Auctions, Collusion & Antitrust Lessons from “Radiopaque Agents” in Italy Antonio Nicita Antonio Nicita Siena Doctorate in L&E Lecture 4

Content Collusion in public tendering on pharmaceuticals Collusion in public tendering on pharmaceuticals Case study Case study General lessons for Antitrust and Competition Policy: General lessons for Antitrust and Competition Policy: (a) Economic criteria to evaluate faciltating factors in repetead auctions; (b) Debate on Regulatory Solutions (c) Ambiguity of Centralised Purchasing through Tendering

“Radiopaque Agents” The Competition Authority has resolved that the Bracco, Byk Gulden Italia, Farmades, Nycomed Amersham Sorin e Schering companies are liable for having infringed section 2 (2) of the Competition Act on the markets for the supply of for the supply of radiopaque agents in Italy. The Competition Authority has resolved that the Bracco, Byk Gulden Italia, Farmades, Nycomed Amersham Sorin e Schering companies are liable for having infringed section 2 (2) of the Competition Act on the markets for the supply of for the supply of radiopaque agents in Italy. These are pharmaceutical specialties that are procured virtually in their entirety by Italian public hospitals and local health authorities (ASLs) to be used for radiological examinations, such as with TAC. These are pharmaceutical specialties that are procured virtually in their entirety by Italian public hospitals and local health authorities (ASLs) to be used for radiological examinations, such as with TAC. In view of the seriousness of the offence, the Authority imposed a fine of 5.5% of the turnover of these companies on the relevant market, totaling about 8.5 billion lire. In view of the seriousness of the offence, the Authority imposed a fine of 5.5% of the turnover of these companies on the relevant market, totaling about 8.5 billion lire.

The investigation began as a result of a complaint from a Local Health Authority which reported that there was an anomalous similarity of the prices charged by all the companies for non-ionic radiopaque agents for radiological use, suggesting the existence of a concerted agreement between the companies. The investigation began as a result of a complaint from a Local Health Authority which reported that there was an anomalous similarity of the prices charged by all the companies for non-ionic radiopaque agents for radiological use, suggesting the existence of a concerted agreement between the companies.AGREEMENT: - system of common prices charged for their products; - system of common prices charged for their products; - strategies to interfere with the competitive bidding of the Local Health Authorities (for example by sharing batches of orders and deciding on which companies would tender for individual orders); - strategies to interfere with the competitive bidding of the Local Health Authorities (for example by sharing batches of orders and deciding on which companies would tender for individual orders); - other forms of co-operation which included coordinating some of their promotional and advertising activities and through the systematic exchange of information on quantities of products sold. - other forms of co-operation which included coordinating some of their promotional and advertising activities and through the systematic exchange of information on quantities of products sold.

The Relevant Market Public Procurement by auctions and direct tendering “decrease of 5% in average price in ”

Market shares (value and volume)

Law 24/12/1993 obliges companies to practice a 50% rebates on (negotiated) public prices when selling to Hospitals Law 24/12/1993 obliges companies to practice a 50% rebates on (negotiated) public prices when selling to Hospitals Radiopaque agents had different negotiated price Radiopaque agents had different negotiated price Each company made a (different) rebate so as to equalize the discounted price of the firm with the lowest public prices Each company made a (different) rebate so as to equalize the discounted price of the firm with the lowest public prices The final price defined was the price generally offered in tendering The final price defined was the price generally offered in tendering The “anomalous price mechanism”

Evidence AGCM found a general evidence of a massive application of the mechanism AGCM found a general evidence of a massive application of the mechanism ASL and Hospitals decisions were: (i) invite to rebates; (ii) adjudications by ASL and Hospitals decisions were: (i) invite to rebates; (ii) adjudications by

Other collusive practices Selective participation (Suspect of rotative shifts) Selective participation (Suspect of rotative shifts) Selective discount (Suspect of Cartel) Selective discount (Suspect of Cartel)

Evidence on agreements (vertical) correspondance with local agents (vertical) correspondance with local agents information exchange on market data information exchange on market data Role of Farmindustria Role of Farmindustria Farmindustria had introduced into its Code of Conduct a provision prohibiting its member companies from granting a discount in excess of the statutory minimum 50% discount on the retail price of each drug when bidding for competitive tenders. Fines could be imposed on member companies which failed to comply) Farmindustria had introduced into its Code of Conduct a provision prohibiting its member companies from granting a discount in excess of the statutory minimum 50% discount on the retail price of each drug when bidding for competitive tenders. Fines could be imposed on member companies which failed to comply)

