Planet Money - The ice cream conspiracy

Episode Date: February 8, 2023

Take a look in any supermarket ice cream freezer section and you may see a mystery. There are big containers of the typical ice cream brands: Breyers, Turkey Hill, and Edy's. And there are specialty brands that make gelato, low-fat and vegan ice creams. And then there are the fancy pints: which is mostly Ben & Jerry's and Häagen-Dazs.Häagen-Dazs has flavors like vanilla, chocolate, pistachio—the sort of flavors that run smooth. And then Ben & Jerry's specializes in chunky flavors: Cherry Garcia, The Tonight Dough, Chunky Monkey, etc. The two hardly ever cross into the other's turf. Why?It's possible they are experiencing something common to natural competition—they are specializing in what works best for them. But, as Christopher Sullivan of the University of Wisconsin-Madison suspects, the two companies may be engaging in what is known as "tacit collusion," where two parties silently agree to... stick to their own territory.We try to get to the creamy core of what makes up a conspiracy, and how the consumer eventually loses out in this cold, cold war.Today's episode was produced by Willa Rubin and Alyssa Jeong Perry. It was engineered by Josh Newell and fact-checked by Sierra Juarez. It was edited by Jess Jiang.Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. Robert Smith! Amanda Ronchek! Fancy meeting you here at our local Brooklyn supermarket. Yes, here we are together. We have just randomly found ourselves in the ice cream freezer section. Well, it is 9.30 at night. It's the traditional time to take an ice cream run. Yeah, I am on an ice cream run here to pick up some pints. I am here for a slightly different reason. I have been staring into these freezers and I've been putting something together. This may be a little red string bulletin board kind of conspiracy theory, but I want you to

see this. I'm going to open up this freezer. Okay, let me show me what you want to show me. Okay, over here on the left we have the big pints of ice cream, right? The Breyers, the Turkey Hill. Okay, over here on the left, we have the big pints of ice cream, right? The Breyers, the Turkey Hill. Over on the far right, you can see the specialty stuff, low-fat gelato. And in the middle, right here. Yes, I can see you've got the fancy pint section. This is completely dominated by Ben & Jerry's and Haagen-Dazs.

Yeah, and that's what's confounding me here. Okay, look at the flavors of the fancy pints. Okay, yes, I see all sorts of different flavors. I see coffee, there's vanilla, there's chocolate. That's the Haagen-Dazs, right? The Haagen-Dazs has these basic smooth, creamy flavors. They might have a wee bit of pistachio or caramel or a little vanilla bean fleck, but mostly Haagen-Dazs makes ice cream you could lick off a spoon. Right. Now, look up at the Ben & Jerry's. Okay. There's no plain strawberry.

There is no coffee. Ben & Jerry's has these big chunks of stuff in them. Yeah, I see there is chocolate chip cookie dough that I know has got big chunks of cookie dough in it. There is fish food that's got marshmallow caramel swirls with, I guess, fudge-shaped fish in it. So much fudge. And then you got you've got chunky monkey a classic you need your teeth to chew a Ben & Jerry's ice cream so these two companies are competitors right there in the freezer together but they don't really compete one makes chunky the other makes smooth why why I don't know I've just always assumed that

they just target different customers, right? Like they've carved out their own niche. Maybe. Maybe. Or maybe there's something else going on here. Maybe there's a mystery to be solved. Hello and welcome to Planet Money. I'm Amanda Aranchik. And I'm Robert Smith. I have been haunting the supermarket and poking around in the frozen food aisle for a couple of years now. Ever since I was at a big, fancy economics conference and an economist there planted this worm in my brain.

Something sketchy, he claimed, is going on inside those ice cream freezers. he claimed, is going on inside those ice cream freezers. Today on the show, we dig our way to the bottom of the pint and ask, is this a case of ice cream collusion? Democracy and capitalism. It's kind of a modern experiment to pair these things up. To say, sure, billionaires can exist, but their vote is not worth anything more than yours. That's a very beautiful idea, but it's also, I think, a fragile idea. A fragile idea that only works if democracy

and capitalism stay balanced. But this balance that we need has gone wrong, so we have to consider change. An argument for repairing the relationship between democracy and capitalism in our recent bonus episode. That's if you're a Planet Money Plus listener. Details are in our episode notes. That economist I met at that big conference, the person who first noticed something amiss in the freezer section, is named Christopher Sullivan. He's a professor at the University of Wisconsin-Madison. When Christopher was growing up, his favorite food was ice cream. His grandmother would even make up her own chunky style.

