Horizontal Price-Fixing in Cyberspace

The 1996 Antitrust Conference: Antitrust Issues in Today's Economy. Sponsored by: The Conference Board, The New York Hilton & Towers Hotel

New York, N.Y.

Date:
By: 
Jonathan B. Baker, Former Director

Note: this speech has been revised and is published as "Identifying Horizontal Price Fixing in the Electronic Marketplace", Antitrust Law Journal, vol. 65, Fall 1996, pp. 41-55.

My contribution to this session on horizontal agreements, which is surely antitrust’s oldest topic, will be simultaneously old-fashioned and futuristic: not exactly old wine in new bottles, but perhaps old messages in new media. It is about how we might deal with conspiracies that hatch, not in secret smoke-filled rooms, but in ostentatiously public, data- drenched information networks — that is, price-fixing in cyberspace. My comments today are my own views, and not those of the Commission or of any Commissioner.

The Commission has been venturing into cyberspace on several fronts recently. Along with other law enforcement officials, we have been trying to monitor the ’Net for deceptive and outright fraudulent advertising. Our Privacy Initiative is facilitating the development of voluntary privacy principles that would govern the use of consumer information in on-line transactions. The Commission has stopped a credit-repair scam being promoted over a commercial on-line service provider.(2) And scores of law enforcement actions have been taken against promoters of bogus investment schemes involving the emerging telecommunications technologies that shape cyberspace.

During the Commission’s just-concluded Hearings on Global and Innovation-Based Competition, we heard a presentation about what the retail market might look like when we can shop in virtual reality. Perhaps marketing and selling directly on the Internet is the wave of the commercial future. In a world of electronic real-time marketing, sellers hold themselves out, literally, to the whole world, one PC at a time. And each of the buyers in that world, sitting in the comfort of home (or, more likely, plugging away during the lunch hour on the office terminal with a direct high-speed link to the ’Net), can reach many sellers and observe, download, and compare their posted prices. Indeed, buyers and sellers may do this all with “intelligent agents,” personalized software sidekicks searching cyberspace for optimal choices and likely customers.

What could be more pro-competitive than such instant, universal exchange and evaluation of enormous amounts of market and product information? The process can dramatically reduce consumers’ transactions costs of search.(3) Internet access and advertising might well reduce the sunk costs of entry, too, also making markets more competitive. At least that’s what Bill Gates argues in the chapter of his new book tellingly titled “Frictionless Competition.(4)

But on the other hand, rapid information exchange also may create the potential for the exercise of market power, as Chicago economist Robert Gertner pointed out in his testimony at the Commission’s hearings.(5) I will put to one side for now the considerable question of the dubious quality of some of this information: the Commission’s own law enforcement actions already show that frauds, like “flames,” can flourish in cyberspace. The quality question will recur, though, as I discuss the competition issues, for combating the fear of fraud can demand investments in reputation heavy enough to discourage entry. My focus, instead, will be the fact that, when competitive rivals, as well as customers, also have rapid access to information about each others’ pricing and rapid ability to respond, they may be able to take advantage of it to reach and police anticompetitive coordination. That’s what the major airlines did, according to the Justice Department, in the first horizontal price-fixing case in cyberspace. In a nutshell — I will discuss this case further in a few minutes — Justice alleged that the carriers negotiated a number of coordinated fare increases, using a signaling language developed from features of electronic fare records largely unavailable or valueless to ticket buyers.

Information exchange in cyberspace

Before the advent of computers, the most interesting example of a difficult parallel pricing case was the problem of price signaling by press release. A leading newspaper reports, for example, that one firm told security analysts that prices will go up 4% next year. The next week, a rival tells the trade press that its prices will rise 3% except for the high performance line, which will go up 5%. In reporting that story, one reporter queries a third firm, which states that the 3%/5% split is consistent with its plans for next year. The following week, the first firm issues new price books incorporating the differential 3%/5% price rise, and the other firms follow suit in the next few days. The question would be whether the firms had agreed to fix their prices.

