Industrial Organization

Collusion and Antitrust Policy

Collusion

Very important topic: Theory

How can it be achieved? What factors affect collusion? Focus on implicit collusion

Empirics/antitrust: How can it be detected? What factors contribute to collusion? What are the damages to society (consumer)? Focus on explicit collusion

Collusion

Very important topic: Theory

How can it be achieved? What factors affect collusion? Focus on implicit collusion

Empirics/antitrust: (How) can it be detected? What factors contribute to collusion? What are the damages to society (consumer)? Focus on explicit collusion

Background on US Antitrust Law

Practices can be judged: As either “per se” illegal

If enough evidence is found, there is no room for argument

Or under a “rule of reason” approach

The practice may or may not be problematic, depending on the specifics of the case

Sherman Act, Section 1

Collusive restraints of trade

“Every contract, combination, … or conspiracy in restraint of trade or commerce among the several states, or with foreign nations is hereby declared illegal. Every person who shall make any such contract … shall be deemed guilty of a misdemeanor and … shall be punished by fine … or by imprisonment … in the discretion of the court”

EC Competition Law, Art. 81

Prohibited are:

“ ...all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market...”

EC Competition Law

Similar treatment: Hard core restraints (price fixing and

market sharing) are per se illegal. BUT exceptions if:

“collusion is for distributional or technological innovation, gives consumers a ‘fair share’ of the benefit and does not include unreasonable restraints that risk eliminating competition anywhere”

Collusive Restraints of Trade

Practices covered by Section 1: Direct Agreements

To fix price To Allocate markets

Geographically By type of customer

Other Collusive restraints Gray area (circumstantial evidence) Parallel behavior, information sharing, trade

associations,

Per se illegal, unless evidence is weak

Rule of Reason

A Note on Market Allocation

Market allocation Geographic allocation is rare (easier to detect) Bidders (sellers) agree on who takes what:

Subcontract bid-rigging: unsuccessful bidders subcontract with successful one

Bid suppression: some conspirators agree not to submit a bid so that another conspirator can successfully win the contract.

Complementary bidding: some of the bidders bid an amount knowing that it is too high

Bid rotation: bidders take turns being the designated successful bidder

Example of Market Allocation

Electrical equipment industry (1950’s) Combination of bid rotation and complementary

bidding and geographic allocation Based on the phases of the moon and regions

(who occupies low bid during which weeks/phases)

Government case first (criminal case), $2 mill. in fines, 7 executives in jail (30 days)

Private cases followed: $400 mill. in damages

Industrial Organization

Case 1: Explicit Price Fixing: ADM

Case 1: Explicit Price Fixing

International price fixing of lysine An essential amino acid, a building block for

proteins that speed the development of muscle tissue in humans and animals

In 1956, scientists in Japan discovered that amino acids can be produced as a byproduct of bacterial fermentation

Today, > 90 % of the world's production is made with this biotechnology and is used as a supplement in animal feeds, poultry, and aquaculture

Japanese Duopoly and Industry Entrants

Ajinomoto & Kyowa Hakko Domestically at first, then internationally:

France(1974), Mexico(1980), US (1984,1986) US lysine market divided 55-45% between

the two Japanese firms South Korean conglomerate Sewon 1980

Operates domestically, achieving 20% world market share by the late 1990s

US price of lysine reached just over $3/lb by late 1980’s

Entry in the 1990’s

In early 1991, two newcomers turned the lysine industry into a five-firm oligopoly, the main one is ADM

ADM enters industry in February 1991

ADM expands global production by 25% above year-end 1990 levels, by 1993 ADM accounted for 1/3 of global capacity (780 Million lbs)

Entry in the 1990’s

In early 1991, two newcomers turned the lysine industry into a five-firm oligopoly, the main one is ADM

ADM enters industry in February 1991

ADM expands global production by 25% above year-end 1990 levels, by 1993 ADM accounted for 1/3 of global capacity (780 Million lbs)

DOJ began undercover investigation in Nov. 1992

On July 27, 1995, over 70 FBI agents raided the world headquarters of ADM and interviewed multiple ADM officers in their homes.

DOJ obtained documents and hundreds of secret tape recordings of the meetings and conversations

The Evidence

Mid-1992: ADM had captured about 80% of US sales and price dropped to 0.68 $/lb.

This price was 0.10 $/lb. below ADM’s long-run marginal cost.

In early 1993, a brief price war arose: ADM’s insisted participants had to agree to global market share. ADM starts operation: P= $0.68/lb. ADM starts conspiracy: P=$0.98/lb Oct. – Dec.

1992 Brief price war: P=$0.65/lb. in May 1993 Successful collusion: P=$1/lb. until 1995.

The Evidence

Entry in the 1990’s

It was easy to prove ADM was guilty Not easy to show “how” guilty:

Before and after method: Alleged conspiracy period? What is a good “comparable” period What is the but-for price?

Cournot? Bertrand?

What is MC? Econometric method

The Problem for the Courts

Industrial Organization

Case 2

Weak Evidence of Price Fixing: ATPCO

What is ATPCO?

Airline Tariff Publishing Company (ATPCO) Owned by the airlines—sends price

change information to airlines and travel agents

At least once a day, ATPCO produces a compilation of all industry prices and sends it to the appropriate airlines and travel agents

How does ATPCO work?

ATPCO transmits a fare basis code (a “name” of the fare), the origin and destination airports, the price, the first and last ticket dates, the first and last travel dates, and any restrictions on the fare.

It grants almost perfect information to all firms in the market

Airline Tariff Case

Monitoring here is immediate and perfect

Posting fares: Start and End sales date

(communication) Fare codes (as footnotes) Start and End travel dates City-pair Restrictions (blackout dates, non-

refundable, etc.)

Airline Tariff Case

DOJ: System used as a signal mechanism:

Pre-announcement and communication: posting future price for future sale date. Iteration to an “agreed price” and exact dates

Coordination to protect more important markets (direct routes): fare codes to send messages

Scheme might have cost $2B to consumers

Airline Tariff Case

DOJ: Airlines’ internal memos: “we are waiting to see if [carrier] is going

to go along with our proposed increase” “we are abandoning our increase on [city

1-city 2] because [carrier] has not matched”

“[carrier] is now on board for the [date] increase to [fare] on [city 1-city 2]”

Protecting direct routes

AA has hub in DFW Continental has hub in EWR

DFW

EWR

ATL

DET

DFW-ATL, AA: $200

DFW-ATL, CO: $100 (code ABC)

EWR-DET, AA: $50 (code ABC - from Mon till Wed)

EWR-DET, AA: $250 (start sale next Wednesday)

AA: I am undercutting you because you have a low price in DFW-ATL.I want you to increase your price to $250

$$ for CO

$$ for AA

Airline Tariff Case

DOJ: “The airlines used the ATP … system to

carry on conversations just as direct and detailed as those traditionally conducted by conspirators over the telephone or in hotel rooms. Although their method was novel, their conduct amounted to price fixing, plain and simple”

Airline Tariff Case

Why was this case difficult but important? No direct evidence of price fixing (price

exchange + conscious parallelism) Case appears as rule of reason

approach Consent decree can not be used as

precedent, BUT DOJ’s willingness to pursue difficult case sent a message