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Despite being often raised by respondents being investigated by competition authorities, the countervailing power defense for collusive behavior under the Monopoly Regulation & Fair Trade Act has received relatively little attention so far. Two strands of thought continue to this day, one being that such collusion would increase market concentration by introducing newly minted market power into the market by virtue of the cartel. Another stand of thought is that all or part of the benefits garnered through the countervailing power created by the cartel will be passed on to consumers, thereby increasing their welfare. A closer look at the theory shows that indeed as the market moves from a monopoly to a bilateral monopoly (where the input seller and buyer are a monopoly and monopsony, respectively), consumers may be better off than before as output increases to more optimal levels. There are, however, important caveats to this observation, as various factors may weaken or even reverse the welfare gains mentioned above. Examples include a breakdown in negotiations between the monopolist and monopsonist, and an increase in market power or collusion on the part of the cartelists in the downstream market or other markets where they are present. Indeed, the theory of the second best teaches us that the welfare effects of both inserting and removing the countervailing cartel will be indeterminate, making it difficult for authorities to properly judge the legality of such cartels. Some have argued that a countervailing power defense should be allowed, albeit restrictively and only under certain conditions such as the lack of market power in the downstream market. However, the likelihood of high administrative costs, and concerns of underdeterrence gives one pause in allowing such a defense even in its restricted form from a policy perspective. In any event, even if one were to allow for such a defense, the cartelist(s) should have the burden of proof of showing that their behavior had actually increased consumer welfare. Proving such, however, will likely be a daunting task.
