HVA KJENNTEGNER

KARTELLER - NORSKE OG

FINSKE HISTORISKE

KARTELLER? Frode Steen

Bergen BECCLE, 25. mars 2014

The presentation

• Summarizes some findings from the last years work

on legal cartels: - Joint Finnish work: «The Anatomy of Cartel Contracts»

coauthored with Ari Hyytinen and Otto Toivanen: 109 nationwide industry cartels between 1950 and 1990 - New coding work on Norwegian legal cartels: 749 cartels

between 1955 and 1991 (Part of an international research project (SEEK) coding an comparing cartels across Austria, Sweden, Norway, Finland and the US, Norwegian data coded by Dag Olav Lillefosse)

“A nation built on cartels” (Historian Markku Kuisma (2010) on Finland).

Motivation

• How to improve the effectiveness of competition policy wrt.

cartels?

• Better understanding of how cartels work.

• Lack of data has inhibited progress.

• Our research: Use data on legal cartels to understand what

cartels contract on the anatomy of cartel contracts.

• Legal cartels can contract on things illegal cartels would like

to contract on.

• Knowledge of (legal) cartel contracts provides

- information on how cartels operate.

- a basis for new theoretical research.

3

Key questions:

1.What do cartel contracts look like?

2. How much variation is there?

3. Do some contract features appear together / separately?

4

• Benefit of legal cartels: We observe the contracts in great detail for a non-

(less-) selected sample.

• Illegal era cartel contracts potentially more incomplete.

• Legal cartels face the same internal incentive problems that illegal cartels

face.

The institutional environment for legal cartels

• In the Nordic countries as well as several European countries

cartels were legal in the period after WorldWar II and all the

way up to the late 80-ies/beginning 90-ies

• The only requirement was that you had to register, and the

registry was typically maintained and run by the competition

authorities

• These registries represents unique knowledge so far not

analyzed

• Within the SEEK project we have access to more than

6000 cartel contracts across 5 jurisdictions

5

Finnish Legal Cartels

• Prior to 1958, no competition law.

• 1958: Registry established. Registration of cartels on initiative of

the authorities.

• 1962: Cartels with an organization need to register.

• 1973: Responsibility to register further enlarged.

• 1988: FCA established. Right to abolish harmful cartels. Cartel

contracts no more legally binding.

• 1993: Cartels illegal.

Purasjoki and Jokinen (2001): “Time was such that there

seemed no need to intervene even in clear-cut cases,

especially if they had been registered. Registration had been

transformed into a sign of acceptability of the [cartel]

agreement, at least for the parties involved [in the cartel]".

6

Norwegian Legal Cartels

• 1954

As of March 19th all larger firm agreement and competition regulation agreements

were obligated to register in the registry. The registry was managed by the

Norwegian Price Directorate (‘Prisdirektoratet’).

• 1957

October 18th 1957 wholesalers were no longer allowed to fix prices and markups

for retailers. Recommended retail prices could be provided by single wholesalers.

• 1960

July 1st 1960: All forms for cooperation on and markups made illegal - But still some industries had exemptions that later were removed: Banking (removed 01.01.84 –

but delayed by three months), Insurance (removed 01.07.84, but delayed by 8 months), Newspapers exempted 1975-1990)

• 1969-1983

Price regulation i various forms (Price freeze periods, cost defined regulated price

increases)

• 1993

June 11th 1993: New competition law and the Norwegian Competition Authorities

was established (January 1994), replacing the Norwegian Price Directorate, Cartel

registry abolished

The Authority view:

Despite the apparent reduced scope for cooperation

over the period, these were not really binding:

Egil Bakke, 1992: «The liberal dispensation practice (in the 1954-

1971 period) mirrored the fact that there existed a positive attitude

towards Norwegian firm cooperating»

“Highlights from the history of the Norwegian Price Directorate, 1917-1992”, (p.10)

Egil Bakke, Former price director of the Norwegian Price directorat

9

VOA011

Sales representative view:

Oskar Magnus Jakobsen, sales rep. paper (75 years) Dagens Næringsliv, February 5. 2005

”Which advice do you have to those who want to

start their own business?

- I will not recommend anyone to start on their own.

Everybody are fighting, it is very tough out there. In all

branches. When I was young we were 12 competitors

that traveled around. We met in Stavanger and shared

the customers equally among ourselves. It was a

wonderful life. Everyone were freemasons. Now the sales

representatives run like crazy. They walk over your dead

body!

