) Most of the world's approximately 120 systems of competition law assign the prosecution of cartels a high priority. The consequences of detection can be severe. The annual global sum of civil fines and treble damages for cartel participants today routinely exceeds hundreds of millions--indeed, even billions---of dollars, and individuals in a growing number of countries face potent criminal sanctions. (2)

Central to the operation of laws that aggressively punish collusion are the definition and proof of concerted action. Powerful consequences flow from whether price increases observed in the marketplace emerge from individual or collective initiative. A firm acting alone ordinarily can set its prices as high as it likes. (3) If the same firm cooperates with its competitors to achieve price increases, however, its executives may go to prison. Despite the crucial role of the concept of concerted action to this framework, few elements of modern antitrust analysis in the United States and in other jurisdictions are more perplexing than the design of evidentiary standards to determine whether parallel conduct stems from collective or from unilateral decisionmaking. (4)

In the case of oligopolies, authorities have struggled to develop suitable evidentiary standards for identifying agreements. Firms in an oligopolistic industry recognize their mutual interdependence, understand that they are players in a repeated game, and act accordingly. (5) In antitrust decisions about allegations of collusive pricing, this pattern of interaction--which courts and commentators describe as "conscious parallelism"--is viewed as insufficient to establish that firms are engaged in concerted action. This is because such pricing can emerge from firms acting noncollusively where they understand their role as players in the repeated oligopoly game. (6) In antitrust cases, courts permit the fact of agreement to be established by circumstantial evidence, (7) but they have required that economic circumstantial evidence go beyond parallel movement in price to reach a finding that the conduct of firms potentially violates section 1 of the Sherman Act. (8) The additional economic circumstantial evidence is collectively referred to as "plus factors." (9)

The interpretation of plus factors in the decision to prosecute and in the resolution of litigated cases has proved to be a vexing task for enforcement officials and judges. Many commentators have catalogued plus factors and discussed the critical mass of circumstances that ought to justify an inference that observed behavior is the product of concerted action. (10) Numerous judicial decisions have wrestled with the evaluation of plus factors in cases dealing with questions of agreement. (11) For all this effort, there is persistent dissatisfaction with the analytical methods commonly used in antitrust enforcement and litigation to distinguish plus factors in terms of their probative value.

The frailties of the existing analytical tests for assessing plus factors have at least two implications. First, they impede the economically sensible resolution of many high-stakes antitrust cases where decisions made on the issue of conspiracy are decisive. Second, the inadequacies of the existing analytical framework may well be magnified in the future. The expanded use of powerful means of detection--including amnesty programs that give certain informants full dispensation from criminal penalties--and ever stronger remedies will encourage firms to achieve consensus through more subtle techniques that fall short of an express exchange of assurances in a covert meeting. (12) If would-be cartel members take this path, then government prosecutors and private plaintiffs may often find themselves relying more extensively on circumstantial proof to establish the fact of coordination. Such a development would place still heavier weight on a proper understanding of plus factors in the treatment of conspiracy questions.

This Article offers a way to increase understanding of plus factors and to improve the manner in which enforcement agencies and courts interpret them in individual cases. We advocate the use of basic probability theory to rank individual plus factors, and groups of plus factors, in terms of their probative value. (13) We refer to plus factors, or groups of plus factors, that lead to a strong inference of explicit collusion as "super plus factors." (14) The taxonomy as well as the framework we provide for assessing the probability of explicit collusion given a plus factor, or given a group of plus factors, provides an improved foundation from which enforcement authorities and courts can analyze potentially collusive conduct.

In this Article, we provide a foundation for courts and agencies to adjust the framework they now use to determine the existence of an agreement when the plaintiff lacks direct testimony or documents that prove concerted action but instead relies on circumstantial evidence that the defendants conspired to fix prices or restrict output. (15) Such an approach focuses on modern economic understandings of what cartel participants do to coordinate their behavior.

A key issue in assessing whether firm conduct is rooted in an agreement to suppress interfirm rivalry is the reaction of buyers to the actions of sellers in a marketplace. Each product/industry/market that is the subject of scrutiny for a potential violation of section 1 of the Sherman Act (16) involves a distinct set of participants, actions, and payoffs. The role of buyers, and their potential resistance to actions by sellers that increase seller payoffs at the expense of buyers, appears to be significant in the implicit thinking of many policymakers and courts that consider whether an observed conduct or outcome in the marketplace is the consequence of explicit collusion. (17) Yet this underpinning for assessing plus factors has not been explicitly recognized. We believe that every producer selling a product in an industry conditions its attempts to raise prices on the extent and nature of buyer reactions, whether the actions of sellers are part of coordinated cartel conduct or not. (18)

The Article proceeds as follows. Part I describes the existing legal standards that courts and antitrust enforcement agencies use to define concerted action and reviews the existing literature regarding plus factors. Part II discusses seller agreements as well as buyer responses to actions of oligopolistic sellers and the implications of each for plus factors. Part III presents a taxonomy for plus factors and identifies several super plus factors. Part IV offers a methodology, grounded in basic probability theory, for ranking plus factors in terms of their probative value.

1. DEFINITION OF CONCERTED ACTION IN ANTITRUST LAW

   Modern competition law makes the detection, prosecution, and punishment of concerted horizontal price and output restraints the chief priority of antitrust policymaking. (19) Commentators generally regard the enforcement of stringent rules against such agreements as antitrust's most important positive contribution to economic performance. (20) With increasing intensity, antitrust authorities around the world prosecute bid-rigging, price-fixing, and market allocation schemes.21 Since the mid- 1990s, a growing number of other jurisdictions have amended their laws to permit the prosecution of cartel offenses as criminal offenses. (22) Private suits in U.S. courts to recover damages on behalf of cartel victims have generated substantial recoveries, (23) and a number of jurisdictions outside the United States are contemplating an expansion of private rights to facilitate the compensation of victims of cartel offenses.

   The litigation of agreement issues has inspired judicial complaints about conceptual uncertainty and doctrinal confusion concerning the boundary that separates lawful unilateral conduct from illegal collective behavior. (24) Despite extensive judicial experience with the issue and major contributions by economists and lawyers concerning possible adjustments in the existing analytical framework, (25) the definition and proof of concerted action remain litigated issues in horizontal restraints cases under section 1 of the Sherman Act. (26) Courts continue to struggle to develop a satisfactory calculus for determining whether, without direct proof of agreement...