How a cartel operates. Evidence from Graphite Electrode Cartel from A Social Network Perspective

How a cartel operates.Evidence from Graphite Electrode Cartel: a

Social Network Perspective

Carlos Ponce (*) & Flavia Roldan (**)

(*) Universidad Alberto Hurtado—ILADES(**) Universidad ORT Uruguay

August 2016

The aim of the paper

The aim of this article

• The aim of this article is to gain understanding about howcartels work.

• To this end, we describe how a cartel operates:

• the Graphite Electrode (GE) cartel.


The aim of this article

• We explore what Levenstein and Suslow (2006) claim:

• ”Successful cartels develop mechanisms for sharinginformation, making decisions, and manipulating incentivesthrough self-imposed carrots and sticks.”

• The success of a cartel depends on the conspirators’sability to design appropriate decision making structures.

• Organizational structures should be able to challenge anyinternal and external threat.


The description of the Graphite Electrode (GE) cartel:

• How?

• What?

• What for?

• and what for?

• Why?



• What and how?:• we describe the social organization of the cartel by using

tools from social network analysis.

• What for?• to understand the main features of its internal organization,• to shed light to the main variables that contribute to shape

such structure.

• And what for?: At least two reasons:

1. Policy reasons2. It’s a part of a bigger project.

The main problem


• Why GE cartel?:

• This cartel is an example among successful profitablecartels.

• The U.S. DOJ:

1. present and future prices,

2. elimination of price discounts,

3. allocation of volume among conspirators,

4. the division of world market,

5. restriction of non-conspirator companies ’access totechnology, among other.

Related Literature

Related Literature

• Economic literatures

• Genesove and Mullin (2001)• Harrigton (2006)• Clark and Houde (2013)• Wang (2008)• Asker (2010)

• Socilogical literature

• Baker and Faulkner (1993)• Faulkner et al (2003)• Morselli et al (2007)

GE cartel: Product description

• Graphite electrodes are large carbon columns used by electric arcfurnaces (EAF) in the making of steel.

• These EAFs use graphite electrodes to generate the heat to meltscrap metal and convert it back into a marketable steel product.

• Electrodes can be up to 700 mm in diameter and 2,800 in lengthand weigh up to 2,200 kg.

• They form part of the roof structure of the furnace.

• It is necessary nine electrodes, joined in columns of three, whichare consumed in approximately every eight hours.

GE cartel: Product description

• The manufacturing process of electrodes takes approximatelytwo moths to be completed.

• There are no product substitutes for GE, other than traditionalmethods of making steel (oxygen or open hearth process).

• It is important to note that GEs make up only 6-7 percent of thecost of production in EAF.

GE cartel: Supply side

• The major producers of GE are multinational firms.

• The market is characterized by an oligopolistic structure withhigh entry barriers.

• It takes approx. 4 years to build a new plant with a capacity of20,000 tones.

• No significant new player has entered in the industry since 1950.

• Participants in the world market:

1. UCAR (US-EU)2. SGL Carbon (US-EU)3. Showa Denko (Japan)4. Others: VAW, Conradty, C/G...

GE cartel: Demand side

• The demand for GE is linked to the production of steel inEAF.

• The customers are steel producer (85% of demand).

• World electric arc steel production grew 38% between1987-1997.

• By 1997, forecasts predicted that capacity of EFA wouldincrease.

• A challenging matter in a conspiracy:• Many variants in order to match to diversity of consumer

preferences.

• The product could change by means of the length, diameteror weight.

GE cartel: The conspirancy

• The principal data source is the information publicly accessibleby the European Commission.

• It include 244 paragraphs with information about carteloperation and description.

• The conspiracy took place between 1992 and 1998 approx..


• The firms involved: SGL, UCAR, VAW, Showa DenkoK.K.(SDK), Tokai, Nippon, SEC, The Carbide Grapite GroupInc. (C/G).

• Practises contrary to competition law:

a. fix the prices of the product;b. agree on and implement a mechanism for implementing

price increases;c. allocate markets and market share quotas;d. agree not to increase production capacity;e. agree not to transfer technology outside cartel members.


• The machinery to define, to implement and to monitoragreements was by meetings:

• periodic ”Top Guy” meetings,

• regular ”Working Level” meetings,

• national and regional meetings, and

• bilateral contacts between firms.

• We concentrate on Top Guy, and Working Level meetingsand some bilateral contacts in the European market.

Theoretical framework


• A price-fixing project involves certain necessary tasks in order toaccomplish its goals.

• Price-fixing conspirators need a device that allows them tocoordinate and communicate with each other.

• Such device should be designed to challenge two crucial issues inillegal projects, namely

• efficiency, and• concealment.


