Parallel Exclusion

By Hemphill, C. Scott; Wu, Tim | The Yale Law Journal, March 2013 | Go to article overview
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Parallel Exclusion

Hemphill, C. Scott, Wu, Tim, The Yale Law Journal

2. The Superior Stability of Parallel Exclusion

To this point, we have identified a similar tendency toward defection in parallel pricing and parallel exclusion. We now suggest reasons that exclusion schemes may be less likely to collapse.

Two important challenges for achieving coordination are identifying the coordination point and observing compliance. (174) Both are easier for parallel exclusion than for parallel pricing.

Identifying the coordination point in oligopolistic price elevation is complex. At its simplest, there is a continuum of prices that could be chosen, and the parties have to find some way, often through communication, to choose one of them. Moreover, that optimal price will change as supply or demand conditions change, requiring the parties, who may vary in their perceptions of what if anything has changed, to select a new elevated price. If the product is differentiated, there may be many different prices that must be coordinated. Figuring out how to allocate the gains from price elevation makes the problem even more complex, (175) because direct payments between the firms are obviously disfavored, and alternative mechanisms-taking turns in supplying a customer, or agreeing on the quantity to be sold by each producer-are likely to require forbidden communication. These allocations will also require rebalancing if supply or demand conditions change, or if the parties miscalculate. The need to rebalance increases the fragility of the arrangement.

By contrast, the implementation of parallel exclusion is often simpler. (176) In theory, the action is often binary: each firm either deals or refuses to deal with a new entrant; or either engages or does not engage in tying or exclusive dealing. For example, in Allied Tube, whether a steel manufacturer had voted to exclude plastic pipes from the Code was clear, as the vote was conducted by open ballot. Without a continuum, there is little need for delicate calibration. Moreover, changes in economic conditions are less likely to change the optimal selection. Gains are difficult to reallocate with such a blunt instrument, providing an incentive to stick with the initial allocation. As a result, readjustments in the sharing rule are also unnecessary.

Here, the comparison to predatory pricing conducted by oligopolists is instructive. In Brooke Group, a major predatory pricing case, the Court discussed the significant barriers to successful coordination. The "anticompetitive minuet" that the Court thought was so "difficult to compose and to perform" in the context of oligopolistic predatory pricing (177) is much simpler in the realm of parallel exclusion.

With price-fixing, observing compliance with the elevated price level is difficult. Rivals may secretly extend price cuts to particular customers. This is particularly true for differentiated products, for which comparisons are more difficult. It is also true when demand or supply conditions are uncertain, in which case it is unclear whether an unexpected drop in profits is attributable to a rival's secret price cut or instead to a change in conditions. With parallel exclusion, observing compliance is much easier. It is hard to secretly cut a deal with an innovative entrant or drop out of an industry-wide exclusive dealing arrangement unnoticed.

Beyond these two advantages, there is a third factor, which is that the permanence of the change resulting from accommodation makes parallel exclusion easier to sustain as compared to parallel pricing. Price cuts are reversible. Firms engage in price wars and then stop, raising their price to the old levels. Where the consequences of defection are temporary, firms are tempted to defect. (178) For parallel exclusion, permitting entry is comparatively permanent and thus severe. Once a firm allows an innovative new entrant, the market structure changes permanently. Consumers become used to and come to rely on the new arrangement.

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