Antitrust’s Interdependence Paradox

*Chancellor’s Professor of Law, University of California, Irvine School of Law. The author thanks Marina Lao, Tony Reese, Jennifer Sturiale, Sam Weinstein, and the participants in workshops at the Competition, Antitrust Law, and Innovation Forum (CALIF) at U.C. Irvine for helpful comments on earlier versions of this Article.Show More

Introduction

Price-fixing conspiracies are the “supreme evil” that Congress intended antitrust laws to deter and to punish.¹ 1.See Verizon Commc’ns, Inc. v. Law Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004) (describing collusion as “the supreme evil of antitrust”).Show More Because price fixers face ten-year prison sentences, criminal fines, and private liability often measured in the hundreds of millions of dollars, price-fixing conspirators generally undertake elaborate measures to conceal their collusion. Consequently, direct evidence of collusion is rarely available, and private plaintiffs must rely on circumstantial evidence to prove their antitrust cases.

Remarkably, federal courts have applied an unproven economic theory to effectively immunize the most likely price-fixing conspiracies from antitrust liability. Price-fixing cartels are more probable in concentrated markets with very few firms, generally called oligopoly markets. Price fixing requires coordination and concealment, which are easier in oligopoly markets. Recent antitrust opinions, however, have made it significantly more difficult for antitrust plaintiffs to prove collusion through circumstantial evidence in precisely these markets, the ones most prone to price-fixing conspiracies. This creates a paradox in antitrust law: the most likely conspiracies are the hardest to prove.

The predicament flows from judicial misapplication of interdependence theory. Interdependence describes the phenomenon of businesses pricing their products based on predicting how their competitors will respond.² 2.See 6 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1410a, at 71 (4th ed. 2017) (“‘Interdependence’ refers to a state of affairs in which each person’s actions depend on his perception of how others will act.”).Show More Interdependence theory predicts that firms in a concentrated market may be able to “coordinat[e] their pricing without an actual agreement to do so.”³ 3.In re Text Messaging Antitrust Litig., 782 F.3d 867, 871 (7th Cir. 2015).Show More Invoking this interdependence theory, federal courts assert that price-fixing conspiracies are unlikely to occur in concentrated markets because the rival firms do not need to conspire: they can simply observe each other from a distance. Consequently, judges discount circumstantial evidence of collusion when price-fixing defendants operate in market structures that are the most conducive to price fixing. As a result, price-fixing conspirators are often insulated from antitrust liability.⁴ 4.See Louis Kaplow, Competition Policy and Price Fixing 133–45 (2013); see also William H. Page, Pleading, Discovery, and Proof of Sherman Act Agreements: Harmonizing Twombly and Matsushita, 82 Antitrust L.J. 123, 130 & n.36 (2018) (describing Kaplow’s “paradox of proof”).Show More

Part I of this Article explains how antitrust plaintiffs must often prove price fixing through circumstantial evidence. This generally requires the plaintiffs to show that the defendants raised their prices in unison and that these parallel price increases were the result of collusion, not independent decision-making. Plaintiffs prove the second step by presenting evidence of plus factors, which are facts and circumstances that make it more likely that price rises were produced by collusion rather than independent parallel action. Courts have long recognized market structure as an important plus factor because concentrated markets are more susceptible to illegal cartelization. Firms in such markets will find it easier to negotiate their cartel agreement, to exclude non-cartel rivals from the market, to enforce their illegal accord, and to conceal their price-fixing conspiracy from antitrust officials and consumers.

Part II explains how courts have also assumed that price-fixing conspiracies do not occur in concentrated markets. Using interdependence theory, several courts have eliminated market concentration as a plus factor even though market concentration facilitates price-fixing conspiracies. Moreover, courts have invoked interdependence theory to drain a wide variety of plus factors of their probative value. And courts sometimes disparage expert testimony that explains why the proffered plus factors point to collusion. Ultimately, courts have imposed heightened evidentiary burdens to prove price-fixing claims in oligopoly markets without providing any guidance on how to satisfy these heightened burdens.

Part III demonstrates that—despite what interdependence theory predicts—firms in concentrated markets still need to conspire to fix prices. An explicit conspiracy has many advantages over relying on interdependence: prices can be more easily fixed, negotiated, and renegotiated with actual conversations among rival firms; cartels can create enforcement mechanisms, which interdependence lacks; and actual conspirators can avoid miscommunications, which can destabilize price-raising aspirations based on interdependence. Empirical evidence shows unquestionably that firms in concentrated markets do, in fact, conspire to fix prices.

Part IV discusses how federal courts misapprehend the relationship between interdependence theory and plus factors. Interdependence theory does not negate plus factors; plus factors disprove interdependence theory. Plus factors help judges and juries “distinguish between innocent interdependence and illegal conspiracy.”⁵ 5.Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., 203 F.3d 1028, 1043 (8th Cir. 2000) (en banc) (Gibson, J., dissenting).Show More The fact that defendants are in a concentrated market represents an important plus factor because concentrated markets facilitate price-fixing collusion. But this evidence must be supplemented by other plus factors. More effort should be undertaken to educate federal judges about how price-fixing conspiracies actually operate. This would reduce the risk of courts invoking interdependence theory to discount plus factors, especially those that are unrelated to market concentration.

1.  See Verizon Commc’ns, Inc. v. Law Offs. of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004) (describing collusion as “the supreme evil of antitrust”). ↑

2.  See 6 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application ¶ 1410a, at 71 (4th ed. 2017) (“‘Interdependence’ refers to a state of affairs in which each person’s actions depend on his perception of how others will act.”). ↑

3.  In re Text Messaging Antitrust Litig., 782 F.3d 867, 871 (7th Cir. 2015). ↑

4.  See Louis Kaplow, Competition Policy and Price Fixing 133–45 (2013); see also William H. Page, Pleading, Discovery, and Proof of Sherman Act Agreements: Harmonizing Twombly and Matsushita, 82 Antitrust

   L.J

   . 123, 130 & n.36 (2018) (describing Kaplow’s “paradox of proof”). ↑

5.  Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., 203 F.3d 1028, 1043 (8th Cir. 2000) (en banc) (Gibson, J., dissenting). ↑