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Investigating Agreements that Restrain Trade
Mark WoodwardAfrican Competition Forum Workshop
March 25, 2013
The Chain of Production
VERT ICAL
HORIZONTAL
Supplier
Manufacturer
Wholesaler/ Distributor
Retailer
Supplier
Manufacturer
Wholesaler/ Distributor
Retailer
Customers (End Users)
Supplier
Manufacturer
Wholesaler/ Distributor
Retailer
3
Anticompetitive Horizontal Agreements
• Agreement
• Among two or more competitors– i.e., at same level in distribution chain
• That unreasonably restrains trade
4
Anticompetitive Horizontal Agreements
• No written contract or other written agreement is required– And wouldn’t be expected in price-fixing agreements
• Under U.S. law, no express verbal agreement or understanding is required
• Rather, a “a conscious commitment to a common scheme”
5
Price-Fixing Cartels Are Different from Legitimate Joint Conduct
• Usually carried out in secret• Never create benefits that offset harm to
consumers– Unlike publicly announced joint ventures, joint
research agreements, or distribution agreements, which may promote efficiency and competition
• Rather, raise prices, restrict output, and inhibit innovation and efficiency
• Harm national economy by reducing output, undermining competitiveness of business purchasers, and distorting best allocation of resources
6
Why Do Price-Fixing Cartels Form?
• Competitors want to make more money• If they can limit competition through a
cartel, they can earn monopoly profits by producing less and selling for higher prices
7
Adam Smith, The Wealth of Nations (1776)
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
8
Universal Concern with Price- Fixing Cartels
• OECD – “the most egregious violations of competition law”
• U.S. Supreme Court – “the supreme evil of antitrust”
• In U.S., detection, prosecution, and deterrence of cartels is high priority– Handled by U.S. Department of Justice
9
Anticompetitive Horizontal Agreements
• Agreement – Conscious commitment to a common scheme
• Among two or more competitors– i.e., at same level in distribution chain
• That unreasonably restrains trade– For cartels, proof of anticompetitive effects
typically not required
10
Preventing Price-Fixing Cartels
• Fundamental responsibility of antitrust enforcement officials
• Also one of the most difficult, because cartels almost always try to hide their actions
11
Forms of Price Fixing
• Agreements among competitors to:– Charge same prices– Increase prices or not reduce prices– Eliminate or reduce discounts– Establish minimum prices– Establish standard pricing formula
12
Conditions Favorable to Creation of Price-Fixing Cartels
• Small number of sellers– Easier to agree on prices– Easier to make sure everyone maintains agreement
on prices
• Other products cannot easily be substituted• Product is standardized• Sellers have opportunities to communicate (e.g.,
through trade association)
13
Conduct That Indicates Possible Price-Fixing Cartel
• Competitors are adopting similar, large price increases that do not appear to result from external forces (e.g., increases in the cost of inputs)
• Competitors meet or communicate regularly, particularly if they discuss prices
• Representatives of a firm make suspicious statements, such as– Any reference to industry-wide or association price schedules– Advance (non-public) knowledge of a competitor’s pricing– Acknowledgments that competitors have discussed pricing
14
Trade Associations
• Many trade association activities do not raise competitive concerns
• Trade associations can bring together large numbers of competitors – Opportunity for anticompetitive conduct, even if rare– Knowledge of competition rules important
• Any trade association announcement of an industry-wide price increase is highly suspicious
• Some trade association meetings can be used as facade for price-fixing discussions
15
Example: Lysine Cartel - European Feed Additives Association
• MIMOTO: So uh, if we use this, uh, plenary meeting as a cover, then our name is on the, uh, minutes of the meeting.
CHAUDRET: As it is here.
MIMOTO: Yes.
WILSON: (ui)
MIMOTO: Many commercial people and some technical people.
WILSON: Right.
MIMOTO: And we have to really discuss the real matter.
WILSON: Yeah. Absolutely.
MIMOTO: On maybe next day we will have a price talk?
WILSON: That's right.
CHAUDRET: Yeah.