By taking potato chips and crumbling them up and sticking them in vanilla ice cream. So, yes, I guess I come from a family that likes odd chunky combinations in ice cream. So imagine his joy when he grew up and discovered a certain Ben and Jerry's flavor. Chunky monkey. Chunky monkey. Chunky monkey. And I forget what's in chunky monkey. It's like a lot of stuff, right?

Banana ice cream with walnuts and chunks of dark chocolate. And then you would, what, take that home and's like a lot of stuff, right? Banana ice cream with walnuts and chunks of dark chocolate. And then you would, what, take that home and have like a tiny little bowl of that until you were lightly satisfied? Oh yeah, always great willpower. Just have one teaspoon and stick it back in the freezer. No, it wouldn't last very long. Back in 2013, Christopher was in grad school and he was studying companies. How companies are organized, how they manage markets, interact with consumers, that kind of thing. And Christopher was particularly interested in how companies compete with each other and sometimes agree not to compete. So at that time, he's thinking about competition and he's having a moment that all grad students have at some point, wondering what he will write his thesis about. I just remember being in my apartment one day.

And he needs something out of the freezer. I can't remember if I was getting ice cream or if I was just getting ice or what exactly I was getting out of the freezer. But yeah, it was the moment I pulled open the freezer, I thought, wait a minute. As a Ben & Jerry's fan, he knew all the flavors that they make, all those chunk-filled delights. But as a budding economist, he started to think about all the flavors that they didn't make. They sell vanilla, but I'm not seeing them sell chocolate. I'm not seeing them sell coffee ice cream.

I'm not seeing them sell strawberry or butter pecan ice cream, which are some of the best-selling flavors in the country. And he thinks to himself, if those flavors are so popular, why would an ice cream company not make them? It seems like Ben and Jerry's must have the know-how. It would be easy to simply not put the big chunks in. You can't make coffee Heath Bar crunch without making coffee ice cream.

So at some point in the factory, there is a big vat of coffee ice cream, right? That's right. That's right. And if you go to their scoop shops, they've sold coffee, chocolate, butter pecan, strawberry ice cream by the scoop in their ice cream shops. Ben and Jerry's clearly know how to make coffee-flavored ice cream without all the chunks. They even sell it in their stores. But usually they do not sell it in the supermarket. And as we noticed in our supermarket, the other big player in the pint space, Pogandaz, they make the opposite. Mostly they just make smooth.

There are all sorts of reasons why this could be happening. Maybe those hippies at Ben and Jerry's just love those chunks, man. Maybe their fans would be upset if they opened a pint and it was chunkless. Perhaps Haagen-Dazs just wants to evoke a fine European restaurant that would never put chocolate-covered pretzel fudge chunks inside their delicate creme. Or, to put it in economic terms? Is this just the result of natural competition between these firms that they would specialize in one type of ice cream

as a way to make as much money as possible? Or is there something potentially beyond that going on? Such as? So are they potentially coordinating or tacitly colluding their choice of flavors? Bum, bum, bum. Clearly, this was a cold case about to heat up. Wait, I got a better one. Clearly, Christopher had a scoop.

It is quite an accusation Christopher is making here. Collusion. When there's even a little collusion in an industry, it has huge implications. And people can even go to jail for it. Yeah, imagine if Ben & Jerry's and Haagen-Dazs were somehow working together. One takes the chunky market, one takes the traditional market, and actively choosing not to compete with each other. That is bad for consumers.

