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Industrial Organization

Industrial Organization. Collusion and Antitrust Policy. Collusion. Very important topic: Theory How can it be achieved? What factors affect collusion? Focus on implicit collusion Empirics/antitrust: How can it be detected? What factors contribute to collusion?

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Industrial Organization

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  1. Industrial Organization Collusion and Antitrust Policy

  2. Collusion • Very important topic: • Theory • How can it be achieved? • What factors affect collusion? • Focus on implicit collusion • Empirics/antitrust: • How can it be detected? • What factors contribute to collusion? • What are the damages to society (consumer)? • Focus on explicit collusion

  3. Collusion • Very important topic: • Theory • How can it be achieved? • What factors affect collusion? • Focus on implicit collusion • Empirics/antitrust: • (How) can it be detected? • What factors contribute to collusion? • What are the damages to society (consumer)? • Focus on explicit collusion

  4. Background on US Antitrust Law • Practices can be judged: • As either “per se” illegal • If enough evidence is found, there is no room for argument • Or under a “rule of reason” approach • The practice may or may not be problematic, depending on the specifics of the case

  5. Sherman Act, Section 1 • Collusive restraints of trade “Every contract, combination, … or conspiracy in restraint of trade or commerce among the several states, or with foreign nations is hereby declared illegal. Every person who shall make any such contract … shall be deemed guilty of a misdemeanor and … shall be punished by fine … or by imprisonment … in the discretion of the court”

  6. EC Competition Law, Art. 81 • Prohibited are: “ ...all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market...”

  7. EC Competition Law • Similar treatment: • Hard core restraints (price fixing and market sharing) are per se illegal. • BUT exceptions if: “collusion is for distributional or technological innovation, gives consumers a ‘fair share’ of the benefit and does not include unreasonable restraints that risk eliminating competition anywhere”

  8. Collusive Restraints of Trade • Practices covered by Section 1: • Direct Agreements • To fix price • To Allocate markets • Geographically • By type of customer • Other Collusive restraints • Gray area (circumstantial evidence) • Parallel behavior, information sharing, trade associations, Per se illegal, unless evidence is weak Rule of Reason

  9. A Note on Market Allocation • Market allocation • Geographic allocation is rare (easier to detect) • Bidders (sellers) agree on who takes what: • Subcontract bid-rigging: unsuccessful bidders subcontract with successful one • Bid suppression: some conspirators agree not to submit a bid so that another conspirator can successfully win the contract. • Complementary bidding: some of the bidders bid an amount knowing that it is too high • Bid rotation: bidders take turns being the designated successful bidder

  10. Example of Market Allocation • Electrical equipment industry (1950’s) • Combination of bid rotation and complementary bidding and geographic allocation • Based on the phases of the moon and regions (who occupies low bid during which weeks/phases) • Government case first (criminal case), $2 mill. in fines, 7 executives in jail (30 days) • Private cases followed: $400 mill. in damages

  11. Industrial Organization Case 1: Explicit Price Fixing: ADM

  12. Case 1: Explicit Price Fixing • International price fixing of lysine • An essential amino acid, a building block for proteins that speed the development of muscle tissue in humans and animals • In 1956, scientists in Japan discovered that amino acids can be produced as a byproduct of bacterial fermentation • Today, > 90 % of the world's production is made with this biotechnology and is used as a supplement in animal feeds, poultry, and aquaculture

  13. Japanese Duopoly and Industry Entrants • Ajinomoto & Kyowa Hakko • Domestically at first, then internationally: France(1974), Mexico(1980), US (1984,1986) • US lysine market divided 55-45% between the two Japanese firms • South Korean conglomerate Sewon 1980 • Operates domestically, achieving 20% world market share by the late 1990s • US price of lysine reached just over $3/lb by late 1980’s

  14. Entry in the 1990’s • In early 1991, two newcomers turned the lysine industry into a five-firm oligopoly, the main one is ADM • ADM enters industry in February 1991 • ADM expands global production by 25% above year-end 1990 levels, by 1993 ADM accounted for 1/3 of global capacity (780 Million lbs)

