Market Prices and Illegal Practices

This paper focuses on contractual relationships between two parties in which the contracted price can be interpreted by one of the parties and by an outside observer (like a court) as a signal that the other party engages in illegal activities in carrying out the contract. We use the Benckiser case as an illustration of such a situation. We construct a simple game to explain the court’s decision to sentence Benckiser to pay for the damage created by the contracted party for the fact that the price it had paid was so low that it should have been interpreted as a signal of illegal activities. More generally, the paper discusses price-setting behavior when illegal practices may occur.

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