Conscious Parallelism and Price Fixing Defining the Boundary

Conscious Parallelism and Price Fixing: Defining the Boundary Author(s): Michael K. Vaska Source: The University of Chicago Law Review, Vol. 52, No. 2 (Spring, 1985), pp. 508-535 Published by: The University of Chicago Law Review Stable URL: . Accessed: 10/09/2014 22:49 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . . JSTOR is a not-for-profit se
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  Conscious Parallelism and Price Fixing: Defining the BoundaryAuthor(s): Michael K. VaskaSource: The University of Chicago Law Review, Vol. 52, No. 2 (Spring, 1985), pp. 508-535Published by: The University of Chicago Law Review Stable URL: . Accessed: 10/09/2014 22:49 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at  .  . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact  . The University of Chicago Law Review  is collaborating with JSTOR to digitize, preserve and extend access to The University of Chicago Law Review. This content downloaded from on Wed, 10 Sep 2014 22:49:53 PMAll use subject to JSTOR Terms and Conditions  Conscious Parallelism and Price Fixing: Defining he Boundary Section 1 of the Sherman Antitrust ct' has eliminated most overt rice-fixing rrangements. n order o avoid sanctions nder this law, firms wishing o engage n collusive,2 nticompetitive practices re forced o enter nto ecret greements o fix prices.3 The detection f these covert greements as become he central focus of section 1 enforcement.4 irect evidence f such agree- ments s difficult o obtain, owever, nd courts must ften ely n indirect r circumstantial vidence f conspiracies o fix prices. Frequently, n important actor n establishing he existence f such a conspiracy s similar onduct y rival firms hat suggests they re attempting o set prices r carve up the market or par- ticular product.5 uch conscious arallelism y itself oes not constitute oncerted ction n violation f the Sherman Act,6 ow- ever, and courts have disagreed ver what additional vidence ( plus factors ) must be produced n order o permit trier f fact to infer he existence f a price-fixing greement.7 508 ' Every ontract, ombination n the form f trust r otherwise, r conspiracy, n re- straint f trade r commerce mong he everal tates, r with oreign ations, s declared to be illegal. 5 U.S.C. ? 1 (1982). 2 Professor, ow Judge, ichard osner noted he difference etween cartel nd a collusive rrangement: Although ometimes he term cartel' s used to refer o any ollu- sive arrangement, t is more ften imited o the kind of formal, bove-board greement among irms o imit heir ompetition hat ne finds n markets, ere nd abroad, ot ub- ject to the Sherman ct. RICHARD POSNER, NTITRUST AW: AN ECONOMIC ERSPECTIVE 39 (1976). The most notable xample f an overt artel s the Organization f Petroleum x- porting Countries OPEC). 3 Posner, ligopolistic ricing uits, he Sherman ct, nd Economic Welfare: Re- ply to Professor arkovits, 8 STAN. . REV. 903, 904 (1970). 4 Posner argues that this focus has virtually mptied the rule against price fixing] f any economic content, o become in effect branch of the criminal aw of conspiracies nd attempts. d. See Delaware Valley Marine Supply Co. v. American Tobacco Co., 297 F.2d 199, 202 (3d Cir. 1961), cert. denied, 369 U.S. 839 (1962). 6 See, e.g., Theatre Enters., nc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954). 7 Compare n re Plywood ntitrust itig., 55 F.2d 627, 634, 637 5th Cir. 1981) al- lowing the inference f conspiracy from parallel conduct and evidence of opportunity o conspire), cert. dismissed sub nom. Lyman Lamb v. Weyerhauser, 62 U.S. 1125 (1983), with Weit v. Continental ll. Nat'l Bank & Trust Co., 641 F.2d 457, 463 (7th Cir. 1981) (holding that parallel conduct plus opportunity o conspire did not permit he inference f This content downloaded from on Wed, 10 Sep 2014 22:49:53 PMAll use subject to JSTOR Terms and Conditions  Conscious arallelism nd Price Fixing 509 The plus factor most often onsidered y courts n determin- ing whether arallel behavior s the result f an agreement s the business-justifications est. Under this test, a price-fixing gree- ment may be inferred rom arallel conduct f firms annot how legitimate ndependent usiness easons or ngaging n such prac- tices.8 Once conscious arallelism ufficient o establish n agree- ment has been found, he practices re deemed llegal per se, with- out an inquiry nto whether he practices are actually anti- competitive.9 Commentators, n the other hand, ncluding ichard Posner and Donald Turner, ave argued hat the courts' mphasis n es- tablishing he existence f an agreement s improper.10 lthough Posner nd Turner mploy ifferent conomic nalyses, oth con- clude that parallel practices iolate he Sherman Act if, nd only if, they have anticompetitive ffects.1' oth advocate an in- quiry-similar o the rule of reason12-into the economic