ARTICLE CONTENTS INTRODUCTION I. PRELIMINARIES A. Situating Parallel Exclusion B. Paradigmatic Examples C. An Unfinished Debate II. MECHANISMS AND EFFECTS A. Mechanisms of Foreclosure 1. Simple Exclusion 2. Recruiting Agents 3. Overbuying an Input 4. Tying and Bundling 5. Resale Price Maintenance 6. Most Favored Nation Provisions 7. Lessons B. Harms C. Benign and Efficient Parallel Conduct 1. Nonexclusionary Conduct 2. Efficient Exclusion III. STABILITY A. Interdependent Exclusion 1. A Prisoner's Dilemma 2. The Superior Stability of Parallel Exclusion 3. Recidivist Exclusion 4. Oligopoly Size B. Exclusion as a Dominant Strategy IV. DOCTRINE A. Monopolization by Multiple Firms 1. Shared Monopoly 2. Conspiracy To Monopolize 3. FTC Enforcement B. Aggregation of Contracts in Restraint of Trade C. Mergers D. The Insufficiency of Horizontal Agreement CONCLUSION
Markets with just a few competitors have long posed daunting problems for antitrust law. Consider the problem in its most familiar form. Two gas stations, the only alternatives on a long stretch of highway, both choose a high price. Each is aware of, and dependent on, the fact that its opponent is making the same choice, but there is no explicit agreement. Must such de facto price-fixing be tolerated? This, the puzzle of "parallel pricing," was the subject of a famous debate between Richard Posner and Donald Turner in the 1960s and has continued to confound courts and scholars for more than forty years. (1)
The classic debate, however, is incomplete, for it is fixated on pricing and thus neglects the importance of parallel exclusion. Parallel exclusion is conduct, engaged in by multiple firms, that blocks or slows would-be market entrants. If Visa and MasterCard together dominate the provision of credit card services and both make it difficult or impossible for American Express to issue a competing card, they are practicing a form of parallel exclusion.
Parallel exclusion deserves much greater attention, for its anticompetitive forms have much greater social consequences than parallel pricing due to their potential to influence not just prices, but also the pace of innovation. After all, setting a high price leaves the field open for new entrants and may even attract them. In contrast, parallel action that excludes new entrants both facilitates price elevation and can slow innovation. As a source of dynamic inefficiency, it has greater long-term significance for the economy. (2)
Parallel exclusion is pervasive in industries that comprise a few major players, as our paper demonstrates. (3) Despite its prevalence, and its potential to do more harm than parallel pricing, the phenomenon too frequently has been neglected. Particular aspects of parallel exclusion have received some attention under various headings, but the phenomenon has seen little systematic or sustained treatment across disparate doctrinal areas and industries. (4) This Article is an effort to fill that gap. We seek to explain the importance of anticompetitive parallel exclusion, characterize its real-world prevalence and harms, and assess various possible solutions.
As is the case with single-firm conduct, we do not insist that all parallel exclusion is anticompetitive, nor do we think that most parallel conduct is exclusionary. Much parallel conduct, such as the tendency of firms to design similar products, has no plausible exclusionary effect. Moreover, some exclusionary conduct is justified and efficiency enhancing and thus should not be subject to antitrust liability, lust as with single-firm monopolization, an evaluation of parallel exclusion requires attention to market structure, conduct, and effects.
Yet we stress that the existence of the bad forms of parallel exclusion is far more than a theoretical phenomenon. Multiple case studies, threaded through the Article, reveal both its mechanisms and the factors that tend to yield stable exclusion. Studies of credit card payment systems, shipping lines, film, telephone services, tobacco, and other industries suggest that lasting exclusionary patterns depend on reliable coordination points for exclusion. A history of exclusion makes it easier to coordinate in the future. Thus, a specific history of monopoly or regulatory exclusion may be a strong predictor of stable exclusion, for the firms involved can simply continue the former monopoly's patterns of exclusion, or find ways to continue the exclusion once provided by now-repealed government regulations.
Our project sits at the intersection of two lines of thinking developed by industrial organization economists and legal scholars: analyses of exclusionary conduct and examinations of cartel stability. As for the latter, a major difference from single-firm conduct is the interaction among the excluders, and the prospect that one might have a unilateral incentive to deviate and cause the scheme to collapse. The incentive to deviate is a key predicate question for any regime of parallel activity. A basic game-theoretic analysis suggests that parallel exclusion regimes may in fact be more stable than parallel price-elevation regimes. That is because the factors that leave price elevation vulnerable to breakdown do not apply as strongly to parallel exclusion. Moreover, in some instances, maintaining an exclusion scheme can simply be a win-win or "dominant" strategy for each of the excluders. In such cases, the likelihood of collapse is even lower, yielding a potentially indefinite system of parallel exclusion.
We conclude that U.S. antitrust doctrine should be adjusted to address anticompetitive parallel exclusion more effectively. At present, form is sometimes exalted over substance, with the effect that horizontal agreement among the excluders is treated as either necessary or sufficient for liability. Properly understood, it is neither. It is the anticompetitive effect of the conduct that should matter, rather than the presence or absence of agreement. We therefore outline several doctrinal proposals to reduce the significance of horizontal agreement.
In particular, we propose that antitrust doctrine recognize parallel exclusion as a form of monopolization, (5) Antitrust liability for monopolization is normally associated with the conduct of a single, dominant firm. We would extend its application to exclusion by multiple firms, subject to the strict limits already present in case law, including monopoly power, anticompetitive effect, and an absence of sufficient procompetitive justification. Second, we support a more robust appreciation of "aggregation," a doctrine recognized by the Supreme Court and applicable to parallel exclusion that is accomplished through contracts between the excluders and other firms, whereby the contracts are evaluated by reference to their cumulative effects. (6) We also spell out why parallel exclusion is a proper concern for merger policy and why we need not automatically condemn those horizontal agreements that lack an anticompetitive exclusionary effect.
Beyond the scholarly debate, this Article has important implications for antitrust enforcers. Our experience suggests that enforcement agencies may decline to even consider the investigation of exclusionary conduct if practiced by multiple firms. The reluctance stems in part from the mistaken view that Turner, in his debate with Posner, demonstrated that the law should never target "mere" parallel conduct, whatever the form. In fact, Turner, while reluctant to pursue parallel pricing, strongly believed that enforcers should pursue cases of oligopoly exclusion-indeed, he believed that "the law on shared monopoly may be brought virtually in line with the law on individual monopoly." (7) Beyond Turner, we believe that if enforcers are excessively reluctant to investigate parallel exclusion, the result may be too much tolerance of anticompetitive conduct.
