The use of economic tools to detect and assess collusive behaviour - - PowerPoint PPT Presentation

The use of economic tools to detect and assess collusive behaviour

António Gomes European Competition Day, Athens, 10 April 2014

Topics

• Cartels and collusive behaviour
• Detection in cartel enforcement
• Reactive detection methods
• Proactive detection methods
• Economic methods in proactive detection
• Complementarity between reactive and proactive detection methods
• Economic methods in collusion assessment
• Conclusions

António Gomes 1 10.04.2014

Cartels and collusive behaviour

• The most serious competition law offence
• Extremely harmful to society
• Deterring or putting to an end a cartel represents a very high value to society
• Detecting, investigating and prosecuting cartels is a priority

BUT

• Secret nature
• High incentives to maintain collusion
• Difficult to detect and prove collusive behaviour

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Detection in cartel enforcement

Detection is an essential part of cartel enforcement: 1. Authorities may act ex-ante to prevent or make difficult the creation of cartels 2. High incentives to collusion: ex-post tools are essential to stop cartels 3. Detection and punishment of cartels acts as an ex-ante tool trough dissuasion 4. The “right” mix of ex-ante and ex-post tools is necessary

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Source: Kai Hüschelrath, 2010 (partial)

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43% 36% 21%

Origin of the cartel cases condemned or being analyzed by the PCA (2003 - 2014)

Leniency Complaints Ex officio

Reactive detection methods

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1. Reactive detection methods play the main role in cartel detection 2. Main reactive methods: Complaints and leniency

Source: Kai Hüschelrath, 2010 (partial)

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3

• Very important tool to detect cartels
• Very effective because it usually ensures “hard” evidence for the case

BUT

• “cartels may remain undetected where incentives to break away from the cartel

are weak” (OECD Roundtable on ex officio cartel investigations and the use of screens to detect cartels, 2013)

• “it is often the case that cartels detected through leniency applications have

already become unstable” (OECD)

• “OFT experience suggests that leniency programmes tend to catch ‘late stage’ or

failing cartels” (Note by the UK, OECD Roundtable, 2013)

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Leniency

1. Is there an over-reliance on reactive methods, namely on leniency programmes? 2. Should competition authorities give more use to proactive methods, namely through the use of economic tools?

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Proactive detection methods

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Source: Kai Hüschelrath, 2010 (partial)

1. Collusion factors 2. Industry economic studies/Sector Inquiries 3. Market screening 4. Systematic monitoring of industry activity

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Economic methods in proactive detection (1)

• Focus on the product and market circumstances in which collusion is probable.
• Useful to (i) create an initial list of “suspect” industries and to (ii) complement

reactive detection measures (e.g. prioritize complaints).

• Relatively simple and easy to implement: do not involve complicated methods

and extensive staff and usually the data used is public and simple to collect.

• Its contribution to collusion detection (and deterrence) raises doubts: considers

the propensity to collude but does not provide evidence of its existence.

• Theoretical economics considers the factors that may influence the rationality

and stability of cartels and collusion and, as such, may be considered in structural screens: (i) Structural factors; (ii) Supply- side factors; (iii) Demand-side factors.

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Structural Screens

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• Look at market variables trough time (e.g. prices, market shares) and assess if

the observed behaviour is consistent with collusive or competitive conditions.

• The appropriate design of the behavioural screens is determinant for its

efficiency: (i) minimize false positives – false alarms – and false negatives – miss in detection; (ii) easy to implement; (iii) escaping should be costly and difficult; (iv) empirical and theoretical support is important; (v) understanding of the market and its functioning is relevant.

• It is important to identify the relevant collusive markers for the markets: these

markers will allow to distinguish between collusive and competitive behaviour (e.g. price markers; quantity markers, cost markers).

• Necessary to identify structural breaks and appropriate benchmarks for screens:

collusive markers should be compared against relevant references (different timeframes, different product markets, different geographic markets), considering additionally events leading to a change in the market functioning.

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Behavioural Screens

Economic methods in proactive detection (2)

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António Gomes 9

STRUCTURAL SCREENS BEHAVIORAL SCREENS THE PROCESS DOES NOT END HERE… The goal of screening should not be getting the final proof regarding collusion. Screening should be used to identify the markets that are worth further investigation effort by the agency in order to get “hard” evidence (e.g. invest in “education” in that sector, promote leniency in the sector; develop interviews and “dawn raids”).

Economic methods in proactive detection (3)

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Criticisms

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• Screens do not provide sufficient proof of cartelisation.
• Screens may lead to false positive and false negative results.
• Difficulties in distinguishing between explicit and tacit collusion.
• As an econometric tool, behavioral screens are subject to statistical uncertainty.
• Screens may be avoided by cartel members.
• Screens have already been tried by competition agencies and the result was not

satisfactory.

Obstacles

• Data requirements.
• Resources involved.
• Limited resources: first create capacity to deal with reactive detection.

Complementarity between proactive and reactive detection methods

António Gomes 11

&

Source: Kai Hüschelrath (partial)

Proactive and reactive methods should be used in complementary way: 1. May change the perception regarding the likelihood of detection and lead to cartel instability 2. May allow to detect stable cartels and detect cartels sooner 3. The increase in the risk of detection may be a driver to leniency applications.

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Economic methods in collusion assessment

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• Relevant to confirm the existence of the conduct

and to evaluate its effect.

• Useful to explain the context in which the conduct
• ccurred and to provide a better understanding of

its motivations.

• Theoretical and empirical use of economics in

collusion assessment in courts should be presented in a simple and intuitive, but not less precise and rigorous way.

• The economic assessment of proved cartel cases

can be used to achieve more appropriate and efficient screens for collusion detection.

(More) Proven cases Economic assessment

• f proven

cases Improve the scans for collusion detection Improve detection and prioritization

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Conclusions

• Detection is an essential part of cartel enforcement
• Reactive detection methods will remain the predominant instrument in cartel

detection

• Proactive detections methods, including economic methods, have an important

role to play

• Screens should mainly be used to flag “suspect” industries and markets and do

not provide isolated hard evidence

• Limitations of screens should be considered to achieve more efficient screens
• Reactive and proactive methods should be used in a complementary way
• More and better ex-officio investigations will contribute to more leniency

applications and to further deterrence

António Gomes 13 10.04.2014

Thank you!

António Gomes agomes@concorrencia.pt

António Gomes 14 10.04.2014