But first I am going to tell you a fictional story about your nine-year-old son and his first entrepreneurial endeavor. If you don’t want to hear about your son, you can skip to the next section, about Bona Law’s new case.
The Lemonade Stand
You don’t have a nine-year-old son? Well … you do for this story. Congratulations, it’s a boy!
As you know, your son’s name is Johnny. You call him Little Johnny, but he is growing so fast, you are not sure how much longer the “Little” will last. But you treasure these times because they grow up so quickly.
And speaking of growing up quickly, Johnny sure is maturing. You tried to get him to clean-up around the house for an allowance, but he turned you down. He said he doesn’t want to be an employee and taking a job with you will just lead him into the rat race. Why would he want to do that?
Instead, Johnny says, he wants to start his own business. Ownership is where the money is, he says. Johnny wants to build cash flow, so he can just skip the rat race. Smart kid.
Okay, you say, “why don’t you start a lemonade stand?”
Johnny is excited. This is his first business—his first taste of Capitalism!
“Yes, I’ll build the best lemonade stand in the neighborhood, will serve the best tasting lemonade, and will be very careful with my costs, so I can charge a lower price and sell the most lemonade.”
Apparently Johnny has been paying attention to the business podcasts you have been listening to in the car.
As you know, you just moved to a wonderful neighborhood in the San Diego area. After years on the east coast, dealing with the harsh weather and sometimes harsh people, you are excited that you are now in paradise. The weather is incredible all year here and the constant sunshine puts you in a great mood.
Of course, it is tough to move to a new area, especially for kids. Johnny is excited, but a little nervous. He doesn’t know many kids in the neighborhood yet, and doesn’t start school until the fall—it is still July.
You and he have both noticed, however, that the neighborhood has a few lemonade stands—and many thirsty neighbors—so this might be a good way for him to make some friends and get to know the neighborhood.
You help Johnny build a stand, but to his credit he does most of the work—his enthusiasm for the venture has produced a work ethic in him you’ve never seen. You also admire his efforts to plan out his purchase of supplies, opting for Costco so he can buy what he needs in bulk at a low cost per glass (as he explained to you).
Johnny now has everything ready for his business: a stand with an attractive sign, cups, a money box, raw materials to make lemonade, a cooler, a couple chairs for him and his friend (or you, when you want to stop by), and, most importantly, the joy of ownership from starting his own business. You’ve never seen him so happy.
You drive around the neighborhood with him and discover that other kids seem to be selling lemonade at $7 per glass, which seems a little high, but it is a wealthy neighborhood, so perhaps that is the market price? It has been a warm, surprisingly humid summer in San Diego. You discuss with Johnny how that weather pattern increases demand. Of course, it did seem odd to you that everyone was selling lemonade at exactly $7 per glass, but you dismiss it.
Johnny did a great job purchasing supplies at the right price, so he calculates that if he sells his lemonade at $5 per glass, he can still earn a healthy profit, while at the same time attracting some additional volume because he will be the lowest price in the neighborhood. And since you live in the suburbs and it is a bit of a drive to any nearby commercial areas, the neighborhood lemonade stands are the easiest way for neighbors to refresh themselves on a hot day.
Day 1: Johnny sets up his stand and it looks great. The sign is bright and bold and the lemonade looks and tastes delicious. You pay him for what you drink, of course, as it is a business not your personal lemonade fountain. You don’t stay very long because this is his venture and you want him to develop his independence.
At the end of the day he comes home with some sweat on his brow and a smile on his face. He said that the lemonade action was non-stop: he was pouring drinks and taking money all afternoon. Customers commented on both the quality of his lemonade and the price, which everyone recognized was the best in the neighborhood.
Mrs. Ochmoneck, who is very influential in the neighborhood, even said that Johnny is her new lemonade supplier.
What a day!
Day 2: It is a Sunday; Johnny wakes up early (which never happens). He is excited for another day of commerce. He tells you he considers dropping his price further, but decides that $5 is a good price because he is making a profit and still attracting lots of business. He spends the morning perfecting his lemonade recipe and working on his sign.