AGCM conclusions Price parallelism in auctions in accordance to the ‘mechanism’ (M), and even in ‘exclusive tendering’ Price parallelism in auctions in accordance to the ‘mechanism’ (M), and even in ‘exclusive tendering’ heterogeneity in costs (?!) heterogeneity in costs (?!) Several anomalies in some other auctions (selective participation, selective discounts over M) Several anomalies in some other auctions (selective participation, selective discounts over M) Substantial stability of market shares in Substantial stability of market shares in A cooperative framework (Farmindustria, Cross- licencing, information exchange on data…) A cooperative framework (Farmindustria, Cross- licencing, information exchange on data…) Some local evidence on some local cartel Some local evidence on some local cartel

Is there any space for economic defence?

Agcm’s argument is a diabolic proof Agcm’s argument is a diabolic proof 1.Too many (non homogeneous) evidences 2.Is the ‘mechanism’ M really anomalous? 3.Could M be a focal point in a repeated game? 4.How to explain evidence (in auctions and in private documents) of competitive war prices? 5.To collude is costly, why using simultaneous alternative mechanisms? 6.Why using M instead of selective participation for ‘true’ minimum discount (the ‘true’ Optimal collusive equilibrium)? 7.Is this variance compatible with a condition of stability for detecting collusion and free-riding? 8.Is the information exchange really relevant? 9.Are market shares really stable?

Is the ‘mechanism’ M really anomalous? /1 In order to be anticompetitive the parallelism of conduct should not be explicable other than on the ground that it had been co-ordinated by means of a concerted practice (Dyestuffs, Wood Pulp,…) In order to be anticompetitive the parallelism of conduct should not be explicable other than on the ground that it had been co-ordinated by means of a concerted practice (Dyestuffs, Wood Pulp,…) Oligopolistic framework (few firms, interdependence, transparency, barriers to entry…): few players may align their conduct as a rational response to the market circumstances Oligopolistic framework (few firms, interdependence, transparency, barriers to entry…): few players may align their conduct as a rational response to the market circumstances AGCM implicit assumption of a one-shot Bertrand game (McAfee&McMillan, 1993) AGCM implicit assumption of a one-shot Bertrand game (McAfee&McMillan, 1993)

Is the ‘mechanism’ M really anomalous? /2 Repeated game ad infinitum with exogenous focal point (implicit collusion) Repeated game ad infinitum with exogenous focal point (implicit collusion) Regulation induces M as focal point and strategic interdependence selects M as the (non-cooperative) equilibrium price: hospitals do not follow the same rules for adjudication Regulation induces M as focal point and strategic interdependence selects M as the (non-cooperative) equilibrium price: hospitals do not follow the same rules for adjudication conscious parallelism: “the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing supra-competitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions” [Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993) ] conscious parallelism: “the process, not in itself unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their prices at a profit-maximizing supra-competitive level by recognizing their shared economic interests and their interdependence with respect to price and output decisions” [Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993) ]

Collusion in repeated games There are multiple NE in a repeated setting There are multiple NE in a repeated setting How is selected the equilibrium? How is selected the equilibrium? Answer: analysis of the economic environment Answer: analysis of the economic environment

Regulation is a facilitating factor (Gal, 2000). In some cases a government-supported maverick is a solution for oligopoly pricing Exogenous focal point reduces uncertainty and may even overcome the economic significance of asymmetry in cost structure in order to induce self-enforcing equilibria: even the most efficient firm may have an incentive to align to focal points (winner takes all vs. satisfacing) Information exchange was virtually non influent

Irrational collusion? On the other hand: AGCM has observed also selective participation and selective discount Why enforcing M, when a superior pay-off was obtainable by concerted practice? Ambiguity and Paradoxes What about concordance of facts and behaviours? Was the price war compatible with optimal penal codes? Were the anomalies observed a local issue? Great diversity in 63% of tenders sample. In 33% of them on average a discount of 5% with respect to M. M is observed only in 45% tenders sample.

