Agreements I

Barbados Fair Trading Commission

Program in Competition Law and Policy
Barbados March 30 31, 2011

Sean Dillon
Bureau of Competition
United States Federal Trade Commission


These views are those of the author and do not necessarily represent the position of the Federal
Trade Commission or any individual Commissioner.
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Goals of this session:
Types of Agreements (horizontal, vertical,
cartel)
Harms of collaboration
Benefits of collaboration
Per se vs. Rule of Reason
Elements of a Case
Proof of an Agreement
Justifications for the Agreement
Harm to consumers/anticompetitive effects
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Horizontal Agreements
Barbados Law
Fair Competition Act, Section 13(2)
Prevents agreements between
businesses that have or are likely to
have the effect of preventing,
restricting or distorting competition in a
market.

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Comparison with U.S. Law
Under Section 1 of the U.S. Sherman Antitrust
Act:
Every contract, combination or conspiracy, in
restraint of trade is declared to be illegal ....

Prohibits only those contracts or agreements
that restrain trade unreasonably (as
determined by the courts).

FTC Act, 15 U.S.C 45(a): (1) Unfair
methods of competition in or affecting
commerce are hereby declared unlawful.

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Agreements Between Competitors
Illegal per se
Purpose and effect are
irrelevant
Strict liability
These include cartels and
other agreements that by
nature almost always
injure competition

Judged by rule of
reason
May or may not be illegal
depending on all of the
facts and circumstances,
including its purpose,
any anticompetitive
effects, any benefits from
the agreement
U.S. law divides anticompetitive agreements between competitors
into two groups:

Careful analysis needed to know which applies
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Collusion: Offense Illegal Per Se
Per se offenses are naked
agreements among competitors to:
Fix prices
Divide markets
Reduce output
Rig bids
No justifications are permitted
These always injure competition
No benefits to consumers
Hard core cartels punishable by
prison, fines
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Agreements Subject to Rule of Reason

Other agreements among competitors are
analyzed according to their purpose and
competitive effects
Some are beneficial, but
Others simply reduce output, reduce choice
and increase cost

In such cases, agreements are illegal only if it is
shown that harm outweighs benefits

Agreements found illegal under the Rule of
Reason are typically remedied through
injunction and damages
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V
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T
I
C
A
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Supplier Supplier Supplier
Manufacturer Manufacturer Manufacturer
Distributor Distributor Distributor
Retailer Retailer Retailer
HORIZONTAL
The Chain of Production



HORIZONTAL AGREEMENTS
&
CARTELS
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Distinction Between Cartels and Other
Types of Horizontal Agreements
Cartel agreements typically include
one or more of the following:
Agreements on what price to charge
Agreements to limit their output
Agreements to allocate customers
Agreements to divide territories or
markets
Agreements to rig the bidding process
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Distinction Between Cartels and Other
Types of Horizontal Agreement
Cartel agreements are illegal per se

Competitive harm is presumed
Experience shows these agreements almost always
lead to higher prices & reduced output

No justifications or defenses considered
Preventing destructive or cut-throat competition
Enhancing service and quality competition
Preventing unsafe competition
The agreed upon prices are reasonable

Subject to criminal prosecution in U.S.
Leniency Programs Eliminate or reduce criminal
penalties against those that report cartels first. U.S.
Governments primary way of detecting cartels.

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Distinction Between Cartels and Other
Types of Horizontal Agreements
Other types of horizontal agreements
may or may not harm competition

May benefit competition when they create
efficiencies:
Lower costs
Reduce risks
Create new or improved products or
manufacturing or distribution methods
Improve the flow of information

May harm competition when they create or
facilitate the exercise of market power
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Types of Horizontal Agreements
Agreements on Price
Facilitating Practices Agreements
Quiet Life Agreements
Group Boycotts
Joint Venture Agreements
Agreements to Improve Functioning
of the Market
Trade Associations
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Horizontal Agreements on Price:
Price Fixing Agreements
These are the most serious because price
often is the principal way that firms
compete.

It is the agreement that is illegal,
regardless of whether the parties to the
agreement ever charge the agreed upon
price.

These agreements can take many forms,
but do not require an agreement on the
ultimate price that will be charged.

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Different Forms of Price Fixing Agreements
To raise or stabilize the price
On a standard formula by which to compute prices
To eliminate discounts or to establish uniform
discounts
On credit terms that will be extended to customers
To use a uniform price as a starting point for
negotiations with potential customers
To discontinue free services
To impose a mandatory surcharge
To use a common sales agent to set prices
To restrict price advertising

