[Congressional Record (Bound Edition), Volume 148 (2002), Part 9]
[Senate]
[Pages 12047-12049]
[From the U.S. Government Publishing Office, www.gpo.gov]




              HIGH FRUCTOSE CORN SYRUP ANTITRUST DECISION

  Mr. LEVIN. Mr. President, I wish to bring to the Senate's attention a 
recent decision of the U.S. Court of Appeals for the Seventh Circuit, 
written by Judge Richard Posner, in the case of In Re High Fructose 
Corn Syrup Antitrust Litigation, found at 2002 U.S. App. LEXIS 11940. 
Judge Posner's unanimous opinion, joined by Circuit Judges William 
Bauer and Michael Kanne, articulates in clear, cogent, and unequivocal 
language the standard for the Federal courts in the Seventh Circuit to 
follow in deciding whether circumstantial evidence of price-fixing or 
tacit collusion should be presented to a jury in antitrust cases. This 
is a much needed improvement in the state of the law, and I hope that 
it will soon be followed in other circuits as well.
  Last month, the Permanent Subcommittee on Investigations, which I 
chair, completed a 10-month investigation into the reasons why gasoline 
prices fluctuate so dramatically and why retail gasoline prices seem to 
go up and down together at so many gas stations. The majority staff 
issued a comprehensive 400-page report explaining our findings, and we 
then held 2 days of hearings on the report.
  I will not summarize the entire report here, but I would urge anyone 
interested in how gasoline prices are set to visit the subcommittee's 
Web site, where the report can be downloaded.
  I would like to highlight, however, several of the issues the 
subcommittee examined that are directly relevant to the Seventh 
Circuit's decision. First, the subcommittee found that in several of 
our domestic gasoline markets where there is little competition a few 
oil companies have sufficient market power to raise the price of 
gasoline through their decisions on how much gasoline to produce.
  The subcommittee examined retail prices in several geographic 
markets. The subcommittee found at various times in these markets the 
prices of the major brands of gasoline followed a ``ribbon-like'' 
pattern. The prices of these brands moved up and down together, usually 
by about the same amount each day, and they maintained a constant 
difference in price with respect to each other.
  The documents reviewed by the subcommittee indicate that the 
marketing practices of the various gasoline wholesalers and retailers 
in the market contribute to this pricing pattern. First, the major 
brands usually seek to maintain a constant price difference with 
respect to one or more other brands that are considered the major 
competition or the price leader in that market. Second, the market 
strategy of the major brands generally is to maintain market share, and 
avoid costly price wars which do not result in greater market shares, 
but often lead to lower margins for all of the firms competing in the 
market. Thus, most of the major brands establish their retail price 
simply by following the price movements of one or more other brands. 
They do not attempt to undercut their rivals; rather they seek to 
maintain their relative competitive position with respect to their 
rivals.
  Another strategy supporting the ribbon-like retail price pattern is 
the influence the refiners maintain over the retail price. Major brand 
refiners usually set the wholesale price paid by their dealers on the 
basis of surveys of the retail prices of competitors; the refiner then 
subtracts an amount considered to be an adequate margin for the 
retailer, and charges the retailer for the remainder. In this manner, 
the dealers receive a fixed margin for their gasoline, and the benefits 
and costs of retail price changes accrue to the refiner rather than the 
dealer. In reality, therefore, a few refiners rather than many 
individual dealers set the retail price of gasoline for the major 
brands.
  The resulting retail pricing pattern--the ribbon-like pattern--is 
exactly the same pattern one would expect to see in a market where 
there is some type of collusion between the firms in the market. In a 
collusive marketplace, each firm has an agreed-upon market share, and 
the relative prices of the different brands are fixed.
  By itself, parallel pricing does not indicate collusion. Parallel 
pricing can develop in a competitive market, as each firm strives 
independently to obtain some advantage from a movement in price, only 
to be matched by its competitors who seek to deny that firm any such 
advantage.
  Hence, to establish that firms in a market are colluding with one 
another, it is necessary to demonstrate more than just the existence of 
parallel or interdependent pricing. A plaintiff, or the government, as 
the case may be, must establish either an explicit agreement on 
pricing, or present sufficient circumstantial evidence indicating a 
tacit agreement on pricing.
  It is rare to find in the modern age, with many corporations well-
schooled in the antitrust laws, and legions of lawyers eager to educate 
those who are not, to find an express agreement to fix prices or 
restrict supply. Moreover, in markets most susceptible to price-fixing 
those with few firms, a high degree of concentration, homogeneous 
products, and high barriers to entry, such as the gasoline market--
express collusion is totally unnecessary to carry out the purposes of 
any such conspiracy. In highly concentrated markets, the few firms can 
observe each other's behavior, determine how they react to various 
strategies, and react accordingly. After a while, the firms in these 
markets can develop patterns of behavior that are as non competitive as 
if an actual agreement had been reached.
  The problem, therefore, is how to determine whether certain market 
activity is the natural result of the structure of the market and 
purely independent decisionmaking, or is the result of some tacit 
agreement or understanding or agreed-upon practices that restrict 
competition.
  Again, rarely will there be a ``smoking gun'' document pointing out 
the existence of tacit collusion. The best way--and in reality the only 
way to determine whether in fact such collusion exists is to look at 
all of the evidence

