CPI Cartel Column edited by Rosa Abrantes-Metz (NYU Stern School of Business)
Click here for a PDF version of this presentation.
COLLUSION AND MARKET TRANSPARENCY
Greater transparency in the market is generally a factor that enhances efficiency and, as such, it is welcome by competition agencies. However, market transparency can also produce anticompetitive effects by facilitating collusion or providing firms with focal points around which to align tacitly their behavior.
Market transparency is a necessary attribute for the model of perfect competition as it increases efficiency by reducing customers’ search costs and allowing suppliers to benchmark their performance with that of their competitors’. Markets operate more efficiently when participants convey information about their prices and offerings, allowing customers to choose between competing products and suppliers, thereby increasing competition between sellers. Knowledge about future price developments, for example, allows customers to plan their purchases accordingly. Similarly, disclosing information about the performance of a company and its future business strategy allows securities markets to operate efficiently by providing current and potential investors with relevant data concerning that company.
Market transparency can either facilitate collusion or competition, depending on the circumstances:
On the one hand, market transparency should be encouraged. Increased knowledge of market conditions mostly benefits consumers, who can choose between competing products with a better understanding of the product characteristics; customers can also compare terms and conditions of the various offerings and freely choose the most suitable one for their needs. Enhanced transparency benefits consumers by lowering search costs. On the supply-side, the knowledge of the market and its key features (e.g., characteristics of demand, available production capacity, investment plans, etc.) facilitates the development of efficient and effective commercial strategies by market players. New entrants or fringe players may benefit from this information and enter the market more effectively and compete more fiercely against incumbents.
Increased transparency, on the other hand, is one of the factors required to reach a collusive understanding and make sure that it is sustainable over time. Transparency generally contributes to the ease of reaching an “agreement,” and decreases incentives to cheat by reducing the time before cheating is detected. In order to reach terms of coordination, to monitor compliance with such terms and to effectively punish deviations, companies need to acquire detailed knowledge of competitors’ pricing and/or output strategies. The artificial removal of the uncertainty about competitors’ actions, which is at the basis of the competitive process, can in itself eliminate the normal competitive rivalry. This is particularly the case in highly concentrated markets where increased transparency enables companies to better predict or anticipate the conduct of their competitors and thus align themselves to it.
COMPETITORS’ COMMUNICATIONS – A CHALLENGING AREA FOR ANTITRUST ENFORCERS
Explicit collusion, resulting from "naked" cartels to fix prices, allocate of customers or rig bids is almost universally condemned as unlawful. Conversely, conduct resulting purely from oligopolistic interdependence (tacit collusion) is generally not seen as a violation of competition law. It is also undisputed, however, that between explicit and tacit collusion there are situations in which firms engage in a range of practices that may help them to reduce strategic uncertainty and align their conduct more effectively. There are various strategies that firms can put in place to this purpose. These include artificially increasing market transparency by exchanging information with competitors or setting up more formalized industry-wide information sharing systems, as well as engaging in unilateral communications to the market (e.g. via press releases or other media) about future strategies, such as planned price increases, capacity, output limitations or other future conduct. In doing so, firms offer focal points on which competitors can align themselves, which can result in higher prices and harm for social welfare.
There can be considerable uncertainty surrounding the issue of whether/when competition law should intervene against unilateral disclosures of information (as opposed to reciprocal exchanges of information). There is little guidance from enforcement authorities and courts and the economic literature is at times equivocal. Making a distinction between purely unilateral conduct, such as unilateral communications (or signalling) which falls outside of the reach of competition laws, and coordinated conduct which could, in principle, fall within these laws, can be a difficult task for competition enforcers. While explicit collusion is viewed by most competition authorities as one of the most serious violations of competition law, tacit collusion or conscious parallel behavior are, on the contrary, not considered as illegal despite the fact that the outcome can be the same as in explicit collusion cases: prices jointly rise to the supra-competitive levels and possibly to the monopoly level. This raises an enforcement dilemma on how to deal with those practices which do not amount to explicit collusion but favor tacit collusion.
UNILATERAL ANNOUNCEMENTS
Unilateral announcements include any communications made by firms to the market (e.g. via press releases or other media communications) to inform the market about strategies, products and developments of the company. Indeed, a unilateral disclosure is not an exchange of information in any well-founded sense but a mere one-way communication. As such, unilateral disclosures present a unique enforcement question because the disclosures are not “agreements” themselves and, thus, must be solely analyzed based on their potential to facilitate tacit concerted activity.
Given the potential pro- and anti-competitive effects of unilateral announcements, competition agencies face the challenge of deciding which are, on balance, harmful. Whether the anticompetitive effects of unilateral disclosure of information outweigh any efficiency-enhancing effects is highly fact specific. Bright line rules are therefore difficult to establish. Nevertheless, certain factors, such as the nature, content and context of the disclosure, allow for general categorizations that may be used as starting points in competitive analysis.
Unilateral announcements can function as signalling devices by which they can indirectly communicate their intentions. Such information disclosure, and the resulting transparency it creates, may also be used by firms to monitor and enforce already existing collusive agreements. The result may have potentially anticompetitive effects on the market. However, in dealing with these practices, competition agencies face significant challenges in discerning unilateral communications used for the purposes of facilitating collusion or aligning of behavior from genuine unilateral practices with potentially pro-competitive effects. The competitive assessment of such cases can only be fact specific.
Nevertheless, several elements may be used as general indicators as to the competitive effects of unilateral information disclosure. Private disclosure between competitors has generally very few pro-competitive effects. On the other hand, public disclosure of information to both sellers and buyers is principally viewed as positive, in particular if the information has commitment value, meaning that it can be reliably traded upon. In terms of content, the disclosure of current or future price information carries greater anticompetitive potential than disclosure of past price information. Equally significant, the context in which the information disclosure occurs is essential for the assessment of its potential effects. Disclosure in concentrated, oligopolistic markets with homogenous products carries much greater likelihood of anticompetitive effects than announcements made in markets with a competitive supply structure and with heterogeneous products.
PRIVATE ANNOUNCEMENTS VS. PUBLIC ANNOUNCEMENTS, AND INVITATIONS TO COLLUDE
It is generally accepted that “private” announcements, which are directed to competitors only, do not have efficiency reasons and can only be motivated by the intention to help rivals to coordinate on a particular collusive price. Conversely, “public” announcements, which are directed to both rival firms and consumers, may provide significant benefits to customers. This positive effect is generally considered stronger than the collusive effects of the announcements.
The reason the distinction between public market transparency and private market transparency should have a bearing on defining a sound policy is that the economic literature associates with public disclosures a number of pro-competitive effects which are not associated with private communications. First and foremost, increased transparency and better knowledge of market conditions benefit consumers. In 1961, Stigler emphasised the importance of search costs for consumers. Buyers need to identify sellers and their prices, while customers need to search for knowledge on the quality of goods. The more information is available on the market (i.e. on the products and services and their suppliers), the better placed consumers are to choose between competing products, as they will have a greater understanding of the product characteristics. Consumers can knowledgeably compare terms and conditions of the various offerings and freely choose the most suitable one for their needs. The positive effects of price advertising are generally considered outweighing in magnitude the collusive effects of the announcements.
In these circumstances, enhanced market transparency through disclosure to the public can benefit consumers by lowering consumers’ search costs. Reinforcing the conclusion of traditional economics, behavioral economics have shown that better informed consumers can be instrumental in developing vigorous competition between suppliers This stream of literature has also shown that information asymmetries and absence of information may not only distort consumer behavior but may also adversely impact competition and competitive outcomes. In these circumstances, increased transparency may improve social welfare. From a more empirical and pragmatic perspective, if the intention of unilateral announcements is to provide focal pricing points for competitors, private communications are significantly less costly and more effective than public announcements. Moreover, public announcements are by definitions visible. As such, they increase the risk of detection by competition enforces, and facilitate the evidence gathering exercise should these practices be investigated at a later stage.
Not every public announcement, however, is necessarily pro-competitive. Public announcements might be harmful to competition if the public communication includes an invitation to collude. Invitations to collude are generally understood as unilateral solicitations to enter into unlawful horizontal price-fixing or market allocation agreements. While private communications can always be construed as invitations to collude, public announcements can also be construed as invitations to collude depending on how the communication is formulated. This would generally be the case of announcements which: (i) contain not only information which must, as a matter of commercial policy, be conveyed to customers but also information which is not intended for that audience, for example including references to specific competitors; (ii) disclose more information about that it is strictly necessary for the purpose of the announcement; (iii) make the behaviour announced contingent on what other market players or the industry at large will do; and (iv) include threats (e.g. a price war) in case other market players do not accept the invitation to collude.