Example: The Lysine Conspiracy
Lysine is a feed additive used by farmers in
livestock feeds a worldwide $600 million
industry.
Members of the lysine cartel reached agreements
to carve up the world market by allocating sales
volumes among themselves and agreeing on what
prices would be charged to customers worldwide.
As a result, prices went up about 70 percent in
the first three months of the conspiracy.
Impermissible naked price fixing resulted in
multi-million dollar fines for cartel members and
criminal convictions.
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Naked Versus Ancillary
Horizontal Agreements on Price
Not all are illegal per se
Distinguish between naked price fixing
agreements and ancillary price fixing
agreements
Naked price fixing: the agreement on price is
the principal agreement.
Per se illegal
Ancillary price fixing: literal agreement on
price, but subordinate to some other principal
agreement involving economic integration
Rule of reason analysis (a balancing test)
Permitted where reasonably related to/necessary
for the principal agreement
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Example: The Case of the Lithotripsy
Joint Venture

Competing urologists formed a joint venture to purchase and
operate a lithotripsy machine
Investors included 35 of 200 urologists in the market
Investors pooled their capital to purchase and operate the machine
Investors shared financial risk of profit or loss

Urologist investors agreed to charge a uniform machine fee
for each use
Literal price fix, but ancillary to the principal agreement and
reasonably related to the principal agreement
Benefits > harms = legal

Urologist investors also agreed to charge a uniform
professional fee for the physician services
No sharing of financial risk
Price agreement not reasonably related to the principal agreement
Illegal

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Proof of Agreement
Requirement of an agreement
Two or more economic actors
Does not have to be express or written

Direct Evidence of an agreement:
Copy of the actual agreement
Statement by a person who attended a meeting
where the agreement was reached
Internal company memorandum written to report a
meeting where the agreement was reached
Notes of a telephone conversation that discussed the
agreement
Statement by a person who was approached by the
cartel to join the agreement
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Proof of Agreement
Circumstantial evidence inferring
an agreement

Look for evidence of behavior that
makes sense only if there is an
agreement

Evidence that tends to exclude the
possibility of independent conduct

Evidence that is against an actors
economic interest absent an agreement
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Example: Parallel Pricing Behavior
All competitors in a market announce at the
same time that their prices will increase by
the same amount.

Suspicious behavior? Yes

Conclusive evidence of an agreement? No

Further investigation needed to eliminate other
non-cartel explanations for the price increase
sudden increase in costs that affect all competitors
at the same time
sudden change in the demand for the product
sudden change in the price of a substitute product
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Facilitating Practices Agreements
Agreements that make it easier for
competitors to collectively exercise
market power and to avoid competing
with each other

May include agreements to share information,
adopt a product standard, or adopt a
particular contracting or pricing practice

These practices may not directly restrain
competition, their use makes it easier for
industry participants to reach or maintain
tacit or explicit agreements on price or output

Difficulty with facilitating practices
agreements is that they are not always
anticompetitive
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Example:
Facilitating Practices Agreement
Price protection clauses: Seller agrees to
either meet any price the buyer is able to
obtain from another supplier or release
the buyer to purchase from the other
seller

Looks pro-competitive in that they can offer
customers lower prices

But can serve as a policing mechanism to
detect cheating on cartels and reduces the
incentives of sellers to offer lower prices
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Quiet Life Agreements
Agreements that restrict competition by
freeing competitors from some significant
aspect of competition that does not directly
involve price or output
Example: Agreements not to advertise
Example: Agreements to limit business hours

Example:
A large group of auto dealers agreed to
restrict their showroom hours, including
closing on Saturdays. The agreement
reduced a service that dealers normally
provide convenient hours and made it
difficult for consumers to comparison shop.
(Detroit Auto Dealers)

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Quiet Life Agreements, cont
Things to consider in analyzing
quiet life agreements:
What competition is being eliminated?
How important is that competition to
consumers?
Does the agreement accomplish
anything other than the elimination of
competition? (Any benefits?)
Could the same benefits be achieved
without eliminating this competition?

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Group Boycotts
Agreements among competitors not to deal
with other competitors, suppliers, or
customers

Some agreements that look like group
boycotts can create efficiencies and make a
market more competitive.

Example: A group of small competitors form a joint
purchasing arrangement for the purchasing and
warehousing of product, enabling them to compete
more effectively with larger companies
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Group Boycotts, cont
Other agreements may harm competition.

Example: A new retailer enters offering very
low prices compared to others. The incumbent
retailers collectively threaten to refuse to deal
with any supplier that does business with the
new low-price retailer. The boycott could
prevent the new entrant from obtaining
sufficient supplies needed to compete, thereby
protecting existing retailers from the low-price
competition and harming consumers.

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Evaluating Group Boycotts
What portion of the companies in the market are
part of the agreement?
To what extent is a competitor excluded or
disadvantaged? Are alternatives available?
If the excluded competitor has alternative ways of
obtaining the same or similar benefits, the exclusion
will not likely be harmful
What is the purpose of the agreement, and what
are the purported benefits?
If the parties claim a purpose other than to exclude or
disadvantage competition, determine whether the
facts support the stated purpose
Could the same benefits be achieved without
excluding or disadvantaging a competitor?
Are less anticompetitive but reasonable alternatives
available for achieving the same benefits?
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Joint Venture Agreements
Cooperation may produce a better
competitor (a more efficient and effective
competitor)

Joint ventures may include terms that
unreasonably restrict competition among
the ventures participants

General guidance on joint ventures
Is the purpose to make the participants more
efficient/effective?
Is the agreement necessary to achieve the
asserted competitive benefits?
Is sufficient competition left to compete with
the newly formed venture?
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Agreements to Improve the Functioning
of the Market
Standard setting agreements among competitors
generally are beneficial to competition.

