Low Price Conspiracy: Trade Regulation and the Case of Japanese Electronics

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Low Price Conspiracy: Trade Regulation and the Case of Japanese Electronics

Low price conspiracy, a form of predation in which several firms conspire, is of increasing concern. It was alleged in the Japanese Electronics case on which the Supreme Court ruled in 1986 [Matsushita v. Zenith, 1986] and in Congressional testimony about cement [Ousterman, 1982, p. 59]. Firms concerned about foreign competitors may raise this issue. Often predation is not properly distinguished from dumping. (1) Dumping, in essence, is price discrimination across international boundaries. Although neither price discrimination nor dumping necessarily implies predation or desire to injure competition, firms which are faring poorly in the marketplace are more likely to see bad intent. Furthermore, use of the antitrust laws or at least some of the dumping laws to restrain those with lower prices seems to require that the firms with low prices had bad intent. Of course similar issues can arise in purely domestic markets.

Much of the antitrust debate and perhaps most of the (foreign) trade regulation debate in the context of multifirm predators has dealt with long run structural change in an industry--especially failing firms.

The first parts of this paper define and characterize low price conspiracy. The second parts evaluate the Japanese Electronics case in that (the alleged) context and consider briefly some other explanations.

In this paper predation is defined as an action by which a firm or group of firms attempts to eliminate one or more firms for the purpose of gaining market power, raising price, and increasing profit. If the action is an agreement among firms to lower price, it is low price conspiracy. Gain of market power is key if there is a public policy issue of loss of economic efficiency. This paper is focused on situations in which the industry is basically competitive with generally homogenous products before the formation of the low price conspiracy. (2)

When a group of firms has consistently lower prices than another group of firms for a period long enough to imperil the latter, then the possibility of low price conspiracy may be considered. Alternatively the alleged conspirators may merely share some cost advantage over the other group. For example, an innocent group of firms with significantly lower capital costs may appear to be pricing below cost since their accounting profit levels would be unremunerative to other firms. Members of the group would expand capacity and move into new geographic and product markets at what seem to others to be unacceptable returns. Further they are likely to have a longer horizon for all their investments and plans.

A low price conspiracy has two phases: a low price phase while competition is being eliminated and a high price phase during which enough profit must be made to more than recoup the losses of the low price phase. Hence, the low price conspirators face all the problems of agreement to raise price in the high price phase plus the difficulties in the low price phase and in coordinating the two phases. (3)

Several conditions are necessary for any reasonable chance of success for a low price conspiracy. If such activity is illegal, it may be precluded. It is assumed that either this is not the case or the conspirators feel that it is likely they will not be faced with legal difficulties. Additionally the conspirators may not use the courts for enforcement of their agreement. (4) The phrase low price conspiracy is used even though it connotes illegality.

Certainly any price lowering or raising conspiracy will have more difficulty if there are more firms in the conspiracy since additional firms increase coordination difficulties. A price conspiracy's attraction also depends on the degree of additional profit resulting if the conspiracy succeeds, so the industry demand must not be highly elastic.

To make a low price conspiracy attractive, the losses of the low price phase together with interest on these losses must be more than recovered later in the high price phase. …