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The Firm as Cartel Manager

Posted by on Wednesday, April 27, 2011 in Articles, Volume 64, Number 3, Volumes.

Antitrust law is the primary legal obstacle to price fixing, which is condemned by Section One of the Sherman Act. Section One condemns only concerted action between separate entities, not unilateral conduct by a single entity. Firms that engage in price fixing may try to reduce the risk of antitrust liability by structuring their actions to appear to be those of a unified single entity that is beyond the reach of Section One.

In this Article, Professors Hovenkamp and Leslie examine how price-fixing cartels govern themselves and maximize their profits by cooperating and colluding, instead of competing. They then use this cartel theory to explain the recent American Needle decision, in which the Supreme Court held that the National Football League (“NFL”) is a collaboration among its individual teams rather than a single entity. Much of the argument by those favoring single entity status for an organization such as the NFL confuses the entity question, which is essentially structural, with the question of cooperation, which is functional or behavioral. Many markets require firms to cooperate in the delivery of their product but the need to cooperate does not make the cooperating firms a single entity immune from Section One liability.

Despite the fact that antitrust law has condemned price-fixing cartels for over a century and the Supreme Court created the single-entity defense over twenty-five years ago, the link between cartel theory and the single-entity question remains largely unexplored. Many successful cartels function by taking control away from the individual members and giving it to a single organization. A business organization such as a corporation becomes an ideal vehicle for cartel management. Understanding how cartels actually operate can help courts distinguish between a legitimate single entity and a centralized cartel structure subject to Section One liability. This Article uses a series of case studies to illustrate how to make this distinction properly.