A proposed solution to the problem of parallel pricing in oligopolistic markets.

 
INTRODUCTION 
I. THE ECONOMICS OF OLIGOPOLISTIC PRICING 
    A. Monopoly 
    B. Perfect Competition 
    C. Oligopolistic Pricing 
        1. Single-period games 
        2. Multi-period games 
    D. Economic Insights 
II. THE CURRENT LEGAL STANDARD 
    A. The Courts' Treatment of Oligopolistic Pricing 
    B. Donald Turner's Controlling Rationale 
    C. The Advantages Associated with Donald Turner's Approach 
    D. The Shortcomings of Professor Turner's View 
III. JUDGE POSNER'S SUGGESTED SOLUTION 
    A. The Example of a Simple Duopoly 
    B. The Positive Implications of the Rule 
        1. Exploring the assumptions of the model 
    C. The Negative Implications of the Rule 
        1. Expanding the model of simple duopoly 
        2. The problem of marginal application 
        3. Relaxing the assumption of zero fixed cost and constant 
            marginal cost 
        4. An encouraging result 
IV. THE SUGGESTED SOLUTION 
V. TESTING THE PROPOSED RULE OF LAW 
    A. A Simple Duopoly 
    B. A More Realistic Model 
CONCLUSION 

INTRODUCTION

This Note seeks to address a systemic and difficult issue in the field of antitrust, namely the problem of proving concerted action for the purpose of price-fixing claims in oligopolistic markets, (l) While antitrust law has been markedly successful in eliminating express cartels, (2) competition policy has been equally noteworthy for its failure to effectively address instances of parallel pricing that may have an economically analogous effect to explicit price-fixing. (3) Though the law has long viewed this shortcoming as an inevitable consequence of market structure, this Note will articulate both a different conclusion and a novel solution.

An oligopoly is a market in which the level of concentration causes firms residing therein to operate strategically. (4) In other words, an oligopolist must factor the expected reaction of its competitors into its first order condition for profit maximization. A firm operating in a monopolized market, or one subject to perfect competition, simply equates marginal revenue with marginal cost in setting price. (5) Doing so in an oligopolized market is not profit-maximizing, however, as the profitability of a given price depends on the price being charged by other firms in the market. This is so because, in selling its goods, a firm will have a unilateral impact on the residual demand facing the other firms in the market. (6)

A major, and very interesting, problem arises in the context of such markets, where it may be possible for oligopolists to reach a self-sustaining, supracompetitive equilibrium. Essentially, it may be feasible for a group of firms to reach a collusive outcome without overt acts of detectable communication. Such tacit collusion results from a "meeting of the minds," whereby competitors recognize that it is in their collective best interests to set price or quantity equal to the collusive level. (7) In such circumstances, application of the antitrust laws becomes challenging. This difficulty emanates from the makeup of the antitrust regime put in place by the Sherman Act.

Section 2 of that Act prohibits firms with monopoly power from improperly maintaining or abusing their dominance. (8) Most firms operating within an oligopoly do so without possessing or exercising such puissance, however. As a result, their unilateral actions cannot be attacked under the Act.

Firms lacking monopoly power can nonetheless be found guilty of violating the Sherman Act under section 1 when they act in concert with their competitors. Accordingly, "contract[s], combination[s,] ... or conspirac[ies] in restraint of trade" may be held illegal, if unreasonable. (9) Hence, at a theoretical level, concerted action by oligopolists can be reached by section 1. The difficulty, which has so far proven to be prohibitive, lies in demonstrating that oligopolists' parallel pricing is a manifestation of concerted, rather than unilateral, behavior.