The head of sales at manufacturer K received a letter from large retailer B. It demanded that K not supply discount channels at prices below the retailer's own selling price. What stood out was the recipient line: the names of four of K's competitors appeared alongside its own. The sales chief had never contacted any of those rivals and had only met with their counterpart at B, a business partner. Yet weeks later, all five manufacturers, K included, raised the prices they charged discount channels. Could this amount to collusion?
Consider another case. The industry leader announces in advance that it will raise prices 7% the following month, citing higher costs. Weeks later, the second- and third-ranked companies raise prices by almost the same margin. No executives or employees at the competing firms ever met or spoke by phone. Is a price increase that simply tracks market conditions acceptable?
Identical prices alone cannot be regulated as collusion. But even without an explicit agreement, the process by which companies arrive at the same price can be a problem. Two cases, one in the U.S. and one in the European Union, show how.
Collusion Created by a Single Letter — the Interstate Circuit Ruling
Interstate Circuit, decided by the U.S. Supreme Court in 1939, began with a letter that a Texas theater chain sent to film distributors.
At the time, eight film distributors handled 75% of the first-run films shown in the United States. O'Donnell, who headed Interstate and Consolidated, which operated first-run theaters in major Texas cities, sent letters in 1934 addressed individually to the managers of each distributor's branch office. The letters demanded that the distributors meet two conditions if they wanted their films to continue showing in his first-run theaters: that subsequent-run theaters showing the same films charge adults at least 25 cents for evening admission, and that they not show those films on double bills with other movies.
The demands were unusual. Admission at most subsequent-run theaters in Texas was 15 cents or less. Meeting the theater operator's demands would inevitably send those prices sharply higher. Each distributor reached its own agreement with Interstate and accepted both restrictions for subsequent-run theaters in six Texas cities. The U.S. government sought penalties on the grounds that the distributors had colluded, but it obtained no testimony or documents showing that they had agreed among themselves.
The Supreme Court nonetheless found collusion among the distributors. The letter was the problem. Because the heads of all eight distributors were listed as recipients, each knew from the outset that the others were weighing the same proposal. Accepting the demands alone would mean losses in the subsequent-run business, but if all the distributors complied, higher admission prices would lift their profits. In fact, regional managers at at least three distributors argued for rejecting the theaters' request, because it departed sharply from established business practice. Even so, the distributors complied almost unanimously with both restrictions the theater chain demanded.
The court held that the distributors' uniform compliance lay "beyond the range of probability" as mere coincidence. It also counted against them that they did not put executives with direct knowledge of the matter on the witness stand.
The U.S. Supreme Court held that "it is elementary that an unlawful conspiracy may be and often is formed without simultaneous action or agreement on the part of the conspirators." Even without evidence of an explicit agreement among the distributors, the theater chain served as a hub connecting them like spokes on a wheel. Such arrangements are known as hub-and-spoke collusion.
Advance Announcements That Removed Uncertainty — the Dyestuffs Ruling
In the 1972 Dyestuffs case in Europe, collusion was found even though there was no evidence of an agreement among competitors — and not even a letter of the kind described above.
Between January 1964 and October 1967, dye prices rose uniformly three times across the European Community. The dye market was an oligopoly in which 10 large producers supplied about 80% of the market. BASF and Geigy, which led the increases, announced their plans in advance, and the other producers followed while watching how national markets within the Community responded.
The court found that by announcing price changes in advance, the market-leading producers had "eliminated all uncertainty between them as to their future conduct," removing much of the risk inherent in changing prices independently. It was difficult to imagine, the court said, that raising prices on the same product by the same amount in the same market at the same time was the result of independent decisions.
The European Court of Justice ruled that such conduct amounts to collusion as a "concerted practice." The companies had not gone so far as to reach an agreement, the court said, but penalties were warranted because there was "coordination" that "knowingly substitutes practical cooperation between them for the risks of competition."
The court said the three price increases were linked to one another, showing "progressive cooperation" among the companies. Announcing prices in advance is not in itself unlawful, of course. Telling customers about prices ahead of time so they can plan purchases is ordinary business activity. What matters is whether an advance announcement conveys market information to customers or sends a signal to competitors. In Dyestuffs, the court concluded that the advance announcements at issue were the latter — a signal to rivals that prices would rise.
The court did acknowledge that "every producer is free to change his prices, taking into account in so doing the present or foreseeable conduct of his competitors." But it held that cooperating with competitors to remove, in advance, mutual uncertainty about the amount, scope, timing and geography of an increase is prohibited. Watching a competitor and following its lead is permitted; coordinating with a competitor beforehand is not.
What Management Should Examine
Never having met a competitor is no guarantee of safety. Companies should ask themselves two questions when changing prices.
First, can our price increase be explained by our own circumstances alone? If it can be justified on independent grounds such as costs and demand, there is relatively little cause for concern. The situation is different if the increase was made in the belief that competitors would follow. The price may end up the same either way, but it is the process of reaching it that invites suspicion of collusion.
Second, is the price information we disclose directed at customers or at competitors? Notifying customers in advance so they can plan purchases is ordinary business. By contrast, disclosing the size and timing of an increase unusually early, or repeatedly withdrawing one after gauging competitors' reactions, can be read as signaling to rivals. The same applies to demands from business partners. Complying with such a demand while knowing that competitors received the same one leaves a company exposed, even if it never once met those competitors.
