THE LAW AND ECONOMICS OF COLLUSION Overview Context: At an - - PowerPoint PPT Presentation

THE LAW AND ECONOMICS OF COLLUSION

Overview

• Context: At an industry convention, a competitor complains that

“competition is much too tough.” How should you reply?

• Concepts: antitrust, competition policy, price fixing, civil and

criminal offense, leniency

• Economic principle: crime does not pay

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Motivating example: lysine

• How the cartel worked
• How the DoJ found out about it
• Economic, legal, and personal ramifications
• Watch video from Fair Fight in the Marketplace

Price fixing and related illegal practices

• Price fixing is illegal

− Criminal offense in U.S. (Sherman Act) − Civil offense in Europe (Articles 101, 102 of Treaty of the EU)

• There may be exceptions and exemptions, e.g.:

− Some sports leagues − European airlines until early 1990s

• Related forms of collusion

− Territorial or no-customer-poaching agreements − Capacity reduction

History of anti-price-fixing law: US

• US, late 1800s: price instability led to formation of cartels
• In addition to price stability, this also brought about high prices
• Sherman Act, 1890. Sections 1 and 2 prohibit such contracts.

Felony (prison sentences).

• Some practices per-se illegal. Otherwise, rule of reason is applied.
• Important precedents: GE and Westinghouse, Airline tariff

publishing (non-explicit collusion)

Top recent DOJ fines

Sherman Act Violations Yielding a Corporate Fine of $10 Million or More Defendant (FY) Product Fine ($ M) Country

• F. Hoffmann-La Roche, Ltd. (1999)

Vitamins $500 Switzerland LG Display Co., Ltd LG Display America (2009) LCD panels $400 Korea Soci´ et´ e Air France and Koninklijke Luchtvaart Maatschappij, N.V. (2008) Air Transportation (Cargo) $350 France (SAF) Netherlands (KLM) Korean Air Lines Co., Ltd. (2007) Air Transportation (Cargo & Passenger) $300 Korea British Airways PLC (2007) Air Transportation (Cargo & Passenger) $300 UK Samsung Electronics Company, Ltd. Samsung Semiconductor, Inc. (2006) DRAM $300 Korea BASF AG (1999) Vitamins $225 Germany CHI MEI Optoelectronics Corporation (2010) LCD panels $220 Taiwan Hynix Semiconductor Inc. (2005) DRAM $185 Korea Infineon Technologies AG (2004) DRAM $160 Germany

Source: http://www.justice.gov/atr/public/criminal/sherman10.html

History of anti-price-fixing law: EU

• EU Treaty Article 101 (formerly Article 81, formerly Article 85 of

Treaty of Rome). Initial precursor: Treaty of Paris (1951).

• Important precedent: Wood pulp (jurisdiction)
• National regulations, esp. UK (civil and criminal offense)

Public and private litigation

• Almost 90% of antitrust enforcement in U.S. through private civil

suits; almost none in the European Union.

• Clayton Act: treble damages (private litigation quite attractive)
• Example: Sun Microsystems 2002 private federal antitrust lawsuit

against Microsoft: using monopoly in PC operating systems market to undermine the success of Sun’s Java technology.

• Later Sun also filed a complaint with the European Commission
• Former EC Commissioner Mario Monti: Europe should consider

allowing U.S.-style private lawsuits

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Leniency programs

• First introduced by DOJ in 1978
• Major revision in 1993

− Less legal uncertainty − Automatic amnesty (still discretionary if report received after an investigation under way) − Significant increase in activity: from 1/year to 2/month reports

• Similar programs in UK, EU, Japan, etc

What determines fines?

• Study by Connor based on US plea bargains.
• Average fine discount w.r.t. maximum fine: 70%
• Fine discounts lower for 2nd, 3rd, etc. plea bargain in each case
• No relation between fine and harm produced by firm
• Fines depend greatly on cartel characteristics: higher fines for

international cartels, bid-rigging schemes

• Leniency higher during Bush II than during Clinton

Evaluating leniency programs

• Performance measures

− Fines − Number of cases

• Fairness

− Example: Diana Brooks and Christopher Davidge

• Over-enforcement

− Private suits − No double jeopardy (why so few in Portugal?)

Mini-case: BA and VA

• Why did BA call VA?
• Are fuel surcharges illegal? Is it illegal for both airlines

to set the same surcharge?

• How would you structure a leniency program?
• Is it fair that two firms are treated differently for the

same crime?

