Review of Industrial Organization 12: 279–290, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
Identifying Participants in a Price-ﬁxing Conspiracy:
Output & Market Share Tests Reexamined
MEHMET E. KARAASLAN
College of Business, Alfred University, Alfred, NY 14802, U.S.A.
Abstract. If there is a cartel agreement among a subset of ﬁrms in an industry, it should be predicted
that all ﬁrms in that industry will increase prices. Nevertheless, industry prices alone should not
indicate that a particular ﬁrm is guilty of that conspiracy. According to the output test and its market
share variant – proposed by Blair and Romano – if the output or the market share of the ﬁrm that
claims to be innocent in the collusive activity rises in response to the price increase, that ﬁrm’s claim
should be accepted as true. Using a collusive variant of the dominant ﬁrm model, this paper shows
that these are not robust tests to reveal either innocence or guilt, and characterizes cases where they
may pardon a guilty ﬁrm (Type I error) or indict an innocent ﬁrm (Type II error). This paper also
shows that a market share test can not be used to prove a dominant ﬁrm’s intent for predatory pricing.
Key words: Dominant ﬁrm, collusion, predatory pricing, output test, market share test, antitrust.
JEL Classiﬁcation: G18, L41, K42.
Widely acceptedeconomictheory predicts that, all ﬁrms in an industrywill increase
their prices following a cartel agreement, even though that agreement may involve
only a subset of ﬁrms in that industry. During antitrust litigation circumstantial
evidence of collusion may easily persuade a jury that all ﬁrms in a highly concen-
trated oligopolistic industry are guilty of price ﬁxing in violation of Sherman Act
Therefore, even though data on industry prices can be interpreted to
indicate collusion, such data are inconclusive on the question of a particular ﬁrm’s
I thank William Hallagan and Shilin Hu for helpful comments on an earlier version of this
paper. I also thank the seminar participants at the 1992 Annual Conference of Western Economic
Association and Central Washington University. Remaining errors are mine.
Such circumstantial evidence may be an increase in price without any obvious increase in cost or
demand; presence of excess capacity; lack of any other mode of competitive conduct such as credit,
delivery terms, advertising; selling on a delivered price basis, etc. Sherman Act Section 1 holds that
“[e]very contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or
commerce among the several States, or with Foreign nations, is declared to be illegal.” 15 U.S.C.
1 (1988). While this is rather general language, it usually refers to conspiracies to ﬁx prices or share
markets. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), where the Supreme
Court, on appeal, sustained the verdict of guilty. Since then, the per se rule toward price ﬁxing in the
1940 decision has been the controlling case. The per se rule says that price ﬁxing is illegal regardless
of the circumstances and that there is no allowable defense.