Nov 02, 2021
On October 27, The Capitol Forum hosted a conference call with Brendan Ballou, trial attorney at DOJ’s antitrust division and author of “The ‘No Collusion’ Rule,” to discuss the article’s proposal that the FTC pursue “no collusion” rulemaking, which would seek to prevent companies from raising prices simply because their competitor has done so. The full transcript, which has been modified slightly for accuracy, can be found below.
MR. TEDDY DOWNEY: Good morning, everyone, thanks for joining The Capitol Forum’s conference call on a really interesting proposal for a “No Collusion” FTC rulemaking. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And I’m joined today by Brendan Ballou, author of this “No Collusion” rule paper and a trial attorney at DOJ.
A quick note before we get underway. The first 20 minutes or so, the call will be an interview with Brendan. And then we’ll move into a Q&A format where we entertain questions from the audience. If you have questions for us, please email them to firstname.lastname@example.org. So thanks so much for joining us today, Brendan.
MR. BRENDAN BALLOU: Thank you so much for having me. I really appreciate it.
MR. TEDDY DOWNEY: And I think we’ve got some disclosures to get out of the way. So I’ll give you that opportunity now.
MR. BRENDAN BALLOU: Yeah, yeah. Like every government attorney, I should be upfront and say that everything we talk about today are my own opinions, not necessarily those of the Department of Justice. But I’m excited to be talking with you.
MR. TEDDY DOWNEY: Yeah, I mean, really interesting paper. So much to go over. I think a really good place to start would be how did this problem start? How and why did the courts start saying that tacit collusion is okay? And has it always been that way?
MR. BRENDAN BALLOU: Yeah, absolutely. So just to define terms, tacit collusion is something of an amorphous concept. When we think of collusion, we think of sort of people meeting in hotel rooms or shaking hands on explicit agreements to raise prices or reduce wages or reduce output. And that’s sort of the mental model that we have. But probably the majority, maybe the vast majority, of “collusion” that happens in our economy is tacit collusion. Collusion where firms manage to raise prices, depress output, depress wages, without ever coming to any sort of explicit agreement with each other. And there are a lot of different mechanisms that they use to do that, and we can talk about that.
But as industries have grown more concentrated, tacit collusion has frankly become a lot easier. And unfortunately, courts have largely sort of rejected the idea that the Sherman Act can be used to address tacit collusion in any way. Back in the 1930s and 40s, there was a line of cases in the Supreme Court and a little bit in the Seventh Circuit that gestured at the idea that maybe the Sherman Act can be used to address this sort of more subtle form of collusion. But beginning in the 1980s, and sort of more definitively in this century, courts have really rejected that idea and sort of thrown up their hands at the concept that the Sherman Act can really address this kind of behavior. So that was sort of the origin for this entire project.
MR. TEDDY DOWNEY: Sorry, if anyone hears children screaming, we pipe in that audio to make it a more authentic COVID era recording. So was it always this way? Before the 80s, what was it like? Could you actually bring cases like that? Or what were the courts like on tacit collusion?
MR. BRENDAN BALLOU: Yeah, yeah. I don’t want to overstate the case here, much as I might like to. But sort of in the shadow of the Great Depression, in the 1930s, there was a series of cases basically suggesting that an explicit agreement wasn’t necessary to find a violation of the Sherman Act.
At the same time, there was sort of a line of cases that was going on in the 1930s and 40s that was also looking at the power of the FTC’s authority under its unfair methods of competition to tackle tacit collusion. And there were a number of cases where the court looked at sort of case patterns that, in at least some light, really looked like tacit collusion cases and found them to be violations of Section 5. And they were really interesting cases. I don’t want to bore you with the details. But there were sort of instances where, for instance, shipping companies were using sort of common rate cards, essentially sort of like an algorithm before computers, to set super competitive shipping prices. And in fact, courts found that those could be a violation of Section 5, ad unfair methods of competition.
I think the tide started to turn—I mentioned that it really happened in the 1980s, but the sort of intellectual progeny happened in the 1960s with Donald Turner over at Harvard writing these papers sort of suggesting that this isn’t really something that the antitrust laws in general, and the Sherman Act in particular, should be concerned with. And I think that they were really concerned with the idea of judges being placed in the position of sort of acting as regulators of entire industries.
So taking that sort of academic literature from the 1960s and then sort of the broader sort of immense power of the Harvard, Chicago School of Antitrust, I think courts became much more skeptical of using the Sherman Act in the sort of way.
MR. TEDDY DOWNEY: And then you mentioned earlier that there’s more concentration now, which makes it easier to engage in passive collusion. Can you speak anything more to why this is an acute problem right now?
MR. BRENDAN BALLOU: Yeah, absolutely. So there are so many statistics on this. Since the 1990s, three fourths of all industries in America have concentrated. When you look at just specific industries, you’ve got just five companies dominating defense contracting, four companies largely dominating air travel, two companies dominating office supplies, sort of example after example of industries that have just become ever more concentrated.
And we can talk about the specific tactics of tacit collusion if you want. But the long and short of it is it’s just a lot easier for companies to tacitly collude with each other when there’s just a couple of them. if a company wants to try to start a collusive scheme by sending out, let’s say, an advance price announcement. So to use just a simple example, let’s say there’s a gas station in town that says, well, we’re going to raise our prices by 20 cents. It’s a lot easier for the gas stations in town to collude if there’s only two or three of them, rather than if there are twenty. So as industries have concentrated, it’s also become a lot easier for the industries to collude.
MR. TEDDY DOWNEY: Okay, great. And this gets to my next question. Joseph Harrington in his paper, “Collusion in Plain Sight”, said the FTC should establish that invitations to collude are explicit violations of the FTC Act and then use Section 5 to bring more cases. I wonder how you arrived at your proposal for a rulemaking rather than a route of just bringing more cases?
MR. BRENDAN BALLOU: Yeah, it’s a great question. And I think, as you’ve described it, I think Harrington’s idea is a good one. My idea for rulemaking kind of came out of the case law in the 1970s. The FTC did try to bring a couple of cases that sort of had the shape of tacit collusion cases and courts struck them down. Not because the FTC lacked authority, but for various individual problems with the cases.
But in one of them, E.I. du Pont, I believe it was the Seventh Circuit, specifically requested sort of guidance from the FTC on the scope of what it meant to be an unfair method of competition. So in a sense, rulemaking here is not just going to empower the FTC, but is going to give some guidance to the courts and add some specificity to what currently is a very broad authority.
MR. TEDDY DOWNEY: And can you go into more detail about how the rulemaking process would work at the FTC? Like how does this go from your paper to becoming law?
MR. BRENDAN BALLOU: Well, I think the good folks over the at the newly created FTC rulemaking office, I know that they’re absolutely swamped with various proposals, but I think this is something for them to consider. And then this would follow the sort of ordinary rulemaking process. Now, I’m a litigator, not a regulator. But as I understand it, we would go through a notice
of proposed rulemaking. There would be an opportunity for comments from interested industries and nonprofits and academics. And then after a number of months, they would issue a final rule. Now, knowing these sorts of things, there would obviously be follow-on litigation. But at least the process of rulemaking is something that agencies and the FTC have a long history of doing. So this wouldn’t be out of the ordinary for the government to be doing.
MR. TEDDY DOWNEY: And you also have five objections that you mention in the paper. Can you walk us through those and why you disagree with them?
MR. BRENDAN BALLOU: Yeah, perhaps it would be helpful just to briefly state what the idea of the rule here is. So the rulemaking at its core would be extremely simple. The key operative sentence—and I think I can pull it up here—would be that it would be an unfair method of competition for a seller to raise the price of a product solely because a competing seller has done so. So this bans sort of extreme forms of tacit collusion where a company raises its prices solely because a competitor has done so.
Now, like any rule, there are going to be reasonable objections to that sort of proposal. The first that I listed was that the FTC lacks the authority to issue the rule. I won’t go into the detail of the case law here, but I think it’s pretty clear that this is well within the scope of what is meant by an unfair method of competition.
The second is that the rule is are necessary. And this kind of gets to the point that we were just talking about with Harrington. Can’t we just bring a series of tacit cases as is? Yes, but I would argue that it probably benefits the Commission, and it probably benefits the courts to go through a rulemaking process so that we can put the meat on the bones of exactly what it means to engage in unfair methods of competition.
The third objection is that the rule might be too broad or alternatively too narrow. I’ve seen sort of related proposals from a lot of leading lights in the antitrust academic literature suggesting like, well, maybe we don’t ban tacit collusion, but let’s ban some of the specific tactics of tacit collusion. I don’t think that these things are mutually exclusive. But I will say that any sort of tactic of tacit collusion often has, you know, it could be either a tactic to engage in a collusion scheme or it could be entirely legitimate. Algorithmic pricing may be used to engage in tacit collusion. It also may be a way to figure out optimal pricing without having to involve a whole lot of employees.
So I would argue that it’s probably a more difficult process than it looks to go after the specific tactics of tacit collusion. And then on the flip side, some people may say that this is too narrow and that we should just be issuing a rule to make explicit the tacit collusion itself as an unfair method of competition. I think that’s understandable. But ultimately, I think would be hard for the Commission or for any sort of court to administer, which is why I proposed explicitly banning only the most extreme forms of tacit collusion.
The fourth would be that a rule like this would be impossible to administer. And we can sort of go through the specifics if it’s helpful, but I’ll try to walk through a couple of stylized examples of how would the FTC actually bring a case under this rule? How would it issue civil investigative demands? What sort of evidence would it be looking for in a company? What sort of remedy would a judge impose? But I think it’s pretty straightforward that, in fact, this is exactly the kind of case that the Commission has the knowhow to bring.
And then the last, and sort of the most extreme objection, is that arguably tacit collusion is good or at least unobjectionable. And I sort of conclude the piece by arguing that sort of even the most committed sort of Harvard Chicago antitrust folks believe that explicit price fixing is bad. That was something that Bork was writing about in the antitrust paradox and saying that the Department of Justice and FTC should still be going after that. And there’s really no economic difference between explicit collusion and tacit collusion. So I think it would be ultimately very hard for people to defend tacit collusion as a good thing or perhaps even as an unobjectionable thing. So those were the five objections that I listed out and tried to respond to.
MR. TEDDY DOWNEY: I want to stay on the main one being that this could get taken to court as an overreach of FTC authority. You sort of dismiss the argument that if a company doesn’t like this rulemaking, they take it to court as FTC overstepping its authority, they wouldn’t have much of a chance. Without necessarily going into the case law too much, why do you think it’s such a strong case that, yes, this is clearly within the FTC’s authority?
MR. BRENDAN BALLOU: Absolutely. So when Congress was writing Section 5 and considering the language of unfair methods of competition, the congressional record is pretty clear that the language was meant to be intentionally broad to encompass activity that was broader than the Sherman Act, and that it was up to the Commission ultimately to decide what were the specific instances of unfair methods of competition that it was going to go after? So I think the language gives the Commission a lot of breadth, and the legislative history suggests that Congress always intended to delegate a lot of power to the Federal Trade Commission.
Now, obviously, if this rule is promulgated, there’s going to be litigation around it. I suspect that litigants would primarily rely on three cases that all happened, I believe, in the 1970s. This was Kellogg, Boise Cascade, and E.I. DuPont. And these were all instances where the FTC tried to bring arguable tacit collusion cases and failed. And in the article, I explain how Kellogg and Boise Cascade failed, not because the FTC lacked the authority to promulgate this rule, but for other reasons in the case that basically the Commission failed to show that the defendants had sort of achieved super competitive prices. So these cases failed, not because the FTC lacked the authority, but because of other reasons in the case.
And I think that the same thing happens with the third case, E.I. DuPont. And I reserve that one because that’s, as I mentioned earlier, the specific case where the court actually invites the Commission to provide more guidance on what exactly is meant by unfair methods of competition.
So I think the text of the statute, I think the legislative history of the statute, and I think the cases subsequently interpreting both, all suggest that the FTC has this authority and rulemaking here would just provide some extremely helpful specificity and some scope around what unfair methods of competition really mean.
MR. TEDDY DOWNEY: And we noticed this in our series, “Coordination Out Loud”, where we look at public comments from executives that could be perceived to be invitations to collude. And they’re pretty explicit that if the price increase doesn’t hold that they’ll go back to their original pricing. So it does seem like there are plenty of examples of that where you couldn’t get away with a price increase in that instance. Or at least the executive doesn’t expect to unless the competitors follow.
MR. BRENDAN BALLOU: If I could just jump in, because it’s a great point that you made is one example that I give in the article—and this has publicly been reported—there’s been litigation by private litigants alleging that airline carriers have engaged in sort of various tacitly collusive schemes, for instance, imposing check bag fees all within a matter of weeks. And in the check bag fee example, the airlines were, at least as alleged in these lawsuits, successful. They were able to maintain the check bag fee.
Well, one counter example is when one of the airlines imposed a fee for the drinks that are served on in-flight. And I think they were going to charge $2.50 or something like that for your Diet Coke. Well, none of the airlines followed suit. And so they quickly actually rescinded the fee. So it’s an example of when you’ve got some more fungible product, it sometimes becomes harder for companies to sort of maintain that first mover advantage.
MR. TEDDY DOWNEY: Yeah, another way to think about it is if there’s actual competition going on, where it’s a market that’s harder to collude, it’s not going to be a successful invitation to collude. So you’re going to probably have fewer of them.
Here’s another question. You mentioned companies are likely to have contemporaneous records justifying pricing decisions because pricing decisions are important and important decisions are likely to be recorded. This may be true at some companies, but I believe it’s less common than you assume. While the record of a price change might be commonly tracked, the rationale behind the price change might not be recorded in contemporaneous documents. For example, a company may have a large price catalog or might participate in a dynamic market where price changes are frequent or may have a culture where topics are discussed orally rather than in written presentation.
In these cases, under your proposed rule, how would a company demonstrate compliance? Would it be required to develop a culture of recording pricing decision rationales?
MR. BRENDAN BALLOU: It’s a great question. And I don’t want to—this feels a little bit like law school. I don’t want to fight the hypothetical here. But I think I would perhaps put a little bit of pressure on the idea that it’s unlikely that companies are going to have any sort of written or other sort of record of both the price increases and sort of the rationale for those increases.
One of the things that I did in researching this article was just looking at how companies actually made pricing decisions. And if you look at very large Fortune 100 companies, they have whole teams devoted to making pricing decisions. Now, obviously, these people aren’t making a record of every decision that they’re making in their office. None of us do. But it suggests that pricing is an extraordinarily important decision for these companies and the kind of thing for which documents and data is going to be developed.
Now, how do we actually identify that evidence? And how do we implement sort of a monitoring program as you suggest? I think those are great questions. In some cases, I talk about private litigation against airlines in the article. There truly are smoking gun emails, at least alleged, saying that, okay. We’re going to back off such and such a price increase because some other airline failed to follow it. And again, at the risk of being a little repetitive here, this is private litigation and I’m not necessarily endorsing it or anything like that. But it’s what’s alleged in the complaint.
So in some industries, there really may be a sort of smoking gun conversation, smoking gun sort of documents and emails. In other cases, as I’ve been learning about this, pricing is an incredibly complicated sort of art and science and one where there is software that essentially manages a lot of the pricing decisions. I believe Amazon changed its pricing list literally millions of times in a given month.
In such a case, what you really just need to do is understand the pricing algorithms and understand if you’re going to be compliant with the rule. Is it possible to raise your price solely because a competitor has raised their price? And that doesn’t necessarily require complicated engineering, reverse engineering, an algorithm or something like that. It just requires a basic understanding of whether a single variable change, a competitor’s price, is sufficient to change the actual owner of the algorithm’s pricing.
So I think that in some ways, the most complex companies, the biggest companies that are using the most advanced software, might be the easiest to identify instances of tacit collusion and as such might be the easiest to monitor.
MR. TEDDY DOWNEY: One thing I was wondering is, do you think by sort of making it so specific, do you think it could—let’s say the FCC sues and goes to court—might run into the issue
where the companies are just giving a separate excuse for why they did it and then getting off the hook?
MR. BRENDAN BALLOU: Yeah, absolutely. It’s something that I was thinking about is do we want to broaden this and say, okay. Was the competitor’s price increase maybe not the sole motivation, but it was the primary motivation? Was it a motivation for raising a price or something like that? Ultimately, I shied away with that because I think the article is strongest, and the rule would be strongest, if it attacks sort of the most pernicious, least defensible forms of tacit collusion. Both because it’s hard to sort of justify it even sort of on sort of pro-market terms, but also because it’s the most straightforward to prove. It’s a relatively understandable inquiry to say, okay, did such and such a company raise their price solely because an oligopolistic competitor did so too? It’s a harder inquiry to say, well, what was their primary motivation? Or was this one of their considerations? Or things like that. So ultimately, I think you sacrifice the ability to go after some cases, but I think a narrower rule might ultimately be easier to administer.
MR. TEDDY DOWNEY: What about banning the invitation itself? Because one of the things we see a lot, that sort of gets you—it doesn’t address the collusion going on that you don’t see at all. But frankly, I mean, I’m sort of overwhelmed with my alerts on, you know, we have a search that looks for terms that spot invitations to collude in public statements. And my inbox is full every day basically of these alerts. What about something even less ambitious than just banning invitations?
MR. BRENDAN BALLOU: Yeah, it’s an important concept, and I know that a number of people have proposed sort of variations on exactly that. The challenge that I think we’ve got is that some invitations to collude may just be so obvious that they can’t really be interpreted as anything else. The challenge is that sort of sometimes these invitations, as we might call them, have perfectly reasons, perfectly legitimate justifications. A person on an earnings call may say that they intend to raise the price of their drug such and such dollars. That may be interpreted as an invitation to collude. It may be interpreted as a signal to shareholders that they are trying to maximize revenue from perhaps a slightly smaller base of consumers or something like that.
I think once you get into the sort of task of trying to ban specific tactics of tacit collusion, I think it becomes sort of like a game of Whack-A-Mole. And it becomes hard to identify all the different permutations, and it becomes hard to sort out which ones are the legitimate versus the legitimate ones.
That said, I don’t want to sort of throw cold water on the idea, either on the idea of sort of parallel rulemaking to prohibit certain sort of specific tactics of past collusion. But also, I don’t want to throw cold water on the idea of, you know, to go back to the Harrington article you mentioned, just bringing litigation against this. Perhaps potentially, these are violations of, you know, these are unfair methods of competition, sort of opportunities for tacit collusion. Perhaps they’re just specific
invitations to collude that may violate the Sherman Act. So I don’t necessarily think that we have to choose just one of these paths.
MR. TEDDY DOWNEY: I have a question here from the audience. I’m assuming you can’t answer it. It’s about the poultry industry. I’m guessing you can’t talk about that. Is that right?
MR. BRENDAN BALLOU: I probably shouldn’t talk about any specific division the department’s involved in. Sorry though.
MR. TEDDY DOWNEY: Another question I have, and this may just come from not fully understanding the FTC minutia, but the FTC has been issuing a lot of these penalty offense notices to companies, telling them, hey, this type of conduct is illegal. We’re putting you on notice. Is that something that you could see here to kind to put them on notice, put companies on notice, so that they could then be later sued if there’s some kind of tacit collusion going on? That’s one. I don’t know if you’ve thought about that at all. But they’ve been mostly in the consumer protection area. One was on fraud at for profit colleges. I saw another one recently on companies that may not be telling the truth about earnings potential.