The press release problem predates cyberspace. With electronic commerce, as the airlines case suggests, the firms do not need to rely on the press to learn their rivals’ plans. They can merely look at what their competitors have posted on-line. The firms would be expected routinely to monitor each others’ competitive moves whether the industry was coordinating or competing. So, the problem antitrust enforcers face in the conditions of rapid, extensive information exchange characteristic of electronic commerce is this: how can we tell whether the primary effect of the dissemination and exchange of information is to help consumers get better, cheaper products —by helping buyers become better informed, or helping firms learn how to cut costs and improve quality? Is the primary effect instead to help rivals reach and police a coordinated equilibrium? Does rapid information exchange improve competition, or make coordination more likely or more effective? And if competition is harmed, can we prove it and frame a remedy?

In the familiar economic model of perfect competition, information is an unqualified good. This suggests that more information, available faster and less expensively, will make markets more transparent, improve consumer choices, help firms make better and cheaper products, and improve competition. But while that is often the case, the result may depend on who is getting the high-quality information and what they can do with it.

One example where increased information actually reduces welfare comes from the theory of coordinated oligopoly behavior. More information exchange among sellers can facilitate coordination, leading to higher-than-competitive prices. In particular, rapid, costless, and extensive exchange of information among sellers may make it easier for parties that want to coordinate to find a set of prices and outputs on which they can implicitly or explicitly agree. It may also reduces any single firm’s incentive to deviate from a coordinated, supracompetitive price once that is agreed on, because others may be more likely to detect and respond to that deviation.

Any firm’s incentive to cut prices comes from the expectation of increased sales. A seller that cuts price anticipates that some buyers will respond by switching from rival sellers. In addition, buyers as a group might purchase more, attracted to the market by the new, lower price. But if rivals can and will match price reductions very quickly, as may occur through postings in the electronic marketplace, this incentive can be greatly weakened. Few buyers will switch from rival sellers, and the price-cutting seller will gain only a fraction of any increase in aggregate purchases. The result may be that sellers will not cut price in the first place, and any higher-than-competitive price would persist.

The instant electronic marketplace will not necessarily attract new entry to resolve this problem, either. If an entrants’s products are similar to those offered by the existing sellers, the new entrant will need to undercut the coordinated price to be successful. But the potential for nearly instantaneous response to its low price means the entrant must worry that it won’t make many sales, for much the same reason that an incumbent firm that considers cutting price could be deterred.

Moreover, the new entrant into electronic commerce must establish a reputation, not just for its products, but also for its probity. In the anonymous expanses of electronic commerce, conventional deterrents against deception, low quality, and outright fraud are still weak. To convince wary consumers that they are legitimate, new entrants may need to make substantial sunk investments in reputation.(6) But if entry turns out to require that kind of investment, the resulting market structure may be more concentrated, and the cyber-commerce promoters’ dream of a large number of sellers could be thwarted.

In addition to discouraging would-be price cutters and new entrants, rapid and extensive information sharing may also enable competitors to reach a non-competitive consensus on prices or outputs more easily. Where it is difficult to identify a consensus high price outcome without making explicit, interfirm commitments, parties may be discouraged by the practical difficulty of keeping a coordinated agreement going as well as by the threat of criminal sanctions against overtly conspiratorial behavior. This is not always the case — for example, leader-follower dynamics alone may sometimes enable parties to identify and settle on a scheme or set of prices that dampens competition, without the kinds of surreptitious communication usually associated with criminal conspiracies — but the problem of identifying a consensus outcome can be a serious impediment to coordination. Rapid information exchange can reduce coordination difficulties by permitting firms to engage in complex discussions more easily and by making those conversations less obvious to customers and antitrust enforcers. Such communication can facilitate coordination even if it is what economists term “cheap talk,” that is, communication imposing little or no costs of commitment on the parties to it, when the primary impediment to successful coordination is identifying the terms of coordination, rather than policing such an arrangement once it is reached.(7)

Agreement and the “oligopoly problem”

Electronic commerce presents a new opportunity for analytical paralysis over the “oligopoly problem” that has perplexed antitrust for decades, indeed for most of the past century. The concern is that anticompetitive results can be reached by means that the law cannot or should not prevent. The legal issue is often framed as asking when it would be appropriate to infer an agreement over price from circumstantial evidence that includes parallel pricing. My focus on when or whether a court should find an agreement puts aside the important question of how an agreement will be reviewed once found —whether it is illegal per se; if reviewed under the rule of reason, whether that review is truncated or full-blown; and how the "less restrictive alternative" issue will be analyzed.

