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Investigating Agreements that Restrain Trade

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1 Investigating Agreements that Restrain Trade
Mark Woodward African Competition Forum Workshop March 25, 2013

2 The Chain of Production
Supplier Supplier Supplier V E R T I C A L Manufacturer Manufacturer Manufacturer Wholesaler/ Distributor Wholesaler/ Distributor Wholesaler/ Distributor Retailer Retailer Retailer Customers (End Users) HORIZONTAL

3 Anticompetitive Horizontal Agreements
Among two or more competitors i.e., at same level in distribution chain That unreasonably restrains trade

4 Anticompetitive Horizontal Agreements
No written contract or other written agreement is required And wouldn’t be expected in price-fixing agreements Under U.S. law, no express verbal agreement or understanding is required Rather, a “a conscious commitment to a common scheme”

5 Price-Fixing Cartels Are Different from Legitimate Joint Conduct
Usually carried out in secret Never create benefits that offset harm to consumers Unlike publicly announced joint ventures, joint research agreements, or distribution agreements, which may promote efficiency and competition Rather, raise prices, restrict output, and inhibit innovation and efficiency Harm national economy by reducing output, undermining competitiveness of business purchasers, and distorting best allocation of resources

6 Why Do Price-Fixing Cartels Form?
Competitors want to make more money If they can limit competition through a cartel, they can earn monopoly profits by producing less and selling for higher prices

7 Adam Smith, The Wealth of Nations (1776)
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith, The Wealth of Nations (1776)

8 Universal Concern with Price- Fixing Cartels
OECD – “the most egregious violations of competition law” U.S. Supreme Court – “the supreme evil of antitrust” In U.S., detection, prosecution, and deterrence of cartels is high priority Handled by U.S. Department of Justice

9 Anticompetitive Horizontal Agreements
Conscious commitment to a common scheme Among two or more competitors i.e., at same level in distribution chain That unreasonably restrains trade For cartels, proof of anticompetitive effects typically not required

10 Preventing Price-Fixing Cartels
Fundamental responsibility of antitrust enforcement officials Also one of the most difficult, because cartels almost always try to hide their actions

11 Forms of Price Fixing Agreements among competitors to:
Charge same prices Increase prices or not reduce prices Eliminate or reduce discounts Establish minimum prices Establish standard pricing formula

12 Conditions Favorable to Creation of Price-Fixing Cartels
Small number of sellers Easier to agree on prices Easier to make sure everyone maintains agreement on prices Other products cannot easily be substituted Product is standardized Sellers have opportunities to communicate (e.g., through trade association)

13 Conduct That Indicates Possible Price-Fixing Cartel
Competitors are adopting similar, large price increases that do not appear to result from external forces (e.g., increases in the cost of inputs) Competitors meet or communicate regularly, particularly if they discuss prices Representatives of a firm make suspicious statements, such as Any reference to industry-wide or association price schedules Advance (non-public) knowledge of a competitor’s pricing Acknowledgments that competitors have discussed pricing

14 Trade Associations Many trade association activities do not raise competitive concerns Trade associations can bring together large numbers of competitors Opportunity for anticompetitive conduct, even if rare Knowledge of competition rules important Any trade association announcement of an industry-wide price increase is highly suspicious Some trade association meetings can be used as facade for price-fixing discussions

15 Example: Lysine Cartel - European Feed Additives Association
MIMOTO: So uh, if we use this, uh, plenary meeting as a cover, then our name is on the, uh, minutes of the meeting. CHAUDRET: As it is here. MIMOTO: Yes. WILSON: (ui) MIMOTO: Many commercial people and some technical people. WILSON: Right. MIMOTO: And we have to really discuss the real matter. WILSON: Yeah. Absolutely. MIMOTO: On maybe next day we will have a price talk? WILSON: That's right. CHAUDRET: Yeah.