This Article proceeds in four parts. Part I defines parallel exclusion and its connection to the well-developed debate about parallel pricing. Part II examines the mechanisms and effects of parallel exclusion. Part III evaluates the stability of parallel exclusion schemes, despite individual incentives to deviate from parallel conduct. Part IV explicates our doctrinal recommendations.
A. Situating Parallel Exclusion
A traditional dichotomy in antitrust analysis tends to obscure the concept of parallel exclusion. The dichotomy is between "exclusion" and "collusion," the two basic categories of anticompetitive conduct. (8) Exclusion refers to the improper preservation of incumbency through self-entrenching conduct. (9) That term is broad enough to embrace exclusion by multiple incumbents, (10) but in practice it has often been limited to exclusion by a single, dominant firm. (11) Collusion refers to cooperation that reduces competition. Arguably that term embraces a variety of strategies, including exclusionary strategies. But its primary meaning within the dichotomy is cooperation that does not entail exclusion: price elevation and other forms of reduced competition among members, such as advertisement or product quality, that tend to attract rather than restrict entry. (12)
Parallel exclusion does not fit the dichotomy as it is commonly understood. As we use the term, parallel exclusion is self-entrenching conduct, engaged in by multiple firms, that harms competition by limiting the competitive prospects of an existing or potential rival to the excluding firms. This definition excludes some forms of parallel conduct of antitrust interest, including so-called facilitating practices that may reduce competition among firms but without impeding entry, (13) and refusals by multiple firms that, even if exclusionary, are not self-entrenching. (14)
Fitting within neither category neatly, parallel exclusion is often overlooked or discussed from some unusual angle. For example, some examinations of parallel exclusion come under the discussion of "boycotts," a label that only increases the confusion. The term is famously slippery and unhelpful. (15) Some conduct labeled a boycott does not entail parallel exclusion, such as actions taken on behalf of a single beneficiary that competes with the excluded firm or firms, (16) or a parallel refusal by suppliers to sell to a buyer unless the buyer accepts more profitable terms. (17) The boycotts that entail parallel exclusion are those in which multiple firms, by means of explicit agreement or formal organization, act jointly to exclude a rival. (18)
To be clear, much of our analysis applies to boycotts that implement parallel exclusion, but we do not favor using the "boycott" label. Moreover, our analysis is not limited to exclusionary systems governed by explicit agreements or by an organization, such as boycotts and joint ventures that deny an entrant access to a key input. (19) In such cases, stability is easy to achieve, and there is little point in discussing it. Instead, we focus our analysis on what we regard as the more interesting and difficult instances in which there is no formal organization -indeed, generally no clear and explicit agreement among the excluders. In these instances stability is a salient question, (20) and the doctrine is unsettled.
Beyond boycotts and joint ventures, parallel exclusion sometimes arises in discussions of collusion and oligopoly that, while mainly focused on price elevation, mention exclusion as well. (21) Other analyses consider particularized forms of parallel exclusion. (22) Further work connects price-fixing with parallel exclusion by considering the conditions under which cartel members might also engage in exclusionary conduct. (23) Closest in spirit to our project is recent work treating "joint dominance" as a serious policy problem. (24)
What is missing is a systematic inquiry into the phenomenon of parallel exclusion, across multiple doctrinal categories and industries. This Article is an effort to fill that gap. We identify the harms, prevalence, and varied mechanisms of parallel exclusion, examine its surprising stability compared to oligopolistic price elevation, and spell out the implications for U.S. antitrust doctrine. We begin by presenting several examples of parallel exclusion in action.
B. Paradigmatic Examples
Visa and MasterCard were the first firms to offer general-purpose credit cards issued by banks, beginning in the 1960s. (25) By the 1980s, the two companies had come to completely dominate the bank-issued credit card industry, and most American banks issued both cards, a state of affairs called "duality" in the industry. Roughly the same banks owned shares of both payment networks, and virtually every retailer accepted both cards. As we shall see, this situation created conditions ripe for parallel exclusion, which tends to arise in industries that comprise a few major players--usually an oligopoly (26)--and in which there is some prospect of innovative entry.
In the late 1980s and 1990s, various firms attempted to enter the lucrative market for credit cards, including Discover and American Express (Amex), the latter of which had until then traditionally issued its own charge cards under a different business model. Matters came to a head when American Express began to recruit banks to issue a new line of Amex-branded credit cards. To prevent the arrival of a true competitor in the credit card market, Visa and, later, MasterCard adopted similar exclusionary rules. (27) The rules banned any member banks from issuing Amex or other cards, on pain of losing the right to issue cards from Visa and MasterCard. (28) With the rules in place, a bank would have to completely forgo issuing Visa and MasterCard cards if it wanted to deal with American Express.
Visa and MasterCard's parallel adoption of exclusionary rules illustrates how parallel action can replicate the exclusive conduct of a monopolist. Critically, there was never any agreement between the two to exclude American Express. However, the two networks, considered together, shared more than seventy percent of the market, measured by volume of transactions. As such, the practical consequence of their exclusion rules was a united front that blocked Amex's market entry. (29)
The Visa-MasterCard case shows how two or more firms that dominate an industry can pursue exclusionary strategies similar in effect to a monopolist's. Our next example, from the pipe industry, is the paradigmatic example of an industry using a formal, industry-wide scheme to block market entry.
Conduit is a form of piping used to carry electric wiring through a building. For much of the twentieth century, it was made of steel and supplied by an oligopoly of manufacturers. In the late 1970s, innovations in plastic technologies made possible the use of plastic poiyvinyl chloride (PVC) conduit. Plastic conduit had several advantages over steel. Unlike steel, the plastic could be cut by hand, and it was cheaper, lighter, and reduced the risk of short-circuiting. (30) To achieve widespread usage of plastic conduit, its manufacturers, beginning in 1978, sought to have plastic conduit approved by the National Fire Protection Association (NFPA), a standard-setting body that publishes the National Electric Code. Incorporation into the Code was essential to the wide-scale adoption of plastic conduit. (31)
A proposal to allow plastic conduit in the Code, backed by its manufacturers and importers, worked its way through the standards process. The steel conduit interests, however, did not stand idly by. According to the rules of the NFPA, approval of the proposal required a majority vote at the Association's next annual meeting. To pack the meeting, one steel conduit manufacturer, Allied Tube, brought 155 new members, including employees, sales agents, and the wife of the national sales director. Each new member registered to vote, attended the annual meeting, and voted against the proposal. Other steel interests, including other conduit manufacturers and major sales agents of steel conduit, made parallel efforts, leading to the recruitment of a total of 230 new voters, who collectively killed the plastic conduit proposal. (32)
The campaign conducted by members of the steel conduit industry is a textbook example of parallel exclusion. The introduction of plastic conduit, a superior product for at least some uses, was slowed or blocked, to the private benefit of steel conduit manufacturers. The exclusion was simple, obvious, and relatively cheap for the incumbents to effect.