Let me quickly make six points about the "oligopoly problem," after which I will illustrate my analysis with two cases. First, a court cannot successfully identify agreements in parallel pricing cases just by applying the common judicial definitions of agreement: a meeting of the minds or conscious commitment to a common scheme. Indeed, a court conscientiously applying these definitions would likely infer an agreement merely from the consciously parallel interaction among oligopolists.(8) When one firm in an oligopoly raises its price, and each of the others follows that lead, it takes little effort to imagine the behavior as constituting an agreement. The first price increase is an offer; those that follow are acceptances; as each observes the others’ actions, they reach a common understanding.

Accepting this result by finding agreement whenever oligopolists price in parallel would lead the law into a hopeless swamp. The reason, and this is my second point, is that it leaves the courts without a remedy. Supposing parallel behavior alone were considered illegal, there would be nothing practical that a court could order the parties to do to correct it. If agreement is evidenced by something beyond merely parallel price behavior, then a court can in principle enjoin that extra “something.” But if that something is absent, the only remedy is judicial price regulation, a complete non-starter.(9) That is why, to paraphrase the Supreme Court, conscious parallelism has not read “agreement” out of the Sherman Act.(10)

Third, a firm or oligopoly that happens to charge prices above the competitive level does not for that reason alone violate the antitrust laws. Fourth, mere leader-follower behavior is not illegal even if supracompetitive prices result.(11)

What the courts actually do in parallel pricing cases tells us what an agreement is under antitrust law. Rather than deeming mere conscious parallelism an agreement, courts first look for certain additional features of firm behavior called “plus factors.” Parallelism plus something might support an inference of agreement. The principal plus factors have historically been the kinds of things that suggest there really was a secret agreement.(12) That is, they are evidence that the parties had gone through a process of negotiation and exchange of assurances in addition to, or as the reason for, their parallel price behavior. They support a conclusion, based on the totality of the circumstantial evidence, that the parties have done more than merely watch each others’ market behavior and respond to it completely independently, as leaders and followers. This judicial methodology carries with it the important point, which is my fifth point: that the legal idea of “agreement” does not describe a result or equilibrium, but one particular process of reaching supracompetitive marketplace outcomes — what I call the “forbidden process” of negotiation and exchange of assurances.(13) And the elements of that process are behaviors that can be enjoined if anticompetitive. Thus, if the oligopoly reaches a high price equilibrium through the forbidden process that the law calls an agreement, we sue; but if it reaches that same result through leader-follower behavior, we do not.

This focus on whether firms have engaged in the forbidden process, and thus on whether a remedy can successfully be framed, is an especially important predicate to clear thinking and wise enforcement when addressing the possibility of price-fixing in cyberspace. Under conditions of rapid information exchange, antitrust law seeks to determine whether the close scrutiny firms give each other and the quick responses firms make to competitive moves by their rivals have evolved into conversations that can be recognized as negotiations and the exchange of assurances. In policing electronic commerce, as with price signaling by press release, the question will be less often whether the firms met in secret and more often whether their interactions constituted the forbidden process deemed a meeting of the minds.(14)

My final point about antitrust’s oligopoly problem, before turning to the case illustrations, is that the critical task of determining whether firms pricing in parallel have engaged in the forbidden process is in large part an economic question. This may not have been so in the past, but it is today because the Supreme Court, in Matsushita, refused to permit an inference of conspiracy that did not make “economic sense.(15) If the industry structure is not conducive to coordination, perhaps because entry is easy or because a firm could cut prices in secret and steal business from rivals, a court must recognize that it would be irrational for the firms to engage in the forbidden process which the courts term an agreement, risking prosecution with no hope of gaining market power.(16) And if instead entry is not easy and firms can discourage price-cutting,(17) a court must consider whether it was necessary for the firms to engage in the forbidden process to reach a coordinated, high-price equilibrium — that is, whether they could achieve that market-power result through simple or sophisticated leader-follower behavior without running the risk of liability. In such a case, the firms can tell the judge, “even if we are coordinating — which, of course, we do not admit — we did not need to agree in order to do so.”