He brings the stand out to where he had it before, a couple blocks from your house. But there is an older boy waiting there for him. You can see them talking from afar, but only hear of the conversation later.
When Johnny arrives, the older boy is not smiling. He says to your son, “I know you are new here, so you probably don’t know how it works. We sell lemonade for $7 this week.”
Johnny doesn’t quite understand, so he laughs, and says, in a teasing way, “You probably don’t sell that much lemonade at such a high price. That’s why I sell it for $5.”
The older boy doesn’t smile; in fact, his scowl intensifies: “You don’t sell it for $5 in our neighborhood.” Without another word, he leaves.
Despite the weird encounter with the older boy, Johnny has another great day: Lots of lemonade goes out; many $5 bills come in.
Day 3: The next day, Johnny arrives at his stand, without incident. More and more neighbors come to his stand for lemonade—“the best lemonade in the area,” many of them say.
But midway through the day, another boy shows up at his stand and tells him that he needs to stop selling it for $5. “We sell it for $7 now in this neighborhood,” the older and surprisingly muscular boy says, while placing his fist into his hand in a repeated pattern.
Your son asks what he means by “we,” and the older boy says that “we” means everyone that sells lemonade. He acknowledges—actually, he brags—that they decide together what price they are going to sell the lemonade in this neighborhood.
Your son, who, like you, is an active reader of The Antitrust Attorney Blog, asks “Isn’t that price fixing?”
The older boy grunts and says “you don’t worry about that, but if you know what is good for you, you will stop selling lemonade below our price.” He then walks away.
Day 4: Your son is shaken, but undeterred. In fact, he is even more adamant that he is going to destabilize this “price-fixing” ring by offering his customers the best lemonade for the best price. You are proud of him, but worried, as those older boys seem rough.
He begins another day of selling and business is good; his customer base grows every day and the weather has been hot and humid.
But about two hours into his workday—that’s right, your nine-year-old son has a workday—one of the older boys shows up, with a mobile lemonade stand. He says to your son’s customers, why buy from him, the new kid in the neighborhood, when you can buy my lemonade at $1 per glass. Despite the wealth of the neighborhood, the customers are quite price sensitive, so they leave your son’s stand and go to the mobile stand where they can buy lemonade at a $1 per cup.
Your son is perplexed because he worked hard to price out supplies and knows that it is virtually impossible to sell lemonade at $1 per cup without losing significant money on each cup. His sales that day are the lowest they’ve been since he started. He walks home, dejected and confused.
Day 5: Your son wakes up even earlier on day 5, with some excitement. He tells you that if the older kid that brought his mobile stand keeps selling lemonade for $1 per cup, he will surely go out of business. He ran the calculations again and little Johnny is convinced that this competitor is taking a significant loss on lemonade.
Buoyed by this research and realization, Johnny sets up his stand, confident that by selling the best lemonade at his $5 price, he will once again be the most popular lemonade seller in the neighborhood.
But about 15 minutes after he arrives, another lemonade seller he recognized shows up with a mobile stand—a different seller from the day before—and again sets up right next to your son, telling Johnny’s customers that his lemonade is only $1.
Day 6: A third kid—the one that threatened him earlier—shows up this time, selling his lemonade for $1, certainly taking a loss.
Day 7: Again, another lemonade seller, different than the earlier three, takes your son’s customers by offering lemonade for $1, which is below cost.
Your son is completely dejected and explains to you exactly what they are doing: “They are taking turns showing up to my stand to take my customers by selling their lemonade for under they own costs, only to customers that want to buy my lemonade.”
By agreeing to alternate taking the loss of selling for $1 and selling their lemonade elsewhere for $7 on the other days—a very large profit—each of the lemonade-selling conspirators minimizes their loses.
And your little Johnny is about to go out of business because he can’t sell sufficient volume of lemonade to handle his fixed and variable costs when his competitors take turns targeting his specific customers at well below their own costs.