Parallel exclusion is a pervasive issue in oligopoly markets. Throughout the Article, we introduce a series of examples drawn from a wide range of industries. Table 1 provides a large set of illustrative examples, drawn from antitrust litigation and commentary. (33) We do not take a view on whether the alleged conduct actually occurred in every case, or if so, whether that conduct amounted to anticompetitive exclusion. Some of the cases are the subject of famous critiques or have plausible procompetitive explanations. The collective weight of these examples, however, suggests that parallel exclusion is a phenomenon worthy of sustained attention.
C. An Unfinished Debate
The scholarly consideration of parallel conduct in oligopoly markets represents an unfinished debate. Most of the analysis is focused on the maintenance of parallel, elevated prices by all members of the oligopoly, as in our opening example of two gas stations on an isolated stretch of highway. In that context, a large "cartel stability" literature in economics seeks to understand the conditions under which a group of firms can maintain elevated prices for an extended period, (53)
The ability of law to address oligopolistic price elevation has been a preoccupation of legal analysis since the 1960s, when it was the subject of a famous debate between Donald Turner and Richard Posner. (54) The debate centered on section 1 of the Sherman Act, which requires a "contract, combination ..., or conspiracy, in restraint of trade." (55) That provision clearly covers, for example, explicit agreements to fix a particular price. It does not cover parallel pricing in which there is no communication or other evidence of interdependence. By interdependence, we mean that "firms refrain from price cutting because of an expectation of retaliation derived from a shared appreciation of their circumstances." (56) (Often, the phrase "conscious parallelism" is also used. (57)) Parallel pricing without interdependence might be the innocuous consequence of shared cost pressures, for example. If the price of steel goes up, it has never been considered an issue if the price of steel pipes should also rise, in parallel, for each pipe producer.
The harder question has been what to do when there is evidence of interdependence, but no clear evidence of an explicit agreement between the competing firms. Reaching a collectively beneficial outcome is the familiar result of a repeated prisoner's dilemma among the participants. Each firm complies out of fear of punishment if its price is not kept high. Section fs requirement of agreement fits awkwardly with this economic model.
Nonetheless, Turner and Posner agreed that interdependent pricing, taken alone, is a meeting of the minds and hence an agreement, as that term is generally understood. (58) Their disagreement was about whether, as a policy matter, such agreements amounted to an unlawful conspiracy under section 1. (59) Turner argued that interdependent pricing is the inevitable result of ordinary profit maximization by oligopolists. Such conduct is different in kind and less troubling than self-entrenching, exclusionary conduct. Moreover, efforts to remediate the pricing would face insuperable practical difficulties. In particular, an injunction would be futile: How could a court implement or a firm respond to the requirement that a firm instead charge a more competitive price, or cease taking its competitor's prices into account? (60)
Posner took the more intelwentionist view that such price elevation does violate antitrust law. (As a judge, Posner has been more circumspect. (61)) He emphasized that the structure of the problem of oligopolistic price elevation does not depend on "detectable acts of collusion." (62) Price elevation is hardly inevitable, but rather is voluntary. Posner acknowledged that identifying actionable price elevation would be difficult, and with respect to remedies, thought that the main challenge was to make sure that damages are high enough to achieve adequate deterrence, given the difficulties of proving a case and the reluctance of courts to impose high penalties. (63)
Louis Kaplow has recently revived this debate. Kaplow begins from the premise that law should identify and deter interdependent price elevations with a view to reducing the resulting social COSt. (64) He contrasts that goal with a current focus of judicial policy, which is to find interdependent price elevation that is based on the existence of an agreement, particularly as identified through communication among firms. (65) The two goals, as he makes clear, are inconsistent: the factors that tend to indicate the existence of an agreement are poor proxies for socially costly price elevation, (66)
Indeed, the mismatch leads to a paradox, which Kaplow terms a "paradox of proof." (67) Under current law, the markets where it is easiest for rivals to set high prices in parallel are actually less, rather than more, likely to give rise to liability. That follows because agreement-whether explicit or based on inexplicit conduct, such as communications that fall short of clear agreement-tends to be needed only when it is difficult to elevate prices without resort to that conduct. That antitrust liability depends on particular horizontal tactics further encourages firms to steer clear of those tactics if possible. In other words, according to Kaplow, antitrust law ends up chasing an esoteric subset of price elevation achieved through direct communication, while ignoring the price elevation that occurs without it. (68)
These issues, carefully examined in the context of parallel price elevation, have not been similarly explored in the context of parallel exclusion. Posner, for example, focused on price elevation, not parallel exclusion. (69) Kaplow limits his analysis to coordinated price elevation. (70) Turner, who generally viewed self-entrenchment as a more important concern than price elevation, is the exception. (71)
The general neglect of parallel exclusion has had unfortunate doctrinal consequences. As an example, consider Bell Atlantic Corp. v. Twombly, an important recent Supreme Court case about what suffices to allege an agreement in restraint of trade. (72) Plaintiffs accused the local Bell companies-the "Baby Bells" produced by the 1984 breakup of AT&T-of agreeing not to enter one another's geographic territories. (73) This is a collusion allegation of the ordinary sort: a nonprice agreement to limit competition among incumbents.
Plaintiffs also made a second allegation, however: that the Bell companies had agreed among themselves to exclude competitive new entrants in their territories. (74) Here, the plaintiffs alleged parallel exclusion. (75 In other words, the Twombly complaint alleged two forms of conduct that are fundamentally different. But the Court gave no indication that it recognized that there might be a meaningful difference between the two types of allegations, as to the likelihood of horizontal agreement or in the magnitude of the consequences for consumer welfare.
Twombly is now the law of the land, interpreted by lower courts to apply to both parallel pricing and exclusion cases. (76) However, there are important reasons to differentiate between exclusion and price elevation. These reasons are the subject of the next two Parts.
II. MECHANISMS AND EFFECTS
This Part takes a deeper look at the mechanisms, harms, and potential benefits of parallel exclusion. We first describe some of the main ways in which an industry may effectuate exclusion of entrants and the potential harms of such exclusion. Next, we consider benign and efficient forms of parallel conduct. The implicit premise of this Part is that the excluders are able to act, in effect, as a single dominant firm engaged in monopolization.
A. Mechanisms of Foreclosure
Anticompetitive exclusion can occur by a wide variety of means. As the D.C. Circuit explained in considering the U.S. government's antitrust suit against Microsoft, "the means of illicit exclusion ... are myriad." (77) When harmful, these methods may weaken the rival, for example, by preventing it from achieving the economies of scale required to offer a competitive price. Lack of scale may also preclude a rival from gaining enough consumer adoption for a virtuous cycle to kick in, whereby widespread adoption makes the product more attractive for all users. The weakened competitor might also find it difficult to finance, either from external capital markets or retained earnings, the research and development needed to better displace the incumbent in the future. In the limit, these tactics may prevent entry entirely.
An extensive literature describes various means by which a powerful firm can exclude a rival and thereby harm competition. (78) These analyses of exclusion, while developed in the monopoly context, inform an understanding of the mechanisms of parallel exclusion. In this Section, we demonstrate with illustrative examples that these models adapt well to the oligopoly context. (79) Oligopolistic excluders, like a single dominant excluder, have both the incentive and the means to exclude. Here we identify six main mechanisms of exclusion used both unilaterally and in parallel, (80)
1. Simple Exclusion
In the simplest story, the excluders act on their own, without enlisting assistance from other parties, to raise the costs of market entry. The excluders might manipulate a standard-setting process to exclude the rival, engineer product incompatibility, or game the regulatory system. Though the methods vary, their shared features are that the excluder does not need to contract with others to succeed and that the costs of exclusion are relatively low. In the monopoly context, a good example of simple exclusion is AT&T's alleged effort in the 1970s to exclude MCI from long-distance service, including sabotaging MCI's connections, punishing its own customers when they chose MCI services, and disparaging the quality and reliability of MCI's products. (81) AT&T accomplished the exclusion on its own and at relatively low cost.
Members of an oligopoly can also use these techniques of simple exclusion, (82) Consider, for example, the Allied Tube case discussed in detail above. In Allied Tube, a group of steel conduit manufacturing firms used a standards process to exclude their rivals, plastic conduit manufacturers. The effort was led by a few firms and succeeded without extensive expenditures or dependence on other layers of the industry. As such, it is a good example of how parallel exclusion schemes can sometimes be most easily accomplished by the excluding industry acting by itself.
2. Recruiting Agents
A second means of exclusion is for the excluder to recruit "agents" at a different point in the chain of production-for example, a manufacturer's downstream distributors-to assist it in accomplishing the exclusion, (83) Microsoft, for example, entered into exclusive contracts with the firms that preloaded software on computers in order to starve Netscape, its rival, of the most important means of distribution. (84) Using such agents to weaken or exclude a competitor is one way to raise a rival's costs. (85)
The credit card case discussed in Part I illustrates the mechanism. As described above, Visa and MasterCard both promulgated rules that forbade member banks who issued credit cards from issuing any credit cards other than MasterCard or Visa, on threat of losing membership in the respective networks. (86) The networks, in other words, used the banks as their agents to exclude American Express from the market for bank-issued credit cards. The threat of being cut off from the Visa or MasterCard network kept each bank in line.
In a European example, the European Commission in the 1990s challenged the exclusionary tactics of a group of eight cargo shipping firms that were parties to a shipping association (or "shipping conference") known as CEWAL (Associated Central West Africa Lines). (87) CEWAL members shipped goods between Europe and West and Central Africa. Among other exclusionary methods, (88) the eight shipping companies devised a similar scheme of "loyalty contracts." In exchange for a 12.5% discount, customers shipping goods between Zaire and Northern Europe agreed to the exclusive use of CEWAL member firms for their shipping needs. Any customer found using an independent shipping firm, even in a very limited fashion, was placed on a blacklist and denied not just the rebate, but also, ominously, any expectation of "normal adequate service." (89)
Agent-driven schemes, unlike simple exclusion, can be expensive for the excluders. This is because the agents lose the opportunity to deal with outsiders, who may offer an innovative product or lower prices. Consider, for example, the distributor who typically wants to carry new or cheaper products. The agent, therefore, must either be paid off, threatened, or both, to make it cooperate with the scheme.
The cost of such a scheme is not necessarily high. Exclusion may be cheap where there are multiple agents and no single agent bears the full cost of exclusion. With multiple agents unable to coordinate their response, and no agent absorbing the full cost of accommodation, one agent may be played off against another, with a resulting equilibrium payment that verges on zero. (90) When the buyers are not final consumers but intermediaries, the problem may be particularly severe. (91) In the Microsoft setting, for example, a given PC manufacturer could be left out of the scheme without jeopardizing the effectiveness of the exclusion. Thus, Dell or HP would have a particularly strong incentive to sign up, lest they be left behind.
The difference between agent-driven and simple exclusion can be somewhat blurry. In many instances of simple exclusion (including the Allied Tube example discussed above), the excluders rely on another institution to achieve exclusion. One difference is that the agent-driven excluders must work with a different part of the industry, with its own business interests, as opposed to an independent body, like a standard-setting organization or government agency.
