Academic journal article Chicago Journal of International Law

Cartels as Two-Stage Mechanisms: Implications for the Analysis of Dominant-Firm Conduct

Academic journal article Chicago Journal of International Law

Cartels as Two-Stage Mechanisms: Implications for the Analysis of Dominant-Firm Conduct

Article excerpt

Apart from selling finished products made from carbon, such as carbon brushes, members of the cartel also sold "blocks" of carbon, which have been pressed but not yet cut and tooled into brushes or other products. A number of third-party "cutters" purchase these blocks of carbon, cut and work them into final products and sell them to customers. These cutters, while customers of the cartel members, also represent competition to them for finished products. Such cutters are typically located in the Middle East or Eastern Europe, but a number of them are located in the EEA [European Economic Area]. The policy of the cartel consisted in fixing the prices of carbon blocks sold to cutters in such a way that competition from them for the finished products made out of those blocks would be limited. As a result, cutters would usually only obtain small customers that were of no interest to the large suppliers. Ideally, at least in the view of some members, cutters should be eliminated altogether by refusing to supply to them.

I. INTRODUCTION

Discussions about the relationship between European and US competition policy today focus extensively on standards for evaluating the conduct of dominant firms. In both jurisdictions, there is awareness that various forms of dominant firm behavior present both anticompetitive and procompetitive possibilities. In a number of cases there appear to be procompetitive motivations for conduct that may also have anticompetitive effects.

Economic theory is sometimes ambiguous about whether and under what conditions a particular type of conduct is on balance pro- or anticompetitive. For example, slotting allowances and exclusive-dealing contracts are two practices that may be anticompetitive in some situations but not in others. Slotting allowances are fixed fees paid by manufacturers to retailers ostensibly to obtain access to shelf space, defray upfront costs, and support downstream promotional activities.2 A prominent theory of competitive harm posits that a large manufacturer may abuse its dominance when it uses upfront payments to bid up die price of scarce shelf space in order to raise its rivals' costs.3 An alternative view is that slotting allowances enhance social welfare by giving retailers an efficient way to allocate scarce retail shelf space.4 In antitrust law, exclusive-dealing contracts are judged by the rule of reason.5 Some authors have shown that exclusive dealing sometimes can enhance efficiency,6 while others have demonstrated that exclusive dealing may enable one firm to monopolize the market.7

A number of difficulties have hampered empirical efforts to determine which reasoning applies in a particular circumstance.8 In trying to assess market effects and assess economic harm in terms of deadweight loss, the behavior of a single dominant firm is difficult to analyze since there is often neither a clear beginning date nor a clear termination date for the conduct in question. Thus, it is hard to find a reliable benchmark against which to assess the conduct. In addition, the counterfactual world in which the relevant behavior does not occur may be structurally différent from the observed situation, making welfare comparisons difficult.

In the debate over the appropriate standards for analysis under antitrust proscriptions against dominant-firm misconduct, many have observed that conduct that generates potential concern under Section 2 of the Sherman Act or Article 82 of the Treaty of Europe is common in competitive industries. In these industries there is little hope of successfully monopolizing the market, and therefore the behavior must have legitimate business justifications.9 By extension, this observation is used to cast doubt on claims of anticompetitive effects of similar practices by dominant firms.

A contrasting observation derived from the study of cartels may be used to make the opposite point. Conduct that an illegal cartel orchestrates to suppress competition might be reasonably suspected of having an anticompetitive rationale. …

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