Transnational Research Associates

Legitimate Price Leadership


Conspiratorial Price-Fixing on the Internet

The Federal Trade Commission (FTC) has been diligently examining the implications of possible conspiratorial price fixing on the Internet since the advent of this new technology, available through the World Wide Web to the public as early as 1991. This powerful federal agency has been increasingly concerned with false advertising, outright fraud and oligopolistic practices which transgress the law. The agency's goal is primarily to protect the consumer from exploitation and, in recent years, to ensure fair practices among the many major industries currently using the Internet as a marketing tool.

Traditionally, in the days before the Internet, prices were established through fair competitive practices and independent pricing policies. Legally, no collusion was possible among or between firms; in fact, price changes were (and still should be) achieved through an independent decision on the part of a major player in a given industrial sector. Secondary firms often follow suit, under such circumstances, but generally do so only if they can reasonably produce their merchandise or services at or near the leader's suggested price level. Otherwise, they may opt to maintain their original prices and suffer the consequences (e.g. loss of market-share) if the leader has undercut previous price levels. If, on the other hand, the industry leader has raised prices, and secondary firms opt not to follow this initiative, they could stand to gain market share, but minimize annual profits or actually produce at a loss, depending on such factors as raw-material price structures or cost of labor. This fundamental principle of industrial economics, known basically as the ‘leader-follower' scenario, has governed consumer markets in this country for over a century. This generally legitimate pricing and repricing mechanism is also commonly known as ‘price leadership'. Prior to the Internet, changes in the price structure were often forthcoming with reluctance, occurred sluggishly and required carefully reasoned, independent decisions on the part of individual firms. Now, in this "speed-of-light" computer environment, temptations to "fix" prices and contingent possibilities for unethical pricing abound.

FTC Speech

In his insightful speech, dealing essentially with horizontal price fixing in the electronic age, presented to the 1996 Antitrust Conference in New York City, Jonathan B. Baker, then Director of the FTC's Bureau of Economics, shed considerable light on the disturbing nature of current practices and explained what measures are being taken to cope with ongoing and potential abuse of the Internet. He points out how easy it has become for businessmen to utilize newly developed software for locating the lowest prices available anywhere on the Net. He alludes to Bill Gates' then newly published book, On the Road, in which "frictionless" competition is discussed in glowing terms and points out the dangers which such unencumbered access to pricing information can create. How easy it may well be to ‘conspire' with other firms to establish certain price levels in major manufacturing or service sectors currently being promoted on the Internet.

Director Baker cites actual and/or theoretical cases wherein, for example, increases of 5% are jointly contemplated among firms, and asks whether this constitutes conspiratorial price-fixing. The answer would seem to be in the affirmative; yet, proof is a delicate issue. The Internet can leave few traces in the hands of an expert. This type of conspiracy is sometimes known as ‘parallel pricing', whereby two or more firms illicitly agree to achieve dominance in a given market by establishing price-levels which could prove injurious to existing competition. Significantly, there are some aspects of parallel pricing, however, which fall within the realm of legal activity.

The FTC Bureau of Economics is also probing, according to Baker, oligopolistic practices, frequently cropping up on the Internet, which are carefully regulated by judicial definitions and regulatory terminology. He makes six salient points in his presentation which should be noted by those who might be positioned to misuse cyber-technology to unfairly undercut or threaten already delicately balanced price structures in a number of important cyber- and non-cyber based industries.

Fortunately or unfortunately, depending on your perspective, because judicial precedents have not been firmly ‘established' with respect to the cyberworld, Courts, as of 1996, had been unable in some instances to enforce what might be considered even basic ethical practices. Baker's points, delivered in 1996, were actually phrased, it appears to me, to inform anti-trust specialists of the loop-holes and weaknesses in existing law which had to be plugged. More current information indicates that some, but perhaps not truly significant, judicial progress has been made in the interim.

His first point is that Courts are reluctant to confirm that parallel pricing is occurring on the Internet because it is not easy to determine if ‘collusion or conspiracy' exists, or if the second party is simply reacting to the first's initiative. His second point is that, even assuming Courts can establish (ostensibly illicit) ‘agreement' among firms, then this activity would prove to be well beyond parallel activity, yet may still be legal. Complications would result as conflicting provisions of existing anti--trust legislation were applied to the situation, particularly under provisions of the Sherman Act.

Applicable Clauses

His third observation is fairly basic. It deals with the motivations of a firm which may appear to restructure its prices. Such a firm may not be demonstrably intending to violate anti-trust legislation. Fourthly, it should be obvious that ‘leader-follower' practices are not necessarily illegal, even if under-cutting or over-pricing may, as a secondary result occur. Fifthly, patently obvious ‘pricing agreements' among firms are unethical, if not always totally illegal, and law-suits to re-establish consumer rights, individually or collectively, are an acceptable recourse. Lastly, Baker reinforces the notion that Courts recognize what a ‘rational' firm generally does and does not do. No ‘inferences' as to what a firm may have done, if those inferences run counter to common business or market sense, can be admitted as evidence. There has to be some proof, in other words, of actual conspiracy to illicitly increase prices (and hence profits).

Baker continues his presentation by addressing the issue of what, precisely, may or may not constitute ‘agreement' in cyberspace. He argues cogently, for example, that the FTC's investigation of airline pricing irregularities was perfectly justified. He points out the convolutions of this industry's deceptive practices, both on-line and off-line, and suggests that the Justice Department and its Anti-Trust Division, working with the FTC, should continue to unravel some of the unusual practices of this industry.

The underlying principles of competition, however, are reinforced in Baker's speech and one comes away with the impression, also given in class and in our text, that more firms in a given sector result in fairer, more honestly competitive practices, while fewer firms tend to concentrate power and favor an atmosphere where pricing violations could well occur. In either instance, however, it is crucial to avoid the appearance of conspiratorial price-fixing and, in the event of an FTC or a Justice Department inquiry, to prepare a strong case for simply having "followed the leader."