[[Page 12048]]

regarding the marketplace and the behavior of the firms in the market. 
For example, are the companies acting independently? To what extent and 
how do they communicate with each other? To what extent do they have 
agreements between themselves on terms of sale, supply, storage, or 
transportation? To what extent do they share information? To what 
extent do they pursue innovation independently?
  At the subcommittee's hearings we heard testimony from several 
attorneys general, knowledgeable in the antitrust laws, including 
Attorney General Jennifer Granholm from my home State of Michigan, that 
the standards used by the courts in recent years have become unduly 
stringent for plaintiffs seeking to present evidence of tacit collusion 
to a jury in an antitrust case. Many courts have been requiring 
plaintiffs in price-fixing cases to present evidence that it was more 
likely than not that the conduct complained of was the result of 
collusion before the evidence would be presented to the jury. In 
effect, this standard relegates to the judge on a motion for summary 
judgment the determination of the basic factual issues that are 
normally the province of a jury. Furthermore, it essentially requires 
the plaintiff to present evidence amounting to a ``smoking gun'' 
demonstrating collusion in order to survive a motion for summary 
judgment by the defendants. This standard thus prevents many cases that 
should be presented to a jury from ever getting to the jury.
  Judge Posner's opinion in the High Fructose Corn Syrup case clarifies 
the law of the Seventh Circuit that economic evidence and other 
evidence indicating firms in a market have an agreement--either tacit 
or explicit--not to compete should be presented to a jury. The opinion 
clearly states that in a price-fixing case the question of ``whether, 
when the evidence was considered as a whole, it was more likely that 
the defendants had conspired to fix prices than that they had not 
conspired to fix prices'' should be presented to a jury, and that the 
antitrust laws do not establish a higher threshhold for surviving 
motions for summary judgment than other types of cases. The plaintiff 
need not present one single item that demonstrates an agreement; rather 
the plaintiff need only demonstrate that the evidence as a whole more 
likely than not shows an agreement.
  Several weeks ago, following the subcommittee's hearing, I wrote a 
letter to the Federal Trade Commission informing them of the 
subcommittee's findings, and urging the FTC to take a number of actions 
to improve the competitiveness of the gasoline refining and marketing 
industry.
  One of the points I stressed to the FTC was that ``In concentrated 
markets juries should be permitted to consider circumstantial evidence 
in determining whether or not the firms in the market are acting in 
collusion. In highly concentrated markets, outright conspiracies and 
collusion between the market participants are totally unnecessary to 
develop concerted action. When there are few firms in a market, these 
firms can easily track and follow each other's behavior. In reality, 
the only way to demonstrate collusion in a concentrated market is 
through circumstantial evidence.''
  The Seventh Circuit has now established this principle as law. I 
commend the Seventh Circuit for this clarification and hope that other 
circuits will follow.
  I ask unanimous consent that my letter to the FTC be printed in the 
Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:
                                             United States Senate,


