Two Sherman Act Section 1 Dilemmas: Parallel Pricing, the Oligopoly Problem, and Contemporary Economic Theory

AuthorJonathan B. Baker
DOI10.1177/0003603X9303800105
Published date01 March 1993
Date01 March 1993
Subject MatterArticle
The Antitrust Bulletin/Spring 1993
Two Sherman Act section 1
dilemmas: parallel pricing, the
oligopoly
problem, and
contemporary economic theory
BY JONATHAN B. BAKER*
143
The
prohibition
most
fundamental
to
Sherman
Act
§
11
bars
an
agreement
on
price
among
competitors.s
Such
an
agreement
is
* Special Assistant to the Deputy Assistant Attorney General for
Economics, Antitrust Division, U.S. Department of Justice.
AUTHOR'S NOTE: The author is indebted to Joe Angland, Michael Asi-
mow.
Paul
Denis. Lawrence DeMille-Wagman. Will Gillespie.
Jay
Hamilton.
Ken
Heyer.
Donna
Kooperstein,
Bill
Kovacic.
M.J.
Moltenbrey, Janusz Ordover, Steve Salop. Mark Schechter. Bobby Willig
and Peter Woodward. The views expressed in this article are not neces-
sarily those
of
these colleagues. nor
of
the U.S. Department
of
Justice.
The author is grateful to the Duke University School
of
Law and the John
M. Olin Foundation. Inc.
for
support.
and
to Natalie
Jackvony
for
research assistance.
Section 1 of the Sherman Act prohibits every "contract, combina-
tion
...
,or
conspiracy" in restraint of trade. 15 U.S.C. §1 (1988).
2Horizontal restraints on price are illegal per se unless they are
ancillary to an economic integration generating a large cost savings or
other efficiency, tantamount to the creation of a new product. Those
e1993 by
Fedenl
Legal Publications. Inc.
144 :
The
antitrust bulletin
akin
to
the
very
trusts
(cartels)
that
the
antitrust
laws
were
intended
to
prohibit.
Through
a
horizontal
agreement
to fix
price,
competitors
may
act
collectively
as
would
a
monopolist,
creating
the
identical
harm
to
competition
and
consumers.
Perhaps
the
most
difficult
issue
in
applying
§1, from
both
a
legal
and
economic
perspective,
is
identifying
an
agreement
among
competitors
to fix
prices
when
the
evidence
of
agreement
is
entirely
circumstantial.t In
particular,
courts
and
commentators
have
debated
for
decades
whether
parallel
price
changes
by
oligopolists
who
recognize
their
interdependence
provide
a
suffi-
cient
basis
for
a
court
to
infer
an
unlawful
horizontal
agreement
under
Sherman
Act
§1,
and
if
not
what
additional
circumstantial
evidence
is
required
to
prove
aconspiracy.'
Parallel
pricing
cases
challenge
courts
to
distinguish
between
unilateral
and
concerted
conduct.
S
The
difficult
issue
of
proving
an
agreement
to fix
prices
from
parallel
pricing
and
other
circumstantial
evidence
is at
the
core
of
restraints that do not fall within the per se prohibition are illegal if unrea-
sonable. See generally, Baker, Per Se Rules in the Antitrust Analysis of
Horizontal Restraints, 36 ANTITRUST BULL. 733 (1991).
When the evidence for an agreement is circumstantial, the fact of
an agreement must be inferred even if the evidence is believed. Circum-
stantial evidence is distinguished from direct evidence of an agreement,
such as the testimony
of
aremorseful conspirator that
"we
met and
agreed to the following conduct" or a written memorialization
of
the
agreement. Although direct evidence may be contradicted by other evi-
dence or challenged as to credibility, it resolves amatter at issue if
believed. In contrast, additional inference is required to resolve the mat-
ter at issue when the evidence offered is circumstantial. 1
MCCORMICK
ON
EVIDENCE
777 (1992).
4Although parallel pricing is the focus of this article, similar infer-
ential issues arise with other forms of parallel conduct, such as parallel
refusals by competitors to deal with a common customer or supplier.
SThe Supreme Court has termed this distinction
"basic"
to the
Sherman Act. Copperweld Corp. v, Independence Tube Corp., 467 U.S.
752, 767 (1984) citing Monsanto Co. v, Spray-Rite
Servo
Corp., 465 U.S.
752, 761 (1984);
accord,
United States v. Colgate &Co., 250 U.S. 300,
307 (1919).
Section 1dilemmas :145
antitrust's
longstanding efforts to attack the "oligopoly problem."
This
term refers to the concern that an industry characterized by a
small
number
of
sellers will exercise
market
power.
During
the
1950s and 1960s, when the structural school
of
antitrust analysis
was dominant, it was
commonly
thought
that
oligopolies
would
normally succeed in raising prices above competitive levels
either
through reaching aprice-fixing agreement,
or
merely
by
interact-
ing while recognizing
their
Interdependence,
The
latter
possibility,
termed
"tacit
collusion,"
was
thought
to be
nearly
inevitable
in
oligopolies. Although antitrust law ultimately rejected the strategy
of
attacking the oligopoly problem by deeming
"conscious
paral-
lelism"
in prices to be an agreement in violation
of
Sherman Act
§
I,
that proposal was widely debated.
In
contrast,
antitrust
commentators
writing
from
the
more
modern Chicago school perspective typically dismiss the possibil-
ity
of
noncompetitive behavior unless the firms actually cooper-
ate.
Under
this view,
the
oligopoly
problem
is
identical
to
the
problem
of
uncovering and prosecuting price fixing. But interfirm
coordination
is
not
inevitable,
and
its
likelihood
depends
upon
certain structural characteristics
of
the industry that vary from
one
market
to another. Since the mid-1970s, the Chicago approach to
antitrust has
come
to dominate courts and commentary," the .term
"tacit
collusion"
has
come
to
mean
no
more
than an
agreement
proved through circumstantial evidence," and an economic analy-
6See generally, e.g., Calvani &Silbarium, Antitrust Today: Matur-
ity or Decline, 35
ANTITRUST
BULL.
123 (1990); Baker, Recent Develop-
ments in Economics That Challenge Chicago School Views, 58
ANrrrRUST
LJ.
645,645 n.l (1989); Baker, Book Review, 34
ANTITRUST
BULL.
919
(1989).
7Kovacic, The Identification and Proof
of
Horizontal Agreements
Under the Antitrust Laws, 38
ANTITRUST
BULL.
5 (1993), at text accompa-
nying note 51. As a matter of logic, an express agreement (in which the
parties provide each other with explicit assurances, usually verbal, that
they will carry out their promises) proved through circumstantial
evidence is not the same as a tacit understanding (in which no such assur-
ances are given). See Esco Corp. v, United States, 340 F.2d1000, 1007
(9th Cir. 1965) ("[al knowing wink can mean more than words"); R. Pos-
NER,
ANTITRUST
LAW 72 (1976) (in tacit collusion, "one seller communi-

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