HANSA

RINGNES

AAS CB

A Norwegian example:

The Beer cartel

MACK

And the agreement between the

breweries

• Prices will not be increased…

• Only one sales agent per area

• If more sellers, common sales agent required

Beer cartel Oslo

• Frydenlund and Ringnes share the market within

Oslo and close to Oslo

Beer

cartel

• Oslo

breweries

more sales

close to

Oslo than

far from

Oslo

Anatomy of cartels in Finland Data source: The Finnish Cartel Registry maintained by the FCA.

• The Registry contains data on 900 legal cartels

(it is known that the Registry is not complete).

• For each cartel, there exists a folder containing at least

- the contract.

- the correspondence between the cartel and the Registry and

- Other documents from press etc

• Semi-structured approach, quantification of contracts.

• For each 4-digit manufacturing industry for which there is

a cartel, we pick the first one.

• This yields 109 nationwide manufacturing cartels.

• 4 economic dimensions: 18 contract clauses

14

Why do Cartels Need Contracts? They have to agree on two issues

• How to raise profits:

- (i) Market Power Attributes (MPA)

• How to deal with instability:

- (ii) Incentive Compatibility Constraint (ICC)

- (iii) Internal Cartel Organization (ICO)

- (iv) External Cartel Contract (ECC)

15

The 18 contract clauses

• (i) Market Power Attributes (MPA)

- 1 Pricing.

- 2 Market-allocation.

- 3 Non-competition / specialization.

- 4 Efficiency.

- 5 Technology.

- 6 Non-price.

16

The 18 contract clauses

• (ii) Incentive Compatibility Constraint (ICC)

- 1 Monitoring.

- 2 Enforcement.

- 3 Expel.

- 4 Fine.

17

The 18 contract clauses

• (iii) Internal Cartel Organization (ICO)

- 1 Meeting.

- 2 Dispute-resolution.

- 3 Structure.

- 4 Vote.

- 5 Sales association.

18

The 18 contract clauses

• (iv) External Cartel Contract (ECC)

- 1 New members.

- 2 Non-cartel supply.

- 3 Entry.

19

Economic dimensions: Usage

20

• Almost all cartel use MPA.

• More than 70% use ICO and

ECC.

• Only half use ICC.

Economic dimensions: Usage

21

1. Cartels economize on contract clauses: Intensity of

usage not very high.

2. Distribution skewed: 90% use top-5 contracts.

How to understand the contract structure? All cartels need to raise profits and deal with instability!

• Two stages approach:

1. Start from MPA

(raise profits)

2. Continue with ICC,

ICO and ECC

(deal with instability)

22

Step 1: How to raise profits Unconditional correlation of MPA clauses

• Three types of contracts seem to emerge:

1 Pricing contracts: Pricing negatively correlated with others.

2 Market allocation: Market allocation not correlated with others except efficiency

3 Non-competition/specialization and Technology: ”hand in hand”

23

pricing market

allocation

efficiency technology non price

market allocation -0.116 1

efficiency -0.216** 0.272*** 1

technology -0.532*** 0.081 0.180* 1

non price 0.302*** 0.044 -0.124 -0.147 1

non comp spez -0.698*** 0.036 0.310*** 0.546*** -0.222**

NOTES: ***, **, and * refer to statistical significance at the 1, 5, and 10% levels.

Cluster analysis of all 18 dimensions supports this.

24

Concentration in contracts: Of 2^18-1 = 262 141 potential contract combinations we find 77

3 clusters emerges Clear pattern around Non Comp Spez (North/West corner) and Pricing

(South/East corner), more scattered around Market Allocation

(ICO) Structure

(ICO) Vote

(ICO) Association

(MPA) Pricing

(ECC) New members

(ICC) Excpel

(ICO) Meeting

(MPA) Market allocation

(MPA) Efficiency

(MPA) Non price

(ECC) Entry

(ICC) Monitoring

(ICC) Enforcement

(ICC) Fine

(MPA) Technology

(MPA) Non comp spez

(ECC) Non cartel supply

(ICO) Dispute resolution

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77

8-10 6-8 4-6 2-4 0-2

Step 2: How do cartels deal with instability: Unconditional correlation between MPA and other