• Are you in favor or against leniency programs?

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Facilitating practices

Def: institutional features that make collusion easier

• Price transparency (published prices)
• Most favored customer clause
• Meet the competition clauses
• Examples:

− GE and Westinghouse and DuPont and Ethyl − Ready-mixed concrete in Denmark − Federal Election Campaign Act and Medicaid reimbursement rules

Ready-mixed concrete in Denmark

Jan-94 Apr Jul Oct Mar-95 Jun Nov 300 350 400 450 500 550 Average 10-MPa Concrete Prices in ˚ Arhus Time

Mini-case: GE and Westinghouse

• What was GE thinking in 1963?

How did Westinghouse react and why?

• What was the DOJ case in 1974?

How would they have fared in court?

• How does the current legal doctrine treat facilitating

practices?

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Non-price agreements

• Research related agreements

− Common standards − Joint R&D − Patent pools

• Information exchange

− Industry associations − Demand and cost data

Exemptions and exceptions

• Major League Baseball; other sports in US
• English Premier League
• European airlines until 1990s
• Export cartels
• Joint marketing programs

Outline

• Collusion: US and EU law
• Leniency programs
• Facilitating practices
• Allowed horizontal agreements
• Cases

Wood pulp

• Wood pulp prices are announced at regular intervals;

competitor prices tend to move in tandem.

• European Economic Community (EEC) initiates

investigation (1977)

• Non-EEC defendants (Finland, US and Canada)

challenge to jurisdiction

• European Courts side with Commission on jurisdiction:

effects doctrine (1988)

• Courts strike down collusion case: price parallelism can

be viewed as the result of collusion only if there is no

• ther explanation for it

Sotheby’s and Christie’s

• The companies: both founded in England, offices in

many countries. Close to 100% art auction market

− Sotheby’s: based in NY; $3bn turnover − Christie’s: based in London; private since 1999

• Revenue sources: fees over “hammer” price

− Seller’s (or vendor’s) commission − Buyer’s premium − Vary by amount, type of auction; special deals

Sotheby’s and Christie’s

• After late 1980s boom, market collapsed in early 1990s

(Japan economic crisis → drop in demand)

• Fierce competition, low profits
• November 1992: Sotheby’s announces increase in

commissions; Christie’s does the same one month later

• March 1995: Christie’s announces increase in sellers’

fees; Sotheby’s does the same one month later

• June 1996: UK OFT initiates informal inquiries
• June 1997: DoJ subpoenas files from the two houses

Investigation, leniency, conviction

• 1998: Fran¸

cois Pinault buys Christie’s for $1.2 billion. Christopher Davidge replaced as CEO

• Late 1999: Christie’s lawyers prepare for government

investigation, uncover evidence of conspiracy

• January 2000: Christie’s agrees to amnesty conditional
• n Davidge cooperating with DOJ. Davidge paid large

sum for doing so

• Early 2000: Ms. Brooks receives permission from

Sotheby’s to do the same but is too late

• September 2001: Ms. Brooks and Sotheby’s plead

guilty (on seller’s commissions)

Court findings

• Mr. Taubman and Sir Anthony met on 12 occasions at

Taubman’s London flat, New York residence

• Ms. Brooks and Mr. Davidge met repeatedly, reporting

to Taubman and Tennant. JFK meeting

• Agreement was established on common fees, no

customer poaching, no special deals to customers (with exceptions)

Court sentences

• April 22, 2002: Mr. Taubman sentenced to a year and

a day in prison and fined $7.5 million

• April 29, 2002: Diana Brooks sentenced to three years
• f probation, including six months of house arrest;

fined $350,000 and ordered to perform 1,000 hours of community service

• Mr. Davidge marries former Chritie’s employee in
• India. Guests paid first-class tickets
• Sir Anthony Tennant refused to testify in US, could

not be extradited from UK. Died in 2011

• Also: civil suit

Sotheby’s and Christie’s: takeaways

• Price fixing is not limited to commodities
• Top management liability conditional on awareness
• Communication isn’t always necessary to maintain high

price equilibrium

Chocolate price fixing

• Class-action suit in Canada (2008)

− Chocolate majors conspired to increase prices − Discussions at trade shows and association events − Total settlements C$23.2m (from Mars’ C$3.2m to Nestl´ e’s C$9m)

• Mars and Nestl´

e still face criminal charges (Canada Competition Bureau). Hershey off the hook through leniency program

Chocolate price fixing

• Class-action suit in US

Nothing scandalous or improper has been discovered within our borders, and no evidence permits a reasonable inference of a price-fixing agreement.