Example: an agreement among plumbing pipe manufacturers
to standardize the sizes, shapes, and material composition so
that builders and consumers can use pipes interchangeably
no matter which manufacturer made them.

Although adoption of standards may exclude
nonconforming products and thus harm the
company (competitor) that makes them, this alone
is rarely a sufficient basis for condemning the
practice as anticompetitive.

Before standard setting can harm competition, one
factor must be present: control over market access.
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Trade Associations
Trade associations carry out many legitimate, positive
functions:
Educating members about technology and other advances
in the industry
Identifying potential problems with products
Facilitating training on legal & other administrative issues
Acting as an advocate or lobbyist before the government

Trade associations also can serve as a forum for cartel
activities, and trade associations can be used as
vehicles for cartels to engage in facilitating practices
and quiet life agreements
Example: farm equipment trade association and its
members agreed not to advertise prices for new farm
equipment and to boycott a trade publication in
furtherance of the agreement
Example: chiropractic trade association and its members
conspired to fix prices and to boycott third-party payers
to obtain higher reimbursement levels
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Which agreements should be illegal?
An agreement between two competitors setting
the price to be charged for their goods/services

An agreement between competitors to limit
production in order to save scarce resources

An agreement setting the price to be charged for
goods competitors jointly develop, produce, and
sell as part of a business venture between them

An agreement between competitors to close their
stores on Saturdays and Sundays in order to
spend time with their families

An agreement between competitors not to do
business with a supplier that has been supplying a
new entrant
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VERTICAL AGREEMENTS
(Vertical Restraints)
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Overview of Vertical Restraints
VRs involve restrictive agreements
between firms that are not direct
competitors. They are very different in
kind from restrictions among competing
sellers, such as price fixing.

VRs, which involve complements in
production, may have both
procompetitive and anticompetitive
features
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Possible VR Structure
Manufacturer
(supplier)
Distributor 1 Distributor 2 Distributor 3
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Types of Vertical Restraints
Vertical Price Restraints
Resale price maintenance Agreement
between manufacturer and distributor not to
sell manufacturers product at or above a price
floor, or at or below a price ceiling.
Vertical Non-Price Restraints
Vertical Territorial Division
Location Clauses
Vertical Customer Division
Others
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Why Vertical Restraints?
Could be profitable for 2 reasons:

1)Because they increase efficiency of the distribution
system and thus help lower supplier costs;

2)Because they increase the suppliers market power
and enable it to earn monopoly profits.

Competition policy that attempts to maximize the
welfare of consumers would try to approve
restrictions that have the first effect, and
condemn those that had the second effect.
Procompetitive Features of VRs
Higher retail margins induce more service
by retailers.
Prevents free riding by discount houses.
Stimulates interbrand competition by
reducing intrabrand competition.
May induce distributors of products to
provide optimal level of promotional display
or advertising services, increasing demand
and benefitting consumers.
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Anticompetitive Features of VRs
RPM Keeps prices higher than they might otherwise be.

Territorial division may facilitate tacit or explicit collusion
by suppliers, particularly if engaged in horizontal
territorial division.

May foreclose competition, as exclusive supply
agreements may cut off key inputs to competitive
suppliers.

Raising Barriers to Entry May require entry at two levels
in chain of production, or raise the cost of new entry.

Toys R Us case (2000) Chain toy store used VRs under
which toy manufacturers agreed not to supply popular
toys to retail discount clubs. Court held VR facilitated
collusion among manufacturers.
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U.S. Legal Analysis of VRs
Non-price VRs analyzed under a rule of reason
analysis.

RPM For nearly 100 years, minimum resale
price maintenance was per se illegal in the
United States.

In 2007, U.S. Supreme Court in Leegin case
held minimum RPM subject to rule of reason
analysis rather than per se prohibition
essentially permitting it in the United States
(but may violate State law).
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Legal Analysis of VRs
As VRs may have either procompetitive or anticompetitive
explanations, facts are key.

Assessing Market Power is important: Market power is
the ability of a company (or companies) to raise prices
above competitive levels without losing sales so rapidly as
to make the price increase unprofitable.

The risk of an anticompetitive outcome is greater when
the firm or firms using VRs have market power Dominant
firm may exclude rivals
Non-dominant firms with market power may use VRs
to facilitate collusion.
Degree of market power may be important.

When VRs are used by firms that lack market power,
efficiency explanations, such as inducing promotional
activities, likely to hold sway.
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