16 Forms of Bid Rigging Agreements among competitors to:
Bid or not bid on contract Predetermine winning bidder Take turns on being lowest-price bidder that wins contract Submit complementary bid, an intentionally high bid designed to lose contract Arrange a payback (in form of money, subcontract, another project, or some other consideration) for losing bidders

17 Indications of Possible Bid-Rigging Agreements
Similarities in bids of different firms -- e.g., identical calculations or notations (indicating that one firm may have prepared more than one bid) A bidder requests a bid package for itself and a competitor or submits both his and another firm’s bids A firm submits a bid when it is incapable of successfully performing the contract Representative of a bidder states that a particular contract “belongs” to a competitor

18 Example: Guam Typhoon Relief

19 Executive’s Decision to Agree to Fix Prices
Premeditated decision Classic cost-benefit analysis Executives weigh: Rewards: money, market share Risks: likelihood of getting caught, severity of punishment Possibility of detection and punishment thus significant potential deterrents

20 Detection: Documents Best documentary evidence: paper or electronic records that reflect or refer to agreements with competitors Next best: records that prove competitor meetings

21 Investigative Tools in U. S
Investigative Tools in U.S. for Securing Documentary Evidence of Price-Fixing Cartels Search warrants (require probable cause, order approved by judge) Subpoenas (compulsory demands) Voluntary production of documents by cooperating companies

22 Evidence of In-Person Meetings & Conversations – Paper Records
Appointment books Calendars/diaries Notebooks Travel itineraries Travel records Expense records

23 Evidence of In-Person Meetings & Conversations – Electronic Records
Files on laptop computers, handheld devices Meeting minutes Unidentified notes Charts, tables, graphs Memos messages Setting up meeting dates, times, locations Post-meeting communications

24 Evidence of Telephone Calls & Conversations
Paper Records in Caller’s Office Telephone message slips Handwritten notes of calls Telephone Billing Records Identify date and time of calls Identify numbers called Can be matched to competitors’ numbers

25 Witness Interviews in Price-Fixing Investigations
Carefully consider your goals before an interview Always prepare an outline before an interview Think carefully about which topics witness is competent to talk about What was witness’s involvement with pricing at his company? Was witness in a position to have: First-hand knowledge of price fixing? Direct communications with competitors? Second-hand information about possible price fixing?

26 Increasing Importance of International Cooperation in Price-Fixing Investigations
Growing consensus among antimonopoly enforcement officials worldwide that price-fixing cartels harm consumers and economies Increasing convergence among enforcement officials worldwide on approaches to investigating price-fixing cartels – e.g., leniency programs Increasing cooperation among enforcement officials in investigations – e.g., coordination of investigations, information sharing Ongoing efforts to share best practices and to develop joint training programs – e.g., International Competition Network

27 Other Horizontal Agreements

28 Anticompetitive Horizontal Agreements
Conscious commitment to a common scheme Among two or more competitors i.e., at same level in distribution chain That unreasonably restrains trade For non-cartel agreements, proof of anticompetitive effects typically is required

29 Non-Cartel Horizontal Agreements
Often not secret May involve some integration of economic activities among competitors, but also may raise costs to consumers through the creation and exercise of market power Some examples: 1. Trade association rules 2. Cooperatives 3. Joint ventures

30 Potential Efficiencies from
Horizontal Agreements Economies of Scale When costs falls with increasing output Can be found in production, purchasing, distribution, warehousing, marketing, advertising, and research and development Economies of Scope When it is cheaper to produce two products together than it is to produce them separately Sharing or Spreading of Risk Practical Test: Is the whole greater than the sum of its parts?

31 Non-Cartel Horizontal Agreements: Questions to Ask
What is the restraint? What is its effect on price and output? Will the restraint inherently tend to suppress competition? Are there any legitimate justifications? (plausible offsetting benefits to competition) Can you make a detailed showing that harm is likely?

32 Example: GM/Toyota Joint Venture
General Motors and Toyota entered joint venture to produce small cars Questions to ask: What effect on price? E.g., via sharing of production information What effect on output? What offsetting benefits? What efficiencies from GM learning Toyota management techniques? What efficiencies from Toyota learning about American workforce?

33 Example: FTC “Three Tenors” Case
Two record companies agreed not to advertise or discount Three Tenors’ First CD or Three Tenors’ Second CD during joint introduction of Three Tenors’ Third CD Questions to ask: What effect on price? E.g., when consumer access to information about alternative products restricted What effect on output? What offsetting benefits? E.g., avoiding “free rider” problem from joint venture

34 Example: FTC v. Cephalon
Agreements to delay generic drug entry in pharmaceutical patent litigation settlements with simultaneous side business deals Questions to ask: What effect on price? What effect from delayed generic drug entry? What offsetting benefits? What benefits from settlement of patent litigation? Are side business deals legitimate, efficiency-enhancing agreements?

35 Resources DOJ Criminal Antitrust Web Site:
FTC/DOJ Antitrust Guidelines for Collaborations Among Competitors

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