economic dimensions

25

pricing market

allocation

efficiency technology non price non comp

spez

ICC 0.236** 0.448*** 0.022 -0.151 -0.002 -0.368***

monitoring 0.173* 0.443*** -0.012 -0.114 0.011 -0.266***

enforcement 0.085 0.483*** 0.198** -0.044 0.087 -0.175*

expel 0.215** -0.002 -0.058 -0.117 -0.111 -0.289***

fine 0.09 0.279*** -0.030 -0.089 0.048 -0.169*

ICO 0.317*** 0.226** 0.05 -0.236*** -0.012 -0.370***

meeting_new -0.014 0.121 0.152 -0.115 -0.124 0.036

dispute -0.357*** 0.339*** 0.233** 0.278*** 0.001 0.304***

structure 0.316*** 0.074 -0.054 -0.251*** -0.145 -0.371***

vote 0.436*** 0.082 -0.070 -0.284*** 0.042 -0.412***

association 0.486*** 0.076 -0.047 -0.334*** 0.137 -0.565***

ECC -0.293*** 0.086 0.028 0.293*** -0.111 0.263***

new 0.395*** -0.082 -0.095 -0.406*** -0.055 -0.500***

non cartel supply -0.529*** 0.212** 0.155 0.587*** -0.032 0.561***

entry -0.380*** -0.015 -0.030 0.313*** -0.099 0.417***

NOTES: ***, **, and * refer to statistical significance at the 1, 5, and 10% levels.

Step 2 (cont.)

How do cartels deal with instability:

• Choosing one of the three contract groups that clusters

around the most prevalent MPA clauses has implications

to the rest of the contract

- Pricing

Positively correlated with ICC and ICO, negatively/not at all with ECO

- and Market Allocation:

Positively correlated with ICC and ICO, negatively/not at all with ECO

- Non-competition&spezialization:

Negatively correlated with ICC and ICO, positively with ECO

• NEXT QUESTION: Is this robust when we control for

cartel heterogeneity: Cartel-/Industry- and Macro controls

26

Statistical analysis: Heterogeneity and

contract design

• Size of the cartel is associated with the choice of how to raise

profits: - (weakly) positively correlated with the use of Pricing, - negatively with the amalgam of Non-Comp-Tech, - uncorrelated with Market Allocation.

• Homogenous goods industries use more (positively correlated with)

Market Allocation.

• Cartel size is mostly positively associated with the use of instability

clauses in ICC, ICO and ECC.

• The relationship between the three most commonly used MPA

contract types is robust to cartel-/industry heterogeneity and

business cycle conditions. - However, the relations between the three most commonly used MPA clauses and the

instability clauses get weaker.

Observables, in particular cartel size and to what extent one is in a

homogenous industry, drive many of the unconditional correlations.

27

Statistical analysis: Complexity of contracts

• # contract clauses and # pages are positively correlated

with the number of members - An increase in the number of members raises the cost of relying on informal

agreements as opposed to relying on formal contract clauses. - But: The correlation with # pages becomes insignificant when we include

macro/industry controls

• The degree of product differentiation is not correlated

with # clauses, but cartels in homogenous goods

industries have shorter contracts. - Suggests that homogenous goods industries have less need to contract on

product characteristics and quality, as conjectured already by Stigler (1964).

• Cartels using Market Allocation contracts write longer

contracts. - Suggests that these forms of cooperation are more complicated than, e.g., the

agreements to not compete or to specialize.

28

Some

preliminaries

on Norwegian

cartels

What is coded?

Industry # %

Cars etc. 11 1.47

Construction and building work 43 5.74

Construction Material 53 7.08

Retailers grocery stores 73 9.75

Various consumer goods 24 3.2

Electrical equipment and electrical articles 30 4.01

Energy 5 0.67

Health and pharmaceutical products 17 2.27

Chemical products 30 4.01

Mechanical industry, machinery, boats 19 2.54

Metals 9 1.2

Metal goods 64 8.54

Petroleum products 6 0.8

Food and beverages 69 9.21

Textiles 49 6.54

Transport 96 12.82

Transport centrals 88 11.75

Pulp and paper 41 5.47

Lumber 22 2.94

Total 749 100

Some Norwegian figures (i)

• Cartel members 0

.01

.02

.03

.04

.05

Den

sity

0 50 100 150 200 250n_upstream

Obs Mean Std. Dev.

