Who are the alleged conspirators in this price-fixing dispute, and how did they allegedly fix prices?
Justice Chavez BACKGROUND The following facts are undisputed. Plaintiffs are “[p]ersons in the State of New Mexico . . . who purchased cigarettes indirectly from Defendants, or any parent, subsidiary or affiliate thereof, at any time from November 1, 1993 to the date of the filing of this action [April 10, 2000].” The original Defendants were Philip Morris, R.J. Reynolds (“RJR”), Brown & Williamson (“B&W”), Lorillard, and Liggett. The events leading up to this lawsuit were set in motion in response to a Philip Morris strategy beginning with an event known as “Marlboro Friday.” Prior to Marlboro Friday, Philip Morris, the market leader, had been steadily losing market share to discount and deep discount cigarettes since 1980, when Liggett pioneered the development of generic cigarettes. In an attempt to regain market share, Philip Morris announced Marlboro Friday on April 2, 1993, “a nationwide promotion on Marlboro that reduced prices at retail by approximately 20 percent, an average of 40[cents] per pack.” In response, RJR and B&W instituted similar promotions. As part of its strategy, Philip Morris announced on July 20, 1993, that there would be a similar reduction on all premium brands, discount brands, and deep discount brands starting on August 9, 1993. Defendants RJR and B&W also followed these price reductions. After these decreases, Defendants began to increase their wholesale list prices on premium and discount cigarettes in near lock-step fashion. Some increases were due to settlements with the 50 states, some because of increases in federal excise taxes, and others were simply planned. Even with these increases, wholesale list prices did not exceed pre-Marlboro Friday levels until August 3, 1998, or when adjusted for inflation, ongoing settlement costs, and federal excise taxes, the list prices did not surpass pre-Marlboro Friday amounts until August 1999. During the time period of the alleged agreement to fix prices, 1993 to 2000, Defendants were engaged in competition with one another regarding promotions at the retail level, resulting in a direct reduction of the retail prices of cigarettes. Plaintiffs filed this class action lawsuit on April 10, 2000, alleging violations of New Mexico antitrust and consumer protection laws. Defendants filed motions for summary judgment. In granting the motion for summary judgment, the district court held that Plaintiffs had met their initial burden of showing a pattern of parallel behavior, but failed to meet their second burden of showing the existence of plus factors that would tend to exclude the possibility that the alleged conspirators acted independently. * * * * * On appeal, the Court of Appeals acknowledged that “Marlboro Friday and the industry-wide price reductions that occurred afterward represented the triumph of competition over oligopolistic price coordination.” Although the Court affirmed summary judgment in favor of Lorillard and Liggett because the evidence showed that they had merely acted “consistent with conscious parallelism,” the Court reversed summary judgment in favor of Philip Morris, RJR, and B&W because “we think that a reasonable factfinder could view conscious parallelism as a relatively implausible explanation for the anticompetitive scenario that played out following Marlboro Friday.” FEDERAL SUBSTANTIVE ANTITRUST LAW: PROVING THE CONSPIRACY There is no doubt that the tobacco industry, in which five companies manufacture more than 97% of the cigarettes sold in the United States, is a classic oligopoly. Because the cigarette industry is an oligopoly, it is likely that when one tobacco company (i.e., Philip Morris) acts in a certain manner (i.e., Marlboro Friday and subsequent price increases), the other firms (RJR, B&W, Lorillard, and Liggett) will determine whether it is in their best interest to follow the leader’s actions. As we will discuss below, when Philip Morris began raising prices after Marlboro Friday, RJR’s and B&Ws conduct in following subsequent price increases was just as likely due to their own independent analysis of what was in their best interests as it was the result of an illegal price-fixing agreement. Therefore, Plaintiffs must present evidence that tends to exclude the possibility that Defendants acted independently or they cannot meet their burden of establishing a genuine issue of material fact. . . . The United States Supreme Court has explicitly stated that “when allegations of parallel conduct are set out in order to make a Section 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” Bell Atl. Corp., 550 U.S. at 557. explanations.’” Clough, 108 N.M. at 804, 780 P.2d at 630 (quoting Matsushita Elec. Indus. Co., 475 U.S. at 596-97). In reviewing Plaintiffs’ plus factors, we find that the district court properly granted summary judgment. Reversed. Questions 1. a. Who are the alleged conspirators in this price-fixing dispute, and how did they allegedly fix prices? b. Who won this case at the New Mexico Court of Appeals, and why did that court rule as it did? c. In general, is parallel pricing a lawful behavior? Explain. 2. a. Why did the New Mexico Supreme Court require a showing of “plus factors” to demonstrate that the cigarette companies had engaged in price fixing? b. Why did the Court reject the plus factors offered by the plaintiffs as evidence of a price-fixing conspiracy? 3. Why did the tobacco companies win this case? 4. Assume two drugstores, located across the street from each other and each involved in interstate commerce, agree to exchange a monthly list of prices charged for all nonprescription medications. Is that arrangement lawful in the absence of any further cooperation? Explain. 5. The “Three Tenors,” Luciano Pavarotti, Placido Domingo, and Jose Carreras, recorded a 1990 World Cup concert, distributed by Polygram, and a 1994 World Cup concert, distributed by Warner. Polygram and Warner subsequently agreed to jointly distribute and share profits from the 1998 World Cup Three Tenors concert. The 1998 recording apparently was less “new and exciting” than had been hoped. Concerned that sales of the earlier recordings would drain interest from the 1998 recording, Polygram and Warner agreed to cease all discounting and advertising of the two earlier recordings for several weeks surrounding the release of the 1998 album. In 2001, the Federal Trade Commission issued complaints against Polygram and Warner. Those complaints eventually reached the District of Columbia Federal Circuit Court of Appeals where Polygram and Warner defended themselves by arguing that the agreement was good for competition in that it increased the joint venture’s profitability from new recordings, and it eliminated free riding by each company (for the 1990 and 1994 recordings) on the joint venture’s 1998 marketing. a. What antitrust violation was alleged by the Federal Trade Commission? b. What is free riding, and why is it a problem? c. Decide the case. Explain. See Polygram v. Federal Trade Commission, 416 F.3d 29 (D.C. Cir. 2005). 6. Assume that 10 real estate firms operate in the city of Gotham. Further assume that each charges a 7 percent commission on all residential sales. a. Does that uniformity of prices in and of itself constitute price fixing? Explain. b. Assume we have evidence that the firms agreed to set the 7 percent level. What defense would be raised against a price-fixing charge? c. Would that defense succeed? Explain. See McLain v. Real Estate Board of New Orleans, Inc., 444 U.S. 232 (1980).
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