A simulation of repeated games

The Agcm conclusion “The whole purpose of this was to avoid any possibility of competition for their products on the basis of their prices, and to interfere with competition for the supply of non-ionic radiopaque agents for radiological use to hospitals and Local Health Authorities”. “The whole purpose of this was to avoid any possibility of competition for their products on the basis of their prices, and to interfere with competition for the supply of non-ionic radiopaque agents for radiological use to hospitals and Local Health Authorities”.

Antitrust issues “the factors which imply tacit collusion is more likely are similar to those which make sustainable cartel behaviour more likely” (Bishop&Walker, 1999) “the factors which imply tacit collusion is more likely are similar to those which make sustainable cartel behaviour more likely” (Bishop&Walker, 1999) Alternative explanations to concerted practice were in this case consistent with the diversity observed Alternative explanations to concerted practice were in this case consistent with the diversity observed How to explain irrational collusion when there is collusion? How to explain irrational collusion when there is collusion? Is there a threshold for minimal consistency? Is there a threshold for minimal consistency? Is there a risk of considering firms’ behaviors in pharmaceutical auction always anticompetitive when there is no one shot Bertrand competition? Is there a risk of considering firms’ behaviors in pharmaceutical auction always anticompetitive when there is no one shot Bertrand competition?

New tools for understading collusion Complementarity and supermodular games [Milgrom&Roberts (1990); Topkis (1998); Vives (2000); Aoki (2003)] Complementarity and supermodular games [Milgrom&Roberts (1990); Topkis (1998); Vives (2000); Aoki (2003)] Institutional complementarities Institutional complementarities Economic agents face different domains of games in selecting their choice in a given institutional framework; choices in one domain act as exogenous parameters in other domains and vice-versa. Economic agents face different domains of games in selecting their choice in a given institutional framework; choices in one domain act as exogenous parameters in other domains and vice-versa.

The Notion of Institutional Complementarity two domains of choices X and Y; {X1, X2} and {Y1, Y2}, with agents i choosing in X and agents j choosing in Y, according to their utilities (respectively, u for i and v for j). two domains of choices X and Y; {X1, X2} and {Y1, Y2}, with agents i choosing in X and agents j choosing in Y, according to their utilities (respectively, u for i and v for j). a)for agent i a)for agent i b) for agent j b) for agent j There can be one Nash equilibrium, but also two pure Nash equilibria (institutional arrangements) for the system as (X1,Y1) and (X2,Y2). There can be one Nash equilibrium, but also two pure Nash equilibria (institutional arrangements) for the system as (X1,Y1) and (X2,Y2). When such multiple equilibria are possible, we say that When such multiple equilibria are possible, we say that (i) X1 and Y1 are institutional complements; (i) X1 and Y1 are institutional complements; (ii) X2 and Y2 are institutional complements. (ii) X2 and Y2 are institutional complements. Initial conditions (regulation, barriers to entry, technology…) matter Initial conditions (regulation, barriers to entry, technology…) matter

Regulatory solutions: benefits Maverick (using focal points to reduce equilibrium prices) Maverick (using focal points to reduce equilibrium prices) Deregulated prices (eliminating exogenous focal points so as to detect collusion) Deregulated prices (eliminating exogenous focal points so as to detect collusion) Centralised Purchasing through Regional Tendering (securing lower prices through Hospitals buyer power and by shifting from repeated to one-shot game) Centralised Purchasing through Regional Tendering (securing lower prices through Hospitals buyer power and by shifting from repeated to one-shot game)

Regulatory solutions: opportunity costs Maverick (uncertainty to detect collusion) Maverick (uncertainty to detect collusion) Deregulated prices (risk of determining a level of price even greater than that associated with implicit collusion) Deregulated prices (risk of determining a level of price even greater than that associated with implicit collusion) Centralised Purchasing through Regional Tendering (it may increase the likelihood of market concentration and segmentation as tendering rounds are repeated over time. “This occurs when the same suppliers keep winning contracts for a certain drug, discouraging other suppliers from continuing to bid for that drug, and perhaps encouraging them to let their product licence expire altogether” (Oxera, 2000)) Centralised Purchasing through Regional Tendering (it may increase the likelihood of market concentration and segmentation as tendering rounds are repeated over time. “This occurs when the same suppliers keep winning contracts for a certain drug, discouraging other suppliers from continuing to bid for that drug, and perhaps encouraging them to let their product licence expire altogether” (Oxera, 2000))