Concepts in Industrial Organization: Price Exchange Agreements and Conscious Parallelism

A price exchange agreement is an "agreement among a group of competitors to provide price information to each other" (Waldman and Jensen 2007, p. 646). According to a previous Supreme Court ruling in the Container Corporation Case (1969), price exchange agreements are not illegal per se; they would have no real effect in a truly competitive market. Only in a market where a few sellers predominate can price exchange agreements affect prices.

A further ruling in the 1978 U. S. Gypsum Case removed further legal obstacles to price exchange agreements. Previously, if price exchange agreements had the effect of raising or fixing prices, the courts presumed that the firms making the agreements had the intent to do so as well. In the U. S. Gypsum Case, however, the Supreme Court determined that actual evidence is needed to establish that the firms involved in such agreements had any kind of wrongful intent.

Conscious parallelism is "an antitrust law term meaning that a group of oligopolists behave in an identical manner, but there is lack of proof that the firms ever met to agree on this parallel course of behavior. Conscious parallelism refers to idea that rational business behavior in a tight oligopoly will lead firms to behave identically with regard to price and other business practices" (Waldman and Jensen 2007, p. 640).

Conscious parallelism may be an instance of tacit collusion. In tacit collusion, the competitors do not explicitly meet but can come to implicit cartel-like agreements through a "meeting of the minds." If competitors recognize that it is in their interests to not engage in price wars and if there exists some form of signaling among the competitors that raising prices is acceptable, this is an instance of tacit collusion. Tacit collusion is extremely difficult (almost impossible) to prosecute legally, because evidence of a cartel agreement is necessary and can seldom be found. But tacit collusion also has very little chance of success because of the difficulties it encounters in coordinating firms' actions so as to prevent competition among the tacitly colluding firms and to prevent new firms from entering the market in question.

It is furthermore extremely difficult to determine whether any kind of collusion was the intention of consciously parallel behavior. Today, it is generally not possible to prosecute parallel behavior among firms, absent an explicit price-fixing agreement.

Sources

Don E. Waldman and Elizabeth J. Jensen. Industrial Organization: Theory and Practice. Third Edition. Pearson Education. 2007.

Pongracic, Ivan. Lectures on Industrial Organization. Hillsdale College. Hillsdale, MI. October 2007.

All lecture material is used with explicit permission.