Chocolate price fixing

• German Cartel Commission (2013)

− Fines over e60m ($82m) − Mars escaped financial penalty as one of the initial whistleblowers

Chocolate price fixing: takeaways

• Transporting evidence across jurisdictions
• Leniency is jurisdiction specific
• Private suits
• Paying damages in class action suits

eBooks

• Wholesale model (Amazon): publisher sets price w,

retailer sets price p and pays w to publisher.

• Agency model (Apple): publisher sets retail price p,

retailer keeps α p. Apple’s α = 30%

• Amazon’s ebook price point: $9.9
• Apple’s proposal to publishers: tiers up to $14.99
• Also: Apple forces MFN clause: if publisher sells for

less than $14.99, Apple has the right to lower price accordingly

eBooks

• Steve Jobs’ idea: help publishers push Amazon to

agency model. In fact, require publishers to move e-tailers to agency.

− Apple’s benefit avoid retail price competition: iPad will beat Kindle on device quality − Publisher’s benefit: fix Amazon’s low pricing problem

• But α = 30% is very high!
• Hachette, Penguin, Random House, HarperCollins,

Macmillan and S&S accept; Random House declines

eBooks

• DoJ’s case (April 2012): Apple’s proposal is a scheme

to increase prices in a coordinated manner

• Hachette, HarperCollins, Simon & Schuster, Macmillan

and Penguin deny wrongdoing but agree to settle (December 2013)

• Pay $166 million to customers (call 1-866-621-4153)
• Federal judge finds (July 2013) Apple violated antitrust

law in helping raise the retail price of e-books

• Case is on appeal
• Note: decision does not imply that agency model or

MFC clauses are illegal

eBooks: takeaways

• Collusion is not limited to smoke-filled room price

fixing: facilitating practices can be deemed anti-competitive (cf GE and Westinghouse)

• Decision does not imply that agency model or MFC

clauses are illegal per se (difference w.r.t. rule of reason)

eBay hiring

• DoJ files a series of civil antitrust suits against Adobe,

Apple, eBay, Google, Intel, Intuit, Lucasfilm, Pixar.

• Claim: “no cold call” agreements. Specifically, senior

executives of eBay and Intuit agreed not to recruit employees from each other

• District court finds agreement, if proven, constitutes

naked horizontal market allocation agreement: manifestly anticompetitive, per se unlawful

• Settlements reached with various companies, most

recently eBay (May 2014)

eBay hiring: takeaways

• Illegal horizontal practices are not restricted to sellers’

actions (monopsony power)

• Illegal horizontal practices are not restricted to setting

prices (e.g., limit competition clauses)

Synthetic rubber

• EC fines ENI and Versalis e272.25 million for

participating in the synthetic rubber cartel (Nov 2006)

• Fine includes a 50% increase due to recidivism: firms

had already participated in Polypropylene (1986) and PVC II (1994) cartels

• In January 2008, Bayer and Zeon are also fined for

cartelization.

− Bayer’s and Zeon’s fines are reduced by 30% and 20%, respectively, under the EC leniency program − However Bayer’s fine is increased by 50% because it had been fined for cartel activity in a previous Commission decision.

Synthetic rubber: takeaway

• Wishful thinking

This is the fourth cartel decision in the synthetic rubber industry in just over 3 years. I hope that this is the last. Buyers of synthetic rubber should be concerned about how much these cartels have cost them. And shareholders should be concerned about how much the fines have cost them. — Competition Commissioner Neelie Kroes

• Cartels on commodities abound, will probably never

end (cf Adam Smith)

The Libor scandal

• To set Libor and Euribor rates, banks submit rates at

which they would be prepared to lend money to one

• another. Then British Bankers’ Association (BBA)

drops the four highest and four lowest, averages the remaining into one rate — LIBOR

• Evidence that traders benefited from falsely reported
• rates. Net lenders ⇒ tendency to push rates up
• In December 2013, EU fines group of global financial

institutions a combined e1.7 billion ($2.3 billion) to settle charges (largest combined fine in EC history)

The Libor scandal

Overall takeaways

• Big temptation to agree with rivals on price increases
• Crime does not pay: fines and jail sentences are common
• Leniency programs have made it worse for firms
• Explicit and implicit collusion; per se illegality and rule of reason