In talking to some of the other parents, you learn that the dad of one of the kid’s selling lemonade—part of the group targeting your son—runs the biggest lemon grove in the area. Apparently, his kid is the ring leader of this lemonade conspiracy, which has been going on for years. All the other lemonade sellers buy their lemons from the kid’s family.
But the most interesting piece of the lemon-grove tidbit is this: When there is a “problem,” like your son—or other would-be lemonade sellers that don’t ascribe to the “neighborhood rule” of selling at the price they are told—the kids that agree to sell lemonade below cost to knock out the uncooperative competitor receive a discount on their lemons as part of the reward for participating in the hit job.
When you decided to move to San Diego, you had no idea the lemonade stand business was so cutthroat. You remember selling lemonade as a kid for 25 cents and didn’t have to worry about threats, cartels, or predatory pricing. Most of the adults just thought it “was cute” that you were selling lemonade.
But lemonade is big business in your neighborhood. It isn’t really for kids.
Day 10: Little Johnny struggles the next few days. He can’t drop his costs below the dollar per glass and even if he did, he knows that the lemonade cartel would drop their price even lower. They aren’t trying to sell lemonade: they are trying to keep him from selling lemonade.
So, with great sadness—even tears—your son tells you that he is going out of business.
Day 11: Driving around the neighborhood, you notice that the price of lemonade everywhere is now $8 per glass. Your son, of course, shut down his stand the day before.
Mrs. Ochmoneck stops by your house to visit. She has her glass of lemonade, of course. You can’t drink the stuff anymore. It has too much sugar and, well, you don’t want to support the cartel that knocked your son from the lemonade market. You drink tea instead—without any lemons.
She too laments your son’s exit from the lemonade business. “He really did sell the best lemonade in the neighborhood,” she says. “He also didn’t water it down with too much ice like some of the others do.”
She also tells you a little bit of the history of the lemonade market in your neighborhood: “We are known for our lemonade in Southern California,” she begins.
That doesn’t surprise you. You listen to her recite the history, but what catches your attention is that she mentions that your son wasn’t the first person to challenge the cartel.
“There were several that came before him,” she says. “It always happens the same way. The new kid sells lemonade. He or she doesn’t water it down with too much ice or skimp on the lemons. They charge a fair price, instead of the outrageous cartel price, and it goes well for them at first. But then the cartel convinces them to either join the price-fixing or the cartel knocks them out of the market, usually in ways similar to what they did to your Johnny. Then, the newcomer shuts down their stand, and the next day prices go up. This pattern is part of the history of our neighborhood. Your son wasn’t the first and he won’t be the last.”
Not accepting this and determined to make sure the cycle stops you, you pick up your cell phone and call an antitrust attorney.
You will have to wait for the next chapter to hear the rest of this story.
Bona Law files Antitrust Lawsuit on Behalf of Clients involving Cement and Ready-Mix Concrete Markets
On a completely different and unrelated topic, on July 24, 2017 Bona Law filed an antitrust lawsuit on behalf of its clients against multiple defendants in the cement and ready mix concrete markets in parts of Georgia and South Carolina. You can read our article about this antitrust lawsuit here.
Our clients are in the ready-mix concrete market. An input for ready-mix concrete is cement. Our clients allege both price-fixing and monopolization claims in the relevant cement geographic markets. As purchasers of cement, they suffered antitrust injury. This is not a class action case.
Our clients also allege a series of anticompetitive conduct and claims in the ready-mix concrete market, in which they compete or sought to compete: “The ready mix cartel … all horizontal competitors—allocated customers, rigged bids, and engaged in group boycotts of nonparticipating competitors, all in a quest to fix, raise, and stabilize the price of ready mix.” (p.2 of Complaint).
Rather than re-describe the essence of the ready-mix concrete market allegations, I will include paragraphs 30 through 33, which I think do a good job describing the basics of how the conspiracy our clients alleged functioned.
I recommend that you read the entire complaint, which is more detailed than the typical initial antitrust complaint.
These paragraphs should give you a sense of the case:
30. Starting in approximately 2009, Argos, Evans, Elite, and Coastal (later Thomas) combined and conspired to jointly monopolize and ultimately fix prices in the market for ready mix concrete in southeast Georgia (including Bluffton and Hilton Head, South Carolina). Together, their combined market share at all times exceeded 80%. These companies formed a cartel to dominate the market and conspired to protect that domination from competitive threats. The motivations and success of this ready mix cartel were supported by Argos’ ability to price supracompetitively in the cement market.
31. From time to time, a new ready mix competitor will enter the market. If the competitor is a threat—that is, if it is sufficiently large to handle substantial projects and compete with the ready mix cartel—the ready mix cartel will attempt to recruit the competitor to avoid price competition.
32. If the competitor is unwilling to cooperate in the price-fixing and market-allocation scheme, however, the ready mix cartel has an effective punishment regime designed to assure compliance or to drive the new entrant out of the market:
a. Trusted employees of the conspiring firms take turns following the competitor’s trucks to job sites and report intel on customers and locations to the cartel and then communicate that information among the cartel members;
b. Argos taps into a trusted manager, Jim Pedrick, to determine the amount of cement that the rogue ready mix price competitor is purchasing. If the competitor is purchasing from Argos’ cement competitors, Pedrick is also able to obtain intel on purchase volume (because Argos and its cement competitors separately agreed to an anticompetitive course of conduct in the cement market and to trade competitively sensitive information). The cartel determines how much concrete the competitor is selling based on its cement purchases and simple math, which allows the cartel to assess the degree of competitive threat and the competitor’s wherewithal to withstand the cartel’s collusive efforts (such as predatory price cutting);
c. Armed with this information, cartel members then develop a turn-based approach to price-cutting the hard-earned customers of the “rogue” price competitor; by engaging in this type of bid rigging, the cartel members are collectively able to withstand significantly more losses in order to take the price competitor’s customers; moreover, cartel members, individually and collectively, recoup any losses from the price cuts when the price competitors inevitably leave the market and the cartel members again raise prices to supracompetitive levels;
d. Additionally, Argos provides rebates of up to 50% on cement purchases when certain cartel members are pricing predatorily, which significantly (and artificially) decreases the costs of materials to allow them even more room to engage in predatory pricing, and more quickly put the target competitor out of business. Argos can afford such steep rebates because it is already pricing supracompetitively as a monopolist and/or by agreeing to fix prices and allocate customers and markets with its cement competitors. And Argos also maintains its monopoly power in the cement market by ensuring its concrete customers—cartel members—become loyal cement customers in return for sharing its monopoly rents when engaging in predatory conduct;
e. Argos works with its conspirators in both markets to make it more difficult or impossible for low-price competitors to obtain essential materials for concrete, such as rock and cement. For example, Argos sought and obtained an agreement from Holcim that neither company would supply cement to Baca Concrete or Bulloch Concrete because they competed on price with the concrete cartel;
f. Argos supplies the cartel with information derived from its illegal price-fixing conspiracy with Holcim, Giant, and Cemex to set cement prices by disclosing the future price of cement before it becomes public, in order to give cartel members an advantage in outbidding or otherwise weakening a competitor in the market; and
g. In some cases, Argos or other members of the cartel will buy out the competitor (after the competitor is sufficiently weakened and has little choice but to sell).
33. Once a competitor is no longer a competitive threat, the ready mix cartel reengages in its ready mix price-fixing scheme through which its members overcharge their customers as much as $15 per yard (more than 20% overcharge). In certain market areas, a “scorecard” is kept between the members, each taking turns winning or sharing jobs to ensure that premium prices are charged to customers, thereby avoiding competition with each other. Southeast Ready Mix and its predecessor Mayson have both been targets of the ready mix cartel.
You will have to wait for the next chapter to hear the rest of this story.
photo credit: rachaelvoorhees A Young Entrepreneur on a Hot Day at Portland State via photopin (license)