Learning objectives

To outline what collusive behaviour is and when it arises. 

To distinguish between the alternative forms of collusive behaviour.    

To identify the different approaches competition authorities use to combat the alternative forms of collusive behaviour.  

To examine the features of two recently detected cartels.

What is collusion?

For economists, collusion is a market outcome – ‘high prices’ 

Collusion:

results in higher prices than equilibrium prices if firms only meet once. 

Competition authorities consider only some forms of collusion to be illegal.

Models of collusion 

Consider a market with 2 identical firms:

The firms produce homogenous products at a marginal cost  of c and have no capacity constraints.

Each period M buyers will each buy 1 unit of the product as long as p≤£10.

 

Absent collusion, Bertrand competition results in: p=c    

The 2 firms would like to collude on p=£10. Assume they then share the market i.e. sales of M/2 each. 

The problem is that each firm has an incentive to cheat:

Set p=£9.99 and sell to ALL M buyers 

In order to prevent cheating: 

It must be possible for a rival to detect a deviation 

A cheating firm can then be punished – aggressive behaviour (e.g. set p=c forever).  This results in foregone profits for the cheating firm.

 

As long as firms are sufficiently patient, collusive behaviour is possible.   

Factors that facilitate collusion

2 important factors that affect the likelihood of collusion are: 

1) Firm numbers

2) Degree of symmetry between firms

1)  Firm numbers 

Allowing for N firms in the earlier example: 

Collusive sales = M/N 

Sales if deviate = M 

As N increases the incentive to deviate increases

Punishment profits = 0 regardless of N 

(rival(s) can set p=c forever)

Collusion becomes harder to sustain as N increases 

2)  Symmetry

Consider 2 firms with different production capacities 

The firm with the larger capacity: 

Has a higher incentive to deviate

Faces a less severe punishment

A transfer of capacity from the largest to the smallest firm would make collusion easier  #p#分頁標題#e#

Collusion becomes easier to sustain as 

firms become more symmetric

Alternative forms of collusion

Cartel: communication between firms with agreement to fix prices. ILLEGAL e.g. fines of over £15m imposed by the OFT on replica kit retailers in 2003. 

Tacit collusion: mutual understanding that high prices benefits everybody. 

Tacit collusion in the 1982 World Cup: 

http://www.ttc-switch.com/fvxzy/

Coordination

Firms need to know what they are colluding on

earlier example assumed common knowledge collusive p=£10

The coordination problem may be difficult to solve under tacit collusion. 

has a rival cheated or perceived a different collusive price?

rely on focal points?

Coordination harder as firm numbers increase  

Talking to each other may aid coordination 

cheap talk?

threat of detection 

Cartels are per-se illegal

NO efficiency justifications 

Exploit consumers , harm welfare 

Quote from a participant in the lysine cartel: 

“Our competitors are our friends. Our customers are the enemy.”

Standards of proof

Extremely difficult to prove prices are ‘too high’ 

Increased legal certainty - require evidence of communication or information exchange 

Parallel prices not sufficient evidence 

Dawn raids used to undercover hard evidence e.g. minutes of meetings, emails, telephone conversations

Combating tacit collusion

Merger policy: 

Competition authority can intervene if there would be an increased likelihood of tacit collusion post merger 

Mergers: 

- reduce N 

+ may increase symmetry  

Penalties for cartel behaviour

Substantial fines – EC up to 10% of worldwide turnover (in all operations) 

2) Damages to 3rd parties (US treble damages) 

3) Jail sentences – in UK & US 

Leniency programmes

Sophisticated fine schemes – total or partial immunity if collaborate. 

Introduced by DOJ in 1978 and the EC in 1996

Complete immunity from fines given to the first firm to report a cartel. 

To qualify a firm must not have coerced other firms into participating in the cartel. 

Reduced fines for cooperating with an ongoing investigation.   

Leniency

Encourages firms to end participation in a cartel#p#分頁標題#e#

Provides evidence for prosecution 

Saves competition authority resources 

Ethical issues

 

The lysine cartel 

Lysine cartel meetings 

Mark Whitacre of ADM informed the FBI about the cartel.  Then secretly filmed the pretend trade association meetings which were held around the world and attended by senior executives. 

Met to fix worldwide production and prices:

‘If we're gonna trust each other, okay, and if I'm assured that I'm gonna get 67,000 tons by the year's end, we're gonna sell it at the prices we agreed to and I frankly don't care what you sell it for. But as long as I know I'm gonna get my 67,000 tons, 'cause I'll sell it at full market price. If you choose not to do that... ‘

Report sales  + compensation scheme in place. 

Discussion of the lysine cartel in a video produced by the American Antirust Institute: 

Jan 1995, Cartel meeting in Atlanta, Georgia: 

Arriving and showing disdain for competition authorities and customers: 

Down to business: 

 

British Airways

2004-06: on at least 6 occasions BA & Virgin discussed or informed each other about proposed fuel-surcharges on long-haul flights.  

BA alleges 3 of these 6 approaches were instigated by Virgin. 

Surcharges increased from £5 to £60 per ticket. 

OFT launched an investigation after information provided by Virgin.  

BA fined £121m and Virgin £0. 4 BA employees still await trial.   

Conclusion 

Collusive behaviour can arise either through tacit coordination or cartel behaviour. 

Competition authorities combat these alternative forms of collusion in very different ways.

Cartel behaviour is treated as per-se illegal. Leniency programmes provide incentives for participants to provide information. Severe penalties are imposed on other participants.  

 

References 

Motta, M., (2004). Competition Policy: Theory and Practise. Ch 4.

Harrington, J.E., (2006). How do Cartels Operate? 

Speech on the Lysine cartel by Scott Hammond (DOJ) in 2005:

BA case: 

OFT (2007) press release:

BBC (2007):