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 LCD panels $400 Korea LG Display America (2009) Soci´ et´ e Air France and Koninklijke Air Transportation $350 France (SAF) Luchtvaart Maatschappij, N.V. (2008) (Cargo) Netherlands (KLM) Korean Air Lines Co., Ltd. (2007) Air Transportation $300 Korea (Cargo & Passenger) British Airways PLC (2007) Air Transportation $300 UK (Cargo & Passenger) Samsung Electronics Company, Ltd. DRAM $300 Korea Samsung Semiconductor, Inc. (2006) BASF AG (1999) Vitamins $225 Germany CHI MEI Optoelectronics Corporation LCD panels $220 Taiwan (2010) 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 Average 10-MPa Concrete Prices in ˚ Arhus 550 500 450 400 350 Time 300 Jan-94 Apr Jul Oct Mar-95 Jun Nov
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 other 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 on 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 of 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
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