ECN 3103 INDUSTRIAL ORGANISATION

Transcription

1 ECN 3103 INDUSTRIAL ORGANISATION 6. Collusion and Cartel Policy Mr. Sydney Armstrong Lecturer 1 The University of Guyana 1 Semester 1, 2016

2 Introduction Definition (Collusion) Collusion is when some or all firms in a market coordinate their prices and quantities. This coordination is typically done with the intent of raising price and earning higher profit. Cartels are cancers on the open market economy..." [Mario Monti, former European Commissioner for Competition, Sept 2000] -... negotiation between competitors may facilitate the supreme evil of antitrust: collusion." [Supreme Court Justice Antonio Scalia, Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko LLP, 2004] -cartels are per se illegal in most countries 2

3 Legal Practice of Defining Collusion - explicit collusion: coordination through direct communication occurs when firms directly communicate about price, market allocation, sales quotas, and other information pertinent to coordinating prices and quantities. - legal status: always illegal -tacit collusion: coordination without direct communication when a less competitive outcome is achieved through mutual understanding among firms; can also involve price leadership, signaling using market instruments such as price, and any other method not involving direct communication -legal status: generally legal 3

4 - price fixing = collusion can be without explicit agreement (=tacit) - collusion requires (credible) threat of punishment (not actual punishment!) - collusion can achieve monopolistic outcome 4

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6 Facts about (Detected) Cartels - some studies estimate cartels controlled 40% of world trade between 1927 and in 1997 developing countries imported $81.1 billion of goods from industries which had seen a price-fixing conspiracy during the 1990s - these imports represented 6.7% of imports and 1.2% of GDP in developing countries - FTC in US and European Commission have increased efforts of prosecution - after 1997 FTC has prosecuted international cartels worth $8 billions of goods annually obtaining $1.2 billions in criminal fines -some more facts on cartels follow 6

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8 Market Conditions conducive to Collusion Which industry characteristics facilitate or hinder collusion? concentration firm asymmetry demand evolution: growing/declining industry technological progress product differentiation frequency of interaction multi-market contact demand fluctuations market transparency 8

9 Market Concentration in many countries competition authorities merger test includes check if merger substantially increase the risk of collusion among the remaining firms in the industry the more firms, the harder it is to sustain a cartel 9

10 Empirical evidence on the effect of concentration is mixed Levenstein and Suslow (JEL, 2006): no simple relationship between industry concentration and the likelihood of collusion". Fraas and Greer (JIE, 1977): median number of firms in an industry with a cartel is 8 why might the empirical evidence be mixed? data is based only on convicted cartels with explicit collusion when there are small number of firms, firms may be able to tacitly collude as number of firms increases, tacit collusion becomes more difficult so there is more explicit collusion 10

11 Firm Asymmetry types of asymmetries: cost, capacity, historical market share, product traits, product lines, financial status, willingness to collude -impact on the set of feasible collusive outcomes cartel stability requires inducing compliance from the firm with the strongest propensity to cheat may require redistributing cartel profit may require having a firm to remain outside of the cartel impact on the selected collusive outcome lower cost firms want a lower collusive price firms with more capacity want a bigger market share how can cartel profit be redistributed" to induce compliance? market allocation (e.g., sales quotas) firms charge different prices (with more sales and profit going to the lower priced firms) monetary transfers (e.g., inter-firm sales) 11

12 asymmetric factors make collusion harder to sustain. Demand Evolution are fast growing or declining industries more conducive to collusion? collusion easier to sustain in growing industries, harder in declining industries industry growth increases future rewards for colluding today 12

13 Market Transparency recall the challenges associated with internal cartel stability 1 coordination 2 monitoring 3 punishment information is essential to 1 firms being able to coordinate their prices and quantities (future price intentions and exchange of current cost and demand data allows to choose profit-maximising collusive allocation) 2 monitoring compliance with the collusive outcome (historical disaggregated data common to all firms allows compliance checks) 3 punishing when there is evidence of non-compliance (allows targeted punishment of deviator) 13

14 Facilitating Practices -facilitating practice is an activity that makes collusion more likely or more effective, either by making coordination easier or making it easier to sustain a collusive agreement agreement among competitors to adopt a facilitating practice may be prosecuted either as an anti-competitive agreement in and of itself or as circumstantial evidence of price fixing examples of facilitating practices 1 meeting competition clauses 2 most favoured customer clauses 3 information exchange of individual firm sales 4 announcements of future price changes involving minimum prices 5 delivered or basing point pricing 14

15 Meet The Competition Clauses -MTC: seller promises that if buyer finds better price elsewhere he would match this better price -they can either charge a low price (L) or high price (H) -consider price equilibrium without MTCs and two MTCs 15

