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 10.04.2014 António Gomes 1

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 10.04.2014 António Gomes 2

Detection in cartel enforcement Source: Kai Hüschelrath, 2010 (partial) 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 10.04.2014 António Gomes 3

Reactive detection methods Source: Kai Hüschelrath, 2010 (partial) Origin of the cartel cases condemned or being analyzed by the PCA (2003 - 2014) 3 1. Reactive detection methods play the main role in 21% cartel detection Leniency 43% Complaints 2. Main reactive methods: Complaints and leniency Ex officio 36% 10.04.2014 António Gomes 4

Leniency • 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) 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? 10.04.2014 António Gomes 5

Proactive detection methods Source: Kai Hüschelrath, 2010 (partial) 1. Collusion factors 2. Industry economic studies/Sector Inquiries 3. Market screening 4. Systematic monitoring of industry activity 10.04.2014 António Gomes 6

Economic methods in proactive detection (1) Structural Screens • 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. 10.04.2014 António Gomes 7

Economic methods in proactive detection (2) Behavioural Screens • 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. 10.04.2014 António Gomes 8

Economic methods in proactive detection (3) The goal of screening should not be getting the final proof regarding collusion. STRUCTURAL SCREENS Screening should be used to identify the markets that are worth further investigation effort by the agency in order to get “hard” BEHAVIORAL SCREENS evidence (e.g. invest in “education” in that sector, promote leniency in the sector; develop interviews and “dawn raids”) . THE PROCESS DOES NOT END HERE… 10.04.2014 António Gomes 9

Criticisms • 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. 10.04.2014 António Gomes 10

Complementarity between proactive and reactive detection methods & 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. 10.04.2014 António Gomes 11

Economic methods in collusion assessment • Relevant to confirm the existence of the conduct and to evaluate its effect. • Useful to explain the context in which the conduct occurred and to provide a better understanding of (More) Proven cases its motivations. • Theoretical and empirical use of economics in collusion assessment in courts should be Economic presented in a simple and intuitive, but not less Improve assessment detection and of proven precise and rigorous way. prioritization cases • The economic assessment of proved cartel cases can be used to achieve more appropriate and Improve the efficient screens for collusion detection. scans for collusion detection 10.04.2014 António Gomes 12

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 10.04.2014 António Gomes 13

Thank you! António Gomes agomes@concorrencia.pt 10.04.2014 António Gomes 14