  15. Entry in the 1990’s • In early 1991, two newcomers turned the lysine industry into a five-firm oligopoly, the main one is ADM • ADM enters industry in February 1991 • ADM expands global production by 25% above year-end 1990 levels, by 1993 ADM accounted for 1/3 of global capacity (780 Million lbs)

  16. The Evidence DOJ began undercover investigation in Nov. 1992 On July 27, 1995, over 70 FBI agents raided the world headquarters of ADM and interviewed multiple ADM officers in their homes. DOJ obtained documents and hundreds of secret tape recordings of the meetings and conversations

  17. The Evidence • Mid-1992: ADM had captured about 80% of US sales and price dropped to 0.68 $/lb. • This price was 0.10 $/lb. below ADM’s long-run marginal cost. • In early 1993, a brief price war arose: ADM’s insisted participants had to agree to global market share. • ADM starts operation: P= $0.68/lb. • ADM starts conspiracy: P=$0.98/lb Oct. – Dec. 1992 • Brief price war: P=$0.65/lb. in May 1993 • Successful collusion: P=$1/lb. until 1995.

  18. Entry in the 1990’s

  19. The Problem for the Courts • It was easy to prove ADM was guilty • Not easy to show “how” guilty: • Before and after method: • Alleged conspiracy period? • What is a good “comparable” period • What is the but-for price? • Cournot? • Bertrand? • What is MC? • Econometric method

  20. Industrial Organization Case 2 Weak Evidence of Price Fixing: ATPCO

  21. What is ATPCO? • Airline Tariff Publishing Company (ATPCO) • Owned by the airlines—sends price change information to airlines and travel agents • At least once a day, ATPCO produces a compilation of all industry prices and sends it to the appropriate airlines and travel agents

  22. How does ATPCO work? • ATPCO transmits a fare basis code (a “name” of the fare), the origin and destination airports, the price, the first and last ticket dates, the first and last travel dates, and any restrictions on the fare. • It grants almost perfect information to all firms in the market

  23. Airline Tariff Case • Monitoring here is immediate and perfect • Posting fares: • Start and End sales date (communication) • Fare codes (as footnotes) • Start and End travel dates • City-pair • Restrictions (blackout dates, non-refundable, etc.)

  24. Airline Tariff Case • DOJ: • System used as a signal mechanism: • Pre-announcement and communication: posting future price for future sale date. Iteration to an “agreed price” and exact dates • Coordination to protect more important markets (direct routes): fare codes to send messages • Scheme might have cost $2B to consumers

  25. Airline Tariff Case • DOJ: Airlines’ internal memos: • “we are waiting to see if [carrier] is going to go along with our proposed increase” • “we are abandoning our increase on [city 1-city 2] because [carrier] has not matched” • “[carrier] is now on board for the [date] increase to [fare] on [city 1-city 2]”

  26. Protecting direct routes AA: I am undercutting you because you have a low price in DFW-ATL.I want you to increase your price to $250 • AA has hub in DFW • Continental has hub in EWR EWR-DET, AA: $50 (code ABC - from Mon till Wed) EWR-DET, AA: $250 (start sale next Wednesday) DFW-ATL, CO: $100 (code ABC) EWR ATL $$ for CO DET $$ for AA DFW DFW-ATL, AA: $200

  27. Airline Tariff Case • DOJ: • “The airlines used the ATP … system to carry on conversations just as direct and detailed as those traditionally conducted by conspirators over the telephone or in hotel rooms. Although their method was novel, their conduct amounted to price fixing, plain and simple”

  28. Airline Tariff Case • Why was this case difficult but important? • No direct evidence of price fixing (price exchange + conscious parallelism) • Case appears as rule of reason approach • Consent decree can not be used as precedent, BUT DOJ’s willingness to pursue difficult case sent a message

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