16 - MTC: whenever firm has high price while rival has low price, high price firm reduces its price - MTC clause destroys firms incentive to undercut rival because rival is committed to follow price cut 16

17 Most-Favoured Customer Clauses seller engages to guarantee a buyer the same conditions offered to other buyers -retroactive MFC: buyer will be offered refund if future buyers will be paying a lower price CASE: GE/Westinghouse Two biggest producers of turbine generators; 1963 GE announced that if sold at any time below its book price all customers of the last six months would get the same discount paid out; they hired accounting firm to monitor them; soon after Westinghouse did the same thing. -What is the effect of this on pricing equilibrium of previous example? 17 suppose current industry price is high

18 suppose when lowering the price, a company would have to refund previous customers a total amount of 2 - although price cut allows firm to steal market share from rival, it also means refunds to old customers weaker incentive for price cuts and MFC can sustain collusion prices for turbine generators invariant from 1963 to 1975 until US DOJ intervened and firms had to give up the MFC clause 18

19 Facilitating Practices and Cartel Prosecution to establish that some firm activity is a facilitating practice which should be prohibited: 1 Did the firms act independently or collectively in adopting this practice? 2 Does the common adoption of this practice promote anticompetitive conduct? 3 Does this practice have any pro-competitive effects and, if so, are they exceeded by anti-competitive effects? - facilitating practices not per se prohibited but they may trigger further investigation by competition authority 19

20 Competition Policy towards Cartels Three stages in fighting cartels 1 Discovery (customer reports, whistleblower, leniency programs, dawn raids, economic analysis) 2 Prosecution (standard of proof) 3 Penalization (corporate and individual fines and damages) we look at these stages in reverse order 20

21 Penalization The Laws: Cartels are illegal! - the very first law against cartel was the Sherman Act (1890) in the US Sherman Act Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." Sherman Act Section 2: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100 million if a corporation, or, if any other person, $1 million, or by imprisonment not exceeding ten years, or by both said punishments, in the discretion of the court." 21

22 Prosecution Standard of Proof -prosecution of cartels requires hard evidence of a CAU (contract, agreement or understanding) -in principle: tacit collusion legal, explicit collusion illegal -tacit collusion (or absence of hard evidence) plus facilitating practices might be sufficient for prosecution -firms use explicit collusion when gains from coordination and information sharing outweigh risk of prosecution -this seems a rather weak standard of proof: can/should we expand domain of illegal collusion? 22

23 Discovery in practice, how are cartels detected? - Stainless steel - Buyers complained to the EC about the rapid increase in prices -Lysine - An employee of ADM divulged the existence of a cartel and became an FBI informant. -Sodium gluconate - Defendants in the lysine and citric acid investigations informed the authorities. -Monochloroacetic acid - Clariant alerted European and American authorities to price fixing involving the Hoechst chemicals business that it had recently acquired. we focus on the two mechanisms to detect and desist cartels 1 economic analysis 2 leniency programmes 23

24 1 Economic Analysis -identify differences in market behaviour between suspected and unsuspected firms -screening: (i) structural (identifying industry traits) or (ii) behavioural (identifying collusive patterns) -problem with structural approach: produces too many false positives behavioural approach: is the collusive model better than competitive model? is there a structural break? - for example, we have a pretty good idea about the typical cartel price path 1 cartel formation is preceded by price decline. 2 transition phase in which price gradually rises 3 stationary phase in which price variance is low 24

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27 Problems with behavioural approach -data intensive when data is hard to get -data and method sensitive reduce court proofness -can lead to higher legal costs -potential for type I or type II errors of enforcement - often successfully used to explain data from convicted cartels - predicting cartels from suspected firms is a different story - economists have a hard time to detect cartels on their own!!! 27

28 2 Leniency Programs Definition (Leniency Program) A leniency program offers reduced penalties to corporations and/or individuals involved in collusion, in exchange for cooperating with enforcement authorities. - has become major weapon in fight against cartels, used in Vitamins, Elevators, Lysine and so on - information from leniency applications often forms basis for dawn raid investigation originated in criminal law, first introduced in 1978 in US, successfully reformed in 1993 since 2003 in Australia (reformed in 2009) since 1996 in Europe (reformed in 2002), since 2006 in Japan, 2002 in Korea 28

29 Leniency Programs in comparison: 29

30 Conditions for admission into leniency program -corporation took prompt and effective action to terminate participation -provides full, continuing and complete cooperation that advances investigation -confession is truly corporate act (for corporate leniency) -firm makes restitution to injured parties where possible -did not coerce other parties in activity or was ring leader 30

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32 Miller (2009) finds that cartel formation and discovery has decreased after the introduction of the leniency programme in the US: 32