3. Overbuying an Input
A third mechanism of exclusion is to buy up an input necessary to an entrant's success. The particular form of the input varies by industry. It might be a natural resource, such as oil deposits or radio spectrum, or an input created by regulation, such as slots at airports for takeoffs and landings. What matters is that the resource must be scarce, such that its restriction by incumbents harms a rival by raising its costs. The mechanism overlaps the recruiting of an agent discussed above, but focuses on the purchase of inputs in spot-market transactions, rather than through more elaborate contracts. As with recruiting an agent, the excluders must pay for the additional unneeded quantity, making the scheme a potentially expensive proposition, (92)
For example, in the 1940s the Department of Justice sued an oligopoly of three cigarette manufacturers-American Tobacco, Liggett, and Reynolds-that had emerged from the dissolution of the American Tobacco Company monopoly in 1911. (93) The government alleged that the "Big Three" had excluded rivals by overbuying tobacco, the key input. (94)
Each of the Big Three depended for most of its business on a single, highly advertised cigarette (Lucky Strike, Chesterfield, and Camel, respectively), which was blended using relatively expensive tobaccos. In the early 1930s, in the depth of the Depression, smaller rivals to the oligopoly began offering lower-price cigarettes (ten cents per pack, compared to fourteen cents), which proved popular. (95) The entrants relied on cheaper blends of tobacco to keep costs down. Acting in parallel, according to the Department of Justice, American Tobacco, Liggett, and Reynolds began to purchase, in bulk, the cheap tobacco leaf that the discounters depended upon, so as to raise the discounters' costs. (96) There was no evidence that the Big Three even used the cheaper tobacco. (97) The goal, according to the government, was "to raise the price of such tobacco to such a point that cigarettes made therefrom could not be sold at a sufficiently low price to compete with the petitioners' more highly advertised brands." (98) The Court concluded that the jury had found an intent, through this and various other efforts, "to establish a substantially impregnable defense against any attempted intrusion by potential competitors into these markets." (99) The Court reached this conclusion despite the apparent absence of an explicit agreement among the Big Three. (100)
4. Tying and Bundling
A related strategy is for the incumbent to insist that a purchaser of one product also take a second product offered by the firm. For example, Microsoft offered an Internet browser bundled with its operating system. This was a useful exclusionary strategy if, as was alleged, the independent version of the tied product-in this case, Netscape's browser-might otherwise emerge as a competitive substitute for the incumbent's tying product. (101) Under certain conditions, moreover, excluding the entrant can provide a source of additional profits from sales of the tied good) (102) These outcomes from tying, however, are far from inevitable. In other settings, tying provides no means for increased profit, (103) and indeed frequently is a source of increased efficiency. (104)
The conduct of Visa and MasterCard provides a second example of alleged parallel exclusion, in the form of parallel tying. A private antitrust suit, pursued simultaneously with the government challenge to the exclusionary rules, challenged the two firms' conduct pertaining to debit card products. (105) Debit cards, unlike credit cards, take money from an affiliated checking account immediately or within a short time. In the 1990s, when ATMs became widespread, a collection of payment networks, with names like Honor, Maestro, and Shazam, offered retailers the service of processing debit card payments. (106) For authentication these firms relied on a personal identification number (PIN) and immediate access to the customer's checking account.
Beginning in the 1990s, Visa and MasterCard launched competing debit systems (built into bank-issued ATM cards, which gained a Visa or MasterCard logo). Their systems relied on a signature, rather than a PIN, and had a much higher fee: roughly, according to plaintiffs, the same percentage fee charged the retailer for credit card services, between one and two percent. (107) Signature debit was more vulnerable to fraud (due to the absence of a PIN) and slightly slower (because a signature was required).
The difference in price led some merchants to seek to refuse to honor the debit cards. However, Visa gave them the choice of either accepting both its credit and debit cards or making do with neither. MasterCard did the same. (108) This demand was sometimes referred to as the "honor-all-cards" rule. (109) The honor-all-cards rule is a good example of an exclusionary tying scheme taken in parallel. The rule served both as a way to blunt the competitive threat to credit cards from PIN debit, and to earn additional profits-billions, according to the retailers- from the debit market.
5. Resale Price Maintenance
Resale price maintenance (RPM) is a contractual practice by which a manufacturer sets the minimum price at which a retailer resells to consumers. As the Supreme Court recently noted, RPM can be used to exclude a rival manufacturer. (110) Economists have spelled out how RPM can have an exclusionary effect. (111) By employing RPM, a manufacturer can ensure that a retailer enjoys a profit when it sells the manufacturer's goods. The threat of losing that profit can be used to induce the retailers to behave in a way that benefits the manufacturer. That induced behavior can be procompetitive, as when the margin is used to encourage service or other valuable activities in support of the product. (112) But it can also be deployed to deter entry. (113) If entry reduces the incumbent's profits, that in turn may reduce the profits transferred to the retailer. As a result, the retailer comes to share the manufacturer's interest in avoiding competition, and might decline to carry a competing brand. The argument applies not only to RPM, but also to other means by which a margin is supplied to the retailer, such as the payment of "slotting fees" to retailers.
A study of the U.S. Sugar Trust in the late nineteenth and early twentieth centuries demonstrates the potential for using RPM to pursue exclusionary goals. During the period in which it controlled more than eighty percent of the U.S. sugar market, the American Sugar Refining Company insisted that wholesale grocers not resell sugar below a minimum price. (114) Wholesalers who promised to adhere to this policy were guaranteed a profit by the payment of rebates, while those who broke ranks were denied a rebate. (115) The point of this scheme appears to have been the exclusion of rivals. (116)
The U.S. cigarette industry offers an illuminating example of the transition from a unilateral to a parallel RPM scheme. In the late nineteenth and early twentieth centuries, cigarette manufacturing was a monopoly, dominated by a Tobacco Trust that lasted for twenty-one years, headed by the American Tobacco Company. (117) During this period, the trust maintained high resale prices, (118) in part by helping cooperative distributors to gain dominance. These policies apparently were designed to prevent entry. (119)
After the Supreme Court ordered the dissolution of the Tobacco Trust in 1911, the Big Three each maintained the RPM scheme of the former monopoly. For example, the Big Three continued to deal exclusively with Metropolitan Tobacco Company, one of the cooperative distributors, in regions that Metropolitan dominated, prompting complaints of a "new four-headed trust." (120) After the Department of Justice threatened to reopen the decree, the four companies agreed to deal with other wholesalers. In the 1920s, some (though not all) manufacturers attempted to maintain the policy, (121) resulting in FTC action122 that helped bring an end to the practice. (123) Whether RPM by the tobacco oligopoly actually had an exclusionary effect is unclear. In the decades after the Trust's dissolution, from 1911 to the 1940s, there was minimal entry despite enormous profit margins, though the high cost of entry was likely the key impediment. (124)
6. Most Favored Nation Provisions
A final mechanism for exclusion by a dominant firm, also applicable to parallel exclusion, is the use of most favored nation (MFN) provisions in contracts. (125) An MFN provision provides the buyer with a kind of insurance. If the seller provides some other buyer with a lower price, the protected buyer also receives the lower price. Protection can also extend to nonprice terms, such as new business models. (126)
An MFN provision can enhance efficiency, for example, by lowering input costs, particularly where bargaining is costly, or by hedging against uncertain market conditions. (127) In some instances, however, an MFN provision can be used to exclude new distributors. (128) Suppose a new distributor, a discount store perhaps, hopes its low prices will help it compete with the incumbent's superior brand awareness or high consumer switching costs. If the discounter tries to get lower prices from sellers, its strategy will be impeded by an MFN provision that forces the seller to extend any new discount to the incumbent distributor as well. (129)
When multiple buyers have MFN agreements with sellers, the effect can be the same as an MFN with a single dominant firm. (130) As more buyers insist upon the MFN provision, it becomes increasingly expensive for a seller to offer a discount to any given buyer, because the discounted price would have to be shared with all the beneficiaries of the MFN clause. And it becomes incrementally more difficult for an entrant buyer to rely on a new and different business strategy because the seller who wants to deal with the new buyer must renegotiate multiple relationships with its existing buyers. One possible example of parallel MFN agreements that has received recent scrutiny is online video distributors, which offer video programming over the Internet in competition with traditional cable providers. (131)
Aside from illustrating the myriad mechanisms of parallel exclusion, these examples present two general lessons about when to anticipate a risk of parallel exclusion.