                            Committee on Governmental Affairs,

                                     Washington, DC, June 6, 2002.
     Hon. Timothy J. Muris,
     Chairman, Federal Trade Commission, Pennsylvania Avenue, 
         Washington, DC.
       Dear Chairman Muris: I am writing to follow-up on several 
     issues raised in the recent report of the Permanent 
     Subcommittee on Investigations, ``Gas Prices: How Are They 
     Really Set?,'' and the Subcommittee's hearings on this 
     subject.
       One of our central findings is that the increasing 
     concentration in the petroleum refining industry has 
     exacerbated the factors that cause price spikes. This has led 
     to sharp increases in prices and an unprecedented level of 
     volatility in a number of gasoline markets in the past 
     several years. Because of the importance of petroleum in 
     America today, gasoline price spikes can significantly harm 
     the national economy.
       During our investigation and at the hearing we examined a 
     variety of proposals for reducing this volatility. I am 
     pleased that the Federal Trade Commission (FTC) has been 
     proceeding with its own study of the reasons for the 
     volatility in gasoline prices and, as you stated in your 
     remarks at the second public conference on this subject, will 
     closely study our report and hearing record during your 
     review. I nonetheless would like to take this opportunity to 
     highlight some of the areas we examined that I believe 
     deserve serious attention during your overall review and as 
     the FTC reviews proposed mergers in the oil industry.


                     Vertically Integrated Markets

       The Majority Staff report and testimony at the 
     Subcommittee's hearings addressed a number of problems that 
     arise when there is a high degree of vertical integration in 
     highly concentrated markets. In such markets, refiners have 
     little incentive to lower wholesale prices, and retailers 
     have limited ability to shop around for lower wholesale 
     prices. The current situation on the West Coast also 
     demonstrates that a high degree of vertical integration in a 
     highly concentrated market poses substantial barriers to 
     entry for other firms seeking to enter either the wholesale 
     or retail market, including very high barriers to imports.
       Professors Preston McAfee and Justine Hastings, both of 
     whom testified at our hearings, have extensively studied the 
     effects of vertical integration in concentrated markets. 
     Their work indicates that mergers between two vertically 
     integrated firms in highly concentrated wholesale and retail 
     markets may be more detrimental to competition, through 
     interdependent interactions between the integrated markets, 
     than a straightforward analysis of the increase in 
     concentration in each of those separate markets might 
     indicate. For example, in looking at the California market, 
     Professors Hastings and Richard Gilbert found ``evidence in a 
     broad panel that vertical integration matters for upstream 
     retail prices and that wholesale prices tend to be higher in 
     markets with large vertically integrated firms.'' I urge you 
     to seriously examine and consider these findings and the work 
     of Professor McAfee in this same area.


                              Inventories

       The increasingly tight balance between supply and demand in 
     gasoline markets--including the reduced levels of crude oil 
     and gasoline in inventories--is one of the prime factors 
     underlying the recent volatility. In a tightly balanced 
     market, even the slightest disruption in supply, such as a 
     pipeline break or an unplanned refinery outage, will lead to 
     a sharp increase in price due to the inelasticity in the 
     demand for gasoline.
       Most oil companies today have adopted just-in-time 
     inventory practices. Although from each company's perspective 
     these practices may minimize day-to-day operational costs, in 
     the aggregate this has eliminated the refining industry's 
     cushion or ``insurance'' against price spikes resulting from 
     minor disruptions in the refining, distribution, and 
     marketing system. It also has created a perverse incentive 
     for refiners. The Subcommittee found documents indicating 
     that a number of refiners prefer a market that is vulnerable 
     to disruptions so they could take advantage of the higher 
     prices that follow any disruption.
       In reviewing proposed mergers, the FTC should carefully 
     examine the potential effects upon the aggregate inventories 
     that would be created as a result of the merger. The FTC 
     should consider requiring companies seeking to merge to 
     ensure that the aggregate inventories that would be 
     maintained after the merger would not be less than, and 
     perhaps even greater than, the aggregate inventories prior to 
     the merger. This would ensure that increasing concentration 
     would not further exacerbate one of the factors leading to 
     price spikes.