16
Forms of Bid Rigging
• Agreements among competitors to:– Bid or not bid on contract– Predetermine winning bidder– Take turns on being lowest-price bidder that wins
contract– Submit complementary bid, an intentionally high bid
designed to lose contract– Arrange a payback (in form of money, subcontract,
another project, or some other consideration) for losing bidders
17
Indications of Possible Bid-Rigging Agreements
• Similarities in bids of different firms -- e.g., identical calculations or notations (indicating that one firm may have prepared more than one bid)
• A bidder requests a bid package for itself and a competitor or submits both his and another firm’s bids
• A firm submits a bid when it is incapable of successfully performing the contract
• Representative of a bidder states that a particular contract “belongs” to a competitor
18
Example: Guam Typhoon Relief
19
Executive’s Decision to Agree to Fix Prices
• Premeditated decision
• Classic cost-benefit analysis
• Executives weigh:– Rewards: money, market share– Risks: likelihood of getting caught, severity of
punishment
• Possibility of detection and punishment thus significant potential deterrents
20
Detection: Documents
• Best documentary evidence: paper or electronic records that reflect or refer to agreements with competitors
• Next best: records that prove competitor meetings
21
Investigative Tools in U.S. for Securing Documentary Evidence of Price-Fixing Cartels
• Search warrants (require probable cause, order approved by judge)
• Subpoenas (compulsory demands)
• Voluntary production of documents by cooperating companies
22
Evidence of In-Person Meetings & Conversations – Paper Records
– Appointment books– Calendars/diaries– Notebooks– Travel itineraries– Travel records– Expense records
23
Evidence of In-Person Meetings & Conversations – Electronic Records
• Files on laptop computers, handheld devices– Meeting minutes– Unidentified notes– Charts, tables, graphs– Memos
• E-mail messages– Setting up meeting dates, times, locations– Post-meeting communications
24
Evidence of Telephone Calls & Conversations
• Paper Records in Caller’s Office– Telephone message slips– Handwritten notes of calls
• Telephone Billing Records– Identify date and time of calls– Identify numbers called– Can be matched to competitors’ numbers
25
Witness Interviews in Price-Fixing Investigations
• Carefully consider your goals before an interview– Always prepare an outline before an interview
• Think carefully about which topics witness is competent to talk about – What was witness’s involvement with pricing at his
company?– Was witness in a position to have:
• First-hand knowledge of price fixing?• Direct communications with competitors?• Second-hand information about possible price fixing?
26
Increasing Importance of International Cooperation in Price-Fixing Investigations
• Growing consensus among antimonopoly enforcement officials worldwide that price-fixing cartels harm consumers and economies
• Increasing convergence among enforcement officials worldwide on approaches to investigating price-fixing cartels – e.g., leniency programs
• Increasing cooperation among enforcement officials in investigations – e.g., coordination of investigations, information sharing
• Ongoing efforts to share best practices and to develop joint training programs – e.g., International Competition Network
27
Other Horizontal Agreements
28
Anticompetitive Horizontal Agreements
• Agreement – Conscious commitment to a common scheme
• Among two or more competitors– i.e., at same level in distribution chain
• That unreasonably restrains trade– For non-cartel agreements, proof of
anticompetitive effects typically is required
29
Non-Cartel Horizontal Agreements
• Often not secret
• May involve some integration of economic activities among competitors, but also may raise costs to consumers through the creation and exercise of market power
• Some examples:
1. Trade association rules
2. Cooperatives
3. Joint ventures
30
Potential Efficiencies from Horizontal Agreements
• Economies of Scale– When costs falls with increasing output– Can be found in production, purchasing, distribution,
warehousing, marketing, advertising, and research and development
• Economies of Scope– When it is cheaper to produce two products together
than it is to produce them separately
• Sharing or Spreading of Risk
• Practical Test: Is the whole greater than the sum of its parts?
31
Non-Cartel Horizontal Agreements: Questions to Ask
• What is the restraint?
• What is its effect on price and output?– Will the restraint inherently tend to suppress
competition?
• Are there any legitimate justifications? (plausible offsetting benefits to competition)
• Can you make a detailed showing that harm is likely?
32
Example: GM/Toyota Joint Venture
• General Motors and Toyota entered joint venture to produce small cars
• Questions to ask:– What effect on price?
• E.g., via sharing of production information
– What effect on output?– What offsetting benefits?
• What efficiencies from GM learning Toyota management techniques?
• What efficiencies from Toyota learning about American workforce?
33
Example: FTC “Three Tenors” Case
• Two record companies agreed not to advertise or discount Three Tenors’ First CD or Three Tenors’ Second CD during joint introduction of Three Tenors’ Third CD
• Questions to ask:– What effect on price?
• E.g., when consumer access to information about alternative products restricted
– What effect on output?– What offsetting benefits?
• E.g., avoiding “free rider” problem from joint venture
34
Example: FTC v. Cephalon
• Agreements to delay generic drug entry in pharmaceutical patent litigation settlements with simultaneous side business deals
• Questions to ask:– What effect on price?
• What effect from delayed generic drug entry?
– What offsetting benefits?• What benefits from settlement of patent litigation?• Are side business deals legitimate, efficiency-enhancing
agreements?
35
Resources
• DOJ Criminal Antitrust Web Site:– http://www.usdoj.gov/atr/public/criminal.htm
• FTC/DOJ Antitrust Guidelines for Collaborations Among Competitors– http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf