Next time you go to the grocery store to buy a can of tuna, take a look at the items on the shelf before you reach for your usual brand. The cans are the same size, and the fish inside is of similar quality, so it is likely that the prices are pretty similar. But are those prices fair? How would you know?
Now stroll over to the beer aisle, where craft brews with creative labels compete for your attention with traditional American beer. You may intuitively understand why a microbrewed IPA costs more than a macrobrewed lager, but what if they are all overpriced? Would you be able to tell?
In a free market system, competition is supposed to make that question moot, incentivizing companies to deliver high quality at lower prices to win your business. Unfortunately for consumers, that is not always the case.
“We often think that companies will act in their own self-interest, set the price that is best for them, and then competition will put a natural downward pressure on prices, benefiting consumers,” says Nathan Miller, associate professor of strategy and economics at -Georgetown’s McDonough School of Business. “But we found that firms would rather not compete. And if they are not competing, they can support higher prices, each earning more profit and leaving consumers worse off.”
Miller recently received a $57,000 grant from the National Science Foundation to study the practice of price collusion, also known as price fixing, in which competing companies work together to keep their prices artificially high. The outcome of his research could help inform antitrust investigations and lead to a better understanding of how competition works — or does not work — for consumers.
Cooperating With the Competition
In recent years, industries that produce tuna, beer, milk, chocolate, poultry, text messaging, and the white pigment titanium dioxide all have made headlines for alleged price fixing. The practice can take many forms, some legal, some not. The U.S. Department of Justice defines price fixing as “an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold.”
The key word being agreement.
Explicit collusion, in which representatives or employees from competing companies agree to coordinate their prices, is illegal under antitrust law and can result in millions of dollars in fines for companies found guilty. Tacit collusion, however, occurs when competitors maintain or adjust their prices similarly, without an outright agreement. This form of price fixing is considered legal.
Miller’s research looks at both, in an effort to neutralize the nuances that characterize price collusion across industries and create models to help investigators identify and analyze it.
“The problem with trying to interpret things like high prices is that they could be higher due to a number of things, like higher materials costs or higher consumer demand,” Miller says. “Without direct evidence that firms are acting to suppress competition among themselves, it is hard to make a conclusive judgment that high prices reflect collusion.”
Miller chose to focus his research on the tuna and beer industries because of two key factors: documentation from recent court proceedings that show how explicit or tacit price fixing occurred, and volumes of unit price and revenue data from grocery stores that sell the products.
“Professor Miller is bringing modern analytical methods and big data tools to study the issue, which gives us a better chance than we have ever had to observe collusion, and particularly tacit collusion,” says John Mayo, the Elsa Carlson McDonough Chair in Business Administration, who has served as an expert witness for the Department of Justice in antitrust cases. “Both the economics community and the legal community are eager to see the output of research like this because it will inform policymakers about when and where tacit collusion might rise to the level of a challengeable offense in the antitrust space.”
Something Fishy in the Tuna Industry
What motivates companies to suppress competition instead of engaging in it?
The price of a product typically reflects the cost to produce it, the willingness of consumers to pay, and the amount of competition in the market. To increase profit margins, companies can cut costs, invest in increasing consumer demand, or eliminate competitive pressure, opening the door for everyone to charge higher prices.
For example, in October 2018, canned tuna giant StarKist agreed to plead guilty to a felony charge of price fixing, facing a fine of up to $100 million. The previous year, one of its two main competitors, Bumble Bee Foods, pleaded guilty to the same charge and paid a $25 million fine. The other competitor, Chicken of the Sea, cooperated and ended up settling in a case involving a similar charge.
“Unfortunately, when companies engage in that kind of collusive activity with an explicit agreement, what they’re doing is undermining the competitive process and circumventing the power of the market to discipline prices and drive them down to competitive levels,” Mayo says.
At the time the collusion is alleged to have happened, from 2011 to 2013, demand for canned tuna was waning, and the price of raw tuna had declined. But wholesalers and retailers who purchased canned tuna noticed something that did not seem to compute: The price of canned tuna across the three major brands stayed put and even increased as demand and costs went down.
Through the legal documents associated with the case, Miller can see the companies conspired to keep their prices high. He can then look at sales data to uncover how this behavior influenced sales and, ultimately, quantify the impact on consumers. Miller plans to publish an empirical analysis of the data in 2020.
“We can document how much prices went up, what the consumer response was, and provide some sense of the magnitude of loss consumers and the economy overall experienced,” he says.
Tacit Collusion in the Beer Industry
In the case of the beer industry, Miller’s research looks at how Anheuser-Busch InBev and MillerCoors have increased prices without explicitly colluding.
“In this case, there is no allegation of law-breaking behavior,” Miller says. “Instead, we see something that looks more like tacit coordination that’s implemented in a particular way, which we call price leadership.”
Essentially, one company announces publicly that it is going to raise prices — well before doing so. Then the other company follows suit. The practice came to light when the Department of Justice filed a lawsuit in 2013 to block Anheuser-Busch InBev’s acquisition of Grupo Modelo — which produces Corona — to prevent competition-eliminating consolidation.
With the growth of craft and microbrews, the beer industry might look like a crowded, competitive marketplace.
“But if you look at total volume of beer sold or total revenues, a surprising amount of sales are still accounted for by Anheuser-Bush InBev and MillerCoors,” Miller says.
At the time of the lawsuit, Anheuser-Busch InBev products accounted for 39 percent of the U.S. market, MillerCoors accounted for 26 percent, and Grupo Modelo, the next largest competitor, had 7 percent. The Department of Justice alleged that even slight price increases resulting from the merger could result in consumers paying billions of dollars more. The complaint included documentation of price leadership in the industry and how it works, giving Miller information he can use to design a model for understanding tacit collusion.
“Our research is an attempt to take that behavior seriously,” says Miller. “The beer industry complaint gives us information about how the firms interacted, which gives us something to model. Then we can try to understand the incentives and the repercussions that go along with price leadership.”
New Answers to Old Puzzles
Miller’s research will help economists and legal experts answer long-standing questions about price fixing and its effects.
For example, after companies tacitly fix their prices, why would one of them not undercut the others to gain more market share? When it comes to mergers, is it possible to predict — and prevent — illegal price fixing before it happens? When is tacit price fixing harmful to consumers, and when is it not?
Miller’s work is part of a growing interest among economists in using current technology to understand how companies interact, how competition works, and how markets respond.
“I do not have a vision that we are going to change what happens in the tuna or the beer market,” says Miller. “I am interested in creating a set of tools that help us understand how we get into situations where a market does not have as much competition as it should, and how we can protect markets by creating the conditions under which competition can flourish and consumers benefit.” GB
Published in Georgetown Business magazine, Spring 2019