Let me highlight three of the economic indicators that could show that firms, in an industry where entry and discounting are discouraged, were selecting a coordinated equilibrium by doing more than merely following each others’ market moves. First, their behavior might be more complex than would be plausible if the outcomes had been reached absent the forbidden process, as through mere leader-follower behavior. A focal point or rule that developed from historic precedent or clear business imperatives would be expected to be obvious and straightforward — such as “we raise all our prices by a common percentage,” or “we don’t solicit each other's customers or in each other's territories.” More complex relationships and rules might imply that the parties had engaged in active negotiation to reach an agreement. Second, the inference of agreement would be strengthened if the parties’ other explanations, of putative legitimate business purposes, are weak or even pretextual. The most common efficiency justification for posting prices — to tell prospective customers what a firm charges — is very persuasive. That is why mere price advertising to buyers does not raise antitrust problems, even if rivals also pay attention or the prices are posted in cyberspace. But other justifications may be less convincing or less related to a legitimate purpose. Third, the inference of agreement would be strengthened if the rivals had an opportunity to communicate, and strengthened even more if their conduct includes overt communications spurring immediate responses, even if those communications constitute “cheap talk.”

Inferring agreement, Gutenberg technology

I have two illustrations from recent government enforcement actions of the way liability can legitimately be attached to parallel behavior, over the parties’ protests that they never reached any objectionable “agreement.(18) The first, the Commission’s recent consent order inSanta Clara Car Dealers,(19) is admittedly a bit low tech. In fact, it involves the technological precursor to the electronic advertising marketplace, namely the newsprint advertising marketplace. And it involves a boycott, not price fixing. But the key problem, the proof of agreement, is the heart of the case. So this is a useful example to review before returning to cyberspace.

Here is the basic fact situation. A local newspaper ran a feature story, “A Car Buyer’s Guide to Sanity,” about how to analyze factory invoices and negotiate better with car dealers, in the newspaper’s weekly automobile advertising section. According to news reports, the dealers got together to complain to the newspaper, and later that same day got together by themselves, ostensibly to vent their anger. Or so they claimed, according to the newspaper story. But they also, within a week, pulled their weekly display advertising from the paper and kept it out for a month.

Where is the evidence of the process of agreement here? First, the industry exhibits characteristics that might help support a coordinated reduction in advertising, and the firms’ conduct was arguably not something that leader-follower behavior alone would plausibly explain. Coordination was plausible because no firm would expect to gain much advantage from “cheating” on an agreement not to advertise, once such an agreement was reached. The cheating would be evident immediately — competitors could literally read it in the newspaper — and their response would appear in print the next week. Yet the risks of leadership may have been too large relative to the likely benefits. One firm could not gain much from ceasing advertising, unless all others refrained. And a leader might have to wait many weeks before all its rivals followed, especially if some went along immediately while others did not.

Second, the justifications offered were unconvincing. The original story itself was hardly defamatory enough to explain the dealers’ virulent reaction. And pulling their advertising does not do much to restore their reputations, assuming they had been damaged. Rather the contrary: it looks like a collective effort to pressure this newspaper and other media into killing stories that could make consumers better informed buyers.

And finally, there was an opportunity for direct communication. The dealers met with each other twice on the same day, just three days after the first story, and the week before their advertising disappeared from the paper. Even in the absence of a direct admission by someone present at those meetings, it does not take a great leap of faith to infer that something they said to each other that day amounted to “agreement” in the meaning of the law.

Reaching agreement in cyberspace

My second illustration is antitrust’s first attempt to grapple with price-fixing in cyberspace: the Antitrust Division’s challenge to the airlines’ electronic system for advising each other of upcoming fare changes. Although I worked on this case in an earlier life, on the government side, I am not speaking for the Justice Department in discussing it here.

The airline price-fixing case highlights the anticompetitive potential of markets with rapid information exchange. The complaint alleged that over a multi-year period around the end of the last decade, the leading U.S. airlines employed a computer system, run by an airline joint venture, to fix prices. The computer system collected the airlines’ actual and proposed price changes and sent them to the various computer reservation systems used by travel agents. The joint venture also processed the price information and gave the airlines detailed reports that were in practice unavailable to users of computer reservation systems. Justice alleged that the airlines were engaged in price-fixing facilitated by the joint venture. The case was settled by consent agreements.(20)

The airline case shows what it takes to prove an agreement in the electronic commerce setting. The proof did not rest primarily on direct evidence, such as a memorialization or testimony of a participant. Or more precisely, the question of whether the electronic communications constituted direct evidence of an agreement was closely related to the question of whether the firms had reached an agreement.(21) It was not contended that parallel pricing and high price levels alone would imply negotiation and exchange of assurances. Nonetheless, the Antitrust Division alleged that the course of conduct amounted to an illegal agreement — actually many illegal agreements over various fares and routes — and included elements that could and should be enjoined.