First, these mechanisms are most effective at deterring the entry of a nascent competitor, as opposed to causing the exit of an existing rival. All of the examples are about keeping out new entrants--American Express, for example, had not yet entered the business of bank-issued cards when Visa and MasterCard deployed their exclusionary policies. Causing the exit of an existing, full-fledged rival is much more difficult because such rivals are better equipped to deter, avoid, or respond to their fellow incumbents' actions.
Second, the price of an exclusion mechanism predicts the frequency of its occurrence. Where exclusion is cheap to implement--for example, the exclusion of PVC pipes by steel pipe manufacturers--parallel exclusion can be supported even if the postexclusion equilibrium features many manufacturers and low profits. Where exclusion is expensive, such as overbuying an input, the exclusion mechanism must generate elevated prices for competitors in order to be viable.
Effective, anticompetitive parallel exclusion generates several distinct harms. First, like parallel pricing, parallel exclusion allows the excluders to sustain higher prices, which deflects some consumers, who value the good at or above its marginal cost, to less desired substitutes. (132) In fact, exclusion preserves and reinforces parallel pricing. After all, if the insiders are unable to maintain an elevated price on account of easy entry, there is no deadweight loss to worry about. Exclusion therefore can be closely linked to price elevation. Our contention, however, is that price elevation is not the only harm caused by exclusion.
The additional harms of parallel exclusion come from slowing or blocking product innovation of two types: the introduction of higher-quality substitutes and lower-cost substitutes. (133) This loss of innovation is a much more important effect. In the 1950s, Robert Solow demonstrated that more than eighty percent of the increase in U.S. labor productivity was due to technical progress. (134) More recently, Herbert Hovenkamp concluded that "today no one doubts ... that innovation and technological progress very likely contribute much more to economic growth than [other factors]." (135) New products and services drive economic growth, and economic analysis suggests that technological change ultimately dominates price effects in its long-run contribution to welfare. (136) A remarkable consensus across a spectrum of economic opinion takes dynamic harms and benefits as far more important than static ones. That observation, however, has not generally yielded a recognition that parallel exclusion can be far more significant than parallel price elevation. (137)
The expected size of the innovation effect will differ depending on the level of innovation already present in the industry. In established industries with familiar technologies, we do not expect the prospect of innovative entrants to make much of a difference. (A complicating factor is that the lack of innovation in an industry may itself be the result of exclusion, such that a low level of innovation is less informative than a high one.) In industries marked by rapid technological change, the exclusion of entrants has a far greater impact on the development of the industry. In these industries, exclusion, not price-fixing, is the "supreme evil" (138) that antitrust should address.
The costs are high where the excluded technological innovation is a better product. In an extreme case it might be so dramatically better that the new product supplants almost all the demand for the old one, as digital cameras did to film cameras. This is the "creative destruction" or "competition for the market" that Joseph Schumpeter took as the key to economic growth. (139) Where the innovative product is a serious existential threat to members of the oligopoly, the incentive to block or co-opt the entrant can (understandably) be strong.
Incumbents may also exclude firms whose innovation affects cost. These entrants or competitors do not offer a different product, but rather a lower-cost version of the same product, usually by improving the efficiency of production. Consider, for example, the well-studied threat to the U.S. steel industry by Japanese rivals from the 1950s through the 1970s. Most studies credit Japan's success in this period to the Japanese adoption of new technologies that facilitated increased economies of scale. (140) In such a case, even if the incumbents are pricing at or near a competitive level, they are likely to perceive a threat from a lower-cost entrant.
The harm from lost innovation is often, but not always, accompanied by price elevation. Parallel exclusion effectively places a moat around incumbents, which shelters them from outside competition. In some instances, the shelter permits the incumbents to earn supracompetitive profits. In others, however, the threat from competition is existential, and the barrier simply allows insiders to continue to eke out a barely profitable existence. (141) Moreover, the feasibility of costly exclusion is related to the nature of the private benefits. Where the benefits are greater--in particular, where exclusion permits price elevation--then parallel exclusion may be undertaken even where it is costly.
In the evaluation of any prospective case of parallel exclusion, it is important to specify that the potential harms of any conduct are highly case-specific. Much turns on the exact nature of the conduct and the identity of both the excluders and the excluded. Hence prosecutorial and judicial discretion are extremely important in this area.
For example, we have identified strong potential effects on innovation as a principal harm of parallel exclusion. This only follows, however, if the would-be entrant is an innovator offering a higher-quality or lower-cost product. When that is not true, excessive entry can itself be inefficient. It requires the entrant to expend the additional fixed cost of entry, and even an entrant that is inefficient relative to the incumbents may be able to survive thanks to price elevation. (142) This is just one consideration that must be kept in mind. We now turn to a more systematic consideration of the benefits of parallel exclusion and related parallel conduct.
C. Benign and Efficient Parallel Conduct
While the subject of this Article is anticompetitive parallel exclusion, we think it important to make clear that across the vast range of business operations, only some fraction of parallel conduct is exclusionary and some fraction of that is both exclusionary and anticompetitive. The latter conclusion follows from the recognition that not all parallel exclusionary conduct is harmful, on balance, once justifications for the conduct are taken into consideration. In this Section we discuss classes and examples of parallel conduct that are unlikely to be of concern.
1. Nonexclusionary Conduct
There are many benign forms of parallel conduct. For example, it is a common and essential part of the competitive process for firms to imitate each other or act in concert, yielding conduct that is parallel but not anticompetitive. One precondition for antitrust scrutiny, then, is that the parallel conduct is of a kind that, in the hands of a dominant firm, would be potentially anticompetitive.