Prices go up. Products stagnate. Think of all the weird, chunky Haagen-Dazs flavors we could be getting. Marcel Proust's Madeline Chunks in Vanilla. I'd buy that. Oh, the memories. So Christopher sets out to get to the bottom of this pint mystery. This would be his dissertation. The first thing Christopher needs is the history of how these companies pick their products. He starts at the beginning. Haagen-Dazs debuts in 1960. Made in New York,

but named like it was from the Scandinavian fjords. Haagen-Dazs is so thick and creamy, giving you a deliciously rich experience that lasts and lasts and lasts. Are they playing a lute? I don't know. I think that might be a harp. I don't know. Doesn't matter. And last, and last. Are they playing a lute? I don't know. I think that might be a harp. I don't know. Doesn't matter.

Anyway, Ben and Jerry's enter the market in 1978, eventually becoming famous for just how unsmooth their chunky flavors are. So when it came to hand-cutting the cookie dough chunks, we kind of made them on the big side. Even if that meant it was a bit of a squeeze getting them into our tubs. That is definitely a banjo. They have the little boink, boink, boink, boink thing in there. The music sounds folksy, but from the beginning, the two companies are at each other's throats. There was even a nasty lawsuit when Ben and Jerry's accused Haagen-Dazs of trying to block distribution of their ice cream to stores. Eventually, there was a stalemate.

Most supermarkets all across the country would come to offer both kinds of ice cream. And when it came to product types, the two companies mostly stayed out of each other's way. When this kind of thing is done explicitly, it's called market division. Most of that is usually studied in the context of geography. You get the north side, I get the south side. Exactly. Instead of having a map of a city, you could kind of have a map of flavor spaces where the chunky flavors live up here and the smooth flavors live down here. And this is kind of the product space analog.

So Christopher sees that Ben and Jerry's, they're living in Chunky Town, Haagen-Dazs is in Smoothville. And through the 1980s, ice cream sales are good for both companies. Together, they own 90% of what is known as the super premium ice cream market. The stalemate holds. That is until 1992, when sales of super premium ice cream start to slow. And both companies are trying to figure out how to respond. And then one competitor decides to cross that invisible border. Haagen-Dazs releases a line of chunky flavors in supermarkets for the first time.

And Ben & Jerry's, immediately thereafter, decides they're going to offer smooth flavors in the supermarket for the first time. Haagen-Dazs names their chunky ice cream extras with a umlaut over one of the A's. And then Ben & Jerry's retaliates with their smooth ice cream, quote, smooth, no chunks. So after years of occupying separate turf, the two companies start going after each other's customers. This is great news for ice cream fans. Lots more choice in the supermarket.

And according to documents at the time, Haagen-Dazs even discounted the price of its new flavors. That is what you would expect in a competitive environment. Christopher says it's also what you would expect from the economic field called game theory. In game theory, you think not just about what your choices are, but what your competitors' choices are, and what are their best strategies, and how

should your strategies adapt to theirs? Game theory. So watching Ben and Jerry's and Haagen-Dazs cross into each other's territory is actually a way of sending a message to your competitor in the game. This is what we would call a trigger strategy, the support collusion. Wow. If you defect, I punish you. And so a natural way to punish you in the product space is you enter my space. I'm going to retaliate by entering your space. This is a cold war. Yes. Oh, no.

Oh, Robert. Each side is marshalling their forces, calling up volunteers with scoops to the ice cream stores. I picture a flavor scientist saying goodbye to his family. I might not make it back. The battle escalates. Veiled threats are made. Ben of Ben and Jerry's was quoted in newspapers at the time as saying, when the smooth get chunky, the chunky get smooth. Damn. Which is very much consistent with what we would call a trigger strategy. The message was sent. The trigger was pulled. Now the two companies have a choice. They could just stay in each other's territory, vigorously competing and may the best ice cream

win. Or they could start cooperating. Ben and Jerry's could retreat back to Chunky Town. Haagen-Dazs would go back to Smoothville, and there would be peace once again in the ice cream freezer. You game theory nerds may recognize this as something called the prisoner's dilemma. If each ice cream company agrees not to compete, then they both win. They can charge much more for their individual products. If the customers want strawberry, well, they're going to have to go to Haagen-Dazs and pay whatever Haagen-Dazs wants. But in the prisoner's dilemma,

you are always tempted to betray the other party. If Haagen-Dazs sticks with smooth, then Ben and Jerry's could be like, eh, psych, we are offering both. Then Haagen-Dazs has to offer both too. Cooperating is really hard. When we're colluding, there are these short-run incentives to deviate and me to come in, massively undercut you,

steal all your customers and earn more money. There are a few more rounds of battles and detente. Christopher can see that by 2013, Ben & Jerry's has returned to its turf, pulling their new plain, smooth flavors off the shelves. Haagen-Dazs waves the white flag and puts fewer chunks in their ice cream. But here's the big question. Was all of this, the smooth getting chunky, the chunky getting smooth, the big retreat, was this actually collusion? Were the two companies working together or at least sending each other signals?

