Greetings. Last time in our video, we talked about what the social cost was of a collusive arrangement. We saw the deadweight loss triangle that made the benevolent dictator quite unhappy because the size of the pie has shrunk. Now, the members of the cartel don't care because what they get out of the operation has grown. That's why they're behaving that way. But the overall, when you take into consideration the fact that we have less output and the consumer surplus has fallen quite a bit, the benevolent dictator is unhappy with the situation. Usually when the pie starts shrinking, the government gets involved. So we're going to talk about this idea of the government getting involved here and we'll talk about the Sherman Act; Section 1. The Sherman Act is the major Antitrust Act in the United States. It says that, collusion is illegal. Remember, the Sherman Act says collusion is illegal but the Sherman Act has no real authority over sovereign nations. So the people who are doing this collusion, that is in the example we have, which was OPEC cartel, the United States government can't file antitrust case against them because they're just sovereign countries who are in a sense having their own treaties with each other about how they're going to trade in particular markets. But collusion in the United States is certainly illegal. It's illegal under the Sherman Act; Section 1, which prohibits restraint of trade. That restraint of trade could be anything. You just can't do things that would eliminate some competition. No. Typically, this is pricing. That's why Section 1 is typically referred to as the price fixing statute in the Sherman Act, because most of the time the collusion is on prices. Firms get together and set prices, think how we'll get married, make sure there's no tape recorders, they are in some closed-door room and they say, let's all raise our price by 12 percent. Let's just go back to the office tomorrow, raise price by 12 percent and just keep our fingers crossed that we can stick to this arrangement. Once again, if they do that, they still have to worry about people cheating on the margin. Saying, well, we've all raised our price by a couple of bucks but I'll just shade mine a little bit to some of my better customers. Just to make sure because it's still a good price for me but maybe I can get a few of the customers from my fellow conspirators and get extra sales that way. The Sherman Act prohibits restraint of trade. The interesting characteristic of the Sherman Act is that it is illegal. Restraint of trade is illegal per se. What that reads is the Latin phrase which basically just means it's illegal. If we find it, it's illegal. The way to think about this is, there's no excuse for it. If you talk about a monopoly case in the Sherman Act, the Sherman Act makes monopoly illegal. But in that case, they have something called the rule of reason. So first, you have to show the existence of a monopoly and then you'd have to show the court that this monopoly is bad. Because sometimes monopolies are good. Monopolies may be good because they got to that market position by building a better product. Their product is so good that 70, 80, 90 percent of the people voluntarily want to buy their products instead of Larry's fly-by-night knockoff, whatever that product is. Price-fixing, in Sherman Act; Section 1 cases, there's no such part of a trial after they show the existence of the fix. So the government produces some memos, they capture our facts, they maybe have put a wire on one of this grundled member of the fix and they go to a meeting and they talk about fixing prices. So they've now proven beyond the shadow of a doubt that there was a price fixing case. There is no moment in the court where the judge will even listen to them making an argument of why it might be good. They can't go up and say, we're a failing industry and we have to get together and help us, we're having so much competition from Asia, low price suppliers, we have to do this. Nothing. The judge will not even listen to it. So once they have shown that the price-fixing actually occurred, then comes the sort of, what does the court decide? Typically, in these cases, we call this the relief. In monopoly cases, which was Sherman Act; Section 2, the relief is what we call structural relief. That is, the court, if they show that not only there is a monopoly but there was a bad monopoly, they went into that monopoly and broke it up into various smaller components to try to get an environment where they would compete against each other. They tried to restore competition rather than you having just one firm pushing around the market. In price-fixing cases, what they want to do is stop people from doing that behavior. So they want to stop people from getting together. They want to figure out ways to make it difficult for the cartel to hold up. Now, in the long history of litigation about price-fixing, the government has sought many different times to establish a precedent. They've taken somebody to court for certain types of behavior with the hope that they could actually make that behavior be considered by the court as something that shouldn't have happened. So for example, many industries have these things called trade associations. A trade association is essentially, the participants in the industry will pay dues to this trade association and the trade association will have some people who run it and they put out these little monthly magazines. The little magazines are like little black and white things that get head shots of people who got promoted at company X and head shots of people who got promoted at company Y. Maybe a little highlighted story about some new policy changes coming out of Washington that will affect the industry and stuff like that. Those are fine. Everybody does that. But what the Department of Justice doesn't like is when those documents, sometimes on the back page of those documents, they'll actually put down how much each firm was producing in the last quarter. Sometimes besides how much they're producing, sometimes they'll even have estimates of what the firms cost were. These people would take that to courts and they say, your Honor, this is just a detection mechanism in the cartels trying to solve all these problems. The only way that you guys can have their price-fix work, we don't have any memos on. That's true. We haven't found any wire tapes yet but they should not be allowed to trade this information with each other because it's basically like a detection mechanism. They're announcing, we're sticking to the plan, here's what we're producing, just like we agreed. So the courts have been relatively tough on trade association publications that go into details as much as maybe giving marginal cost or average cost or some of these sort of things. That's kind of a cat and mouse game that the Department of Justice plays with firms because firms have to solve those three problems. If they want their collusion to work, they have to sell those three problems that we've outlined before. What should we have for market price? That is also a market output. How much are we each going to agree that will stick to these rules? What's the policing mechanism? It's a difficult problem. Believe me. I don't want it to seem like this is completely happens everyday but it does. There's lots of price-fixing cases over the course of a year. You'll see lots of Sherman Act price-fixing cases. It's not so much right now by the federal government but the law is the law and firms can file civil cases against them, especially if they're buying product from some people who are producing, for example, raw materials like steel or tires or something that other producers have to buy to make their product. These other producers say, what do you mean? I think you guys have a price-fixing. It's amazing to me. Everybody's charging the exact same price for tires. What's going on here? They might file their own suit. So there's a lot of these things that happen over the course of the year. Finally, I should say one thing that, for many years when the court actually determined that there was some price-fixing going on, the court would for years just impose a fine. They'd put a big fine and they'd say, don't do that anymore. They put a big fine on the company. But basically, right around the late '60s and early '70s, the Department of Justice basically told the court, hey, these companies are treating this fine like the cover charge to get into some great big party. They're going wild, they're fixing prices and if they get caught, well, we just have this fine and we have to pay. We would like to have people go to jail. Have the senior executives go to jail. So that's started in the late '70s and there was a market drop in the amount of attempted price-fixing because if you get caught, that can be the end of your career. You're going to go spend five years in a federal penitentiary. Now, it might be a nice golf course type of place because it's full of a lot of very wealthy white collars, but regardless, your career is pretty much over at that point in time. So the Department of Justice has the ability to file criminal charges. So most price-fixing cases, even though the Federal Trade Commission can get involved with price-fixing cases, the Department of Justice can bring the hammer down a lot harder on the executives. That's what they want to do is put in the mind of other executives, don't fool around with fixing prices. Don't even talk to your rivals about your prices. If you're sitting beside him on the airplane, don't talk to him. Otherwise, you're going to spend some time in jail. Okay.
