Market allocation is a non-competitive agreement between direct rivals to divide markets, customers, or product lines, effectively eliminating competition for a designated segment of business. This practice operates as a form of illegal collusion, where firms agree not to compete against one another, allowing each participant to secure a guaranteed share of the market. Such schemes are a serious breach of competition law because they directly undermine the principles of a free and fair marketplace. By removing the pressure of rivalry, market allocation harms consumers by stifling innovation, reducing choices, and leading to artificially inflated prices.
Understanding Market Allocation Agreements
Market allocation agreements are a form of horizontal restraint, meaning the conspiracy takes place between companies operating at the same level of the supply chain and are direct competitors. The fundamental mechanism involves competitors abandoning their natural impulse to contest for business. Instead, they collude to create a system where each firm can operate as a local monopolist within its assigned sphere. The explicit goal is to eliminate the economic pressures that competition naturally creates, such as the need to lower prices or improve service.
The agreement may be formal and written, but more often it is a tacit or oral understanding reached during conversations between executives or sales representatives. Once the division is established, participating firms refrain from soliciting business from the agreed-upon customers or territories. This restraint ensures that each conspirator faces no threat of being undercut by a rival, which allows them to maintain or raise prices without fear of losing market share. Customers are thus denied the opportunity to benefit from price competition, and the colluding firms enjoy higher profit margins at the expense of the public.
Specific Types of Market Allocation Schemes
Geographic Division
Geographic division schemes involve competitors agreeing to sell only within a predefined territory, with each firm promising to stay out of the others’ designated areas. For instance, two regional distributors might agree that one will exclusively serve the northern half of a state while the other handles the southern half. This arrangement prevents customers in the northern territory from seeking lower prices or better service from the rival distributor. The effect is the creation of smaller, non-competitive markets that would otherwise be contested.
Customer Division
In a customer division scheme, competitors allocate specific clients or categories of clients among themselves and agree not to pursue business from accounts assigned to their rivals. For example, one company might agree to focus solely on government contracts while a competitor serves only private sector clients. Allocation can also be based on customer size, with one firm taking large corporate accounts and the other focusing on small businesses. This agreement ensures the customer has only one viable supplier, severely limiting their negotiating power.
Product or Service Division
Competitors can divide the market by agreeing to specialize in different product lines or services within the same industry. For instance, two technology companies might agree that one sells a specific software application while the other focuses on a related hardware component, even if both have the capacity to offer both. By carving up the product offering, the firms avoid head-to-head competition. This arrangement allows each conspirator to maintain a monopoly over their specialized segment, limiting consumer choice and stifling incentives for product innovation.
Why Market Allocation Violates Antitrust Law
Market allocation is a severe violation of competition law, falling under the prohibition of the Sherman Antitrust Act, Section 1, which bans contracts or conspiracies that restrain trade. It constitutes an agreement between rivals to substitute cooperation for competition.
Courts treat horizontal market allocation as per se illegal. This legal standard means the conduct is considered unlawful regardless of the conspirators’ intent or any purported justification. The per se standard is reserved for conduct so consistently harmful to competition that no in-depth inquiry into its effects is necessary.
Market allocation inherently harms consumer welfare by eliminating the natural market forces that encourage low prices, high quality, and innovation. When competitors agree to stay out of each other’s domain, consumers lose the ability to choose among multiple suppliers, leading to reduced service quality and higher costs. The per se rule reflects the public policy stance that the potential harm from such anti-competitive cooperation far outweighs any possible benefit.
Severe Penalties for Violating Market Allocation Laws
Engaging in illegal market allocation carries severe criminal and civil penalties for corporations and individuals. The U.S. Department of Justice (DOJ) prosecutes these violations as felonies. Corporate fines can reach a maximum of $100 million per violation. Under the Alternative Fines Act, this limit can be increased to twice the gain derived from the crime or twice the loss suffered by victims, whichever is greater.
Individuals, including executives and managers, can face personal criminal penalties of up to 10 years in federal prison and fines of up to $1 million per violation. The DOJ seeks significant jail time for individuals involved in these schemes to ensure a strong deterrent effect.
Victims of market allocation can file private civil lawsuits. Successful plaintiffs can recover treble damages, meaning the violator must pay three times the amount of the actual damages suffered. This threat of massive financial exposure emphasizes the risk associated with agreements to restrain trade.
Recognizing Red Flags and Ensuring Compliance
Employees and executives should be vigilant in recognizing specific conversational and market red flags that may indicate an illegal market allocation scheme is forming. Any discussion with a rival about specific customers, territories, or future business plans must be avoided. Warning signs include:
- Unsolicited contact from a competitor suggesting they “respect” each other’s customers or territories.
- Competitors submitting intentionally high or non-competitive bids to guarantee a rival wins the contract.
- A sudden, unexplained market stability where prices remain high despite economic conditions.
- Any agreement, tacit or explicit, to divide clients or geographic areas.
A robust internal compliance program is the most effective defense against liability. This program should feature clear, written policies prohibiting anti-competitive contact with rivals and mandatory, regular antitrust training. Employees who suspect an illegal agreement should immediately report concerns to the company’s legal counsel or a designated compliance officer. Individuals who report criminal antitrust violations are protected from retaliation under the Criminal Antitrust Anti-Retaliation Act (CAARA), which offers remedies such as reinstatement and back pay.