A first example within this category is coincidental or "best-practices" conduct that lacks self-entrenching effects. For example, competing firms might all do business with the same travel agent or order their office furniture from the same manufacturer. While this certainly counts as parallel conduct, it is hard to imagine circumstances in which it would be anticompetitive.
More important is the process of imitation, or parallel product design. The competitive process depends on firms imitating or copying each other's products and services, as happens frequently when the product is successful. Consider that Apple's successful iPad, a tablet computer introduced in 20l0, was immediately imitated by competitors, including Samsung, Amazon, and others. The end result was a form of parallel conduct-numerous competing firms released somewhat similar tablets-yet also many more choices for the consumer, plus lower prices. (143)
Such imitation or parallel product design is central to the competitive process, for other firms must introduce products that meet the same consumer demand for there to be competition at all. At some point, of course, close copying could erode the incentives of the innovator, but that is an issue mainly of concern to the intellectual property laws. (144)
Outside of imitation, it is also very common for parallel product design to emerge when firms react similarly to trends, fashions, and external shocks. Hemlines tend to rise and fall in parallel, and cars become larger and smaller depending on consumer preference and the price of gasoline. Again, with important exceptions, such parallel product design decisions ought to be considered essential to the competitive process.
The next category of benign parallel conduct is practices that involve a potentially exclusionary tool but no substantial likelihood of exclusionary effect. For example, consider the commonplace parallel adoption of "loyalty cards" by competing coffee shops or supermarkets. This is parallel conduct, and it is not impossible that a loyalty program could either be used in an anticompetitive manner or form part of an exclusionary strategy. In the usual case, however, given that any new entrant can easily start its own loyalty program, and given the limited degree of loyalty such programs usually inspire, such cards are unlikely to represent anticompetitive parallel exclusion in the ordinary course of affairs.
Similarly, there are various industry-wide practices, such as bundling car radios with cars, or widespread use of the franchise model by restaurants, that may match the form of an exclusionary practice discussed in Section II.A. In each of these, the practice could be used in exclusionary manner, but in the normal course of affairs should be presumptively considered harmless parallel conduct. This is only a presumption, however. In Part IV, we consider the limited circumstances under which these practices, as a doctrinal matter, give rise to antitrust concerns.
2. Efficient Exclusion
Some of the most interesting cases concern parallel conduct that is exclusionary but nonetheless, on balance, not anticompetitive. Such conduct can be described as "incidental" or "justified" parallel exclusion, conduct where the exclusion is a secondary or even unintentional effect of some other, laudable goal that justifies it. Sometimes the exclusionary effect is known to the parties in question, but at other times, the firms involved might not even recognize that their actions support an exclusionary outcome0. (145) Unfortunately, it is impossible to describe the full range of conduct that might be counted as incidental or justified parallel exclusion. Here we provide illustrative examples based on important cases.
Standard Setting. Standard setting is a form of parallel product design that is interesting precisely because its beneficial, innovation-inducing effects depend on parallel conduct by most of the members of the industry. As such it is an exemplar of beneficial or efficient parallel conduct. Though undeniably exclusionary by its very nature, standard setting is ordinarily justified.
We can describe a standard as an explicit or implicit agreement among competitors to design some aspect of a product in exactly the same way. Such standard setting can be pursued through a standard-setting organization (whether private, such as the Institute of Electrical and Electronics Engineers or Internet Engineering Task Force, or public, such as the Federal Communications Commission (FCC) and International Telecommunication Union), or, alternatively, arise in an organic fashion. An example of an explicit, agreed-upon standard is the 802.11 standard for WiFi routers, which ensures that any device adhering to the standard can connect to any other. The QWERTY keyboard is an example of an organic standard: it arose in the typewriter industry after being adopted by the Remington Company in the 1870s, and it remains the standard for personal computers and even mobile phones today. (146)
While the goal of standard setting is interoperability rather than exclusion, standard setting necessarily has incidental exclusionary effects. That follows because the choice of a standard excludes noncompliant products. However, such effects, in the usual case, should be considered secondary to the primary goal of ensuring interoperability or defining a set of standards that serve as a platform for follow-on products and applications. (147) In practical effect, a standard usually makes market entry easier, by allowing firms to enter a market without complete integration. A headphone manufacturer, for example, can be a stand-alone firm; the standard means it need not also make its own music players to compete. A successful standard, on balance, makes market entry easier, not harder.
But standard setting cannot always be given a free pass, because its exclusionary nature can, and has been, used for anticompetitive ends. A standard can have an exclusionary effect if it is crafted so as to exclude one class of disfavored competitors, rather than to spur innovation or serve other purposes. We need only return to Allied Tube, discussed earlier. There, the industry body, dominated by steel pipe manufacturers, set a standard that excluded plastic piping and thereby barred the manufacturers of such pipes from competing. The difference between Allied Tube and ordinary standard setting is that there the standard was deliberately engineered to exclude a certain class of competitors. It serves to show that per se legality for standard setting is inappropriate.
Parallel Marketing Practices. The adoption of parallel marketing practices is a good example of parallel conduct that, while intended for one purpose, may yield incidental exclusionary effects. Consider, as an example, the Kellogg case pursued by the FTC for most of the 1970S. (148)
The FTC accused four firms (with a combined ninety percent share of the ready-to-eat breakfast cereal market, as of 1970 (149)) of using "brand proliferation," in parallel, as an exclusionary practice. Cereal manufacturers, the theory went, had flooded the market with multiple variations of a basic cereal concept in order to exclude competitors. (150) For example, in the flavored cereal area, Kellogg and its fellow oligopolists created multiple similar sugar cereals, including "Froot Loops, Cocoa Puffs, Trix, Orange Sugar Crisp, Kream Krunch, Kombos and Krinkles." (151) FTC staff argued that brand proliferation made it much more difficult for a would-be entrant to gain market share by exhausting shelf space and thereby limiting the scale available to a potential entrant. Brand proliferation required a would-be challenger to the oligopoly to enter with multiple brands at once in order to succeed. (152)
Whether the practice actually had this exclusionary effect was never quite clear, but if it did, the case is also a good example of what we have called incidental exclusion. For even if the secondary effect was exclusionary, the primary goal of carrying diverse brands was likely to serve a broader variety of consumer preferences. At least some brand proliferation was clearly warranted: even if both children and adults like sugary cereal, they will likely be attracted to different packaging. The Commission effectively admitted that the exclusion was incidental when it ended the Kellogg case, ruling that "[b]rand proliferation is nothing more than the introduction of new brands which is a legitimate means of competition." (153)
Requirements Contracts. A final notable area in which parallel exclusion is frequently justified is the industry-wide adoption of requirements contracts. A requirements contract is a form of exclusive contract that obligates a firm, for some period of time, to buy all of its needs for a certain product from a single supplier. Such contracts are common and often efficient, for example, because they allow the seller to maintain the quality of a branded service. When such a contract is entered into between two firms without market power, there is usually no reason to subject the agreement to antitrust analysis. However, when the practice of requirements contracting becomes an industry-wide standard, a different analysis becomes necessary.
