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Sotheby's President Going, Going, Gone
Subject Collusion and antitrust law
Topic Government and the Economy
Key Words Commission fees, agreement, price-fixing, antitrust violations, fine, conspiracy
News Story

The former president and chief executive of Sotheby's auction house, Diana D. Brooks, has pleaded guilty to fixing hundreds of millions of dollars in commission fees with the other company in the auction industry, Christie's, between 1993 and 1999. Customers were thereby unable to negotiate commission prices. The two companies would agree on which should raise their fees first, and who would follow. They also exchanged information to monitor their agreement. In addition, Sotheby's and Christie's agreed not to give interest-free loans to sellers, and to refrain from making charitable donations to potential sellers such as museums, libraries and foundations as a means of soliciting business.

In a separate case, Sotheby's pleaded guilty to price-fixing and other antitrust violations and agreed to pay a $45 million fine over five years. Christie's has not been charged because it came forward with evidence of conspiracy.

The acting assistant attorney general said, "Those charged today were engaged in classic cartel behavior - price-fixing, pure and simple. These are serious crimes and the antitrust division will prosecute them wherever they occur."

(Updated November 1, 2000)

Questions
1.

Why was it relatively easy to fix commission fees in the auction industry?

2. Christie's and Sotheby's acted together as a cartel to maximize joint profits.
a) Draw a diagram of a cartel's equilibrium, showing the demand and marginal revenue curves and the marginal and average total cost curves. Mark the joint-profit-maximizing price (commission fee) and output (items auctioned).
b) Had commission fees been competitively determined, what would have been the equilibrium fee and number of items auctioned? Show the equilibrium on your diagram.
c) The two auction houses agreed to refrain from giving interest-free loans to sellers and charitable donations to potential sellers. How did this affect their joint-profit-maximizing equilibrium and the amount of profit earned? Illustrate on your diagram.
3. The acting assistant attorney general stated that price-fixing is a serious crime and that it would be vigorously prosecuted.
a) Explain why price-fixing is a serious crime with reference to the concepts of consumer surplus and deadweight loss.
b) Why is it worth spending a great amount of money prosecuting price-fixing cases?
Source Ralph Blumenthal and Carol Vogel, "In Plea, Sotheby's Ex-Chief Points to Her Superior," The New York Times, October 6, 2000.

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