2024 - Reprints: Managerial Economics

In this case of a bread cartel in Israel, the bakeries’ executives agreed to raise the price of sliced dark bread and challah in some stores and to stop competing in each other’s local markets. Overall, the bakeries complied with these agreements. Although the executives admitted to most of the charges, their interpretation of the events differed from those of the Israeli Competition Authority (ICA) and that is where the case becomes interesting.
The market power of retail chains caused bakeries to sell sliced dark bread and challah at a loss in order to be able to sell other bread products to retailers. From that normal state of affairs, in response to entry into its home market, one of the bakeries started offering stores a special deal of "3 loaves for 10 shekels NIS (Israeli new shekel)". A few months later, the bakeries entered into an unlawful agreement to stop the "3 for 10" deals (along with raising some other prices).
The ICA argued that, prior to the agreement, the bakeries had fiercely competed and the intent of the cartel was to raise prices to supracompetitive levels. The ICA also claimed that, but for the cartel, this level of competition would have continued indefinitely. In contrast, the bakeries claimed the motivation for the agreements was to stop a price war from spreading to other stores. They saw their conduct as intended to raise prices to competitive levels from subcompetitive levels, and that the fierce competition was an aberration that would not have lasted long even without collusion.
It is not clear whether the “normal” conduct that the agreement restored was one of genuine competition or of a tacit agreement involving an allocation of geographic markets (which the aggressive conduct preceding the agreement may have violated).