Question 1
On august 31, 1969 in the United States District Court M.D. North Carolina, Greensboro Division the United States of America as plaintiff, seeks to restrain and prevent the alleged violation of section 1 of the Sherman Act. The complainant, United States of America accused defendants of exchanging among themselves information involving price that have been charged, quoted, or contracted to charge to particular customers. The defendants were allegedly doing this with the aim of restricting price competition among themselves in the corrugated containers business in the Southeastern United States. However, the complaints of price fixing and violation of Sherman Act was dismissed by the court after trial due to lack of evidence.
Question 2
The provision of the US antitrust Law that was invoked to judge the case was the Sherman Act, which was signed by President Benjamin in 1890. This antitrust law aims at restricting and eliminating illegal behaviors that restrict free and fair market competition. The laws back the prevailing economic theory that argue public to be served by free competition in trade. This is because, when there is a free completion in the market, the businesses compete to improve the quality of the products as the price goes down. However, some businesses attempt to diminish competition by use of illegal business behaviors such as price fixing among others. The plaintiff believed that, when the defendants engage sharing information regarding what price will be charge or be quoted was a sing of monopolizing the industry. If there were substantial evidence that the defendants were exchanging pricing information for restricting price completion, then there would be a violation of the Sherman Act. It is, therefore, admittedly a threat that price information was used to enhance ant-competitiveness in the industry.
Question 3
The market is characterized by fungible products, inelastic demand and competition determined by prices. The market structure portrays more of an oligopolistic behavior. The corrugated container industry market has few sellers who are in a position to control the market share. The market consists of many competitors who compete to influence the remaining part of the market share. In this market, the smaller and new sellers can tend to lower the prices of the product to attain a larger market share. This nature makes it complicated to set high artificial prices as the likelihood to cut the product prices acts as a detriment. Lowering the prices have not made the sellers obtain the largest share in the market but it results to lower returns and sharing of profits. Due to uncertainties in the market, the government may have intervened to restrain the price competition. The exchange of the pricing information rarely affects a true competitive price. The immediate and short run orders have led to an inelastic demand in the market. Information on price data is not quickly disclosed to buyers and sellers, and this demonstrates the market imperfection. The market does not have a perfect information flow that helps to develop price uniformity. The behavior of stabilizing prices or increasing them is against the ban of one of the Sherman Act.
There exist few barriers to entry in the corrugated container industry market. The new investors require $50,000 to $75,000 for a startup. In an eight-year period, the sellers increased from 30 to 51. In the above case, the entry was considered a legal action and it was free to everyone who could meet the set standards of the market.
Question 4
The ‘Conduct” that has been considered as anticompetitive, exercised by the defendants, is an attempt to fix prices. The defendants were accused of sharing pricing information for stabilizing prices in the market. Each competitor would give information regarding the current price charged or quoted to particular customers with expectations that the other competitor would do the same. As a result, the practice was seen as the establishment of the anticompetitive strategy in the corrugated container industry where competition was restrained. This was a violation of the Sherman Act, which requires competitors to practice free and fair market behaviors.
The defendants have used the anticompetitive price strategy because they have achieved price stabilization subsequent to the exchange of price data among themselves. The defendants requested prevailing price information from their competitors so as they can be able to charge or quote the same price in the industry. Although the defendants had the freedom to withdraw themselves from the practice, it was affirming that whenever defendant requested and received such information, they were willing to provide their information in return. The defendants also used divided territories through acquiring consumer base for each competitor in the container industry.
Question 5
The defendants furnished the data to ensure that they traced the price charged by competitors. The price exchanges seemed irregular and infrequent as captured by the defendant data. The defendant could compute the prices quoted by their competitors on the product. The customer was obliged to pay the quoted price captured by the defendant in furnishing the price exchange information. This made the competitors lower their prices since the defendants seemed to charge the same price with the rivalry or even cut the prices to have a larger market share.
Question 6
In the case, the District Court did not rule in favor of the defendants. The court claimed that there was no evidence to demonstrate that the Sherman Act controlled the prices. The court indicated instances where the defendant stopped exchanging the price information, but the price behavior remained constant. Evidence portrayed scenarios where the price information exchange was ignored, but the prices increased. The government also failed to condemn the behavior where the competitor shares information with the customer. In the above case, there was no evidence that indicated that the behavior of cutting prices was economically feasible. The legal action taken against the defendant ruled out that price exchange information was only meant for the defendants. It is not indicated anywhere that other manufacturers could not be supplied with the price information. The government failed to admit that it aimed at controlling the prices and termed the plea of the defendants illegal.
Question 8
The Structure-Conduct-performance paradigm helps the analyze the market performance through evaluating the interrelations of the three significant elements of the market. These elements include structure, conduct and performance. With this model, it is easy to determine the performance of the corrugated container industry by evaluating the firm’s conduct, which in turn depends on the market structure. Therefore, it is significant to evaluate the market structure of the corrugated container industry.
The corrugated container industry is a perfect completion market because there are a large number of firms in the market. In this market, the competition is anticipated to be at its greatest possible level so that they can produce the best outcome to the consumers. This market sells homogeneous and identical products allowing any other competitor to enter in the market. Therefore, in this market, there are no barriers to enter or to leave the industry. The entry is also easy in the industry due to the abundance of the raw materials. Since the industry in question represents a perfect competition market, any firm is not allowed to influence the market price or the market conditions. Each price is considered to take price from the industry.
However, there are factors that make perfect competitive firms fail to follow the perfect competition market. These factors include technology, nature of the product, market entrance barriers, supply and demand concentration and product differentiation. For the case of the corrugated container industry, the firms supply exceeds the demand, and competition is based on price while demand is inelastic. Given these conditions, there is a possibility for firms in the industry to restrict entry and competition by price fixing.
Market conduct
According to the model, this refers to the way sellers and the buyers behave to themselves and to each other. The conduct in corrugated containers industry indicates that firms have a behavior of consulting each other on what price to charge or quote to a particular customers. In a competitive market, the firms are required to compete by producing quality products at a lower price to improve public welfare. Therefore, by exchanging price information, the firms behave contrary to the conducts of the perfect competition market. Since the defendants enjoy 90 percent of the market share, they have competitive advantage and economies to scales. This allows them to charge the same price as other quoted prices or below the quoted price. Therefore, this is seen as anti-competitive behavior that restricts competition and market entry.
Market performance
According to the trend of the price levels over a period, the corrugated containers industry shows that its performance is deteriorating. The facts revealed that the price trend has been downward. According to the conduct of the firms in the industry is anticipated to improve efficient outcomes in production, allocation and dynamic. In the case of the corrugated container industry, the firms’ behavior of fixing price was a way of reducing the efficiency outcome because if the price were fixed, the firms would exploit customers by poor services or low quality products. Therefore, according to this model, it is clear that there is a high likelihood of attempting anti-competitive condition so that entry can be restricted a firms can make better profits.
