Author: Jarod Bona
Have you ever considered the idea that your business would be much more profitable if you didn’t have to compete so hard with that pesky competitor or group of competitors?
Unless you have no competition—which is great for profits, read Peter Thiel’s book—this notion has probably crossed your mind. And that’s okay—the government doesn’t indict and prosecute the antitrust laws for what is in your mind, at least not yet.
But, except in limited instances, you should definitely not divide markets or customers. Indeed, you shouldn’t even discuss the idea with your competitors, or, really, anyone (many antitrust cases are made on inconveniently worded internal emails).
The reason that you shouldn’t discuss it is that market-allocation agreements are one of the few types of conduct that the antitrust laws consider so bad they attach the label “per se antitrust violation.” The other per se antitrust offenses are price-fixing, bid-rigging, maybe tying, and sometimes group boycotts.
What is a Market Allocation Agreement?
When competitors divide a market in which they can compete into sections in which one or more competitors decline to compete in favor of others, they have entered into a market allocation agreement.
The antitrust problem with a market allocation agreement is that a group of customers experiences a reduction in the number of suppliers that serve them. The companies dividing the markets benefit, of course, because they have less competition for at least some of the market, which means that it is easier to raise prices or reduce quality.
It doesn’t matter, from an antitrust perspective, how the competitors divide the markets or even whether they both end up competing for that product or service after the agreement.
For an obvious example ponder a small town with two large real-estate brokerage businesses—Northern Real Estate Brokers and Southern Real Estate Brokers. A river flows across the town, roughly dividing it into northern and southern regions. The Northern Real Estate Brokers mostly attract clients north of the river and the Southern Real Estate Brokers usually service clients south of the river. But the river is passable; there is a bridge and it isn’t that big of a river anyway. So sometimes agents of each brokerage will participate in transactions on the other side river from their normal client base.
Late one evening, in the middle of the bridge, the leaders of the two companies meet and agree that from that point on, each company would only sell properties on their side of the river.
This is a market allocation agreement and the leaders could find themselves in antitrust litigation, or even jail (the Department of Justice will often prosecute per se antitrust violations).
While the geographic boundary made for an obvious way for the two companies to divide markets, they also could have agreed not to steal each other’s customers. So if a real estate agent from northern brokerage firm claimed a customer, no agent from the southern brokerage firm would compete for their business.
This customer allocation agreement is also a per se antitrust violation. To see how this type of antitrust offense can develop in a seemingly innocent way, read our article on the anatomy of a per se antitrust violation.
In this way, the antitrust laws actually encourage stealing customers.