Investigating Agreements that Restrain Trade

Mark WoodwardAfrican Competition Forum Workshop

March 25, 2013

The Chain of Production

VERT ICAL

HORIZONTAL

Supplier

Manufacturer

Wholesaler/ Distributor

Retailer

Supplier

Manufacturer

Wholesaler/ Distributor

Retailer

Customers (End Users)

Supplier

Manufacturer

Wholesaler/ Distributor

Retailer

3

Anticompetitive Horizontal Agreements

• Agreement

• 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.”

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

• Agreement – 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. 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

• E-mail 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

• Agreement – 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:– http://www.usdoj.gov/atr/public/criminal.htm

• FTC/DOJ Antitrust Guidelines for Collaborations Among Competitors– http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf