Opinion ID: 543660
Heading Depth: 2
Heading Rank: 1

Heading: Pricing Pattern Evidence

Text: 30 The first set of evidence that the appellants claim indicates the existence of a conspiracy is a set of analyses of the appellees' pricing patterns. 2 This analysis was performed by appellants' expert Keith Leffler. The raw data which Mr. Leffler analyzed were derived, in large measure, from pricing information collected by Lundberg Surveys, Inc. During the period from 1968 to 1973, the Lundberg firm collected, on a weekly basis, retail price information from individual stations in 14 different cities in Arizona, California, Oregon, and Washington. Mr. Leffler analyzed this data for the largest city in each of the four states. His analysis of this weekly price data indicates that, between 1968 and August 1972, the average retail prices of stations selling appellees' gasoline in the Los Angeles, Phoenix, Portland, and Seattle markets generally followed a sawtooth pattern. That is, the average prices would generally decline over a period of time ranging from approximately three to eleven weeks, and then the prices would return to roughly their original, higher levels over approximately a one to four week period. Both the price increases and decreases from week to week were often quite sharp; but the increases were often especially sharp. 31 The parties do not seriously dispute that the sharp increases in retail prices were generally the consequence of the withdrawal of dealer discounts, thus resulting in the restoration of the normal higher dealer tankwagon prices. 3 Accordingly, we cannot accept the district court's conclusion that the cyclical pattern of retail prices does not suggest that wholesale prices followed a similar pattern. See Petroleum Prods., 656 F.Supp. at 1300 (the cycle of retail price changes reflected by the charts does not establish that the defendants' wholesale prices followed the same pattern). 4 Indeed, we note that the data presented by the appellees themselves concerning their wholesale prices indicates that the pattern of these prices was a cyclical one of sharp increases followed by gradual declines. The key disagreement between the parties concerns the significance of this pattern. The appellees argue that the restorations and the sawtooth pattern of prices do not indicate conspiracy because the same pattern would be produced by individual companies each deciding to follow the others' price lead. In short, the appellees essentially assert that their pricing behavior was interdependent rather than conspiratorial. 5 The appellants disagree, arguing that these price cycles were not the result of any sort of independent action, but are rather an indication of collusion. The appellants assert that a conspiracy may be inferred from this pricing data because the price increases were too large and too risky to have occurred in a competitive market. According to the appellants, any company that raised its prices this sharply would so risk losing business that it would never take such a step without some advance assurance that others would follow. Therefore, argue the appellants, the fact that such price increases were made is an indication of a prior agreement to raise prices. 32 In applying Matsushita, our first task is to decide whether the appellees' claim of interdependent pricing constitutes a sufficiently plausible independent explanation for their pricing behavior. The appellants' key argument on this score is that the price increases were so risky that it is implausible to believe that any firm would have undertaken them without some advance agreement from competitors. We note that such an argument may often be valid when the relevant market is highly unconcentrated or where the increase cannot be reversed easily or readily without substantial loss of goodwill. See VI P. Areeda, Antitrust Law p 1425d at 150-53, p 1431a at 183-84 (1986). In a highly unconcentrated market, any firm that attempted a unilateral supracompetitive price increase would quickly lose business to its many other competitors. Interdependent pricing is not likely to occur because each firm realizes that the possibility of undetected shading of the interdependent price by a single firm would quickly lead to a return to the original market price. Turner, The Definition of Agreement Under the Sherman Act: Conscious Parallelism and Refusals to Deal, 75 Harv.L.Rev. 655, 659-60 (1962); see also VI P. Areeda, supra, at p 1429a. In such a market, any single firm can increase its output without substantially affecting the market price or the market shares of its competitors. This fact substantially increases the odds that shading by an individual firm would either go undetected or be ignored, and the consequent spread of such discounting would rapidly bring the overall price back down. Turner, 75 Harv.L.Rev. at 660; VI P. Areeda, supra, at p 1429a. Therefore, without some sort of prior agreement prohibiting such shading, the temptation for any individual firm would be almost irresistible. Turner, 75 Harv.L.Rev. at 660. Accordingly, in highly unconcentrated markets, a claim that price increases were the result of sequential interdependent price increases is often likely to prove implausible. 33 However, as the number of firms in a market declines, the possibilities for interdependent pricing increase substantially. In determining whether to follow a unilateral price increase by a competitor, a firm in a relatively concentrated market will recognize that, because its pricing and output decisions have an effect on market conditions and will generally be watched by its competitors, there is less likelihood that any shading would go undetected or would be ignored. The firm thus knows that if it fails to follow the price lead, the leading firm will quickly reduce its prices back to their earlier level. VI P. Areeda, supra, at p 1429b. On the other hand, the firm may recognize that the higher price is one that would produce higher profits. It may therefore decide to follow the price increase, knowing that the other firms will likely see things the same way and that, at any rate, any subsequent downward movement in prices would likely be detected before there was any substantial loss of market share. Id.; Turner, 75 Harv.L.Rev. at 661-62. 