Tacit Cartels, Oligopolies and the Problem of Conscious Parallelism

Abstract:     
Conscious parallelism typically afflicts oligopolistic industries where firms adopt their business practices based on what other firms are doing, rather than competing for consumers. The most obvious manifestation of conscious parallelism occurs where prices across companies in an industry not only become suspiciously similar, but also change rapidly in strikingly parallel ways the prices of gasoline, airline tickets, and broadband access provide three particularly salient contemporary examples. While this phenomenon might seem obviously and intuitively antithetical to antitrust principles, its punishment has long been problematic to cartel theory. The root of competition law's current weakness lies in the belief that absent an ability to prove explicit collusion among players, conscious parallelism cannot be punished.

This paper argues that the conventional approach to conscious parallelism is unimaginative and anemic. The argument is structured into three parts.

Part I argues that conscious parallelism is undertheorized. Existing policies are based on selective reading of an article written by Donald Turner in 1962. Turner argued that parallel behavior is inherent and rational in oligopolistic industries; as a consequence, some additional evidence suggesting a conspiracy must be brought forward to punish the oligopolists. Except for a spate of research that sputtered out in the mid-1980s, Turner's nearly fifty-year old thesis remains, sadly enough, that state of the art. As a consequence, conscious parallelism goes unpunished.

Part II suggests three different theories through which conscious parallelism might be addressed. First, and most simply, the standard for establishing a conspiracy might be lowered such that an explicit agreement (or "meeting of the minds") not be required. Agreement might be inferred from oligopolists' conduct. In such a way, antitrust laws such as 1 of the Sherman Act or Article 81 of the Treaty Establishing the European Union (EU) might be reinvigorated to address conscious parallelism.

A second path would be to analogize oligopolists' behavior to that of monopolists, thereby invoking anti-monopolization laws such as - 2 of the Sherman Act or Article 82 of the Treaty Establishing the EU. Such an approach is not as unusual as it might first appear. It builds on the notion of "abuse of collective dominant position" in EU competition law, and even the idea of "shared monopoly" that was developed in US antitrust circles in the late 1970s. After all, if one believes that oligopolies inherently tend to consciously parallel behavior, then the structure of the industry should be changed. Indeed, in a neglected portion of his seminal article, Turner himself suggests using anti-monopolization law to restructure oligopolistic markets and thereby avoid conscious parallelism.

Third, government could regulate oligopolistic markets to protect consumer interests. If monopoly and atomistic competition form two poles, one might conceptualize oligopoly as closer to monopoly, then invoke regulatory tools that are used in monopolistic industries. While perhaps controversial, such an approach would take a holistic approach to antitrust and regulation. It also builds on the insights of core theory, which suggests that certain markets prone to high fixed costs (as oligopolistic markets tend to be) do not reach a stable competitive equilibrium. In the language of core theory, they have an "empty core." A robust competition law, a synthesis of antitrust and regulation, might manage the specific portions of oligopolistic industries prone to an empty core and let competition flourish elsewhere.

Finally, Part III of the article explores the political economy of conscious parallelism. While each of the theories explored in Part II evince strong foundations, conscious parallelism remains common. Much of the blame here lies in the deregulatory fervor of the past three decades, led by the Chicago and public choice schools, that have chipped away at the intellectual respectability of robust antitrust enforcement. The challenge in regions with developed antitrust traditions notably the US and the will be to question the laissez-faire assumptions that antitrust has become enamored of.

To be sure, oligopolies are less well understood that monopolistic and atomistically competitive markets. Yet it does no good, except to the oligopolists, to resign oneself to the notion that mainstream thinking in cartel theory is not imaginative enough to address the phenomenon, so we just let it be. Instead, we must begin with the concept that such behavior is dangerous, then find mechanisms in competition policy to grapple with it. As mergers proceed apace and more and more industries consolidate into oligopolies or duopolies, the problem is only bound to get worse.

Keywords: conscious parallelism, cartel, monopolization, antitrust, competion law

JEL Classifications: K21, L41

Working Paper Series