ffects f firms' arallel behavior without separate nquiry nto the exis- tence of an agreement mong firms ot to compete.'3 This comment rgues that both the courts' reatment f in- ferred greements s per se illegal nd Posner's nd Turner's ule- of-reason nquiries or nticompetitive ffects re inadequate nd contrary o section 1, which equires hat there be both an agree- ment nd a restraint f trade.'4 Part I of the comment xamines the economics f cartelization nd conspiracies o restrain rade and outlines he differing pproaches o the subject uggested y Turner nd Posner. Part II explores he udicial treatment f par- allel behavior. In Part III, the comment rgues that findings f both an conspiracy hen rebutted y evidence hat the adoption f the parallel onduct was sup- ported y ndependent usiness ustifications), ert. denied, 55 U.S. 988 (1982). 8 See infra note 82 and accompanying ext. 9 See, e.g., n re Japanese lec. Prods. Antitrust itig., 23 F.2d 238, 10 3d Cir. 1983), cert. ranted ub nom. Matsushita lec. Indus. Co. v. Zenith Radio Corp., 05 S. Ct. 1863 (1985); Weit v. Continental ll. Nat'l Bank & Trust Co., 641 F.2d 457, 465 7th Cir. 1981), cert. denied, 55 U.S. 988 (1982); n re Plywood Antitrust itig., 55 F.2d 627 (5th Cir. 1981), ert. ismissed ub nom. yman amb v. Weyerhauser, 62 U.S. 1125 1983). But see Ambook nters. . Time nc., 612 F.2d 604, 618 n.23 2d Cir. 1979) questioning he parties' assumption hat per se rule pplied), ert. dismissed, 48 U.S. 914 (1980). 10 See infra notes 44-48, 55-57 and accompanying ext. See infra notes 34-66 and accompanying ext. 12 Under he rule f reason, court must ind hat practice s anticompetitive n effect before t condemns he practice nder he Sherman ct. See infra ote 70 and accompany- ing text. 13 See infra note 66 and accompanying ext. 4 See supra note 1. This content downloaded from on Wed, 10 Sep 2014 22:49:53 PMAll use subject to JSTOR Terms and Conditions  510 The University f Chicago Law Review [52:508 agreement nd anticompetitive onduct re required n order o es- tablish violation f section 1. Thus, parallel conduct ound o constitute n agreement nder the business-justifications est should not be treated s per se illegal because, nlike many vert price-fixing greements, uch conduct s not anticompetitive n its face. Conversely, ondemning arallel ctivity nder rule of rea- son inquiry without egard o the existence f an agreement x- poses firms o liability or therwise egitimate onduct olely be- cause the conduct has an adverse mpact n competition. nder such a standard, irms ould be liable under ection not because their onduct, tanding lone, s anticompetitive, ut because the interaction f the conduct f several irms as an adverse mpact on competition. uch an effect annot properly e brought ithin the scope of section 1. In order o find violation f section 1, therefore, ourts hould first etermine, sing he business-justifi- cations est, whether here s an agreement, nd should hen na- lyze he parallel onduct nder he rule-of-reason nquiry o deter- mine whether he practices ave anticompetitive ffects. I. ECONOMIC APPROACHES TO CARTELS, CONSPIRACIES, AND CONSCIOUS PARALLELISM In a competitive arket, o firm cting lone can affect he market rice f commodity. ' irms ct as price-takers nd maxi- mize profits y increasing heir utput until he cost of the last unit sold (the marginal ost of production) quals the market price.16 y forming cartel, owever, irms an affect he market price.'7 artels maximize he profits f their members y reducing total output nd setting rices well above marginal ost,'8 hus achieving market rice hat s higher han the price hat would prevail f the market were ompetitive. ' 16 EDWIN MANSFIELD, MICROECONOMICs 20 n.2 (3d ed. 1979). 16 R. POSNER, supra note 2, at 241. 17 R. POSNER & F. EASTERBROOK, ANTITRUST: CASES, ECONOMIC NOTES, AND OTHER MATERIALS 1065 (2d ed. 1981). 18 See JAMES KOCH, INDUSTRIAL ORGANIZATION AND PRICES 420-22 (2d ed. 1980). 19 R. POSNER & F. EASTERBROOK, supra note 17, at 1064-65. The probability f effective collusion s not the same for all markets. everal market factors have been identified hat facilitate ollusion; these include product homogeneity, nelastic product demand, concen- tration of economic power, fewness f firms, nd the conviviality f interfirm elationships. See, e.g., F.M. SCHERER, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC PERFORMANCE 199- 227 (2d ed. 1980); Hay & Kelley, An Empirical Survey of Price Fixing Conspiracies, 17 J.L. & ECON. 13, 14-16 1974). The Depression-era igarette ndustry resents good example of a market ripe for ollusion. t was concentrated nd dominated by three powerful manufac- turers. Moreover, he Big Three had cozy business relations. For example, in order to This content downloaded from on Wed, 10 Sep 2014 22:49:53 PMAll use subject to JSTOR Terms and Conditions
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