Efficiency aim

• Efficiency aim of the organization structure calls for fluidcommunication among its members.

• More communication may positively impacts on carteleffectiveness:

• cartel members could be aware about cartel’s activities as awhole.

• More communication could also reduce possibility ofmisscoordination among agents.

• Face-to-face meetings, phone calls...are the devicescommonly used to coordination and communicationspurposes.


Secrecy aim

• Concealment aim calls for low level of contacts, and networks aremarked by high level of distance between participants (sparsenetworks).

• This configuration offers security but communication flow amongits members is low.

• Nonetheless, a centralized structure might be preferred:

• it reduces the number of agents with relevant informationabout illegal activities.

Social description

Social description

• The cartel studied here is organized along a set of meetings thatallow to elaborate and institutionalize cartel rules of exchange.

• A social organization structure is defined by the triple

S = {M,N, g}

where

• M is the set of meetings held by cartel members• M = {m1,m2, ...}

• N is the set of employees (or actors) who participate incartel activities:• they are executives of different rank in the hierarchy from

firms participating in the collusion.

• g is the affiliation network of relationships between thesetwo sets, i.e. M and N .

Social description

Social description

• The design of the affiliation network g implies to set themeetings, and define who goes to which meeting.

• In an affiliation network context, employees are linked amongthem only by mean of meetings; and meetings are linked amongthem only by mean of the employees.

• Additionally, it is worth to note that to assign persons tomeetings also implies to:

• define the frequency of contacts,

• the frequency of attendance to certain kind of meetings,

• the co-attendance of employees to meetings, and

• the design of meetings in regarding the rank of employeeswho attend to them among other elements.

Social organization of GE cartel


• 21 individuals (employees) and 33 meetings.

• Employees: by rank and by firms

• Rank 1= CEOs; rank 2= gral managers; rank 3= salemanagers.

• Meeting: S - I - I/M - M


Social organization of GE cartel. 1992-98

Type of meeting # meetings # attendances Avg rankS 5 27 1I 4 25 2,25

I/M 1 2 3M 14 115 2,74

Subtotal 24 169Bilateral meetings

SB 1 2 1IB 3 6 1,67

IB/MB 2 4 1MB 3 6 1,33

Subtotal Bilateral 9 18Total 33 187

Governance structure and allocation of authority

Efficiency vs. Security:Density

Efficiency vs. Security:Density

Density =#ties

(n×m)= 0.2366

• where n is the # of rows (employees) and m is # of columns(meetings).

• Among all possible ties, 23.6% are actually present.

• The collusive network is not so dense.

• Efficiency vs. Security and Density :

• as # of ties increases, more information can flow amongnodes; but

• as # of ties increases, it is more easy to discover theseillegal activities.

Efficiency vs. Security: Centrality

Degree centrality

• The degree centrality of an employee is the number of eventswith which its is affiliated.

• The degree centrality of an event is the number of actorsaffiliated with it.

• This measure gives an idea about how active is an actor or howpopular is a meeting.

• This centrality measure points out the more active nodes but, atthe same time, the more visible nodes for any external scrutiny.

• In GE cartel, employees that have more degree centrality areSGL2 followed by SGL3 and UCAR3.

• And the more central meetings are M7 (implementation ones)and M11 (monitoring meeting).


Degree centrality


Betweenness centrality

• This measure focuses on the extent to which actors sit ongeodesic paths between other pairs of actors.

• Betweenness centrality measures the ability of a node to controlflow of information.

• An event gains betweenness centrality if it contains non centralactors.

• The betweenness centrality of an event increases to the extentthat pairs of actors share only that event in common.

• Betweenness centrality captures how cartel’s designer solves thetrade-off between efficiency and security.

• Actors with highest betweenness centrality are SGL1 and SGL2.

• The highest betweenness centrality meetings is the implementingmeeting M6.


Betweenness centrality


Eigenvector centrality

• The centrality of an actor is proportional to the centralities ofmeetings to which the actor has attended; and the centrality of ameeting is proportional to centrality of members affiliated to it.

Efficiency vs. Security: Covert coordinators

Covert coordinators. Betweenness vs. Eigenvector

Concluding remarks

• We reconstruct and analyze the GE cartel from aperspective that combines elements from economic theoryand tools from sna.

• We study the internal structure of communication amongparticipants.

Concluding remarks

• The network of communication as a result of the trade-offbetween efficiency and security aims.

• The rank of individuals: key in the organization ofmeetings.

• Labor division among cartel members as a function ofexpertise and hierarchical position.

• The low level of density in the overall network may suggestcartel’s designers take care about security.

