Oligopoly Coordination, Economic Analysis, and the Prophylactic Role of Horizontal Merger Enforcement

By Jonathan B. Baker (American University) & Joseph Farrell (University of California)

This article takes a fresh look at a longstanding issue in antitrust economics and policy: the problem of oligopoly coordination. First, it explains why coordinated conduct in oligopoly markets is a serious problem and an appropriate concern of antitrust enforcement. It shows that empirical economic studies, experimental results, real-world examples, and economic theory do not support the claims of antitrust commentators and courts influenced by the Chicago school that coordination is unlikely absent express collusion and that express collusion itself is uncommon. Second, it clarifies that coordinated outcomes can arise both from “purposive” conduct, when firms attempt to develop a common understanding and deter price-cutting, and from “non-purposive” conduct, when firms respond to one another’s price changes in a natural and predictable business way. While non-purposive conduct was once a central concern of antitrust enforcement, the article explains, it is largely and inappropriately ignored today. Third, the article shows how the detailed analysis of the potential coordinated effects of horizontal mergers should turn on whether the coordinated effects concern principally involves purposive or non-purposive strategic conduct. It also explains that greater concentration can be expected to make coordination more likely, stronger, or more effective, whether through purposive or non-purposive conduct. This supports a structural merger policy, by which mergers between rivals that increase concentration significantly in a concentrated market are presumed to harm competition.

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