Friday, July 20, 2012

No Lobster Cartel in Maine . . . .

Excess Capacity

Not Evidence of Collusive Output Reduction

Flotilla of Lobster Boats Plying Their Trade in Casco Bay

A recent article in the Portland Press Herald quotes a state official warning Maine's lobstermen not to engage in price fixing or collective tactics designed to restrict the supply of lobsters.   In particular, the Press Herald quoted Marine Resources Commissioner Patrick Keliher as follows:

"We have heard that fishermen are seeking to impose a de facto shutdown of the fishery and coercing others into complying by threatening to cut off their gear," Keliher said in his release. "Any such actions will be met with targeted and swift enforcement."
Mr. Keliher is of course correct that agreements between  to fix prices or reduce output are unlawful, both under Section 1 of the Sherman Act and Maine's parallel antitrust statute.   More precisely, an agreement between lobstermen to set prices or reduce output would be unreasonable per se and thus contrary to the "Rule of Reason" that the Supreme Court articulated in Standard Oil v. United States, 221 U.S. 1 (1911).

At the same time, as the Press Herald article notes, individual lobstermen remain entirely free to refrain from setting new traps and/or harvesting from traps already set.  Moreover, it seems highly unlikely than any conspiracy between lobstermen could in fact result in unreasonably low output or unreasonably high prices.  In particular, several factors suggest that any collective effort to increase prices or reduce output would be doomed to fail.  First, there are over 1,000 lobstermen in Maine; it would be difficult to say the least for such individuals to negotiate and police an anticompetitive agreement.  Second, even if most lobstermen in fact agreed to reduce output and increase prices, those who refused to participate in the agreement could undercut it, by increasing their own output and thereby counter-acting any output reduction by conspirators.  Such a response would be particularly effective if the market was characterized by excess capacity, e.g., unused but servicable equipment like the unused lobster traps, pictured above, located on an island in Casco Bay. Third, ostensible participants in a price or output agreement could cheat, surreptitiously setting more traps than called for by the agreement, for instance.  Fourth, even if all current partipants in the marketplace somehow agreed to reduce output and increase prices, any resulting unreasonable prices would attract new entry, thereby increasing output and driving prices back down.

Those suspcious that price fixing might be afoot might invoke reports of lobstermen simultaneously reducing the number of traps set or harvesting less often from such traps, as Businessweek reported earlier this week.  However, such data are equally consistent with an alternative hypothesis, namely, that market participants are rationally responding individually to low lobster prices.  (The Businessweek article reports that lobstermen are receiving between $2 and $2.50 per pound for theit catch; the Press Herald suggests that the price has been even lower.)  Simply put, as prices fall, the payoff from searching for lobsters falls as well, with the result that individual lobstermen might conclude that the cost of such search outweighs the potential benefits, at least in the short run.  Because similar lobster prices prevail throughout the Maine region, numerous lobstermen might individually decide to "stay home." Taken together these individual and perfectly legal decisions might (incorrectly) appear to be the result of collective action.  Absent additional evidence demonstrating actual collective action, however, the public should be confident that the lobstering trade is a well-functioning competitive market.