Antitrust Explained

Some agreements among competing companies – such as boycotting reverse auctions for portable sanitation services – are illegal, says a Federal Trade Commission attorney

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Some cost-minded homebuilding companies are turning to online reverse auctions to obtain rock-bottom prices for portable restroom services. While this may suit service consumers, reverse auctions – in which bidders try to win contracts by submitting lower and lower bids in real time – aren’t attractive to pumpers already working with slender profit margins.

Because the auctions are held in real-time, prices often fall more rapidly – and are likely to go lower – than in a traditional bidding process. This has frustrated some pumping contractors to the point that they’ve talked about boycotts against reverse auctions. But Geoffrey Green, a deputy assistant director at the Federal Trade Commission, says that’s a bad idea. In fact, such a boycott would violate federal antitrust laws.

Green explains what constitutes antitrust violations and the philosophy behind the laws. He also offers surprising scenarios that could get unaware pumpers in trouble. Here’s what he had to say:

Pumper: What’s the rationale behind antitrust laws?

Green: Antitrust laws are designed to protect competition and to protect consumers against anti-competitive practices. Some common violations include bid-rigging, price-fixing and market-division agreements among competitors. The policy rationale for antitrust laws is that competitive markets operate efficiently and serve the interests of consumers by producing low prices, variety, high quality and innovation. Anti-competitive practices conversely create inefficiencies in the economy and harm consumers through higher prices, diminished quality, less innovation and reduced choice.

Pumper: So would it be illegal to boycott a reverse auction?

Green: It would be illegal for competitors to agree to boycott a reverse auction. Competition generally requires that independent firms make independent decisions about whether they’ll compete and on what terms they’ll compete. The purpose of the boycott, as I understand it, is to stymie a buyer’s attempt to create competition among contractors and drive prices down. Any attempt by competitors to act collectively and interfere with that mechanism would harm consumers by leading to higher prices. Therefore, it violates the principles of antitrust laws.

Let me add that no individual contractor is obligated to participate in an auction. What creates a problem here is if the competitors reach a collective decision not to participate. The critical issue here is whether contractors are acting independently or pursuant to an agreement. An agreement between even two competitors can violate the law … the more firms you bring into the conspiracy, the greater the potential consumer harm and the more egregious the conduct. But you don’t need more than two contractors agreeing to contravene the law.

Pumper: What’s another scenario that would constitute an antitrust violation?

Green: Suppose you have five septic tank pumpers within a particular municipality who are unhappy about competition leading to lower profits. If each of them agrees to raise prices by 10 percent tomorrow, that would be a price-fixing agreement and constitute a potential criminal activity.

Pumper: What exactly is a market-division agreement and why is it illegal?

Green: A market-division agreement occurs when, say, Firm A agrees to compete only on the east side of town and Firm B agrees to compete only on the west side of town. Or if five competitors agree to divide the market into five sectors, and allocate those five sectors among themselves, with one serving each of the five sectors. That would be a criminal violation of antitrust laws because the likely effect of that agreement is higher prices for consumers.

Pumper: Do agreements have to be in writing to constitute a violation?

Green: No, the agreement does not have to be in writing or signed, or explicit. Any sort of informal meeting of the minds or implicit understanding can constitute a violation of antitrust laws.

Pumper: How can small businesses avoid inadvertent wrongdoing?

Green: Business managers should educate themselves and educate their employees. Lots of businesses have antitrust compliance programs, where they bring in outside lawyers to instruct employees as to what they can or cannot do. If you’re attending an event where you’re going to discuss competitive conditions or activities, you should have an understanding of antitrust laws and know what can or cannot be discussed.

Pumper: Then what can small-business owners legally discuss among themselves?

Green: In many industries, firms join trade associations and share information that helps them operate more efficiently in their markets. They educate each other and engage in political activities collectively. They can engage in joint ventures to do something that individual firms don’t have the resources to do.

There is a whole world of activities you can engage in without raising significant antitrust issues. As a rule of thumb, if what you contemplate is something that’s desirable to consumers – that reduces prices or provides a service that’s otherwise unavailable in a market – you’re probably OK. If it’s a plan you feel you need to hide from customers, you may be violating antitrust law.

Pumper: Then what’s the best way for businesses to co-exist with competitors?

Green: The safest thing to do is have an arms-length relationship. But I don’t want to give you the impression that simply meeting or talking or attending events with your competitors is itself illegal. There are lots of legitimate reasons for firms to collaborate and communicate.

For example, if there’s a bid that no individual firm has the resources to do on its own, it’s legal for several businesses to work together. Or suppose all contractors in a state wanted to forecast demand for their services in the next 10 years. If they collectively commission a professor to do such a study and share the results, that would be legitimate.

Moreover, if they want to share information about what kind of equipment works best and is the most efficient, or what type of equipment tends to be defective, and the information helps them operate more effectively, that, too, would be a legitimate reason to communicate with each other. If they all wanted to jointly lobby a legislature about an issue of common interest, that’s OK, too.

Pumper: What about sharing equipment, which friendly competitors sometimes do in this industry?

Green: If you have a piece of equipment that I don’t have and you lease it to me, that’s legitimate. Or if there’s a piece of expensive equipment that neither of us can afford and we share the cost of acquisition, and agree that you can use it on certain days and I will use it on certain days, that’s legitimate.

Pumper: Are there more subtle forms of antitrust activity?

Green: Yes. For example, it violates antitrust laws if the two of us agree that you won’t advertise in the east and I won’t advertise in the west. Or if you agree to serve big customers and I agree to serve only small customers, or agree that neither of us will provide a particular kind of service to customers, that would be anti-competitive. The same is true if we both agree that neither of us will extend credit to customers. Or that neither of us will service customers on weekends.

It’s also illegal for competitors to band together to drive out a rival. Say there’s a firm in a market that’s a price-cutter, and his rivals are unhappy because he’s driving down prices. If higher-priced competitors scheme to drive out a lower-priced contractor, that’s a violation. If you agree to forgo rivalry in exchange for your competitor also forgoing rivalry, you’ll find yourself in antitrust trouble.

Pumper: Are group-purchasing agreements, which take advantage of volume price discounts, permissible?

Green: Yes. If a group of rivals joins together and approaches, say, a toilet paper manufacturer, you can engage in cooperative purchasing to obtain price efficiencies.

Pumper: Where can pumpers get more information about antitrust laws?

Green: We have educational campaigns, we issue press releases and provide a lot of information on our website (www.ftc.gov).



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