Three aspects of the evidence — the three that I described above — made the inference of agreement persuasive to the government. First, there was a great deal of communication among the airlines, which they understood as such. They created their own language using fare relationships and “footnote designators.” The communications were “cheap talk:” they largely involved fares unavailable to consumers until a consensus was reached, or else available only for short periods and not widely purchased. The carriers probably conveyed more information through their computers than conspirators meeting in a hotel room ever would. From this communication, the Antitrust Division contended it could identify roughly fifty distinct agreements: that is, offers, negotiations, and acceptances.(22)

Second, the conduct was too complex to have been arrived at other than through the forbidden process of negotiation and exchange of assurances. One airline would post a rate change for the route between cities A and B, and relate that to a posting involving the route between C and D. Other airlines would answer quickly, but echoing or revising some feature of the first posting and perhaps also bringing in routes involving X and Y too — none of these proposals necessarily effective or binding on any of them yet. These city pairs were typically unrelated in cost or demand; rather, they were connected, in the parties’ communications, by use of footnote designators or other fare codes, as signals that the proposals were meant to be related to each other.(23) This process would continue until the carriers would converge on a consensus set of adjustments to the original fares. It is not hard to read these complex outcomes — particularly as they involve routes not naturally related — as resulting from a process of negotiation and agreement, albeit in a potentially public forum.

Third, claims of legitimate business justification were unconvincing. In practice the features of the computer-communicated price records that conveyed offers and acceptances had little value to consumers and sometimes were not even available either to the ticket-buying public or to travel agents, the most sophisticated non-airline users of the information. For example, the “last ticket date,” which the carriers claimed was useful to consumers trying to get the best price before it changed, was not actually binding on the airlines and was inaccurate about half the time. The Antitrust Division contended that this information was used, not to benefit consumers, but to negotiate prices with other airlines. The consumer losses from higher prices potentially measured in the billions of dollars.(24)

The consent order tries to strike a balance between the interests of promoting efficient conduct and preventing coordination. The behavior that most clearly failed to amount to legitimate communication to customers was enjoined. The order prevents the airlines from using “footnote designators” and other methods to engage in quasi-public negotiations about price levels without incurring risks or costs. But the order permits efficiency- promoting behavior. It does not prevent the airlines from communicating their rate plans as long as the communications go to consumers too, and as long as the communication is not just “cheap talk.”

Proving cyberspace agreements

The airline price-fixing case suggests how firms can use public communications channels to reach anticompetitive agreements, and how law enforcement can respond. The lessons learned in reviewing messages sent over this relatively small-scale communication network should apply as commerce expands to the Internet and beyond.

In particular, the airline case suggests that, as shopping moves from terrestrial space to cyberspace, it is likely to be easier in one respect but harder in another to infer price fixing from parallel pricing. The inference may become easier because cyberspace enriches the opportunities for communication. According to the Justice Department, the airline carriers did not resist the temptation, offered by contemporary telecommunications technology, to create a language, engage in detailed and extensive conversations, and reach complex bargains. It remains to be seen whether rivals in other industries confronted with a similar opportunity to fix prices will be cagier.

On the other hand, it will likely become more difficult to infer an agreement from parallel prices as commerce moves to cyberspace if the information shared among rivals, and allegedly used to negotiate price increases, is equally available and valuable to buyers. In general, the more the information goes to customers and is used by them, the better defendants’ claim of a legitimate business justification and the more difficult the inference of agreement.(25) It was fortunate for antitrust enforcement that the first alleged example of price-fixing in cyberspace occured over a network more readily available to rivals than customers, and was conducted through communications of little value to buyers — that is, with features that undermined the business justification for the information exchange.