                     Pipeline and Terminal Capacity

       The history of the Wolverine Pipeline in Michigan, as 
     recounted in the Subcommittee's report, demonstrates how 
     control of critical transportation and storage facilities are 
     a less visible but very effective way to influence cost, 
     supplies, and market prices. The Wolverine case demonstrated 
     that parties who control the transportation and storage 
     facilities can take advantage of the complexity of the laws 
     and regulations to circumvent the requirements of the law and 
     limit competition in the market.
       According to the Federal Energy Regulatory Commission 
     (FERC), the Wolverine Pipeline violated the Interstate 
     Commerce Act for approximately twenty years in the manner in 
     which it allowed access and established tariffs for shipments 
     over the pipeline. With the intervention of the Michigan 
     Attorney General, one small, independent company, Quality 
     Oil, successfully challenged Wolverine's practices and 
     obtained its rightful access to the pipeline. Quality Oil's 
     access to the Wolverine Pipeline at non-discriminatory 
     tariffs will benefit consumers in

[[Page 12049]]

     Michigan by increasing the supply of gasoline to independent 
     dealers at competitive prices.
       The Quality Oil/Wolverine Pipeline case demonstrates the 
     importance of the mission of agencies such as the FERC and 
     the FTC in ensuring there is fair competition in the 
     marketplace. In markets in which a dominant player controls 
     the transportation and storage of a product such as gasoline, 
     I urge the FTC to use its available authorities to ensure 
     that this market power is not abused. Similarly, in reviewing 
     proposed mergers, the FTC should ensure that the proposed 
     merger does not create any new barriers to entry into a 
     market through a lack of access to pipelines and terminals.


                           refining capacity

       As you are aware, approximately half of the refineries in 
     the United States have closed over the past twenty years. 
     This has resulted in a decline in the aggregate amount of 
     refining capacity, as well as increasing concentration in the 
     refining industry. There are a variety of reasons for this 
     increase in concentration, including the phase-out of federal 
     subsidies that benefitted smaller refiners, increasing 
     capital costs for refinery operation due to more stringent 
     environmental regulations, economies of scale, and mergers 
     within the oil industry. One of the Subcommittee's central 
     findings is that in a number of markets this increase in 
     concentration has exacerbated the factors that lead to price 
     spikes.
       In several recent mergers the FTC has required the 
     divestiture of refining assets to preserve competition in the 
     wholesale market. The Subcommittee received testimony that 
     the divestiture of refining assets to firms that were much 
     less capitalized than the divesting firm has contributed to 
     the decline in inventories, as these less capitalized firms 
     are less able to carry inventories. I urge you to review 
     whether the divestitures the FTC has required have had the 
     intended effect of preserving competition, or whether, in 
     view of experience to date, additional conditions upon 
     mergers or divestitures of assets are necessary to fully 
     preserve competition in the refining industry.


                         moratorium on mergers

       At the Subcommittee's hearing, the Attorneys General from 
     the States of Connecticut and Michigan recommended that a 
     one-year moratorium be placed on all major mergers within 
     highly concentrated markets in the oil industry. The purpose 
     of the moratorium would be to enable the Congress to consider 
     more effective remedies to the problems arising from 
     increasing concentration and allow the FTC to consider this 
     problem as well. I am enclosing for your consideration a copy 
     of the statement of Attorney General Blumenthal in support of 
     this moratorium.


