Presentation on theme: "Investigating Agreements that Restrain Trade"— Presentation transcript:
1 Investigating Agreements that Restrain Trade Mark WoodwardAfrican Competition Forum WorkshopMarch 25, 2013
2 The Chain of Production SupplierSupplierSupplierVERTICALManufacturerManufacturerManufacturerWholesaler/ DistributorWholesaler/ DistributorWholesaler/ DistributorRetailerRetailerRetailerCustomers (End Users)HORIZONTAL
3 Anticompetitive Horizontal Agreements Among two or more competitorsi.e., at same level in distribution chainThat unreasonably restrains trade
4 Anticompetitive Horizontal Agreements No written contract or other written agreement is requiredAnd wouldn’t be expected in price-fixing agreementsUnder U.S. law, no express verbal agreement or understanding is requiredRather, a “a conscious commitment to a common scheme”
5 Price-Fixing Cartels Are Different from Legitimate Joint Conduct Usually carried out in secretNever create benefits that offset harm to consumersUnlike publicly announced joint ventures, joint research agreements, or distribution agreements, which may promote efficiency and competitionRather, raise prices, restrict output, and inhibit innovation and efficiencyHarm 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 moneyIf 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 priorityHandled by U.S. Department of Justice
9 Anticompetitive Horizontal Agreements Conscious commitment to a common schemeAmong two or more competitorsi.e., at same level in distribution chainThat unreasonably restrains tradeFor cartels, proof of anticompetitive effects typically not required
10 Preventing Price-Fixing Cartels Fundamental responsibility of antitrust enforcement officialsAlso 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 pricesIncrease prices or not reduce pricesEliminate or reduce discountsEstablish minimum pricesEstablish standard pricing formula
12 Conditions Favorable to Creation of Price-Fixing Cartels Small number of sellersEasier to agree on pricesEasier to make sure everyone maintains agreement on pricesOther products cannot easily be substitutedProduct is standardizedSellers 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 pricesRepresentatives of a firm make suspicious statements, such asAny reference to industry-wide or association price schedulesAdvance (non-public) knowledge of a competitor’s pricingAcknowledgments that competitors have discussed pricing
14 Trade AssociationsMany trade association activities do not raise competitive concernsTrade associations can bring together large numbers of competitorsOpportunity for anticompetitive conduct, even if rareKnowledge of competition rules importantAny trade association announcement of an industry-wide price increase is highly suspiciousSome 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 contractPredetermine winning bidderTake turns on being lowest-price bidder that wins contractSubmit complementary bid, an intentionally high bid designed to lose contractArrange 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 bidsA firm submits a bid when it is incapable of successfully performing the contractRepresentative of a bidder states that a particular contract “belongs” to a competitor
19 Executive’s Decision to Agree to Fix Prices Premeditated decisionClassic cost-benefit analysisExecutives weigh:Rewards: money, market shareRisks: likelihood of getting caught, severity of punishmentPossibility of detection and punishment thus significant potential deterrents
20 Detection: DocumentsBest documentary evidence: paper or electronic records that reflect or refer to agreements with competitorsNext best: records that prove competitor meetings
21 Investigative Tools in U. S Investigative Tools in U.S. for Securing Documentary Evidence of Price-Fixing CartelsSearch 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 booksCalendars/diariesNotebooksTravel itinerariesTravel recordsExpense records
23 Evidence of In-Person Meetings & Conversations – Electronic Records Files on laptop computers, handheld devicesMeeting minutesUnidentified notesCharts, tables, graphsMemosmessagesSetting up meeting dates, times, locationsPost-meeting communications
24 Evidence of Telephone Calls & Conversations Paper Records in Caller’s OfficeTelephone message slipsHandwritten notes of callsTelephone Billing RecordsIdentify date and time of callsIdentify numbers calledCan be matched to competitors’ numbers
25 Witness Interviews in Price-Fixing Investigations Carefully consider your goals before an interviewAlways prepare an outline before an interviewThink carefully about which topics witness is competent to talk aboutWhat 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 economiesIncreasing convergence among enforcement officials worldwide on approaches to investigating price-fixing cartels – e.g., leniency programsIncreasing cooperation among enforcement officials in investigations – e.g., coordination of investigations, information sharingOngoing efforts to share best practices and to develop joint training programs – e.g., International Competition Network
28 Anticompetitive Horizontal Agreements Conscious commitment to a common schemeAmong two or more competitorsi.e., at same level in distribution chainThat unreasonably restrains tradeFor non-cartel agreements, proof of anticompetitive effects typically is required
29 Non-Cartel Horizontal Agreements Often not secretMay involve some integration of economic activities among competitors, but also may raise costs to consumers through the creation and exercise of market powerSome examples:1. Trade association rules2. Cooperatives3. Joint ventures
30 Potential Efficiencies from Horizontal AgreementsEconomies of ScaleWhen costs falls with increasing outputCan be found in production, purchasing, distribution, warehousing, marketing, advertising, and research and developmentEconomies of ScopeWhen it is cheaper to produce two products together than it is to produce them separatelySharing or Spreading of RiskPractical 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 carsQuestions to ask:What effect on price?E.g., via sharing of production informationWhat 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 CDQuestions to ask:What effect on price?E.g., when consumer access to information about alternative products restrictedWhat 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 dealsQuestions 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