From one perspective, it may seem remarkable that a defendant’s business justification plays any role in determining whether an agreement was reached. Firms can engage in the forbidden process of negotiation and exchange of assurances for good or ill, and their purpose would seem logically unrelated to their means. Moreover, efficiencies are already taken into account both in determining whether an agreement that nakedly restrains trade should be reviewed under the rule of reason, and when an agreement’s reasonableness is assessed. Yet the law has evolved this way for a good reason. Recall that when a court deems conduct an agreement, it is committing itself to enjoining the behavior should it find the agreement unlawful. The absence of a business justification for the suspect conduct (as with other factors like communication and the complexity of the conduct relative to what leader-follower behavior might reasonably yield) suggests that the firms could and would behave differently if enjoined, and thus that a judicial remedy short of price regulation is indeed available. As commerce shifts into cyberspace, and the characterization issue shifts from the question of whether the firms met in secret to whether their observed interactions constituted the forbidden process, it remains important to remember that an antitrust agreement is a process that can be enjoined.

If the more important lesson of the airline price-fixing litigation is that public communications potentially have a strong business justification, even if they improve the prospects for successful coordination among competitors, then the difficulties of inferring an agreement among rivals in parallel pricing cases will become even greater as commerce moves to cyberspace. Absent that enforcement tool, antitrust has few good alternatives for addressing the “oligopoly problem.” In some cases, enforcers will have direct evidence of an agreement that does not depend upon interpreting communications in cyberspace. Even if the agreement is not memorialized, for example, a remorseful executive may testify to its terms. Another approach is to prevent structural conditions conducive to coordination, through merger enforcement or through challenges to the “facilitating practices” by which firms commit themselves to high prices or to rapidly detect and respond to discounting by rivals.(26)

Why fresh-air agreements can be as worrisome as those in smoke-filled rooms

Let me conclude by returning to terrestrial space and reminding us why antitrust enforcers should spend resources addressing the problem of coordination among oligopolists. There are four reasons to think this a serious concern. First, the active criminal enforcement program of the Antitrust Division reminds us that firms do indeed fix prices. Second, contemporary economic theory’s study of “repeated games” shows that supracompetitive pricing through coordination is plausible in many oligopolies, even if the firms do not reach that outcome by engaging in the process antitrust deems an agreement. Third, recent empirical research suggests there is a great deal of market power in some concentrated industries, and that anticompetitive conduct is a significant cause of high price-cost margins.

Finally, business practice, as evidenced by the advice of academic business strategists, confirms that firms actively seek to facilitate coordination. Ironically, antitrust enforcement against traditional conspiracy has produced a teaching device that business schools routinely use to show budding executives exactly how to coordinate without reaching agreements. I refer to the government’s famousElectrical Equipment cases of 35 years ago. After their indictments and convictions, the firms introduced a number of practices, unilaterally, to improve their prospects of reaching consensus by simplifying their strategies and to discourage deviation . No longer were bids assigned by the phases of the moon and a series of secret meetings. But by standardizing product definitions, distributing price books, and committing to “most favored customer” protections, they succeeded in lifting prices back up toward where they had been when the firms were conspiring overtly.(27)

In short, it is not just arid game theory or mysterious econometrics that suggests that firms can find ways other than overt agreement to reach a non-competitive equilibrium. Business students are taught explicitly how to put prices up to where they would be if they were conspiring with their competitors, but in a way that makes it difficult for courts to infer an agreement so they will not land in jail. As commerce moves to cyberspace, so does the potential for anticompetitive coordination. Coordination will take new forms, so antitrust scrutiny must adapt to these developments and find ways to identify the “agreements” reached there that the law can remedy.

(1)*The views expressed here are those of the author, and not necessarily of the Federal Trade Commission or any Commissioner.

(1)I thank Michael Wise and Mary Jean Moltenbrey for comments and contributions.

(2)FTC v. Brian Corzine, CIV-S-94-1446 (E.D. Cal., TRO entered September 12, 1994).

(3)Moreover, rapid, inexpensive information exchange could under some circumstances facilitate secret, targeted discounts — thus discouraging coordinated interaction, albeit at the price of limiting or reversing the reduction in buyer search costs.

(4)” Bill Gates, The Road Ahead 157 (1995).