Or did they just try out some new flavors and the flavors didn't sell? Christopher starts to analyze the data. Companies that are truly competing act in a certain way. If you study their products and prices over the years, the data should be responding largely to consumer demand. But if two companies are cooperating, then their actions and prices seem to move together. But if two companies are cooperating, then their actions and prices seem to move together. Christopher pulls ice cream pricing data from more than 7,000 stores, and he does all of these calculations on ice cream demand. And what Christopher finds is that this fancy ice cream is far more expensive

than what you would expect in a perfectly competitive world. Ergo, he concludes, whatever is going on in ice cream land is not competition. It is collusion. Back of the envelope calculation, how many billions of dollars have we ice cream eaters lost to this cooperation or collusion or whatever it is? That is a good, sorry, give me one second. That is a good... Sorry, give me one second. Now that was kind of a joke question, but Christopher is an economist

and seems to be hunting for an actual envelope. Most of his paper is math and models, so he does have the answer. In the median kind of supermarket, in kind of the average supermarket, prices are 20 to 50% higher for pints of Ben & Jerry's and Haagen-Dazs than they would have been if the firms had not coordinated on products and prices.

20 to 50 percent higher. I mean, that's a lot, you know. We could have all afforded an extra pint of ice cream if we hadn't paid those high prices. So Christopher's data analysis showed that there was some sort of collusion, that consumers were being hurt. But was there anything illegal going on here? Did the ice cream executives plan this all out or were they just watching each other's signals and acting accordingly? In other words, should the FBI agents be putting on those cool jackets with the letters on the back and preparing to drag some dairy cows to jail? We'll find out after the break. To recap, Ben and Jerry's and Haagen-Dazs dominated the super premium ice cream market, but they didn't directly compete on flavors, even though they clearly could and sometimes had in the past.

The case has got all the fixings of collusion, but did these companies break the law? I'm sure the executives at Haagen-Dazs and Ben & Jerry's are listening very carefully to my words right now, ready to flee the country for some other country that is both collusion and lactose tolerant. I'm trying to think of where that might be. Where are they going to go? Switzerland. Ah, Switzerland. It's always Switzerland. Anyway, so for this question of legality, we went to Fiona Scott-Morton. She's a professor of economics at the Yale School of Management. What would you say are your credentials for being able to help us with questions of collusion? That's an excellent question. I do not have a law degree. I'm an economist,

but I spent a couple of years as chief economist at the Department of Justice in the antitrust division, where I supervised about 50 PhD economists who do the work of evaluating conduct when we enforce the antitrust laws. The antitrust laws. There are rules that govern what businesses can and cannot do when it comes to competing fairly. And they're based on the Sherman Act of 1890. So it's really quite old. And it forbids contracts, combinations, and conspiracies in restraint of trade. Contracts, combinations, and conspiracies in restraint of trade. They do not write laws like they used to. Now, in the more than 130 years since Sherman wrote that, we've had thousands of cases

testing exactly what crosses that alliterative line. And that can also help us evaluate our ice cream case. So first, sometimes it is just really obvious that you are illegally colluding. If you meet with the neighboring supermarket in the parking lot at the dead of night and set a price for something, eggs, bananas, roast beef, that's illegal. And indeed, this kind of parking lot price fixing really happens. A classic case was in the canned tuna industry. No joke.

