Tacit Collusion

Nicolas Petit’s new(-ish) article on tacit collusion is a wonderful piece of scholarship. Unfortunately, it is also wrong. To be clear, it is not the economics that I have a problem with. The author’s understanding of the relevant industrial organisation literature seems to be more or less unimpeachable. In fact, it’s not even really the legal analysis that is problematic. Instead, the key flaw is in the paper’s essential policy assumption. All the other problems of the article proceed from that one flaw.

The flaw in question is one that we might plausibly dub The MEP’s Fallacy, because it is Members of the European Parliament who suffer from it more than anyone else. The Fallacy is the thought that: a) there is a problem, and b) I can fix it, lead inevitably to the conclusion that: c) I should fix it.

Not all problems that can be fixed at the EU level should be fixed there.

Something similar goes for competition law: Not all problems that can be resolved through competition law, should be. This is not just a question of the goals of competition law, but also one of its suitability for pursuing various goals, not to mention wider legal principles.

In this  particular case, I’m afraid I have to join the other side of the debate discussed by Nicolas (I’ve never met him in person, but we’ve been in touch in various ways, so I feel confident that he’d be OK with me calling him that): I am fundamentally uneasy with the notion of using art. 101 TFEU for types of collusion that are not in some sense based on an agreement. It appears to me that "agreement” is the core actus reus of that provision,  just like “abuse” is for art. 102. It is the overt act that - in this case non-criminal - liability attaches to.

That reminds me, as an aside: How can the Dutch competition authority give six people a fine of € 120.000 each without having to satisfy the standard of art. 6 ECHR? We all know that the normal competition enforcement procedure - as used by the Commission and by most Member States - only barely satisfies that provision, and that is when it is applied to companies. (Let's face it: every company that brings an action for annulment against a competition decision adressed to it will argue that the whole procedure is in violation of art. 6. We all know that those arguments never succeed, but we also know that that is more for pragmatic and stare decisis reasons than for reasons of honest merit.)

Saying that competition fines are not criminal only gets you so far. At some point that just isn't  credible anymore, and as far as I'm concerned that line lies somewhere between giving Microsoft a € 561 million fine and giving a private person a fine of € 120.000, and perhaps even on the other side of that Microsoft fine.

Anyway, too much creativity with the actus reus is equivalent to prosecuting someone for manslaughter because they drove 150 kph and someone might well have died. Much as there is some room for creativity with regard to intent, by including dolus eventualis, there has to be a link to someone dying or almost dying. Without that, the charge would just be completely unmoored from the actual offence.

In competition law, the issue is not usually one of intent. But there is some scope for creativity with regard to the "agreement"-element. Art. 101 already suggests as much, by listing as possible acti rei:

• - agreements between undertakings,
• - decisions by associations of undertakings, and
• - concerted practices

As Nicolas explains, however, the Court of Justice drew some clear lines here. These lines are - contrary to his assertion - in no way unintelligible or regrettable as long as one bears in mind that the problem is how to prove a concerted practice, rather than what kind of concerted practice falls within the scope of art. 101. After all, the word "concerted" implies some meeting of minds, which is enough - conceptually - to make concerted practices similar in nature to explicit agreements and decisions by associations; the actus reus is clearly the same in all cases. But as prof. Posner pointed out in the passage quoted in fn. 140, the proof is categorically different. There would normally be no "smoking gun". Instead, the relevant proof would focus on what decision makers knew and expected about each other's decisions. (Note the similarity here with the Cournot and Bertrand models. In fact, despite Nicolas' analysis I am still not entirely clear why a Cournot market would not imply tacit collusion.) Because of this proof problem, it might be safer to limit concerted practices to those cases where, evidence-wise, the balance between Type-I and Type-II errors is not too eggregious. And that is all the Court seems to have done.

In Posner's words:

The biggest problem in applying [art. 101] to tacit collusion is that of proof: How can the existence of noncompetitive pricing be established without any proof of acts of agreement, implementation, or enforcement? Without denying that these will be extremely difficult cases, one can point to several types of evidence that should convince the trier of fact that sellers are guilty of tacit collusion as that term is used here.

The Court in Suiker-Unie et al. v. Commission (1975):

173. THE CRITERIA OF COORDINATION AND COOPERATION LAID DOWN BY THE CASE-LAW OF THE COURT, WHICH IN NO WAY REQUIRE THE WORKING OUT OF AN ACTUAL PLAN, MUST BE UNDERSTOOD IN THE LIGHT OF THE CONCEPT INHERENT IN THE PROVISIONS OF THE TREATY RELATING TO COMPETITION THAT EACH ECONOMIC OPERATOR MUST DETERMINE INDEPENDENTLY THE POLICY WHICH HE INTENDS TO ADOPT ON THE COMMON MARKET INCLUDING THE CHOICE OF THE PERSONS AND UNDERTAKINGS TO WHICH HE MAKES OFFERS OR SELLS.

