[Pages S6312-S6314]
From the Congressional Record Online through the 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 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

[[Page S6313]]

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 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

[[Page S6314]]

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.

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