34 There has been a considerable debate in the literature over whether interdependent pricing is an inevitable or inherent feature of certain types of concentrated markets. Compare VI P. Areeda, supra, at pp 1430-32 (inherent); Sullivan, The Viability of the Current Law on Horizontal Restraints, 75 Cal.L.Rev. 835, 858-59 (1987); Turner, 75 Harv.L.Rev. at 665-66 with R. Posner, Antitrust Law: An Economic Perspective 42-47 (1976) (not inherent); Posner, Oligopoly and the Antitrust Laws: A Suggested Approach, 21 Stan.L.Rev. 1562, 1566-75 (1969). We need not take any side in this debate. 6 Regardless of whether such conduct is an inevitable consequence of a more concentrated market structure, we conclude that it is at least plausible to assert that such pricing behavior can occur when the number of significant rivals in a market is sufficiently small. 35 We do not think that the number of significant firms in the gasoline markets involved in this case is so large as to render the possibility of sequential interdependent price increases wholly implausible. Although these markets would probably not be considered highly concentrated in Herfindahl-Hirschmann terms, that does not imply that the appellees' claim of interdependent pricing is implausible. VI P. Areeda, supra, p 1431a at 183 (noting that the Herfindahl-Hirschmann Index cannot capture the full range of factors bearing upon the existence or strength of recognized interdependence). As Professor Areeda has noted, All one can say with assurance is that such interdependence and price coordination are implausible when there are 'many' 'significant' rivals (more than a dozen?) but more likely as the number of firms decreases. Id. at 184. The gasoline markets under discussion here appear to lie in that gray area where, although not altogether inevitable, interdependence is distinctly possible. See F. Scherer, Industrial Market Structure and Economic Performance 288 (2d ed. 1980) (discussing empirical evidence of interdependent pricing in the gasoline industry). Indeed, the appellants have not pointed to any evidence indicating that the number of firms in these markets is too large for interdependence to occur. 36 Nonetheless, we noted earlier that, even in highly concentrated markets, a unilateral price hike might be too risky to make without advance agreement if the increase could not be readily reversed without a significant loss of goodwill. On the other hand, where a unilateral price increase can be withdrawn quickly, a firm may very well decide to test the waters without any sort of advance commitment from its competitors as to whether they will follow. In this regard, we note that the uncontested record evidence indicates that unilateral price increases in these markets were quickly reversible. 7 Furthermore, the evidence indicates that, although unilateral restorations could often entail significant costs if unsuccessful, the costs do not appear to have been so prohibitive as to suggest that the possibility of such unilateral action was implausible. 8 37 We recognize that such interdependent pricing may often produce economic consequences that are comparable to those of classic cartels. Nonetheless, proof of such pricing, standing alone, is generally considered insufficient to establish a violation of the Sherman Act. See Wilcox v. First Interstate Bank of Oregon, N.A., 815 F.2d 522, 526 (9th Cir.1977) ([T]he fact that competitors may see proper, in the exercise of their own judgment, to follow the prices of another manufacturer, does not establish any suppression of competition or show any sinister domination.) (quoting United States v. International Harvester Co., 274 U.S. 693, 708-09, 47 S.Ct. 748, 754, 71 L.Ed. 1302 (1927)); see also Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478, 484 (1st Cir.1988), cert. denied, 488 U.S. 1007, 109 S.Ct. 789, 102 L.Ed.2d 780 (1989); Apex Oil Co. v. DiMauro, 822 F.2d 246, 253-54 (2d Cir.), cert. denied, 484 U.S. 977, 108 S.Ct. 489, 98 L.Ed.2d 487 (1987); E.I. DuPont de Nemours & Co. v. F.T.C., 729 F.2d 128, 139 (2d Cir.1984) (The mere existence of an oligopolistic market structure in which a small group of manufacturers engage in consciously parallel pricing of an identical product does not violate the antitrust laws.); VI P. Areeda, supra, at p 1432; Turner, 75 Harv.L.Rev. at 669-72. Additional proof beyond mere parallel pricing usually is required. 9 38 Our discussion of Matsushita highlights the wisdom of this rule. In applying the second prong of the Matsushita test, we must ask whether, given the possibly interdependent nature of the pricing behavior observed in this case, permitting a Sec. 1 violation to be found solely on such evidence would have the effect of deterring important legitimate conduct. We conclude that, if we were required to decide based on the price cycle evidence standing alone, we would find that it would not be enough to survive summary judgment. To permit an antitrust violation to be based on the sawtooth price pattern in this case, without more, would require a company making wholly independent pricing decisions to consider that the possible responses of its competitors might render it liable for treble damages. Similarly, following another company's price increase might very well provide the evidence that a disgruntled customer would need to get to a jury in a treble damage antitrust suit. It thus appears that permitting an inference of conspiracy from the parallel pricing evidence alone would result in an anticompetitive dislocation by distorting independent pricing decisions. 39 We also cannot agree that, without more, the conspiratorial nature of the price restorations is indicated by the fact that the price hikes were too high. Were we to permit such a theory, few pricing decisions would be immune from antitrust scrutiny. Any unhappy buyer in a market experiencing a general increase in prices could bring an antitrust action against the sellers, arguing that the conspiratorial nature of the price increase is indicated by the fact that the increase was too high. The court would then be required to receive evidence as to the wisdom of, and necessity for, the price increase, and to judge what constitutes a fair price. The federal courts generally are unsuited to act as rate-setting commissions. See VI P. Areeda p 1432 at 203. Accordingly, the appellants must rely on additional evidence beyond mere price parallelism in order to avoid summary judgment.