THE LEGAL TREATMENT OF UNILATERAL ANNOUNCEMENTS
In pursuing unilateral disclosure of information with anticompetitive effects, competition agencies have generally relied on legal concepts derived from the prosecution of cartels, such as agreement or concerted practice. Some jurisdictions, where these concepts have either been interpreted too narrowly or been altogether absent, have introduced specific provisions dealing with unilateral announcements.
Some jurisdictions rely on the concept of “agreement” and look at whether an agreement can be inferred from evidence suggesting that competitors have not acted independently. Other jurisdictions, in particular those in the European Union, rely on the concept of “concerted practice,” which allow them to deal with practices that, while anticompetitive, do not amount to an agreement. Proving that a unilateral disclosure of information constitutes an agreement restricting competition can be difficult, in particular in jurisdictions where the concept of an agreement has been interpreted narrowly.
In the United States, on the other hand, in light of the challenges with applying Section 1 of the Sherman Act to these practices, the enforcement agencies have often relied on the concept of an ‘invitation to collude’ under Section 5 of the FTC Act and Section 2 of the Sherman Act. Two recent cases in the US clearly illustrate the meaning of invitation to collude.
In Valassis Communications,1 the FTC challenged the announcement made by Valassis president and chief executive officer, in a public call with analysts, detailing its strategy to increase prices. In order to regain market shares lost in the previous years to its competitor News America, Valassis decided to communicate to News America an offer to cease competing for News America customers, provided that the latter ceased competing for Valassis customers. If accepted, both firms could raise prices within their respective protected customer bases and end their price war. Valassis proposed that prices be restored by both firms to the pre-price war levels and described how business with shared customers and outstanding bids to News America’s customers would be handled. Valassis would monitor News America’s response, looking for “concrete evidence” of reciprocity in “short order.” If News America continued to compete for Valassis customers and market share, then the price war would resume. To resolve these allegations, Valassis entered into a consent order with the FTC that prohibits unilateral communications, both public and private, concerning the company’s willingness to refrain from competing with rivals or to co-ordinate pricing with them.
The FTC case against U-Haul2 involved both private and public communications. According to the complaint, U-Haul’s CEO instructed U-Haul’s regional managers and dealers to reach out privately to their counterparts at Budget (U-Haul closest competitors in the market for consumer truck rental) to exhort them to match U-Haul’s higher rates. A year later, U-Haul’s CEO allegedly instructed managers to raise their rates, anticipating that “Budget will come up.” But Budget did not immediately follow. Then, during a conference call with stock analysts, in response to a question about U-Haul’s pricing strategies, U-Haul’s CEO explained that U-Haul was trying to “show price leadership” for the good of the entire industry. He said that U-Haul was attempting to indicate to competitors that they should not “throw the money away,” and that they should “[p]rice at cost at least.” The CEO then indicated that he had instructed U-Haul managers to wait a while longer for Budget to respond and that he was optimistic that Budget would respond by raising prices. He also added that Budget need not match the U-Haul prices exactly, but could lag behind by 3–5 percent.
MANDATORY DISCLOSURES OF INFORMATION
In many jurisdictions information disclosure is mandated by laws or sector regulations. This is the case of securities rules and regulations, under which public companies are required to disclose regularly vast amounts of corporate and financial information. In addition to complying with regulatory requirements, private and public firms are strongly encouraged to provide additional information to stakeholders and potential investors. This is particularly the case after the announcement of quarterly results, when executives are often subject to detailed questions by financial analysts seeking to determine the future outlook of the company. Unilateral communication of company information therefore happens both regularly and legitimately, and to a large extent produces the beneficial effects of transparency described above. Nevertheless, these forms of communication might expose the company to antirust liability in light of the risk of collusion that they may create.
As the context of the communication is so determinative of its legitimacy, per se rules are less helpful in this respect. Despite this need for case-by-case analysis, given the large amounts of legitimate, and in some cases required, information that firms disclose to the general public, it would be useful for enforcers to provide guidelines and safe harbours that would allow companies to steer clear of infringing competition laws. In principal, these guidelines should take into account the modern demand on firms to provide information to the public and investors as well as the specific conditions of each industry.
1 Valassis Communications, 2006, FTC File No 051 0008.
2 Matter of U-Haul Int’l, Inc and AMERCO, 2010, FTC File No 081-0157.