Starkist, Bumblebee, and Chicken of the Sea were accused of colluding to sell cans of tuna for the same price. Chicken of the Sea cooperated with the government, paid a settlement. The other companies were fined. The Bumblebee CEO went to jail. Fiona says the key to such cases is proof of an explicit deal. Perhaps a secret recording of a meeting, a stool pigeon ratting out the other tuna guys. Do you need to have a smoking gun, an email, a conversation, a phone call? Could you just kind of wink and nod and use oblique references and still collude? Well, this is exactly the difference between illegal collusion and something we call tacit collusion.

This next type of collusion, tacit collusion, doesn't have a formal agreement between competitors. Tacit collusion is often made up of subtle signals. Imagine three pizza places in your neighborhood. One of them raises the price for a whole pie, and the other two look at that and think, that looks pretty good to me, and they also raise their prices. Now, pizza place number one looks at that and thinks, hey, we're kind of all in this together, wink, and raises the price again. And the two other joints follow. Now, they're all watching each other. They're mimicking each other, but they're not talking to each other or communicating in any way. And so that is actually not something we can go after under the Sherman Act today in the United States.

It doesn't feel good, though. It kind of feels bad. It feels really bad, yes. But not illegal bad. Okay. We asked Fiona where the ice cream case falls. Is it tacit collusion or the illegal kind? What would it take to put the ice cream execs into prison?

Oh, I think they would have to talk to each other about either setting prices or not innovating in each other's direction and that conversation would need to be memorialized in a recording device or a text message or a memo or something. Is there any proof? We went back to Christopher to ask,

in all your work, you finished your dissertation, you got your PhD, but in all of that, did you turn up anything? Did the ice cream people meet at some ice cream conference over a bowl of rum raisin, shake each other's icy cold hands? No, I haven't found any evidence that they actually explicitly, either through phone calls, with wiretaps, or through emails, actually communicated these strategies and their intent to monopolize the super premium ice cream market.

So, in the ice cream collusion case? I don't believe that either Ben & Jerry's or Haagen-Dazs engaged in any behavior that's illegal in the United States. There you have it. No legal line was crossed. Now, of course, we did reach out to both companies for comment. First, I talked to the head of Ben and Jerry's PR team, a guy named Sean Greenwood. So are you currently or have you in the past colluded with Haagen-Dazs? No, I don't think there was any collusion, never any discussion, never any, you stay in your lane and we'll stay in ours. So why doesn't Ben & Jerry make more smooth flavors? I think the issue is if you talk to the hardcore Ben & Jerry's fans and say to them,

are you going in and you look for something smooth and creamy or you look for something loaded with stuff in it? I think it's the latter for them, right? They go, no, I want something like, you know, chocolate fudge brownie with these big chunks of brownies in there. That's what scratches their Ben & Jerry's itch. Haagen-Dazs had something similar to say. They denied that they colluded. They say that their focus is on making lots of different flavors.

Quote, some are appreciated by consumers, some are not. In the end, the consumer decides. End quote. Look, we know that this ice cream case is funny. Amanda and I got to eat some pints, make some puns. But remember, by Christopher's calculation, the consumer is still getting screwed here. Illegal or not, like it is infuriating. And once you suspect tacit collusion in ice cream, you start to see it everywhere.

Especially in markets where there are only a few competitors. In a robust market with a dozen companies, it is much harder to collude. But if there are only two or three big players, you can do the kind of tacit collusion that we've been talking about. You can watch, send signals, and punish each other for crossing the line. The federal government has already noticed what looks like tacit collusion in the U.S. beer market, where it's dominated by a couple of giant companies. And the government is actively prosecuting drug manufacturers, accusing them of explicit collusion to divvy up the market for generic drugs.

And it makes us wonder about car rental companies, candy makers, concert ticket sellers. Wherever you see a suspicious lack of competition, you should ask yourself, am I paying more because of this? Consider it the new economic standard for collusion. Does it pass the chunky monkey test? it pass the Chunky Monkey test. Today's episode was produced by Willa Rubin and Alyssa John-Perry. It was engineered by Josh Newell and fact-checked by Sierra Juarez. And it was edited by Jess Jiang.

Special thanks to Professor Nathan Miller at Georgetown. I'm Robert Smith. And I'm Amanda Aronchik. This is NPR. Thanks for listening. And a special thanks to our funder, the Alfred P. Sloan Foundation, for helping to support this podcast.