                            parallel pricing

       The Subcommittee also received testimony on what the 
     appropriate burden of proof should be in order to establish 
     illegal collusion under the antitrust laws. The Attorneys 
     General testified that the standard currently used by many 
     courts presents too high a hurdle for plaintiffs in antitrust 
     cases to present their evidence to a jury.
       In concentrated markets juries should be permitted to 
     consider circumstantial evidence in determining whether or 
     not the firms in the market are acting in collusion. In 
     highly concentrated markets, outright conspiracies and 
     collusion between the market participants are totally 
     unnecessary to develop concerted action. When there are few 
     firms in a market, these firms can easily track and follow 
     each other's behavior. In reality, the only way to 
     demonstrate collusion in a concentrated market is through 
     circumstantial evidence.
       We found numerous instances of parallel pricing within the 
     gasoline industry. At certain times in certain markets, all 
     of the major brands went up and down together, and stayed at 
     a constant differential with respect to each other. Although 
     parallel pricing in and of itself does not necessarily 
     indicate collusion, I believe that additional circumstantial 
     evidence should be considered by a jury in determining 
     whether in fact such collusion exists in concentrated 
     markets.
       I therefore support the standard set forth in In re 
     Coordinated Pretrial Proceedings in Petroleum Products 
     Antitrust Litigation, 906 F.2d 432 (9th Cir. 1990), cert 
     denied, 500 U.S. 959 (1991), in determining whether the 
     plaintiff's circumstantial evidence of collusion can be 
     presented to the jury.


             importance of independents in gasoline markets

       Numerous studies have demonstrated the importance of 
     independent gasoline refiners and dealers in preserving 
     competition in the gasoline wholesale and retail markets. For 
     example, in one of the most rigorous studies to date, which 
     is cited in the Subcommittee's report, Professor Hastings 
     documented how the loss of one independent retail chain in 
     Southern California led to across-the-board price increases 
     at the pump in the areas previously served by the chain. In 
     addition, the Subcommittee's investigation found a number of 
     industry analyses indicating that the greater the presence of 
     non-majors in a specific market, the lower the retail price.
       The continuing decline of independents nationwide and in a 
     number of markets presents a significant concern that prices 
     in the affected markets will rise above purely competitive 
     levels. In your reviews of proposed mergers I urge you to 
     carefully examine the effect of the proposed merger upon the 
     presence of independents in the market. Not only are large 
     retail chains necessary to present effective competition for 
     other large retail chains, but a healthy independent sector 
     is necessary to maintain true price competition.
       In this context, I urge you or the FTC staff to meet with 
     the Association of Merger Dealers and seriously consider 
     their proposal for the purchase of up to 17 Mobil-branded 
     retail sites currently owned by Phillips/Tosco, which were 
     acquired by Tosco under the consent decree in the Exxon-Mobil 
     merger. In my opinion, it would be worthwhile for the FTC to 
     consider this proposal as a test case to see whether the 
     divestiture of gasoline stations owned by major brands to the 
     dealers rather than to other major brands can be an effective 
     way to inject competition into markets where a proposed 
     merger would be detrimental to competition.
       In closing, I would like to thank you and the FTC staff for 
     the support provided to the Subcommittee during this 
     investigation. Our extensive requests for documents were 
     responded to in a timely manner, and the FTC personnel were 
     readily available to answer the Subcommittee's questions. I 
     look forward to continuing our productive working 
     relationship in this and other issues.
       Should you have comments regarding this letter, please feel 
     free to contact me or have your staff contact Dan Berkovitz 
     or Laura Stuber, Counsels to the Subcommittee, at 224-9505. 
     Again, thank you for your time and consideration.
           Sincerely,

                                                   Carl Levin,

                                               Chairman, Permanent
     Subcommittee on Investigations.

                          ____________________