< 250 members 601 30.1 43.5

> 250 members 71 4083.8 10691.2

Examples of

huge cartels:

-Loggers

-Transporters of

timber

-Doctors

-Veterinaries

-Child delivery

nurses

Some Norwegian figures (ii)

• First time registrations in registry

0.1

.2.3

Den

sity

1950 1960 1970 1980 1990reg_year

reg_year Freq. Percent

1955 284 37.92

1957 120 16.02

1958 9 1.2

1962 69 9.21

1964 36 4.81

1965 22 2.94

1966 30 4.01

1967 59 7.88

1972 26 3.47

1977 14 1.87

1983 20 2.67

1989 54 7.21

1990 3 0.4

1991 3 0.4

1989, project launched

To make priority to the registry

Work: ‘Active Authorities’, all cartels

were to be visited next three years:

The project: «Active authorities»

• Three years: 1989-1991, visiting all registered firms

• The idea was that the registry was very helpful also as an information

source, and by updating all information the competition would work better.

• Conclusion: Results did not correspond to ressources used...

‘To fulfill the requirements from the registration law, both the firms and the

authority had to spend so much resources that the system could not be

defended’

Halvorsen and Undrum, (p. 74. 1995)

• This experience was one of the major reasons that the new competition

law did not continue the registration requirements

Some Norwegian figures (iii)

• Births

0

.00

5.0

1.0

15

.02

.02

5

Den

sity

1850 1900 1950 2000birth

One cartel also born

In 1730

0

20

40

60

80

100

120

140

160

180

200

1955 1957 1958 1959 1962 1967 1972 1977 1983 1985 1989 1990 1991

Some Norwegian figures (iv)

• 703 Exits – as measured

by last registration

New rule introduced in 1957:

price fixing illegal

1967: more puzzling

Last

registration Freq. Percent

1955 1 0.14

1957 180 25.6

1958 5 0.71

1959 1 0.14

1962 66 9.39

1967 165 23.47

1972 55 7.82

1977 48 6.83

1983 76 10.81

1985 1 0.14

1989 6 0.85

1990 20 2.84

1991 79 11.24

Total 703 100

Some Norwegian figures (v) - Duration 0

.01

.02

.03

.04

Den

sity

0 20 40 60 80 100duration

Total 8 100.00

227 1 12.50 100.00

138 1 12.50 87.50

123 1 12.50 75.00

110 1 12.50 62.50

109 1 12.50 50.00

107 1 12.50 37.50

105 1 12.50 25.00

103 1 12.50 12.50

duration Freq. Percent Cum.

. tab duration if duration>100

8 outliers:

N=661

Average: 25.51

How to raise profits in Norway?

Aggregated to Finnish clauses

36

96%

82%

26%

5%

9%

24%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MPA price market_allocation non_comp_spez technology non_price

How to raise profits in Norway? Pricing clause disaggregated

37

49%

21%

2% 0% 0%

13% 15%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.27%

How to raise profits in Norway? Other MPA-clauses disaggregated

38

6% 5% 3%

15%

5% 3% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Market allocation

What about MPA, ICC, ICO and ECC usage

Norway vs Finland

39

MPA ICC ICO ECC

Norway 0.96 0.27 0.31 0.33

Finland 0.96 0.52 0.85 0.73

• «How to raise profit»:

MPA(Norway) = MPA(Finland)

• «How to deal with instability»

Clauses less used in Norway

• ICC lowest usage both contries,

but most clearly in Finland

What about within correlation in Market power

attributes (MPA)

• Some similarities even in

correlations despite different

definitions of MPA

• Still Three types of

contracts: 1.Pricing contracts: Pricing negatively correlated with others. 2. Market allocation: Market allocation not correlated with others 3. Non-competition/ specialization and Technology: Less ”hand in hand”, but still significantly correlated

40

Norway

Pricing

Market

allocation Technology

Non

price

Market allocation -0.33 1

Technology -0.10 0.07 1

Non price 0.18 0.04 0.13 1

Non comp spez -0.28 -0.01 0.16 0.03

Finland

Pricing

Market

allocation Technology

Non

price

Market allocation -0.12 1

Technology -0.53 0.08 1

Non price 0.30 0.04 -0.1 1

Non comp spez -0.70 0.04 0.3 -0.22

(Bold implies significance on 5%-level)

What to learn and where to go?

• Regularities seem to exist wrt contract design - Cartels economize on contract clauses. - We find three basic contracting approaches: cartels either agree on prices,

allocate markets, or use some type of non-competition/specialization clause to raise profits. - These are gross substitutes and their correlation structure is not explained by

the number of members in the cartel and whether the industry is producing homogenous goods. - Choosing one of these approaches has implications to the rest of the contract.

• Despite different jurisdictions and macro-trends, at least

the MPA structure has similarities across Norway/Finland

• More to learn on heterogeneity across industries/firms

• More to learn on duration/survival when comparing

countries

41