(5)Robert Gertner, Hearings on Global and Innovation-Based Competition, Federal Trade Commission Dkt. P951201 (November 20, 1995). Gertner emphasizes the "trade-off between the beneficial effects of sharing information about market costs and demands, which can lead firms to make more efficient production [and] pricing decisions, ... [and the harmful effects of] sharing information about prices, quantities, and customers, which can enable firms to charge a price above competitive levels." (Transcript at 2763.)

(6)To be sure, certifying agencies may develop to assure buyers that sellers will actually send goods promised and deal with problems that arise. See Robert Gertner testimony at the Commission’s Hearings, supra note 5. (For example, perhaps one reason use of credit cards is already ubiquitous in telephone sales, other than the convenience, is that buyers can stop payment if seller doesn’t send the product.) Another marketplace response to the quality assurance problem would be for a firm to post a bond backed by a well-known institution. Still another tactic would be to promote, buy, or transplant “brand name” recognition. However, these marketplace responses would often be expensive or else would presuppose that the firm has already established brand recognition or reputation, so that it is not really much of a “new” entrant.

(7) Firms that compete across several different product or geographic markets, in particular, may find “cheap talk” a useful way to coordinate their strategies. Multi-market contact also increases the opportunities available for disciplining firms that would be tempted to cheat on the coordinated arrangement. See B. Douglas Berheim and Michael Whinston, Multimarket Contact and Collusive Behavior, 21 RAND J. Econ. 1-26 (1990); William N. Evans and Ioannis N. Kessides, Living by the “Golden Rule”: Multimarket Contact in the U.S. Airline Industry, 109 Q. J. Econ. 341 (1994).

(8)Richard Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan. L. Rev. 1562, 1576 (1969); Jonathan B. Baker,Two Sherman Act Section 1 Dilemmas: Parallel Pricing, the Oligopoly Problem, and Contemporary Economic Theory, 38 Antitrust Bull. 143, 178 (1993). Cf. Monsanto Co. v. Spray-Rite Service Corp., 465 U.S.752, 764 n.9 (1984) (to show ?a meeting of the minds’ or ?a common scheme’ in a dealer-termination case, “evidence must be presented both that the distributor communicated its acquiescense or agreement, and that this was sought by the manufacturer.”)

(9)Donald Turner, The Definition of Agreement Under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 Harv. L. Rev. 655 (1962).

(10) Theater Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 541 (1954).

(11) See, e.g., Clamp-All Corp. v. Cast Iron Soil Pipe Institute, 851 F.2d 478, 484 (1st Cir. 1988)(Breyer, J.), cert. denied, 488 U.S. 1007 (1989).

(12) See William E. Kovacic, The Identification and Proof of Horizontal Agreements Under the Antitrust Laws, 38 Antitrust Bull. 1, 31-55 (1993).

(13) Baker, supra note 8, at 179.

(14) For an example of a court asking the latter question in a non-cyberspace context and finding a conspiracy, see United States v. Foley, 598 F.2d 1323 (4th Cir. 1979), cert. denied, 444 U.S. 1043 (1980).

(15) Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 596, 597-98 (1986); accord, Eastman Kodak Co. v. Image Technical Servs., Inc., 112 S. Ct. 2072, 2083 (1992).

(16)This argument will have the greatest power in circumstantial evidence cases. If a court has reliable direct evidence of conspiracy, it may reasonably find an agreement notwithstanding arguments that such behavior would be irrational given market structure.

(17) Rapid identification and response to rival price-cutting may discourage price reductions by competitors. Firms that raise their own costs of lowering price, for example in some circumstances by adopting “most favored nations” clauses, can also create an industry environment inhospitable to price reductions.

(18) A third example comes from In re Coordinated Pretrial Proceedings in Petroleum Prods. Antitrust Litig., 906 F.2d 432 (9th Cir. 1990), cert. denied, 111 S.Ct. 2274 (1991). The circuit court held that a jury could find an agreement on price in a parallel pricing case with evidence including direct contacts among defendants, advance price announcements, posting of prices in unusual detail, the absence of a business justification for advance price announcements, and evidence that these practices were intended to lead to higher prices.

(19) Santa Clara County Motor Car Dealers Association, Dkt. C-3630 (consent order, December 13, 1995).

