Panel V The German Cement Cartel

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1 Panel V The German Cement Cartel Ulrich Schwalbe University of Hohenheim ACE Annual Conference 2009 Nov. 26, 2009 Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

2 Syllabus 1 The Additional Proceeds Concept 2 Coordinated Behaviour in the German Cement Industry 3 Temporal Comparative Markets and the Price War 4 Conclusion Cartel Fines as Part of the System of Competition Law Enforcement Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

3 The Assessment of Cartel Fines Additional Proceeds as a Basis for Cartel Fines Legal standard for the assessment of cartel fines in Germany until 2005 A fine up to e and, in addition, a fine up to three times the additional proceeds or extra revenue generated by the cartel arrangement. Additional proceeds:the difference between revenues with and without the cartel arrangement. Question: What would have happened without the cartel arrangement? What is the counterfactual? Problem of the estimation of a hypothetical competitive price. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

4 The Assessment of Cartel Fines Legal Standards for the Counterfactual In German legal commentaries, the problem of the counterfactual is addressed as follows: Commentary on German Competition Law In particular, it has to be established which realistic alternatives would have resulted, e.g. whether a market structure of perfect competition... or a competitive behaviour typical for an oligopoly... was possible or probable. It is about the identification of hypothetical processes that are not mere theoretical possibilities but are plausible and hypothetical realistic. Immenga/Mestmäcker (2001) Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

5 Coordinated Behaviour in the German Cement Industry Coordinated Behaviour as a Plausible Alternative Economic theory has identified several factors that have an impact on the intensity of competition in an oligopolistic market. If these factors are present, a spontaneous, tacit coordination will be a realistic possibility in such a market. In the German cement market, most of these factors are present. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

6 Coordinated Behaviour in the German Cement Industry Fundamental Factors Firms have been operating in the market for a long time, and they interact repeatedly. Because of excess capacities and economies of fill, there is a credible punishment mechanism available. High market transparency because of pricing system and structural connections. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

7 Coordinated Behaviour in the German Cement Industry Factors Related to the Firms Small number of firms few large firms and several smaller ones. Structural connections between firms, cross ownership, membership in the board of directors. Symmetry with respect to technology and cost structure (high fixed cost, low variable cost). Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

8 Coordinated Behaviour in the German Cement Industry Criteria Related to the Market High barriers to entry because of scarcity of raw material deposits, environmental constraints, and regulations on landscape preservation. Homogeneous product. Low price elasticity of demand. Typical transactions: Many transactions, high frequency, and low volume. No buyer power. Multimarket contacts with asymmetric market shares between firms in different geographic/national markets. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

9 Coordinated Behaviour in the German Cement Industry Means of Coordinating Behaviour Information sharing by structural connections, statistics of the Association of German Cement Producers Price leadership (e.g. HC in southern Germany) Pricing System of uniform deliverd price is common in the German cement industry. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

10 Coordinated Behaviour in the German Cement Industry Coordinated Behaviour without Cartel Agreement Result: Coordinated behaviour of firms in the German cement industry is not a mere theoretical possibility but a realistic alternative. The same market outcome could have resulted from tacitly coordinated behaviour. There are serious doubts as to whether any additional proceeds have been generated by a cartel agreement. This result is also supported by a quantitative analysis: All in all, the results of the statistical analysis, taking into account the qualitative arguments, make positive additional proceeds that result from a restriction of competition in the period from 1998 to 2001 seem per se implausible. The in dubio pro reo principle implies that no fines in excess of e should be imposed. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

11 Problems with the Additional Proceeds Concept Problems with Additional Proceeds High legal standards with respect to proof of additional proceeds. Decision by the Higher Regional Court in the Berlin ready mix concrete case: No additional proceeds due to cartel. Fine of 67 Million e was reduced to e. Problem of underenforcement! In particular, cartels in markets were conditions for coordinated behaviour are present are less prone to fines. They can bring forward convincing arguments that, without the agreement, the market outcome would have been the same. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

12 Problems with the Additional Proceeds Concept Transition to a Turnover Based Approach Reform of cartel fines in the 7th amendment of German Competition Law. Assessing additional proceeds is no longer required (though it might be implicitly necessary, but much lower need for precision). However, several cases of importance are pending with the HRC. The FCJ cancelled the judgement to avoid the underenforcement problem. Higher standards of proof that no additional proceeds were generated. Rebuttable presumption that additional proceeds were realized. A comparative market approach to estimate the additional proceeds should be employed when possible. Alternative: Use a general economic analysis based on cost and allow for an average profit margin. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

13 Comparative Markets Comparative Markets as Benchmarks In the estimation of additional proceeds, the concept of a temporal comparative market has been employed. Conceptual problems of how to take account of the price war. Was this comparative market the best choice? Other comparative markets, e.g. geographic markets, might have been more suitable, e.g. the Austrian market for southern Germany or the French market for the north. Here, problems of cartelization might be present, cost and quality differences have to be taken into account. But: Are these problems more serious than the price war problem? Taking into account the regional structure of the German cement market, different (types of) comparative markets could have been used for different regional markets. Or, if there are no suitable comparative markets, is the overall economic analysis a sensible alternative? Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

14 Conclusion Conclusion Concepts of the calculation of fines based on additional proceeds can be difficult and problematic. Transition to a turnover based approach as in European competition law. Has this been an improvement? Optimal fines should be related to the advantage, i.e. the additional profit realized by the violation, and the probability of detection. Link between gains and fines has been loosened. Turnover related fines might become excessive and lead to overdeterrence. Views on overenforcement in the literature are mixed. Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

15 Conclusion Conclusion Cartel fines are part of the overall system of enforcement of competition law. Optimal cartel fines should take into account 1 Probability of detection (depending on leniency programs and the activities of competition authorities) 2 Private enforcement of competition law (single or multiple damages, joint and several liability) 3 Leniency Programs (depending on the expected fine and private enforcement). Different aspects of competition law enforcement should not be analyzed in isolation. The effectivity of the overall system of cartel enforcement should be maximized. Problem of the assessment of cartel fines as part of the overall system of competition law enforcement should receive more attention from economists! Ulrich Schwalbe (University of Hohenheim) German Cement Cartel ACE Annual Conference / 15

Chapter 15 Oligopoly

Goldwasser AP Microeconomics Chapter 15 Oligopoly BEFORE YOU READ THE CHAPTER Summary This chapter explores oligopoly, a market structure characterized by a few firms producing a product that mayor may