174. ALTHOUGH IT IS CORRECT TO SAY THAT THIS REQUIREMENT OF INDEPENDENCE DOES NOT DEPRIVE ECONOMIC OPERATORS OF THE RIGHT TO ADAPT THEMSELVES INTELLIGENTLY TO THE EXISTING AND ANTICIPATED CONDUCT OF THEIR COMPETITORS, IT DOES HOWEVER STRICTLY PRECLUDE ANY DIRECT OR INDIRECT CONTACT BETWEEN SUCH OPERATORS, THE OBJECT OR EFFECT WHEREOF IS EITHER TO INFLUENCE THE CONDUCT ON THE MARKET OF AN ACTUAL OR POTENTIAL COMPETITOR OR TO DISCLOSE TO SUCH A COMPETITOR THE COURSE OF CONDUCT WHICH THEY THEMSELVES HAVE DECIDED TO ADOPT OR CONTEMPLATE ADOPTING ON THE MARKET.

And, 13 years later in Woodpulp II, the Court was even more cautious with regard to these evidentiary problems:

71 In determining the probative value of those different factors, it must be noted that parallel conduct cannot be regarded as furnishing proof of concertation unless concertation constitutes the only plausible explanation for such conduct. It is necessary to bear in mind that, although [art. 101] prohibits any form of collusion which distorts competition, it does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors (see the judgment in Suiker Unie, cited above, paragraph 174).

"Regarded" and "plausible" suggest that this is a statement about how cases are to be brought and proved, not about the underlying concepts. Conceptually, I would argue that any kind of "conscious parallelism" is captured by art. 101 TFEU. (Contrary to Nicolas, I regard "conscious parallelism" as an eminently useful label, because more than "tacit collusion" it neatly makes clear what exactly the offending action is. The elements are: a) parallel behaviour that is, b) consciously so. In the term "tacit collusion", the word "collusion does all the work, thus begging the question what that word actually means.) I would define conscious parallelism, conceptually, as any kind of behaviour that succeeds in reducing competition by taking advantage of each decision maker's understanding of every other decision maker's reasoning. Clearly, this is essentially the same as Nicolas's tacit collusion. (Cf. his very helpful diagram on p. 24.) However, in collusion cases as in abuse of dominance cases, competition law doctrine has to be developed with an eye to the relative probability of Type-I and Type-II errors, and their relative cost to society. When it comes to tacit collusion, we want to avoid mistaking success for monopolisation, or a social-welfare enhancing coordination for a collusion-facilitating agreement. For this reason, the Court's approach seems quite sensible, although I would have preferred it if they had not been quite so categorical in ruling out the possibility of a successful tacit collusion case under art. 101 TFEU.

Relying on art. 102 TFEU, on the other hand, seems highly problematic from a conceptual point of view, because it is difficult to see how a single oligopolistic firm is "dominant", while I have no idea what "collective dominance" means outside the context of "groups of firms that were legally distinct, but subject to a unified economic management, including vertically related companies (mother and subsidiaries)", i.e. “undertakings [that] present themselves on the market as a single entity and not as individuals”. (These quotes are taken originally from an article by prof. Joliet from 1974 and from the Commission's Decision in the Italian Flat Glass case, respectively.) In other words, while there is some room for creativity with respect to the concept of "one or more undertakings" which hold(s) a single "position" in the market, I would think that this concept cannot be stretched to the point where it includes companies that are clearly perceived as competitors by their customers.

And much as dr. Petit seems to think that the mere fact that tacit collusion ought to be subject to regulatory intervention means that either art. 101 or art. 102 has to give way, as noted above that is not the case. He is completely right to reject what he calls "moral justifications" for tacit collusion (p. 19 of his article). Competition authorities and regulators are rarely confronted with anything other than regulatory subjects who engage in rational market conduct, and this has never been held to undermine the moral case for intervention, although it might impact the question of the size of penalties. However, this does not mean that existing competition law should be extended past its breaking point.

Instead, there are two solutions that should be preferred for those cases that cannot reasonably be brought within existing law. On the one hand, there are the market investigations that he mentions, as they are carried out in the UK by the Competition Commission under part 4 of the Enterprise Act 2002. S. 131(1) says:

The OFT may, subject to subsection (4), make a reference to the Commission if the OFT has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom.

(Ministers have the same power under s. 132.)

When an adverse effect on competition has been established by the CC, it can take any of a wide range of measures - at a sector-wide level - to remedy the problem. It seems eminently advisable to create such a power for the Commission as well, if necessary with a veto power for the Council and the Parliament through comitology. As far as I can tell, Nicolas agrees.

To the extent that this is still not enough, there is only one option remaining: sectoral regulation through the legislature. (What Bergqvist calls "industrial policy". His article offers a more in-depth discussion of the interaction between competition law and sector-specific legislation.) It seems to me that under the general common market rules, the EU legislature has wide-ranging powers to create a sector-specific framework to enhance social welfare by combating tacit collusion. This power may not reach as far as structural remedies, but it certainly suffices to go after any number of facilitating factors. This road seems by far preferable to the competition law path, not only because it is more legitimate, but also because it allows for more sector-specific knowledge to be brought to bare on the problem, and because it avoids the problem of a regulator working within an artificial, and artificially narrow framework. Instead, in this way the solution can be designed on a blank sheet.

To a hammer, all problems look like a nail. Let's make sure that the same isn't true for the carpenter.