(20) United Stated v. Airline Tariff Publishing Co., 1994-2 Trade Cas. (CCH) ¶ 70,687, (D.D.C August 10, 1994) (final consent decree); 1993-2 Trade Cas. (CCH) ¶70,410 (D.D.C November 1, 1993) (consent decree). See also Airline Tariff Publishing, Competitive Impact Statement, 58 Fed. Reg. 3971 (Jan. 12, 1993); United States’ Response to Public Comments, Civ. No. 92-2854 (D.D.C. filed April 8, 1993); United States’ Response to Questions in Appendix A of the Court’s Order Dated May 24, 1993, Exhibit 1, Declaration of Jonathan B. Baker, Civil No. 92-2854 (D.D.C. filed June 28, 1993); Airline Tariff Publishing, Competitive Impact Statement, March 17, 1994, 59 Fed. Reg. 15225 (March 31, 1994); and William Gillespie, Cheap Talk, Price Announcements, and Collusive Coordination, Economic Analysis Group Discussion Paper, EAG 95-3, September 25, 1995.

(21) That is, Justice alleged that the communications involving fares could be read, by one who knew or had broken the code, as memorializing as well as negotiating the terms of an agreement.

(22)The “offers” typically proposed quid pro quo conduct: if you do X then, and only then, will I do Y. When, after “negotiations,” the carriers had reached a consistent set of proposals, all offers were “accepted” and allowed to take effect.

(23) The most attractive agreements for the carriers were probably those in which carrier 1 would increase fares on a route into carrier 2’s hub, and in exchange carrier 2 would increase fares on a route into carrier 1’s hub. See Declaration of Jonathan B. Baker, supra note 20.

(24) Id. One recent Brookings study concludes that anticompetitive prices resulting from price leadership cost consumers $356 million per year during the 1980s. Steven A. Morrison & Clifford Winston, The Evolution of the Airline Industry 77 (1995). Although the analysis was partly motivated by the Justice Department’s price-fixing complaint, the study was not designed to capture much of the harmful effects alleged and may, in consequence, have underestimated the annual consumer injury resulting from the airlines’ exercise of market power.

In particular, the Brookings study identified routes in which price leadership occured by examining the impact of changes in each carrier’s average fares during one quarter on the average fares of rival carriers during the following quarter. This approach adapts the common econometric practice for testing “causality” to the available data. Yet most of the behavior challenged by Justice would have appeared contemporaneous using this methodology, regardless of the duration of the supracompetitive prices, and therefore involved routes that would have been deemed unaffected by price leadership. (Most of the negotiations identified by Justice employed fares that were unavailable to consumers until consensus was reached, or else were available only for short periods and not widely purchased; in either case, they would have little effect on average fares. Furthermore, most of the negotiations took place within, rather than across, quarters.) Accordingly, the study’s comparison of price-cost margins between leadership and non-leadership routes would be expected to understate the price elevation resulting from the interfirm fare coordination alleged by Justice. (Moreover, the data employed by the Brookings researchers is not perfectly suited for isolating the effects of the alleged fare agreements, because it dates fares by travel date rather than ticket purchase date.)

(25) But not always. For example, suppose firms negotiate a price-fixing agreement publicly by giving advance notice of anticompetitive price increases that rivals modify or match before a consensus is reached. The price-fixing firms should not be allowed to evade prosecution by claiming that buyers want the advance notice in order to accelerate some purchases before the new, high price takes effect. Buyers would do even better if, because advance notice was prohibited, price-fixing was no longer facilitated. See United States’ Response to Public Comments, United States v. Airline Tariff Publishing Co. supra note 20, at 29.

(26) If facilitating practices are adopted by agreement, that agreement may violate Sherman Act §1. I have elsewhere suggested, in an article written before I got my current job, that the Second Circuit, in resolving the Ethyl litigation, E.I. du Pont de Nemours & Co. v. F.T.C., 729 F.2d 128 (2d Cir. 1984), was wrong to discourage the Commission from attacking unilateral facilitating practices under FTC Act §5, and that in any event the Federal Trade Commission retains the power to address such problems through informal competition rulemaking. Baker, supra note 8, at 207-19.

(27) See Proposed Modification of Existing Judgments, U.S. v. General Electric, 42 Fed. Reg. 17,004 (1977).