MR. BRENDAN BALLOU: Yeah. No, it’s not something that I’ve considered. But I am excited about the way that you’re phrasing this, which is there may be ways to change companies’ behavior and to sort of put a stop to anti-competitive conduct short of massive multi-year litigation on some of these things. One of the challenges that I think we have in the antitrust generally is just how long it takes to litigate these cases. And often by the time that you reach a final agreement, sort of the core underlying conduct has been mooted. So if there are tools in the toolbox that can get at some of these things, short of multi-year litigation, absolutely, I think that would be really exciting.
MR. TEDDY DOWNEY: And then I’ve got my last question here. What kind of reaction have you gotten from the paper to date? From our experience, we started writing about this series, “Coordination Out Loud”. I think it was kind of falling on deaf ears a little bit. I mean, not a lot of interest. But I’d say in the past few months we’ve gotten a lot more interest in it. I’m curious what kind of reaction you’ve gotten from your paper that you can talk about?
MR. BRENDAN BALLOU: Yeah, yeah, it’s been really heartening. Sometimes when folks hear about it for the first time, I think it kind of comes out of left field as like is this something that we can even—is this something that we should even be worried about? But I think the more that we’ve talked to people about it, the more that people have read the article, I think people are coming to understand sort of the breadth of tacit collusion, the scope of it, how it’s really transforming our economy. And also incidentally, something that we didn’t talk about, how our case law is making it harder to prove explicit collusion cases. But I think as people are absorbing this, I’m hopeful that they’re becoming more encouraged about the rule. And I’m hopeful that the simplicity of it is going to make it appealing to people. So I’m really excited about people’s initial reaction.
MR. TEDDY DOWNEY: Then the last question. Do you have any other people who have been writing about collusion or about FTC rulemaking, competition rulemaking, that sort of steered you in this direction or were some kind of inspiration at all for what you ended up writing? I think it’d be helpful for our listeners to maybe read up some other scholars as well.
MR. BRENDAN BALLOU: Yeah, absolutely. Well, one of them is Chairwoman of the FTC right now. So Lina Khan and Rohit Chopra wrote this great article, I think last year, “The Case for Unfair Methods of Competition Rulemaking”, University of Chicago Law Review. Sandeep Vaheesan wrote “Resurrecting a Comprehensive Charter of Economic Liberty”, which I thought was really helpful. Back in 2017, Tim Wu wrote a piece called “Antitrust Via Rulemaking” and that was in the Colorado Technology Law Journal. I think that those were all really great pieces and sort of helped spur my thinking on this stuff.
I would also just add Einer Elhauge over at Harvard has been writing about horizontal shareholding for a number of years. I think could be described as sort of a tactic of tacit collusion. And I think his scholarship has been really interesting and really important. And then I just add one or two more names. Spencer Weber Waller over at Loyola, I think, has a really beautiful historical perspective on a lot of these issues, and I encourage people to check out his scholarship.
And then just a final thing, you probably won’t read much of their work because it all happens in brief, but Aaron Hoag, Robert Lepore, Kathleen O’Neill and Adam Severt over at the Department of Justice, all really contributed to the thinking on this piece.
Oh, and one last piece, because you always want to sort of shout out antitrust scholars on these things. John Newman, who was in Miami, but I think he might have moved, also was extremely helpful here and has been writing on a similar issue. I know that was a lot of names, but I’d encourage people to check it out because they’re all doing really interesting, important work.
MR. TEDDY DOWNEY: No, this is great. I’ve got a couple of new names. I’ve read most of these papers already, but I’ve got a couple here to look up. I mean, I’m embarrassed that I didn’t know them all since I have this series on collusion, but it’s always good to learn more. And Brendan, we have no more questions from the audience. Thank you so much for doing this. It’s such an interesting topic. It’s such an interesting time to be thinking about these things and really appreciate your time.
MR. BRENDAN BALLOU: Well, thank you for your time and thank you for the audience’s time and the questions. It’s really helpful.
MR. TEDDY DOWNEY: And thanks everyone for joining us today, and this concludes the call.