The Standard Stations case illustrates the problem. (154) In the 1940s, the Department of Justice sued Standard Oil of California (Socal) based on its requirements contracts with Socal-branded gasoline retailers. The case raised the exclusionary concern that these contracts might suppress competition, apparently by limiting the remaining available outlets for retailing. The Supreme Court condemned this practice as an antitrust violation. (155)
This result is often criticized, but sometimes for the wrong reason. For example, one leading critic of the case dismisses the result on the ground that as to Socal, "the absence of market power could have been determined on the pleadings." (156) The idea is that a firm so unimportant would be incapable of orchestrating an anticompetitive result. But this critique misses an important aspect of the case. The Court's opinion was not an attack on Socal's conduct alone, but on an industry-wide practice of exclusive contracting. Collectively, the top seven firms accounted for a large fraction of distribution. (157) The Court centered its attention on the fact that "all the other major suppliers have also been using requirements contracts," (158) which "enable[d] the established suppliers individually to maintain their own standing and at the same time collectively, even though not collusively, to prevent a late arrival from wresting away more than an insignificant portion of the market." (159)
In other words, Standard Stations is properly understood as a case about parallel exclusion. Judged as such, nevertheless, the case was still wrongly decided. First, the anticompetitive effects of the practice are hard to discern. (160) The Court itself acknowledged the absence of demonstrated effect. (161) We are unaware of evidence that distribution resources were scarce or difficult to build, so exclusivity was unlikely to prevent the emergence of competitors to Socal and the other firms already in the market. Nor were the contracts of long duration, meaning that retailers could eventually switch suppliers if necessary. Even if the exclusion of additional competitors had been effective, moreover, the effect on competition would likely have been modest, as there were many competitors already. In this respect, the conduct is properly regarded as nonexclusionary.
Second, the conduct appears to have been justified on several grounds, indicating that this was a case of justified parallel exclusion. Indeed, the Standard Stations Court identified a variety of procompetitive benefits that could result from requirements contracts. (162) One not discussed by the Court, but applicable here, is the protection of Socal's investment in the stations, such as pumps and signage, that it expected to recoup through the contract over time. (163) Allowing the retailer to buy gasoline from another source would preclude a return on those investments. It would also permit a form of free riding, in which a dealer could invisibly pass off a lower quality gasoline from another provider as Socal's, a harm ultimately borne by Socal and other dealers. (164) Thus, any modest exclusionary effect of the industry-wide practice was likely outweighed by the justifications. It is in light of this fuller analysis that the requirements contracts in Standard Stations should not have been condemned.
A principal objection to our analysis so far might take the following form. We have assumed that a group of firms acts just like a single monopolist in excluding competitors. But in reality, they might behave differently. As in a price elevation scheme, and unlike single-firm exclusion, one or more firms might deviate from an exclusion scheme and cause it to collapse.
We therefore turn to a consideration of the stability of parallel exclusion schemes. Parallel exclusion differs from parallel pricing in its relative resistance to collapse. Parallel pricing may be harder to sustain due to both external and internal factors. The external constraint is that the elevated price attracts entry from outsiders. The internal constraint is that cartels are unstable. We postulate that sustaining cooperation to exclude in parallel should usually be easier than pricing in parallel. Consequently, we predict that even oligopolies that compete on price may nonetheless cooperate on exclusion. Regulation of parallel exclusion is thus all the more important, and its relative neglect all the more surprising.
We proceed, following basic game theory, by examining two different games in which oligopolists find themselves. In the following Section, we examine those cases in which the excluders face a dynamic of interdependence, analogous to the familiar prisoner's dilemma of price elevation. In Section III.B, we consider a second game, in which exclusion is a dominant strategy.
A. Interdependent Exclusion
1. A Prisoner's Dilemma
A single excluding oligopolist generally faces some pressure to cheat, just as a single participant in a parallel pricing scheme does. One source of cheating is the impulse to accommodate the entrant. Consider a setting where a would-be entrant offers new technology. While it might be collectively advantageous for the incumbents to keep out the innovation, an entrant can pay one of the excluders to let it in, promising the excluder a share in the profits it will earn. (165)
The wireless telecommunications market provides an illustration. In November 2007, Google released Android, an open-source smartphone operating system. (166) At the time, the four dominant wireless carriers had reason to be wary. Android enabled the use of technologies that the carriers considered threatening, particularly WiFi technologies and voice-over-IP programs such as Skype that substituted for the wireless carriers' own telephone services. (167) However, each carrier also could gain a short-term advantage by adopting Android and offering to its customers features not otherwise available. That pressure to defect doomed any exclusionary scheme. At the time of Android's launch, T-Mobile, the weakest of the carriers, announced it would use Android, (168) and the other carriers eventually followed suit. (169)
A second potential source of cheating is shirking (170) Exclusion costs something to implement. For example, distributors and suppliers are likely to recognize that less competition means higher prices to the distributor, or lower prices to the supplier. The agents therefore have to be paid-in effect, share in the profits from exclusion-in order to go along with the plan. (This point has less force if the agents can be played off against each other, as discussed in Part II.) Even in instances of cheap, "simple" exclusion such as Allied Tube, someone has to make the effort necessary to rig the standards process. The result is a collective action problem of the kind analyzed by Mancur Olson. (171)
Parallel exclusion schemes, therefore, will sometimes create the incentives of a prisoner's dilemma. In a one-period game, the dominant strategy is to defect. (172) Under the right conditions, nevertheless, the cooperative outcome is maintained. The repeated prisoner's dilemma amounts to, in effect, a coordination game. (173) If the shadow of the future looms large, each firm recognizes that defection will disrupt the cooperative equilibrium in future periods, and acts accordingly.…