The Firm as Cartel Manager
Christopher R. Leslie and Herbert J. Hovenkamp, The Firm as Cartel Manager, 64 Vand. L. Rev. 811 (2011).
Antitrust law is the primary legal obstacle to price fixing, which is condemned by Section 1 of the Sherman Act. Firms that engage in price fixing may try to reduce their probability of antitrust liability in a number of ways. First, members of a price-fixing conspiracy go to great lengths to conceal their illegal activities from antitrust enforcers. Second, because Section 1 condemns only concerted action, firms may structure their relationship to appear to be the action of a single entity that is beyond the reach of Section One.
In its American Needle decision the Supreme Court held that the NFL is a collaboration of its individual teams rather than a single entity when the issue was a single exclusive license covering the individual IP rights of all of the member teams. The American Needle decision could conceivably rest on alternative rationales for its separate entity conclusion. These are (1) the teams are separately owned profit centers capable of competing with each other; (2) the particular agreement challenged in this case restrained the ability of the teams to market their IP rights individually; (3) the teams themselves acting together actively made decisions about how their IP rights should be packaged and sold. The Supreme Court’s decision depends on propositions (1) and (2) but not proposition (3). Indeed, the question of the individual teams day to day control of sales was not all that important. Rather, the relevant question was who is controlled.
Much of the argument favoring single entity status for an organization such as the National Football League (NFL) confuses the entity question, which is essentially structural, with the cooperation question, which is functional or behavioral. Many markets require firms to cooperate in the delivery of their product, in some cases a great deal, and the need for cooperation or even for interconnectivity requires application of antitrust’s rule of reason.
This paper examines cartel organization, concluding that the Supreme Court was correct to identify the issue as who is controlled, rather than who is in control. Too much individual member control undermines rather than furthers price fixing agreements. Many successful cartels function by taking control away from the individual members and giving it to a single organization. A business organization such as a corporation becomes an ideal vehicle for cartel, because such organizations are charged with maximizing the value of the firm, and maximization occurs when members reduce output to the cartel level. We apply this reasoning to a number of joint ventures including the Supreme Court’s Sealy, Topco, and Dagher cases, and to the recently created MasterCard and Visa IPOs.