• From the analysis of different centrality measures,it ispossible to state that:• cartel’s instigators exert a role of coordinators, but• in a position such that they try to remain hidden from

antitrust scrutiny.• That is, efficiency may was limited by the security target.

Concluding remarks

• The network of communication as a result of the trade-offbetween efficiency and security aims.• The rank of individuals: key in the organization of

meetings.

• Labor division among cartel members as a function ofexpertise and hierarchical position.

• The low level of density in the overall network may suggestcartel’s designers take care about security.

• The flow of information between I and M tasks is large bycomparing with the flow of information that takes placebetween S and M tasks.

• Given the attendees of each kind of meeting: Rank 1s haveno contact with Rank3s: cartel’s designers maximizesecurity subject to a necessary level of efficiency.


Closseness centrality

• One actor might be tied to a large number of others, but thoseothers might be rather disconnected from the network as awhole.

• In a case like this, the actor could be quite central, but only in alocal neighborhood.

• Closeness centrality takes into account the distance of a node toall others in the network.

Centrality measures

Closseness centrality

• Actors with highest closeness centrality are SGL2 and UCAR2followed by SGL3 and UCAR3.

• The more closeness meetings are M6 and M7, both monitoringones .

• As less closeness centrality, more distant the node is from allother.

• In such a case, the node get less information from the networkbut, at the same time, it is more invisible to antitrustauthorities.

• It is possible to interpret that in these cases, cartel ’s designerprefers keep these nodes in a secure position rather thanprioritize the efficiency of the node.


Efficiency vs. Security:Core-periphery analysis

• Core-periphery analysis captures a notion of centralization.

• Centralization measures the extent a network is dominated by asingle node.

• Core-periphery analysis describe a network that can bedominated by a group of nodes, i.e., employees and meetings.

• Core employees attend to core meetings and peripheral actorsattend to peripheral events.

• The core is a group of cooccurring employees and events;

• Periphery consists of both a subset of employees who arenot co-attending to the same meetings, and a partition ofmeetings that are disjoint because they are not attended bythe same employees.


Efficiency vs. Security:Core-periphery analysis

Meetings

The following graph represents the similarities among meetings:

Meetings

Allocation of authority

Type of meeting Average of rankS 1I 2,25M 2,74

Meetings: Density

• Members of the cartel need to meet frequently to reachagreements and to put the agreements in actions depending onthe complexity of them.

• Attendance on meeting impacts on the success of agreementsthat have been reached.

• Joint attendance and also the continuity of attendance are goodsince cartel’s s member could be involved in a repeated game.

• Density is measured as the number of pairs in common.

• The density index for GE cartel= 2.04, i.e., in avg, a pair of

meetings have 2.04 actors in common.

Meetings

Mobilization: Density

S I M IB MB

S 3.60 0.37 0.00 0.83 0.78I 0.37 1.60 3.07 0.32 0.33

M 0.00 3.07 7.52 0.20 0.31IB 0.83 0.32 0.20 0.5 0.87MB 0.78 0.33 0.31 0.87 0.67

Employees

The following graph represents the similarities among employees:

Employees

Mobilization: Density

• The density for the co-membership matrix: avg # of meetings towhich pair of actors belong.

• Density = 2.55 that is in average, a pair of actors meet together2,55 times.

Employees

The density by taking into account the rank of employees.

1 2 3

1 3.24 0.071 0.00

2 0.071 1.96 3.70

3 0.00 3.70 12.14

Centrality measures: Employees

Centrality measures: Meetings

Motivation

Motivation

Our starting points are:

• The organizational design of a cartel is a tool to solve theproblem of moving towards the collective goals.

• It is a tool to reconcile conflicts and demands imposed bycompetition among firms participating in the conspiracy.

• The social organization must assure efficiency of its actions, andmust take into account external and internal sources ofdisruption.

Motivation

Motivation

• The social organization of a price-fixing conspiracy is a device ofcommunication among participants.

• It should has two aims: efficiency and an secrecy aim against anyexternal menace.

What we do

• Our description includes the hierarchical aspects of taskallocations among employees of firm participants.

• Internal organization of the cartel = the internal organization ofthe communication.

• Cartel designers have to define:

• the contacts, the frequency of contacts, who would be incontact, and for what.

What we do

• That implies to define:

• tasks, and• the allocation of authority of decision making.

• Some relevant issues that cartel designer should solve are:

• who and how decides on prices and on market allocations,• who and how implements such allocations, and• who and how monitors those agreements.

• In the ”who” and ”how” cartel designers have take into account:

• the market conditions, and• the aim of efficiency in functioning and protective against

any external disruption.

How a cartel operates. Evidence from Graphite Electrode Cartel from A Social Network Perspective

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